Price Elasticity of Demand

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Price elasticity of demand

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Price Elasticity of Demand

  1. 1. Unit 1 Micro The Importance of Elasticity of Demand
  2. 2. Get help from fellow students, teachers and tutor2u on Twitter: #econ1 @tutor2u_econ
  3. 3. Examiners reward answers that provide chains of reasoning
  4. 4. These are good connective phrases by contrast… A consequence of this might be … therefore… this might mean… on the other hand…this is because
  5. 5. Diagrams matter! Diagram must haves Fully labeled Original and new equilibrium Demand and supply the correct way round Well explained – you must explain why the curve has shifted, in detail Think about the elasticity – e.g. oil has inelastic demand and supply
  6. 6. Price Elasticity of Demand
  7. 7. Elasticity Matters! What do I need to know? The definitions of each elasticity The formula’s and be confident in using them How to draw the diagrams The determinants of PED and PES Examples Why they are important
  8. 8. Factors that Affect Price Elasticity Necessity or luxury? Availability of substitutes Consumer income Brand loyalty Habits Frequency of purchase
  9. 9. Peak and Off-Peak Demand
  10. 10. Peak and Off-Peak: Price & Revenue Price Quantity Price Quantity S1 Q1 Q1: Diagram assumes a fixed supply capacity in the market Q1 S1 D1
  11. 11. Peak and Off-Peak: Price & Revenue Price Quantity Price Quantity S1 Q1 Q1: Diagram assumes a fixed supply capacity in the market Q1 S1 P off- peak D1
  12. 12. Peak and Off-Peak: Price & Revenue Price Quantity Price Quantity S1 Q1 Q1: Diagram assumes a fixed supply capacity in the market Q1 S1 P off- peak D1 D2
  13. 13. Peak and Off-Peak: Price & Revenue Price Quantity Price Quantity S1 Q1 Q1: Diagram assumes a fixed supply capacity in the market Q1 S1 P off- peak D1 D2 P peak
  14. 14. Peak and Off-Peak: Price & Revenue Price Quantity Price Quantity S1 Q1 Q1: Diagram assumes a fixed supply capacity in the market Q1 S1 P off- peak D1 D2 P peak
  15. 15. Cross Price Elasticity of Demand
  16. 16. Cross Price Elasticity of Demand
  17. 17. The 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 for Good Y with respect to Good X? Cross price elasticity
  18. 18. The 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 for Good Y with respect to Good X? Xed = % change in DX / % change in PY = +10% / +20% = +0.5 I.e. X and Y are weak substitutes Cross price elasticity
  19. 19. Using Cross Price Elasticity The table below gives estimates of the price elasticity’s and cross-elasticities of demand for bus and rail travel. What would be the change in the volume of rail travel resulting from a 25% increase in bus fares?
  20. 20. Using Cross Price Elasticity The table below gives estimates of the price elasticity’s and cross-elasticities of demand for bus and rail travel. What would be the change in the volume of rail travel resulting from a 25% increase in bus fares? Answer: = +4% (+0.16 x 25)
  21. 21. Income elasticity
  22. 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. 23. Income elasticity – counter cyclical products
  24. 24. And for pizza too!
  25. 25. Application of income elasticity The table shows a consumer's expenditure on a range of goods at different levels of income. For which good does the consumer have an income elasticity of demand greater than zero, but less than one?
  26. 26. Get help from fellow students, teachers and tutor2u on Twitter: #econ1 @tutor2u_econ

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