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AS Unit F581:AS Unit F581:Markets in actionMarkets in action
Competitive markets Competitive markets and how they workand how they work
Price elasticity of Price elasticity of demanddemand
Definition and formulaDefinition and formula
Definition The responsiveness of quantity demanded to a change in price
Definition The responsiveness of quantity demanded to a change in price
FormulaFormula
price in change percentagedemanded quantity in change percentage
TerminologyTerminology
Price elastic demandWhere the percentage change in quantity demand is greater than the percentage change in price
PED is less than -1
Price elastic demandWhere the percentage change in quantity demand is greater than the percentage change in price
PED is less than -1
Price inelastic demandWhere the percentage change in quantity demanded is less than the percentage change in pricePED is between -1 and zero
Price inelastic demandWhere the percentage change in quantity demanded is less than the percentage change in pricePED is between -1 and zero
6)
Work in pairs
Decide whether the product is price elastic or price inelastic
and why
Task 1Task 1
Determinants of PED
The number of
close substitutes
The number of
close substitutes
The degree of necessity
The degree of necessity
The % of a consumer’s income
The % of a consumer’s income
Time periodTime period
The breadth of definition
The breadth of definition
Extent of habitual
consumption
Extent of habitual
consumption
Usefulness of PEDUsefulness of PEDBusinesses 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?
Task 2Task 2Read 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?
Task 3Task 3Using the diagrams on the worksheet explain how the change in price indicated would affect the revenue from sales
Q2Q1
P2
P1
D
Quantity demand
Price
Quantity demandQ2 Q1
P2
P1
D
Price
Task 4Task 4A 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
The nature of The nature of ‘estimates’‘estimates’
Task 5Task 5Answer the past paper questions on flybe in the worksheet
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