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THE MARKET (contd)
ELASTICITIES
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` P
D
x D
x Q
` P
D
` D
x Q
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` P
` D
` D
x Q
` P
` D
x D
x Q
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` Do you always change how much you buy?
` Or does it depend?
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` If the price rises, you buy less.
` If the price rises, you buy the same.
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` If the price falls, you buy more.
` If the price falls, you buy the same.
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` Low price elasticity` High price elasticity
P
Q
D
D
P
Q
D
D
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` Two Demand Curves/Schedules - in each case,
the quantity demanded rises, as price falls but
the relationship between price and quantity differs
between the two the SLOPE of the twoschedules is different.
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` This measures the responsiveness of quantity
demanded to a change in price.
` It is calculated using a formula ` PED = % change in quantity demanded
% change in price
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` Demand is PRICE ELASTIC when PED is greater than1. In this case, a percentage change in price will lead toan even larger percentage change in quantity.
` Demand is price INELASTIC when PED is less than 1. In
this case, a percentage change in price will lead to asmaller percentage change in quantity demanded.
` Demand is said to be of UNITARY ELASTICITY whenPED is 1. In this case, a percentage change in price willlead to an equal, and opposite, percentage change in
quantity demanded.
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` Price Elasticity of Demand varies between
products because -
` the availability of substitutes - the better the
substitute, the higher the Price Elasticity ofDemand for a product.
` Habit - how easy is it for people to change from
one product to another.
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` The proportion of income spent on the product.
` Absolute price level.
` A necessity?
` Time.
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` Think of something you would buy more of.
` Think of something where your buying habits
would stay the same.
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` What might you cut back on?
` What might you carry on buying in more or less
the same quantities?
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` This measures the responsiveness of quantitydemanded to a change in income.
`
IED
= % change in quantity demanded% change in income
IED is normally positive ie quantity
demanded rises, as income rises.
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` Income Elasticity of Demand (IED) variesbetween products because -
` luxuries (holidays) will tend to have a high IED,whereas necessities (milk) will have a low IED.
` For some products, the IED is negative - inferiorgoods (bus travel; cheap cuts of meat).
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` This measures the responsiveness of the
quantity demanded of one good (A) to a
change in the price on another good (B).
` CED= % change in quantity demanded of good A
% change in price of good B
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` Two goods which are substitutes for each other
will have positive CED an increase in the price
of one will lead to an increase in demand for the
other.` Two goods which are complements will have a
negative CED an increase in the price of one will
lead to a fall in demand for the other.
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` Substitutes? (apples and pears).
` Complements? (petrol and cars).
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` This measures the responsiveness of quantitysupplied to a change in price..
` PES = % change in quantity supplied` % change in price.
` PES may range from zero (no response insupply to a change in price, perfectly inelastic);
to between zero and one (less thanproportionate response, inelastic); to one toinfinity (marked response in supply, elastic).
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` What determines it?
` - how easy is it to switch resources?
` - how much time is there?
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` P P s
`
S
` sS
Q Q
Price Elastic SS Price Inelastic SS
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` Price of a newspaper = 50p
` Total sales = 100,000
` Total revenue = 50,000
` Price increases to 60p
` Total sales = 70,000
` Total revenue = 42,000
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` PED = % change in quantity demanded
` % change in price
` = - 30% = 1.50 = elastic.
` + 20%
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