Price Elasticity of Demand
Demand
Lesson duration is: 15 minItems in this lesson
Demand
What we're going to cover
This session
What is demand?
Influences on demand
What is price elasticity of demand (PED)?
Calculating PED
Interpreting PED
Analysing the impact of PED on revenue
Remember - This is your session, if I'm going too fast or too slow, let me know and we change the pace to suit you.
What is demand?
Demand is how much of a product customers want to and are able to buy.
Being able to anticipate demand is important because it will influence how much of a product a business produces and what staff they need to employ.
Influences on demand
Influences on demand - Price
How much would you pay? Is it value for money? Is it affordable?
Influences on demand - Price of other products
Complementary products are demanded at the same time. An increase in the price of a complementary product will reduce demand for both products.
Substitute products - If the price of a substitute increases that will reduce the demand for that product and increase demand for the other.
Other influences on demand
Income - Usually with more income, demand for products increases.
Customer tastes - Customers’ attitudes towards products will change with their tastes.
Marketing activities - The marketing activities of the business and of rivals’ businesses will influence how much customers want to buy. Can you find and buy the product easily?
Elasticity of demand
Marketing data helps a business understand what is influencing demand for its products and how sensitive demand is to any change in these factors.
The sensitivity of demand to changes in different factors is measured by the elasticity of demand.
Price Elasticity of Demand
The price elasticity of demand (PED) examines the effect of a price change on the quantity demanded, all other factors unchanged.
% Change in Quantity Demanded
% Change in Price
PED =
Price Elasticity of Demand
% Change in Quantity Demanded
% Change in Price
PED =
%△QD
% △ P
PED =
%△QD
% △ P
Calculating PED
% Change in Quantity Demanded
% Change in Price
PED =
Greggs increases the price of its sausage rolls by 10%. As a result, quantity demanded falls by 15%.
PED =
% Change in Quantity Demanded
10
PED =
-15
10
= -1.5
Calculating PED - Your turn
% Change in Quantity Demanded
% Change in Price
PED =
Costa Coffee increases the price of its flat whites by 10%. Quantity demanded falls by 5%.
PED =
% Change in Quantity Demanded
10
PED =
-5
10
= -0.5
Calculating PED - Your turn
% Change in Quantity Demanded
% Change in Price
PED =
ASOS decreases the price of a jumper by 15% during a sale. Quantity demanded increases by 45%.
PED =
% Change in Quantity Demanded
-15
PED =
45
-15
= -3
What do the PED results mean?
Positive or negative?
The sign of the answer tells us whether the changes in quantity demanded and price are going in the same or opposite directions.
If the quantity demanded and the price move in the same direction the PED will be positive.
Price decreases and quantity demanded decreases
Price increases and quantity demanded increases
What do the PED results mean?
Positive or negative?
Most calculations of PED give negative results.
Price and quantity demanded usually move in opposite directions.
What do the PED results mean?
Size of the answer - How big is the number?
Shows how much the quantity demanded changes in response to a 1% change in price.
The bigger the number the more quantity demanded changes following a price change.
PED = -2
A +1% change in price leads to a -2% (-2 × 1%) change in quantity demanded.
PED = -0.5
A +1% change in price leads to a -0.5% (-0.5 × 1%) change in quantity demanded.
What do the PED results mean?
PED = -2
A +10% change in price leads to a -20% (-2 × 10%) change in quantity demanded, all other factors constant.
PED = -0.5
A +10% change in price leads to a -5% (-0.5 × 10%) change in quantity demanded.
PED greater than 1 so price changes lead to larger changes in demand. Known as being Price Elastic.
PED less than 1 so price changes lead to smaller change in demand. Known as being Price Inelastic.
What do the PED results mean?
Price Elastic = PED greater than > 1 (ignoring the sign). The change in quantity demanded is bigger than the change in price.
Price Inelastic = PED less than than < 1 (ignoring the sign). The change in quantity demanded is smaller than the change in price.
Price increase of 10% led to a decrease in Quantity Demanded of 20%.
PED = -2
Is this Price Elastic or Price Inelastic?
Price Elastic
Price Inelastic
Price increase of 5% led to a decrease in Quantity Demanded of 15%.
PED = -3
Is this Price Elastic or Price Inelastic?
Price Elastic
Price Inelastic
Price increase of 10% led to a decrease in Quantity Demanded of 5%.
PED = -0.5
Is this Price Elastic or Price Inelastic?
Price Elastic
Price Inelastic
Why does PED matter? How does it impact revenue?
Price Inelastic Demand
A change in price leads to a smaller change in the quantity demanded.
Price increase = Increased Revenue
Sale price per unit has gone up and fall in sales so low that this does not offset the higher price and revenue increases.
Price Elastic Demand
A change in price leads to a larger change in the quantity demanded.
Price increase = Lower Revenue
Price increase means the fall in the number of units being sold is so great that it outweighs the effect of the higher price per unit being charged.
Price Inelastic Demand
Price Inelastic Demand
A change in price leads to a smaller change in the quantity demanded.
Price increase = Increased Revenue
Sale price per unit has gone up and fall in sales so low that this does not offset the higher price and revenue increases.
Explain what will happen to revenue if sales price of a product is decreased and it has Price Elastic Demand?
Explain what will happen to revenue if sales price of a product is decreased and it has Price Inelastic Demand?
Why does PED matter?
Important for businesses when setting the price because they will want to estimate the impact on sales and revenue of any potential price change.
Next session
Analyse the influences on PED
Past paper questions
