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- 1. AS Micro The Importance ofElasticity of Demand
- 2. Price Elasticity of Demand
- 3. Elasticity Matters!What do I need to know?The definitions of each elasticityThe formula’s and be confident in using themHow to draw the diagramsThe determinants of PED and PESExamplesWhy they are important
- 4. Factors that Affect Price Elasticity Necessity or Availability of luxury? substitutes Consumer Brand loyalty income Frequency of Habits purchase
- 5. The price of a tablet computer falls from£800 to £600 and as a result, weekly salesof the tablet device expand from 100,000to 150,000. It can be inferred that theprice elasticity of demand for this pricechange is?% change in demand = 50%% change in price = -25%Price elasticity of demand = 50 / -25 = -2
- 6. A mobile phone company has 3 million customers for apackage of services. Each customer pays a monthly fee of£20. The company conducts market research and estimatesthat price elasticity of demand for this package is (-) 2. If thecompany reduces monthly fees by £5, the change in totalrevenue is likely to be:% change in price = 25%Elasticity = 2% change in demand = 50%New demand = 4.5 million customers @ £15 = £67.5 millionChange in total revenue = + £7.5 million
- 7. A manufacturer reduces the price of itswashing machines by 5% and, as a result,the volume of sales of washing machinesrises by 4%. The value of price elasticity ofdemand for the good following this pricechange is?Ped = 4% / 5% = 0.8 (demand is inelastic)
- 8. In September 2009, the London EveningStandard was charging 50p per copy and selling250,000 copies a day. In October 2009 a newowner decided to make it a free paper and byMarch 2010 the Standard was selling 600,000copies each day. Calculate the price elasticity ofdemand for this price change.% change in demand = 140%% change in price = 100%Price elasticity of demand = 1.4 (i.e. Elastic)
- 9. Peak and Off-Peak Demand
- 10. Peak and Off-Peak: Price & RevenuePrice S1 Price S1Poff-peak D1 Quantity Q1 Quantity Q1 Q1: Diagram assumes a fixed supply capacity in the market
- 11. Peak and Off-Peak: Price & RevenuePrice S1 Price S1 D2Poff-peak D1 Quantity Q1 Quantity Q1 Q1: Diagram assumes a fixed supply capacity in the market
- 12. Peak and Off-Peak: Price & RevenuePrice S1 Price S1 Ppeak D2Poff-peak D1 Quantity Q1 Quantity Q1 Q1: Diagram assumes a fixed supply capacity in the market
- 13. Peak and Off-Peak: Price & RevenuePrice S1 Price S1 Ppeak D2Poff-peak D1 Quantity Q1 Quantity Q1 Q1: Diagram assumes a fixed supply capacity in the market
- 14. The case for price discounting Spare capacity Help low income Cash-flow groups New Market share customers
- 15. Dangers from discounting Price seen as indicator of quality PED could be lower than expected Consumers become anchored to lower price
- 16. Cross Price Elasticity of Demand
- 17. Cross Price Elasticity of Demand
- 18. Cross price elasticityThe price of Good X rises by 20 %. As a result,the demand for a substitute Good Y rises by 10%. What is the cross-elasticity of demand forGood Y with respect to Good X?Xed = % change in DX / % change in PY= +10% / +20% = +0.5I.e. X and Y are weak substitutes
- 19. Using Cross Price ElasticityThe table below gives estimates of the priceelasticity’s and cross-elasticities of demand for busand rail travel. What would be the change in thevolume of rail travel resulting from a 25% increasein bus fares?
- 20. Using Cross Price ElasticityThe table below gives estimates of the priceelasticity’s and cross-elasticities of demand for busand rail travel. What would be the change in thevolume of rail travel resulting from a 25% increasein bus fares? Answer: = +4% (+0.16 x 25)
- 21. Income elasticity
- 22. Income elasticity of demand• Normal goods – positive income elasticity• Luxury goods – income elasticity > +1• Necessities – income elasticity >0 and <+1• Inferior products – negative income elasticity• Counter cyclical goods – products whose demand varies inversely to the macroeconomic cycle – demand rises in a downturn
- 23. Rising demand for cinema visits
- 24. And for pizza too!
- 25. Application of income elasticityThe table shows aconsumers expenditureon a range of goods atdifferent levels ofincome. For which gooddoes the consumerhave an incomeelasticity of demandgreater than zero, butless than one?

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