So what is today about then?

Title: Price Elasticity of Demand

aka PED

Elasticity

“Elasticity is a measure of the

extent to which a quantity responds to

a change in a variable.”

Price Elasticity of Demand

Elastic Inelastic

Percentage change in

Demand will be

Greater than change in price.

Percentage change inprice will be

Greater than change in demand.

“The responsiveness of Demand to a change in

price.”

Price Elastic Goods

• Very responsive to Price changes

• Many Substitutes (undifferentiated)

• Products widely available

Price Inelastic Goods

• Less responsive to Price changes

• *** Inelastic goods are still affected by price rises! ***

• Inelastic goods tend to be…– Highly branded (highly fashionable) – Innovative – In short supply– Few Substitutes – Habit Forming

Calculating P.E.D.

P.E.D. = Percentage change in Demand

Percentage change in Price

% Change = Difference x 100 = _____ % Original

Calculating P.E.D.

Value Description Explanation• 0 Perfectly Inelastic Price has no

effect on demand at all

• 0<1 Inelastic Price has a small effect on demand

• 1 Unitary Changes are the same

• 1<Infinity Elastic Demand is very sensitive to price

• Infinity Perfectly Any Increase in price, kill Elasticdemand

A Demand Curve of an Elastic GoodPrice

Quantity Demanded

0

D

250

200

150

100

50

500400300200100 600

Total Revenue at £150Price

Quantity Demanded

0

D

250

200

150

100

50

500400300200100 600

600 x 150

Total Revenue at £200Price

Quantity Demanded

0

D

250

200

150

100

50

500400300200100 600

200 x 100

A Demand Curve of an Elastic GoodPrice

Quantity Demanded

0

D

250

200

150

100

50

500400300200100 600

Revenue Lost Due To Price Increase

Revenue Gained Due To Price

Increase

A Demand Curve of an Inelastic GoodPrice

Quantity Demanded

0

D

250

200

150

100

50

10080604020 120

A Demand Curve of an Inelastic GoodPrice

Quantity Demanded

0

D

250

200

150

100

50

10080604020 120

50 x 60

A Demand Curve of an Inelastic GoodPrice

Quantity Demanded

0

D

250

200

150

100

50

10080604020 120

250 x 40

A Demand Curve of an Inelastic GoodPrice

Quantity Demanded

0

D

250

200

150

100

50

10080604020 120

Revenue Gained Due To Price Increase

Revenue Lost Due

To Price Increase

A Demand Curve of an Perfectly Inelastic Good

Price

Quantity Demanded

0

D

50

40

30

20

10

108642

A Demand Curve of an Perfectly Inelastic Good

Price

Quantity Demanded

0

D

50

40

30

20

10

108642

A Demand Curve of an Perfectly Inelastic Good

Price

Quantity Demanded

0

D

50

40

30

20

10

108642

A Demand Curve of an Perfectly Inelastic Good

Price

Quantity Demanded

0

D

50

40

30

20

10

108642

Revenue Gained Due To Price

Increase

A Demand Curve of an Perfectly Elastic Good

Price

Quantity Demanded

0

D

1000

800

600

400

200

25020015010050

A Demand Curve of an Perfectly Elastic Good

Price

Quantity Demanded

0

D

1000

800

600

400

200

25020015010050

400 x 250

A Demand Curve of an Perfectly Elastic Good

Price

Quantity Demanded

0

D

1000

800

600

400

200

25020015010050

Revenue Lost Due To Price Increase

A Demand Curve for a Good with Unitary Price Elasticity

Price

Quantity Demanded

0

D

y

x

z w

A Demand Curve for a Good with Unitary Price Elasticity

Price

Quantity Demanded

0

D

y

x

z w

Revenue Lost Due To Price Increase

Revenue Gained Due To Price Increas

e

Summing Up

Elastic Goods • Percentage change in Demand is greater than percentage change in price.

• Highly responsive to price change • Increases in price will lead to fall in total revenue.

Inelastic Goods • Percentage change in Demand is Less than percentage change in price.

• Slightly responsive to price change (BUT STILL RESPONSIVE!)

• Increases in price will lead to a raise in total revenue.