The document discusses various concepts related to elasticity of demand, including: 1) It emphasizes the importance of drawing diagrams correctly when explaining elasticity, ensuring demand and supply curves are the right way round and changes are well explained. 2) It outlines factors that affect price elasticity of demand, including whether a product is a necessity or luxury, availability of substitutes, consumer income, brand loyalty, and habits. 3) It discusses peak and off-peak demand, showing how suppliers can charge higher prices during peak times by shifting the demand curve rightwards. 4) It provides the formula for calculating cross-price elasticity of demand and works through an example of estimating changes in the demand

1. Unit 1 Micro
The Importance of
Elasticity of Demand

2. Examiners reward
answers that provide
chains of
reasoning

3. These are good connective phrases
by contrast…
A consequence of
this might be …
therefore…
this might
mean…
on the other
hand…this is because

4. 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

5. Price Elasticity of Demand

6. 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

7. Factors that Affect Price Elasticity
Necessity or
luxury?
Availability of
substitutes
Consumer
income
Brand loyalty
Habits
Frequency of
purchase

9. Peak and Off-Peak Demand

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. 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. 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. 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. 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. Cross Price Elasticity of Demand

16. Cross Price Elasticity of Demand

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. 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. 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. 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. 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. Income elasticity – counter cyclical
products

24. And for pizza too!

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?