PeD mirror walkthrough calculations.

1. Revision
Elasticity & it’s importance

2. Did anyone watch some
adverts?
Did you find anything offering 0%

3. Elasticity
“Elasticity is a measure of
the extent quantity responds ?
to which a
to a
change in a variable.”

4. Calculating P.E.D.
P.E.D. = Percentage change in Demand
Percentage change in Price
% Change = Difference x 100 = _____ %
Original

5. What is Price elasticity?
• The responsiveness of one variable to changes
in another
• When price rises what happens to demand?
Demand falls
BUT!
How much does demand fall?

6. Elasticity – the concept
• If price rises by 10%, what happens to demand?
• We know demand will fall
• By more than 10%?
or
• By less than 10%?
• Elasticity measures the extent to which
demand will change

7. PeD Mantra….
Consider a
10% increase
in price
• If answer is between 0 and -1
• e.g. -0.4 or -0.8
• The relationship is inelastic
Consumers
DO NOT
react much to a
change in price
• If the answer is between -1 and infinity
• e.g. -1.4 or 2 or 12.3
• The relationship is elastic
Consumers
DO react
To changes in
prices
21/09/14 7

8. Elastic or inelastic????
Would customers react lots (ELASTIC)
or not much (INELASTIC)….. With the
following PeD’s????
Use your
whiteboards

9. Elastic or inelastic?
-3
Elastic
– because a 10% increase in price
would lead to a 30% fall in demand

10. Elastic or inelastic?
-0.4
Inelastic
– because a 10% increase in price
would lead to a 4% fall in demand

11. Elastic or inelastic?
-0.1
Inelastic
– because a 10% increase in price
would lead to a 1% fall in demand

12. Elastic or inelastic?
-1.1
Elastic
– because a 10% increase in price
would lead to a 11% fall in demand

13. Elastic or inelastic?
-14
Elastic
– because a 10% increase in price
would lead to a 140% fall in demand

14. 5 examples of
• Elastic
– products or
services
• Inelastic
– Products or
services

15. What about the effect on
revenue?

16. Using PeD to calculate changes in
TR
• What if a company sells
10,000 units at £5.
• What is their current TR?
• TR = P x Quantity
sold
• TR = £5 x 10,000 =
• £50,000
• What if the company has
a PeD of -0.5?
• If they reduced their price
– would the customers
react a bit or loads?
• is -0.5 inelastic or elastic?
• INELASTIC….

17. Using PeD to calculate changes in
TR
• What if a company sells
10,000 units at £5.
• What is their current TR?
• TR = P x Quantity
sold
• TR = £5 x 10,000 =
£50,000
• What if the company has
a PeD of -0.5?
• …. and they reduce
their price to £4.50
• What would happen
to their TR now? Will
it increase or
decrease?
• 1st you need to know what
the % increase in price
has been….?

18. Using PeD to calculate changes in
TR
• What if a company sells
10,000 units at £5.
• And now their price is
£4.50
• What is the %
change?
• Difference/original x
100 = % change
• 5 - 4.50 = 0.5 / 5 x 100 =
-10%
• So if the company
originally sold 10,000
units…..
• And PeD is 0.5
• And price has dropped by
10 %
• What will happen to
DEMAND?
So what’s 5% 0f 10,000 units?
500 units
But would that be a fall or an
increase in sales?????
10% x 0.5 = 5%

19. And the last step of the
calculation…
• The original Q is what would happen to the
company TR if they changed their price from £5
to £4.50, with original sales of 10,000?
Original TR
£5 x 10,000 = £50,000

20. And the last step of the
calculation…
• The original Q is what would happen to the
company TR if they changed their price from £5
to £4.50, with original sales of 10,000?
Original TR
£5 x 10,000 = £50,000
New sales
£4.50 x (10,000 + 500)
= £4.50 x 10,500
= £47,250

21. So a price cut ….
Doesn’t guarantee higher
profits!

22. What if they increased their price?
• Price was £5 but now
£5.50?
• Price increase is 0.5/5 x
100 = +10%
• The company still has a
PeD of -0.5
• So sales will FALL by
5%
• 10,000 x 5%
• = 10,000 -500
• So £5.50 x 9,500
• TR = £52,250
• So an inelastic
product will earn
MORE REVENUE
with a price rise!

23. Who needs a recap?
If not – get on with the worksheet

24. Worksheet Questions…
1. A company has a price cut from £10 to £8. What will be
the impact on their revenue if they have a PeD of 0.8
and originally sold 30 units?
2. A company has a price cut from £20 to £14. What will
be the impact on their revenue if they have a PeD of 2
and originally sold 100 units?
3. A company has a price rise from £15 to £16. What will
be the impact on their revenue if they have a PeD of 2
and originally sold 100 units?