Price elasticity of demand

1. Unit 1 Micro
The Importance of
Elasticity of Demand

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3. Examiners reward
answers that provide
chains of
reasoning

4. These are good connective phrases
by contrast…
A consequence of
this might be …
therefore…
this might
mean…
on the other
hand…this is because

5. Diagrams matter!
Diagram must haves
Fully labeled
Original and new equilibrium
Demand and supply the correct way round
Well explained – you must explain why the
curve has shifted, in detail
Think about the elasticity – e.g. oil has
inelastic demand and supply

6. Price Elasticity of Demand

7. 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

8. Factors that Affect Price Elasticity
Necessity or
luxury?
Availability of
substitutes
Consumer
income
Brand loyalty
Habits
Frequency of
purchase

10. Peak and Off-Peak Demand

11. Peak and Off-Peak: Price & Revenue
Price
Quantity
Price
Quantity
S1
Q1
Q1: Diagram assumes a fixed supply
capacity in the market
Q1
S1
D1

12. Peak and Off-Peak: Price & Revenue
Price
Quantity
Price
Quantity
S1
Q1
Q1: Diagram assumes a fixed supply
capacity in the market
Q1
S1
P off-
peak D1

13. Peak and Off-Peak: Price & Revenue
Price
Quantity
Price
Quantity
S1
Q1
Q1: Diagram assumes a fixed supply
capacity in the market
Q1
S1
P off-
peak D1
D2

14. Peak and Off-Peak: Price & Revenue
Price
Quantity
Price
Quantity
S1
Q1
Q1: Diagram assumes a fixed supply
capacity in the market
Q1
S1
P off-
peak D1
D2
P peak

15. Peak and Off-Peak: Price & Revenue
Price
Quantity
Price
Quantity
S1
Q1
Q1: Diagram assumes a fixed supply
capacity in the market
Q1
S1
P off-
peak D1
D2
P peak

16. Cross Price Elasticity of Demand

17. Cross Price Elasticity of Demand

18. 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?
Cross price elasticity

19. 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
Cross price elasticity

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

24. Income elasticity – counter cyclical
products

25. And for pizza too!

26. 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?

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students, teachers and
tutor2u on Twitter:
#econ1
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