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PED & PES- Economics.pptx
- 1. Topic: Elasticity ofDemand & Supply Price elasticity of demand (PED) & Price elasticity of supply (PES) Date: 4th Sep, 2023 Yousaf Dar Economics Teacher Mob: +971-553310969 or +92-3214193887
- 2. Unit 2.7 &2.8: PED & PES Learning Objectives By the end of this topic, you will be able to: define price, income and cross elasticity of demand (PED, YED & XED) calculate and interpret PED figures explore the determinants of PED analyze real-life examples to identify elastic and inelastic products in the UAE context discuss the significance & implications of PED define, calculate & interpret PES
- 3. Introduction to Elasticity So far in the analysis of demand & supply, the focus was on understanding the general direction of any change in price and its effect on the quantity demanded or supplied. Would you expect a rise in the price of gasoline in the UAE to have much impact on the demand for gasoline? • OPEC & crude oil price changes • India’s Jet Airways was the second largest airline in India until it stopped flying in 2019 What do Economists mean by Elasticity? • Price Elasticity of Demand PED = Perentage change in quantity demanded Perentage change in price ‘ • Income Elasticity of Demand YED = Perentage change in quantity demanded Perentage change in income • Cross Elasticity of Demand XED = Perentage change in quantity demanded for good A Perentage change in price of good B Unit 2.7: Price elasticity of demand (PED)
- 4. Price elasticity ofdemand (PED): A measure of the responsiveness of the quantity demanded to a change in price. PED = Perentage change in quantity demanded Perentage change in price Calculating PED • Calculate the percentage change in quantity demanded: Change in demand original quantity demanded X 100 • The percentage change in price is: Change in price original 𝒑𝒓𝒊𝒄𝒆 X 100 Unit 2.7: Price elasticity of demand (PED)
- 5. Numerical example forcalculating PED: PED = Perentage change in quantity demanded Perentage change in price For example, the quantity demanded may rise from 200 to 240 as a result of price falling from $10 to $9. In this case the percentage change in quantity demanded is: Change in demand original quantity demanded X 100 i.e. 40 200 X 100 = 20% The percentage change in price is: Change in price original 𝒑𝒓𝒊𝒄𝒆 X 100 i.e. −$1 $10 X 100 = -10% When these changes have been calculated, the percentage changes in quantity demanded is divided by percentage changes in price to give the PED. In this case, this is 20% −10% . Hence the PED is -2. Unit 2.7: Price elasticity of demand (PED)
- 6. Interpretation of PED ThePED figure provides two pieces of information. • One is given by sign, this tells us that there is an inverse relationship between the quantity demanded and price. • The other piece of information is provided by the size of the figure. A figure of -2 of PED, for example, indicates that a 1% change in price will cause a 2% change in quantity demanded. Elastic and inelastic demand • Elastic demand: When the quantity demanded changes by a greater percentage than the change in price • Inelastic demand: When the quantity demanded changes by a smaller percentage than the change in price Unit 2.7: Price elasticity of demand (PED)
- 7. Elastic demand: In thiscase, the percentage change in quantity demanded is: 200 300 X 100 = 66.67% and the percentage change in price is: −$20 $80 X 100 = -25% . Hence, PED = 66.67% −25% = -2.67 This means, a change in price makes a higher change in quantity demanded. These products have a price elastic demand. The value of PED is greater than 1. Unit 2.7: Price elasticity of demand (PED)
- 8. Inelastic demand: In thiscase, the percentage change in quantity demanded is 5% and the percentage change in price is -10 %. Hence, PED = 5% −10% = - 0.5 When the % change in quantity demanded is lesser than the % change in price, it is said to have a price inelastic demand. Their values are always below 1. A change in price makes a smaller change in demand. Unit 2.7: Price elasticity of demand (PED)
- 9. Activity –1 CalculatingPED (3 minutes) Assume that there are two products called product A and product B. Both products are unrelated and are currently priced at AED 100 and demand for them is 1000 units per month. Consider what might happen to the demand for A and B if the price rises to AED 105. The quantity demanded of product A only falls from 1000 to 990, whereas the quantity demanded of product B falls from 1000 to 900. • Calculate the percentage change in quantity demanded & the percentage change in price for goods A & B. By putting these values into the PED equation, we can calculate the PED. Product A = % Δ in 𝑄𝐷 % Δ in P = (-) 0.2 Product B = % Δ in 𝑄𝐷 % Δ in P = (-) 2.0 Unit 2.7: Price elasticity of demand (PED)
- 10. Unit 2.7: Priceelasticity of demand (PED)
- 11. Other degrees ofelasticity 1. Perfectly inelastic demand: When a change in price has no effect on quantity demanded. In this case, PED is 0. 2. Perfectly elastic demand: When a change in price causes a complete change in the quantity demanded. A firm can sell any quantity at the going market price but nothing above this price. In this case, PED is infinity and is represented by vertical straight line. 3. Unit elasticity of demand: When a change in price causes an equal change in the quantity demanded. In this case, PED is unity. Unit 2.7: Price elasticity of demand (PED)
- 12. Unit 2.7: Priceelasticity of demand (PED) Elasticity of Demand Value (ignoring the sign) Description Perfectly Elastic Infinity The percentage change in the quantity demanded is infinite Elastic > 1 The percentage change in QD is greater than the percentage change in the variable Unit Elastic = 1 The percentage change in the QD is equal to the percentage change in the variable. Inelastic < 1 The percentage change in the QD is less than the percentage change in the variable Perfectly Inelastic 0 There is no change in the QD
- 13. Determinants of priceelasticity of demand 1. Availability of substitutes (Attestation services, Entry test fee, IELTS) If a product has many substitute products it will have an elastic demand. For example, Coca-Cola has many substitutes such as Pepsi and Mountain Dew. Thus a change in price will have a greater effect on its demand (If price rises, consumers will quickly move to the substitutes and if price lowers, more consumers will buy Coca-Cola). 2. Proportion of income spend on commodity (Price of a flight vs. price of a bus trip into town) Goods such as rice, water (necessities) will have an inelastic demand as a change in price won’t have any significant effect on its demand, as it will only take up a very small proportion of their income. Luxury goods such as cars on the other hand, will have a high price elastic demand as it takes up a huge proportion of consumers’ incomes. 3. Necessities versus luxuries Luxury products usually have elastic demand. In contrast to luxuries, necessities tend to have inelastic demand. 4. Time period (Govt. regulated Electricity vs. Solar energy, rise in fee for urgent passport processing, Airline fare) Demand for a product is more likely to be elastic in the long run. For example, if the price rises, consumers will search for cheaper substitutes. 5. Definition of market The more narrowly defined a product is, the more elastic its demand. The narrower the definition, the more substitute a product is likely to have. Unit 2.7: Price elasticity of demand (PED)
- 14. Unit 2.7: Priceelasticity of demand (PED) PED and the total spending on a product and revenue gained • If the product is found to have an elastic demand, the producer can lower prices to increase revenue. The law of demand states that a price fall increases the demand. And since it is an elastic product (change in demand is higher than change in price), the demand of the product will increase highly. The producers get more revenue. • If the product is found to have an inelastic demand, the producer can raise prices to increase revenue. Since quantity demanded wouldn’t fall much as it is inelastic, the high prices will make way for higher revenue and thus higher profits. Activity 2– (3 minutes) Price elasticity of a certain product is 2. Would you advise the seller of this product to increase the selling price in order to increase his sales revenue? Justify your answer.
- 15. Price elasticity ofsupply (PES): A measure of the responsiveness of the quantity supplied to a change in price. PES = Perentage change in quantity supplied Perentage change in price Calculating PES • Calculate the percentage change in quantity supplied: Change in quantity supplied Original quantity supplied X 100 • The percentage change in price is: Change in price Original price X 100 Unit 2.8: Price elasticity of supply (PES)
- 16. Numerical example forcalculating PES: PES = Perentage change in quantity supplied Perentage change in price For example, the quantity supplied may rise from 100 to 130 as a result of price increasing from $10 to $12. In this case the percentage change in quantity supplied is: Change in supplied Original quantity supplied X 100 i.e. 30 100 X 100 = 30% The percentage change in price is: Change in price Original price X 100 i.e. $2 $10 X 100 = 20% When these changes have been calculated, the percentage changes in quantity supplied is divided by percentage changes in price to give the PES. In this case, this is 30% 20% . Hence the PES is 1.5. Unit 2.8: Price elasticity of supply (PES)
- 17. Interpretation of PES ThePES is a positive figure as the quantity supplied and price are directly related. The higher the figure, the more responsive the supply is. A PES of 1.5, for example, means that a 1% rise in rice will cause a 1.5% change in quantity supplied. Elastic and inelastic supply Elastic supply is when the percentage change in quantity supplied is greater than the percentage change in price. In contrast, inelastic supply is when the percentage change in quantity supplied is less than the percentage change in price. Unit 2.8: Price elasticity of supply (PES)
- 18. Activity 3 (5minutes) - Quick Assessment- PED & PES 1. The price of bread rose by 5% and quantity demanded fell by 4%. What was the price elasticity of demand for bread? A -0.4 B -0.8 C -1.25 D -2.0 2. In response to an increase in price from AED 5 per kilo to AED 6 per kilo, a farmer increased supply from 400 kilos to 500 kilos per week. What is the price elasticity of supply? A 0.8 B 0.9 C 1.2 D 1.25 3. In each case, calculate the PES: a. A fall in price from $5 to $4 causes supply to contract from 10,000 to 4,000. b. Supply extends from 200 to 210 when price rises from $10 to $14.
- 19. Student Feedback/ Checklist:The RAG rating is below Topic Student should be able to Comments These are the topics in the syllabus This is what you should be able to do or know for each part of the syllabus. Detailed points about the syllabus You can use the tick boxes to show how confident you feel about when you have taught a concept. R= RED means that you’re really unsure and lack confidence. You might want to focus your revision here and possibly want to meet your teacher for guidance. A= AMBER means you are reasonably confident but need some extra practice. G= GREEN means that you are very confident. As the coverage of the syllabus progress, you can concentrate on the RED and AMBER items in order to turn them into GREEN items. You might find it helpful to highlight each topic in red, amber or green to help you to prioritise your studies. Here are some extra comment(s) to help teacher to plan revision for the students. :
- 20. Summary & SelfEvaluation Checklist : Unit 2.7 & 2.8 : PED & PES Student should be able to Student’s Understanding (RAG Rating) Comment Understand the concept of elasticity and the difference between elastic and inelastic demand Describe and calculate PED, YED, XED & PES. Explain the factors affecting PED draw and interpret demand curves to show different PED Explain the relationship between PED and total spending on a product, and the revenue gained
- 21. Command Words The commandword will relate to the subject context. Command word What it means Define Give precise meaning Calculate Work out from given facts, figures or information Describe State the points of a topic/ give characteristics and main features Identify Name/select/recognise Analyse Examine in detail to show meaning, identify elements and the relationship between them Discuss Write about issue or topic in depth in a structured way
- 22. Home Work- PriceElasticity of Demand and Supply Activity –4 (15 minutes) a.) The price of packet of Salt has increased and as a result the quantity of demand has fallen as follows. Price per packet Quantity of demand 6 200 9 160 Calculate its PED and explain the changes in sales revenue. b.) The price of Banana per KG has increased from $20 to $22 and its quantity demanded has fallen from 400 units to 300 units. Calculate its PED and explain the changes in sales revenue.
- 23. Elasticity of Demandand Supply Thank You & Good Day! Feel free to contact me in case you have any queries: Yousaf Dar Mob: +971-55-3310969, +971-54-2897487 Email: [email protected] LinkedIn Profile: https://www.linkedin.com/in/yousaf-dar-aaba1b190/