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)

22. Income elasticity

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?