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Price elasticity of demand 04 03

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simple but effective presentation on what is elasticity

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Price elasticity of demand 04 03

  1. 1. Price Elasticity of Demand
  2. 2.  Demand is Elastic if the proportional change in Quantity is greater than the proportional change in price.Example: Price increases by 5% & the quantity demanded falls by 6%... Demand is Unitary when the proportional change in quantity is equal to the proportional change in price.Example: Price falls by 5% & the demand rises by 5%...
  3. 3.  Demand is inelastic if the proportional change in quantity is less than the proportional change in price.Example: Price falls by 5% & the demand increases by 2%...
  4. 4. PED = % change in quantity demandedPrice % change in price P Gain in total revenue (5%0 P1 Loss in total revenue (6%) Q Q1 Quantity Elastic demand P.E.D. = (>1)
  5. 5. Price P Inelastic demand P.E.D. = (<1) Loss in total revenue P1 Gain in total revenue Quantity Q Q1
  6. 6. Features of Price Elasticity of Demand Feature Elastic Goods Inelastic GoodsPED value Greater than 1 Less than 1Price rise means Larger fall in demand Smaller fall in demandSlope of demand Flat SteepcurveNumber of Many FewsubstitutesType of good Luxury NecessityPrice of good Expensive CheapExample Jaguar cars Petrol
  7. 7. Price Elasticity of Supply
  8. 8.  Priceelasticity of supply (PES) measures the responsiveness of supply to a given change in price. PES = % change in quantity supplied % change in price
  9. 9.  Supply is said to be elastic when the quantity changes by a greater proportion than the price change. Inelasticsupply is when quantity changes by a smaller proportion than the price change.
  10. 10. Features of Elasticity of Supply Feature Elastic Goods Inelastic Goods PES Value Greater than 1 Less than 1 A prise rise means A larger rise in supply A smaller rise in supplySlope of supply curve Flat SteepThe good is produced Rapidly Slowly The time period is Months Days The firm has Large stocks Limited stocks Example Screws Beef
  11. 11. Formation of a Market Price Inthe market place the forces of Supply & Demand interact to create a market price. Ineconomics this is known as the equilibrium price – the price at which the quantity demanded equals the quantity supplied…
  12. 12. Price of Quantity Quantity Fish Demanded Supplied 60p 300 600 55p 400 550 50p 500 500 45p 600 450 40p 700 400 35p 800 350
  13. 13. The equilibrium price is 50p. At this price the quantity that will be bought & sold is 500 Price D S 60 50 40 30 20 10 0Quantity 100 200 300 400 500 600 700 800

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