Price Elasticity of Demand

AS Economics

Aims and Objectives

Aim: Understand Ped

Level

Objectives:
Define Ped Draw different Peds

E-D C-B

B-A
A-A*

Analyse the effects on Peds of different factors changing Evaluate changes in Ped

Starter
Is the demand for cigarettes inelastic or elastic?

Has this changed over time?

Importance of Ped for Firms

Firms can use Ped estimates to predict: The effect of a change in price on qty demanded The effect of a change in price on TR The likely price volatility in a market following unexpected changes in supply The effect of a change in indirect tax on price and qty demanded and also whether the firm is able to pass n some or all of the tax to the consumer.

Elastic or Inelastic Demand?

A 10% fall in the price of Euro-star tickets A 20% increase in the price of the Financial Times A taxi home from a nightclub on a Friday night

A 15% rise in car insurance premiums charged by Tesco car

insurance Motorway petrol prices rise by 5% The price of central heating oil rises by 20% in December A leisure club decreases monthly charges by 15% in a bid to

increase number of members

Time Frame & Ped Oil Price Shocks

Two oil shocks in 1970s Could be in 21st Century too! http://www.youtube.com/watch?v=VCLRlVxO H-Q

Time Frame & Ped Oil Price Shocks

Response to higher prices was modest in the immediate period As time passed people found ways to consume less petroleum
Better mileage from cars by switching to smaller vehicles Higher spending on insulation Car sharing

Car manufacturers invested enormous sums in fuel efficient cars seeing a long term market opportunity Development of oil substitutes in long run

Short Term Demand For Oil

Price P2 P1
The demand for oil is inelastic in response to price changes in the short run. Mainly because it is an essential input into many production processes.

Q2 Q1

Qty

Short Term Demand For Oil

Price P2 P1 P3
D SR D LR Longer run demand is relatively more elastic if non-oil substitutes develop

Q2

Q1

Q3

Qty

Using Ped
For each of the following questions discuss in your groups how you could use Ped to provide answers. 1) How much tax revenue will higher sin taxes on cigarettes and alcohol provide? 2) Why do airline often give discounts for advance bookings? 3) What happens to our demand for foreign holidays when the exchange rate appreciates? 4) Why do hotels lower room-rates at weekends and why do car rental firms charge lower prices at the weekends?

Why are hotel prices so expensive in Edinburgh during the month of August?

Link retail sales with the idea of price elasticity of demand