PRICE ELASTICITY OF DEMAND

TB page 46 - 56
PRICE ELASTICITY OF DEMAND
Measures the degree of responsiveness (sensitivity) of the quantity demanded of
a product following a change in its price.

Price Elastic
If a price change causes a relatively large change in quantity demanded
Ex: Coca Cola, smartphones, Louis Vuitton bag, chocolate bar, transportation

Price Inelastic
If a price change causes a relatively small change in quantity demanded
Ex: rice, gasoline (oil), water, electricity, tobacco, alcohol
DETERMINANTS OF PED (TB p.51-52)
Time
Habits, addictions, and tastes
Income
Substitute (availability
and price of)
 Price Elastic Price Inelastic
Pric

PED > 1 (ignoring minus sign) PED < 1 (ignoring minus sign)

Lots of substitutes Very few substitutes

Little loyalty to the product Necessity or strong addiction
Luxurious goods (depends on the income share) Strong brand loyalty (eg: Cambridge IGCSE and A
Often relatively expensive Level)
Usually not too expensive
Perfectly inelastic Perfectly elastic

PED = 0 PED = ∞
Cancer treatment/chemotheraphy, Goods with perfect substitute readily
Prescription drugs, anti-venom injection available on the market
Other scarce/non-substitute goods
FORMULA
PED = % change in Quantity demanded %△Qd
% change in price %△P

%△Qd = change in quantity x 100 Q2 - Q1 x 100

original quantity Q1
%△P = change in price x 100 P2 - P1 x 100
original price P1
EXERCISE (answer on p.47)
XXI increases its ticket price from $10 to $11 and it
leads to demand falling from 3500 to 3325 customers
per week. Calculate the PED for XXI tickets.
EXERCISE (answer on p.48)
The demand for football match tickets at $50 is 50,000
per week. If the football club raises its price to $60 per
ticket and demand subsequently falls to $45,000 per
week, what is the value of price elasticity of demand?
PED and COMPANIES
Knowledge of PED for a product can inform firms/companies about
their pricing strategy in order to maximise sales revenues.
EXERCISE - page 56
Suppose Sharma Fabrics sells 1350 units of wool per month at $4 each. Following
an increase in price to $4.60 per unit, the firm discovers that the quantity demanded
falls to 1215 units per month.
A. Calculate the PED for wool sold at Sharma Fabrics.
B. Explain how knowledge of PED can be of use to Sharma Fabrics.
Hi SEC 3 students ..
v I hope you are still enthusiastic with this Home Learning :) Do this Home Learning
seriously and keep up with the pace or you will have to keep up with many materials.
v study from this link if you still need further explanation
https://www.youtube.com/watch?v=HHcblIxiAAk
v To self-check your comprehension, do the following exercise in the TB :
page 50 Exam Style questions no.1 & 2
page 52 Exam Style question
page 56 Exam style questions (slide 12)
v Check your answers next week April 6 - 10).