PRICE ELASTICITY

OF
DEMAND
What is Price Elasticity of
Demand?
Economists,
Economists,Marketing
Marketingmanagers
managersetc.,
etc.,
need
needtotoknow
knowwhat
what effects
effectsaachange
change
ininprice
pricehas
hason
onthe
thequantity
quantity
purchased
purchased(Demanded).
(Demanded).

Price
PriceElasticity
Elasticity
measures how
measures how
responsive
responsivedemand
demandisisto
to
changes
changesininprice.
price. Handout Page 2
Handout Page 2
 Review
Demand for Mars bars At ₤.30 the shop sells
Demand for Mars bars Atmars
₤.30 the
₤.50 300 barsshop
per sells
300 mars bars per
week.
week.
₤.40

Dropping the price to

Price

₤.30 Dropping
₤.20 the shopthe price
sells 400to
₤.20bars
mars the shop sells 400
per week.
mars bars per week.
₤.20

₤.10

100 200 300 400 500 600 700 800

Quantity Demanded (per week)
 An
AnElastic
ElasticDemand
DemandCurve
Curve

₤500 Dropping the price to

Dropping the price to
₤200 the demand
₤200 the to
increases demand
620 (over
₤400 increases to 620 (over
double the amount
doubledemanded).
initially the amount
initially demanded).
Price

₤300

₤200

₤100

100 200 300 400 500 600 700 800

Quantity Demanded
 An Elastic Demand Curve
An Elastic Demand Curve

Effects on revenue:
₤500 Effects on revenue:
₤300 x 300 = ₤ 90,000
₤400 ₤300 x 300 = ₤ 90,000
₤200 x 620 = ₤ 125,000
₤200 x 620 = ₤ 125,000
Price

₤300

₤200

₤100

100 200 300 400 500 600 700 800

Quantity Demanded
 An
AnElastic
ElasticDemand
DemandCurve
Curve

₤500 A small increase in

A small increase in
price by ₤50 results
price by ₤50 results
in a sharp fall in
₤400 in a sharp fall in
quantity
quantity
demanded.
₤300 demanded.

₤200

₤100

100 200 300 400 500 600 700 800

Quantity Demanded
 Elastic Demand Cure

A demand curve is Elastic

when a percentage change
in price results in a
proportionally LARGER
percentage change in
quantity demanded.
 What
What is
is the
the approximate
approximate
quantity
quantity demanded
demanded at
at ₤.30?
₤.30?

Between
Between ₤.40
₤.40 and
and ₤.30
₤.30 demand
demand is
is
____________.
____________.
Quantity
₤.50 Demanded Give
Give aa reason
reason why.
why.

₤.40
Price

₤.30

₤.20

₤.10

100 200 300 400 500 600 700 800

Quantity Demanded
 An Inelastic Demand Curve

₤500
Dropping the price to
₤200 the demand
₤400
increases only 340.
Price

₤300

₤200

₤100

100 200 300 400 500 600 700 800

Quantity Demanded
 An Inelastic Demand Curve

₤500 Effects on revenue:

Effects on revenue:
₤300 x 300 = ₤
₤400 ₤300 x 300 = ₤
90,000
90,000
₤200 x 340 = ₤
₤200 x 340 = ₤
Price

₤300 68,000
68,000
₤200

₤100

100 200 300 400 500 600 700 800

Quantity Demanded
 An Inelastic Demand Curve

₤500 An increase in price

An increase in price
by ₤50 results in a
by ₤50 results in a
very small decrease
₤400 very small decrease
in the quantity
in the quantity
demanded.
demanded.
Price

₤300

₤200

₤100

100 200 300 400 500 600 700 800

Quantity Demanded
Inelastic Demand Cure

A demand curve is Inelastic

when a percentage change
in price results in a
proportionally smaller
percentage change in
quantity demanded.
 Price elasticity and A
A company
company selling
selling specialist
specialist drill
drill
bits
bits increases
increases the
the price
price from
from ₤20
₤20 to
to
company revenue ₤40.
₤40.

What
What isis the
the weekly
weekly revenue
revenue the
the
Quantity company
company is is receiving
receiving at
at the
the original
original
₤50 Demanded price?
price?
___________________
___________________
₤40 What
What isis the
the weekly
weekly revenue
revenue the
the
company
company is is receiving
receiving at
at the
the new
new
price?
price?
Price

₤30 ___________________
___________________

Highlight
Highlight the
the area
area of
of the
the graph
graph
₤20 that
that represents
represents the
the gain
gain in
in
revenue.
revenue.
₤10 Highlight
Highlight the
the area
area of
of the
the graph
graph
that
that represents
represents the
the loss
loss in
in revenue.
revenue.

100 200 300 400 500 600 700 800

Quantity Demanded per week
 A
A retail
retail store
store selling
selling “KitKats”
“KitKats” increases
increases the
the price
price from
from twenty
twenty pence
pence
to
to thirty
thirty pence.
pence. Below
Below is
is the
the demand
demand curve.
curve.

What
What is
is the
the weekly
weekly revenue
revenue the
the company
company is
is receiving
receiving at
at the
the original
original price?
price?
___________________
___________________
What
What is
is the
the weekly
weekly revenue
revenue the
the company
company is
is receiving
receiving at
at the
the new
new price?
price?
___________________
___________________
₤.50
Highlight
Highlight the
the area
area of
of the
the graph
graph that
that represents
represents the
the gain
gain in
in revenue.
revenue.
Highlight
Highlight the
the area
area of
of the
the graph
graph that
that represents
represents the
the loss
loss in
in revenue.
revenue.
₤.40
Quantity
Demanded
Price

₤.30

₤.20

₤.10

100 200 300 400 500 600 700 800

Quantity Demanded per week
Discussion, which of the following
are price elastic or price inelastic?
 How to calculate Price Elasticity
of Demand

Percentage change quantity demanded

Price Elasticity Percentage change quantity demanded
Price Elasticity
of Demand
of Demand
==
Percentage change in Price
Percentage change in Price

Percentage change quantity demanded divided by

Percentage change quantity demanded divided by
Percentage change in price
Percentage change in price
 How to calculate
percentages

To calculate a percentage To calculate a percentage

change in demand: change in price:
Change in demand x 100 Change in price x 100
Original demand Original price
The price has
The percentage
The price
changed has₤300
from change in price
tochanged from=₤300
₤200 change -₤100 ÷ ₤300 x 100 =
to ₤200 change =
₤100
₤100 33.33%
₤500 The percentage
change in
₤400 demand
340 ÷ 300 x 100
Price

₤300 = 113.33%
₤200
Demand has
₤100 changed from 300
to 640 change = 340

100 200 300 400 500 600 700 800

Quantity Demanded
 Calculating the price elasticity
of demand

Percentage (%) change quantity demanded

Price Elasticity Percentage (%) change quantity demanded
Price Elasticity
of Demand
of Demand
==
Percentage (%) change in Price
Percentage (%) change in Price

The percentage change in

Price demand = 113.33%
Elasticity =
-3.4
The percentage change in price
= -33.33%
 Price Elasticity = -3.4

Demand for a product usually rises when the

price falls, the relation between then is inverse
this is why we get a negative figure. This minus
sign is sometimes ignored.

The number 3.4 shows the degree of elasticity

 Price Elasticity Values

 Price elastic = more than 1

 the % change in price will lead to a Larger % change
in quantity demanded.

 Price inelastic = less than 1

 the % change in price will lead to a Smaller %
change in quantity demanded.
 Fab Tuck Co
 Fab Tuck sells confectionary.

 Last week, they set the high price of 30p for

Snickers bars and sold 20.

 This week, they decided to reduce the price to

27p and sells 30.

Work out whether Snicker is price

elastic and inelastic
First you need to work out the
percentage change.

Week Week Percentage

1 2 change

Quantity 20 30

Price 30p 27p

Percentage = Change x 100

Original
 Week Week Percentage
1 2 change

Quantity 20 30 50%
30p 27p -10%
Price

Elasticity = 50% -5
-10%
 Thanks to
ReneS matches

Jennifer Leigh matches

Zsolt Berky landrover
MK Media Productions spaghetti
Jurvetson diamond
Paul Davidson Jet
To calculate a percentage
change in demand:
Change in demand x 100
Original demand
A demand curve is Inelastic
when___________________________________
________________________________________
________________________________________
________________________________________
________________________________________
Price elasticity =

To calculate a percentage
change in demand:
The price has The
Thepercentage
percentage
The price has₤300 change
changed
tochanged
from
from=₤300
₤200 change
changeininprice
price
to ₤200 change =
_____
-₤100 ÷ ₤300 x 100 =
-₤100 ÷ ₤300 x 100 =
_____ _______
_______ The percentage
₤500 change in
demand
₤400 340 ÷ 300 x 100
= _____
Price

₤300

₤200 Demand has

changed from
300 to 640 change
₤100
=______

100 200 300 400 500 600 700 800

Quantity Demanded