These notes include Price, income and cross elasticities of demand, Income Elasticity of Demand, Cross Elasticity of Demand for Week 4. Types of Market Failure, Externalities for Week 6. Alternative views of consumer behaviour, Public Goods, Information Gaps for Week 7. And Government Intervention ...
1.2.3 Price, income and cross elasticities of
demand
1) Own Price Elasticity of Demand
a) Understanding of price elasticity of demand
i. Price Elasticity of Demand- a measure of how quantity demanded of a good
responds to a change in its price
e.g. when price of a toy car increased from 50p to 70p the demand for them
fell from 15 cars to 10.
ii. Numerical value of own price elasticity of demand is usually negative
because demand falls as price increases for most goods.
(b) Use formula to calculate price elasticity of demand
i. ii. PED formula = percentage change in quantity demanded/percentage
change in price
(c) Interpret numerical values of price elasticity of demand
i.Define and explain each of the following terms, referring to its numerical
value and showing it graphically:
Price elastic- If the value of PED is >1
% change in price will cause a larger percentage change in quantity
demanded. value of PED, more elastic demand is for the good. Revenue
increases by decreasing prices (not as desirable for businesses as incr. costs of
production w higher demands)
e.g. LIDL
, Perfectly price elastic- PED of infinity
Rise in price= demand falls to zero. Fall in price= infinite increase in quantity
demanded.
Consumers are willing to buy all they can get at P but none at a higher price.
Price inelastic- value of PED is between 0 and 1
% change in price will cause a smaller % change in QD. Smaller PED value,
more inelastic demand for the good. (not very responsive)
Change in QD is “less than proportionate” to the price change, by (X) x
e.g waitrose
(better for businesses as a rise in market price will lead to an increase in total
revenue for seller of the product)
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