1. Answering the question... By How Much?

2. What we know We all remember the law of demand that says: We all remember the law of demand that says: But is that good enough for a Producer wishing to plan their pricing stategies? But is that good enough for a Producer wishing to plan their pricing stategies? As the Price of a good or service increases the quantity demanded will decrease (Vice Versa) ceteris Paribus. As the Price of a good or service increases the quantity demanded will decrease (Vice Versa) ceteris Paribus.

3. The Answer... We need to analyse the change in the quantity demanded so that we can tell the producer if they should increase their prices and what impact exactly it should have on their revenue. We need to analyse the change in the quantity demanded so that we can tell the producer if they should increase their prices and what impact exactly it should have on their revenue. To do this we need to do a little ‘Math’..... To do this we need to do a little ‘Math’.....

4. What will we be working out? We will be working out the amount of change that occurs to quantity demanded as the price changes i.e. When we are told that the quantity demanded will change we can figure out ‘By How Much’. We will be working out the amount of change that occurs to quantity demanded as the price changes i.e. When we are told that the quantity demanded will change we can figure out ‘By How Much’.

5. The Maths... We are going to work out the ‘By how much’ of a quantity demanded change to a change in price so: We need to work out the change in quantities and an average of the change in quantities and see that as a relationship to the change in prices and an average of the changes in prices.

6. What does it look like? ((Q2-Q1)/ ((Q1+Q2)/2)) / ((P2-P1)/ ((P1+P2)/2))

7. Is there an easier Equation? See if you can re-work the equation to make it easier? See if you can re-work the equation to make it easier? What if they were all percentages? What if they were all percentages? What would it look like? What would it look like?

8. Case Study Consider the market for music CDs. When the price of CDs is $30 per unit, consumers buy 6 per year. When the price falls to $20 per unit, consumers buy 12 per year. Consider the market for music CDs. When the price of CDs is $30 per unit, consumers buy 6 per year. When the price falls to $20 per unit, consumers buy 12 per year.

9. The calculations

10. What does it all mean? We ignore the minus sign when calculating price elasticity. When the price of CDs falls from $30 to $20, and the quantity sold increases from 6 per year to 12 per year, the price elasticity of demand is 1.67: We ignore the minus sign when calculating price elasticity. When the price of CDs falls from $30 to $20, and the quantity sold increases from 6 per year to 12 per year, the price elasticity of demand is 1.67: CDs are price elastic over this price range i.e. They will be more responsive to a change in price. CDs are price elastic over this price range i.e. They will be more responsive to a change in price.

11. Types of Elasticity More Responsive=Elastic More Responsive=Elastic Less Responsive=Inelastic Less Responsive=Inelastic Exactly proportional=Unitary Exactly proportional=Unitary

12. Is it the same along a demand curve?

13. Elastic Demand

14. Inelastic Demand

15. Extreme cases What happens if we push the responsiveness to the limit? What happens if we push the responsiveness to the limit?

16. Extreme cases of PED

17. Elasticity examples

18. Elasticity on the web... Price Elasticity of Demand Explained Price Elasticity of Demand Explained Price Elasticity of Demand Explained Price Elasticity of Demand Explained Click on the link above to go to You tube video on elasticity.