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