AS Micro The Importance of Elasticity of Demand
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AS Micro The Importance of Elasticity of Demand
- 1. AS Micro The Importance of Elasticity of Demand
- 2. Price Elasticity of Demand
- 3. 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
- 4. Factors that Affect Price Elasticity Necessity or Availability of luxury? substitutes Consumer Brand loyalty income Frequency of Habits purchase
- 6. The price of a tablet computer falls from £800 to £600 and as a result, weekly sales of the tablet device expand from 100,000 to 150,000. It can be inferred that the price elasticity of demand for this price change is? % change in demand = 50% % change in price = -25% Price elasticity of demand = 50 / -25 = -2
- 7. A mobile phone company has 3 million customers for a package of services. Each customer pays a monthly fee of £20. The company conducts market research and estimates that price elasticity of demand for this package is (-) 2. If the company reduces monthly fees by £5, the change in total revenue is likely to be: % change in price = 25% Elasticity = 2 % change in demand = 50% New demand = 4.5 million customers @ £15 = £67.5 million Change in total revenue = + £7.5 million
- 8. A manufacturer reduces the price of its washing machines by 5% and, as a result, the volume of sales of washing machines rises by 4%. The value of price elasticity of demand for the good following this price change is? Ped = 4% / 5% = 0.8 (demand is inelastic)
- 9. In September 2009, the London Evening Standard was charging 50p per copy and selling 250,000 copies a day. In October 2009 a new owner decided to make it a free paper and by March 2010 the Standard was selling 600,000 copies each day. Calculate the price elasticity of demand for this price change. % change in demand = 140% % change in price = 100% Price elasticity of demand = 1.4 (i.e. Elastic)
- 10. Peak and Off-Peak Demand
- 11. Peak and Off-Peak: Price & Revenue Price S1 Price S1 Poff- peak D1 Quantity Q1 Quantity Q1 Q1: Diagram assumes a fixed supply capacity in the market
- 12. Peak and Off-Peak: Price & Revenue Price S1 Price S1 D2 Poff- peak D1 Quantity Q1 Quantity Q1 Q1: Diagram assumes a fixed supply capacity in the market
- 13. Peak and Off-Peak: Price & Revenue Price S1 Price S1 Ppeak D2 Poff- peak D1 Quantity Q1 Quantity Q1 Q1: Diagram assumes a fixed supply capacity in the market
- 14. Peak and Off-Peak: Price & Revenue Price S1 Price S1 Ppeak D2 Poff- peak D1 Quantity Q1 Quantity Q1 Q1: Diagram assumes a fixed supply capacity in the market
- 15. The case for price discounting Spare capacity Help low income Cash-flow groups New Market share customers
- 16. Dangers from discounting Price seen as indicator of quality PED could be lower than expected Consumers become anchored to lower price
- 17. Cross Price Elasticity of Demand
- 18. Cross Price Elasticity of Demand
- 19. Cross price elasticity 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
- 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?
- 21. 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)
- 23. 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
- 25. Rising demand for cinema visits
- 26. And for pizza too!
- 27. 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?