gcse economics - business finance - elasticity
1. Price Elasticity of Demand
This measures the relationship between changes in price of a product and the change in demand for the product.
Sometimes a change in price has a major effect on the demand e.g. holidays to Jamaica
Other times changes in price have a minor effect on the demand for the product e.g. petrol
Examples |
|||
Product |
% change in price |
% change in demand |
Effect |
Cigarettes |
+20% |
-5% |
Minor |
Benson & Hedges |
+20% |
-30% |
Major |
Petrol |
+20% |
- 2% |
Minor |
Jamica Holidays |
+20% |
-40% |
Major |
KEY TERMS
PRICE ELASTIC
If the % change in quantity demanded is greater than the % change in price
it has a major effect. In this case demand is very responsive to a change
in price. It is called elastic
PRICE INELASTIC
If the % change in quantity demanded is less than the % change in price
it has a minor effect. In this case demand is not very responsive to a change
in price. It is called inelastic
Features:
PRICE ELASTIC GOODS |
PRICE INELASTIC GOODS |
Lots of substitutes |
Very few substitutes |
Luxury |
Necessity or addictive |
Little loyalty to the product |
Strong brand loyalty e.g. Sony |
Often expensive |
Usually not too expensive |
WHAT TO DO AS A BUSINESS?
PRICE ELASTIC GOODS
- Try not to increase the price as the business will collect less revenue.
The fall in demand will outweigh any extra price increases
- Cut prices a little as more people will buy your product.
PRICE INELASTIC GOODS
• It should be possible to increase the price a bit and still collect
extra revenue. There will be a slight fall in customers but enough people
will pay the extra price.
•
It is not worth cutting the price. It wont attract many new customers
•
These goods are often taxed heavily because people continue to buy them as
they are considered to be necessities e.g. petrol, cigarettes
2. Income Elasticity of Demand
This measures the relationship between a change in income and the change in demand for a product. For example if you have a pay rise of 10% which goods would you buy more of and which goods would you buy less of?
Examples
|
|||
Product
|
% change in income
|
% change in demand
|
Effect
|
Tesco bread
|
+10%
|
+5%
|
Positive
|
Netto bread
|
+10%
|
-5%
|
Negative
|
Levi Jeans
|
+10%
|
+20%
|
Positive
|
Skoda Cars
|
+10%
|
-20%
|
Negative
|
If an increase in income causes an increase in demand then the good is normal
(Tesco bread) or superior if there is a major effect (Levis)
If an increase in income causes a fall in demand then the good is classed as inferior (Netto and Skoda
ACTION
A Why does the Chancellor tax price inelastic goods more heavily?
B Explain clearly the difference between price elastic demand and price inelastic
demand
3. Cross Elasticity of Demand
This measures how the change in the price of one good affects the level
of demand for another
For example if the price of cinema tickets went up how would this affect
the local video shop?
Or
If the price of batteries went up how would this affect the demand for
walkmans
Good A |
Good B |
% Change in Price of A |
% Change in demand for B |
Effect |
Cinema |
Local videos |
+20% |
+10% |
Same + & + |
Batteries |
Walkman |
+20% |
-10% |
Different + & - |
Cassettes |
Video recorder |
+30% |
-20% |
D + & - |
Twix |
Mars |
-20% |
-20% |
Same - & - |
Apples |
Pear |
+10% |
+8% |
Same + & + |
| DVD player | DVD's | -30% | +50% | D - & + |
WHAT DOES IT MEAN?
When the effect is the same
These goods are SUBSTITUTES, they are in competition with each other
When the effect is different
These goods are COMPLEMENTARY, one is needed to support the other
4. Price elasticity of supply
This measures how supply (production) responds to a change in price
ELASTIC SUPPLY
Supply changes by a greater percentage than price. Firms are able to increase production quickly if prices increase. They must have some available labour and spare machinery / raw materials
INELASTIC SUPPLY
Supply changes by a lower percentage than price. Firms are unable / or choose not to increase production quickly if price increases
These GCSE Economics revision notes have been kindly provided by Peter Davies of Mill Hill School, Ripley Keep Up-todate with your GCSE Economics - Subscribe Free to Economics in the News by Email
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