1. AS Unit F581:
Markets in action
Competitive markets
and how they work

2. Price elasticity of
demand

3. Definition and formula
Definition
Definition
The responsiveness of quantity
The responsiveness of quantity
demanded to a change in price
demanded to a change in price
Formula
Formula
percentage change in quantity demanded
percentage change in price

4. Terminology
Price elastic demand
Price elastic demand
Where the percentage change in
Where the percentage change in
quantity demand is greater than the
quantity demand is greater than the
percentage change in price
percentage change in price
PED is less than -1
PED is less than -1
Price inelastic demand
Price inelastic demand
Where the percentage change in
Where the percentage change in
quantity demanded is less than the
quantity demanded is less than the
percentage change in price
percentage change in price
PED is between -1 and zero
PED is between -1 and zero

5. Task 1
6)
Work in pairs
Decide whether the product is
price elastic or price inelastic
and why

6. The number
The number
of close
of close
substitutes
substitutes
The % of a
The % of a
consumer’s
consumer’s
income
income
The degree of
The degree of
necessity
necessity
Determinants of PED
Extent of
Extent of
habitual
habitual
consumption
consumption
Time
Time
period
period
The
The
breadth of
breadth of
definition
definition

7. Usefulness of PED
Businesses might use the concept of Ped to
help them find answers to the following:
 Should firms charge a high or low price when a
product is launched?
 Should producers absorb a tax, or can they
pass it onto consumers?
 Will discounts lead to a rise in total revenue or
will extra sales actually cause total spending by
consumers to fall?
 Should businesses charge the same price to all
consumers or would a policy of price
discrimination be more profitable?

8. Task 2
Read the case study about the
pricing strategy of airlines and
suggest how a knowledge of the
price elasticity of demand of air
travel might be useful to airlines.
Think about:
- what is the impact on sales as fares rise?
- will revenue rise or fall?
- how would knowing the PED help?

9. Task 3
Using the diagrams on the
worksheet explain how the
change in price indicated would
affect the revenue from sales

10. Price
P1
P2
D
Q1
Q2
Quantity demand

11. Price
P2
P1
D
Q2
Q1
Quantity demand

12. Task 4
 A business cannot know its PED with
certainty. All PED values are estimates.
They can be estimated in two ways:
 price experimentation
 econometrics
 Why might the PED estimates derived
from each method be unreliable?
 answer on your worksheet

13. The nature of ‘estimates’

14. Task 5
Answer the past paper questions
on flybe in the worksheet