Elasticity calculations + Homework i.e. no excuses not to try
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Transcript of Elasticity calculations + Homework i.e. no excuses not to try
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Elasticity & it’s importance
Did anyone watch some adverts?
Did you find anything offering 0%
Elasticity
“Elasticity is a measure of the extent to which a
quantity responds to a change in a variable.”
?
Calculating P.E.D.
P.E.D. = Percentage change in Demand
Percentage change in Price
% Change = Difference x 100 = _____ % Original
What is Price elasticity?
• The responsiveness of one variable to changes in another
• When price rises what happens to demand?
Demand fallsBUT!
How much does demand fall?
Elasticity – the concept
• If price rises by 10%, what happens to demand?
• We know demand will fall• By more than 10%?
or• By less than 10%?
• Elasticity measures the extent to which demand will change
09/04/23 7
PeD Mantra….
• If answer is between 0 and -1 • e.g. -0.4 or -0.8• The relationship is inelastic
• If the answer is between -1 and infinity
• e.g. -1.4 or 2 or 12.3 • The relationship is elastic
Consumers DO NOT
react much to a change in
price
Consumers DO react
To changes in prices
Consider a 10% increase
in price
Elastic or inelastic????
Would customers react lots (ELASTIC) or not much
(INELASTIC)….. With the following PeD’s????
Use your whiteboards
Elastic or inelastic?
-3
Elastic– because a 10% increase in price would lead to a 30% fall in demand
Elastic or inelastic?
-0.4
Inelastic– because a 10% increase in price would lead to a 4% fall in demand
Elastic or inelastic?
-0.1
Inelastic– because a 10% increase in price would lead to a 1% fall in demand
Elastic or inelastic?
-1.1
Elastic– because a 10% increase in price would lead to a 11% fall in demand
Elastic or inelastic?
-14
Elastic– because a 10% increase in price
would lead to a 140% fall in demand
5 examples of
• Elastic – products or
services
• Inelastic – Products or
services
What about the effect on revenue?
Using PeD to calculate changes in TR
• What if a company sells 10,000 units at £5.
• What is their current TR?
• TR = P x Quantity sold
• TR = £5 x 10,000 =• £50,000
• What if the company has a PeD of -0.5?
• If they reduced their price – would the customers react a bit or loads?
• is -0.5 inelastic or elastic?
• INELASTIC….
Using PeD to calculate changes in TR
• What if a company sells 10,000 units at £5.
• What is their current TR?
• TR = P x Quantity sold
• TR = £5 x 10,000 = £50,000
• What if the company has a PeD of -0.5?
• …. and they reduce their price to £4.50
• What would happen to their TR now? Will it increase or decrease?
• 1st you need to know what the % increase in price has been….?
Using PeD to calculate changes in TR
• What if a company sells 10,000 units at £5.
• And now their price is £4.50
• What is the % change?
• Difference/original x 100 = % change
• 5 - 4.50 = 0.5 / 5 x 100 = -10%
• So if the company originally sold 10,000 units…..
• And PeD is 0.5
• And price has dropped by 10 %
• What will happen to DEMAND?
10% x 0.5 = 5%
So what’s 5% 0f 10,000 units?
500 units
But would that be a fall or an increase in sales?????
And the last step of the calculation…
• The original Q is what would happen to the company TR if they changed their price from £5 to £4.50, with original sales of 10,000?
Original TR
£5 x 10,000 = £50,000
And the last step of the calculation…
• The original Q is what would happen to the company TR if they changed their price from £5 to £4.50, with original sales of 10,000?
Original TR
£5 x 10,000 = £50,000
New sales
£4.50 x (10,000 + 500)= £4.50 x 10,500 = £47,250
So a price cut ….
Doesn’t guarantee higher profits!
What if they increased their price?
• Price was £5 but now £5.50?
• Price increase is 0.5/5 x 100 = +10%
• The company still has a PeD of -0.5
• So sales will FALL by 5%
• 10,000 x 5%• = 10,000 -500
• So £5.50 x 9,500
• TR = £52,250
• So an inelastic product will earn MORE REVENUE with a price rise!
Who needs a recap?
If not – get on with the worksheet
Worksheet Questions…
1. A company has a price cut from £10 to £8. What will be the impact on their revenue if they have a PeD of 0.8 and originally sold 30 units?
2. A company has a price cut from £20 to £14. What will be the impact on their revenue if they have a PeD of 2 and originally sold 100 units?
3. A company has a price rise from £15 to £16. What will be the impact on their revenue if they have a PeD of 2 and originally sold 100 units?