Week 7 Economics Grade 9 Chp 11
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muhammadhammad2876Week 7 Economics Grade 9 Chp 11
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muhammadhammad2876PAKISTAN INTERNATIONAL SCHOOL, AL AZIZIYAH JEDDAH
CAMBRIDGE CURRICULUM SECTION (CCS)
► Cambridge IGCSE and O Levels Economics
► Term 1: Session 2024 - 2025
► Subject: Economics
► Course Code: 0455
► Week 7: 29th Sept – 3rd Oct
Lesson 1
Graded Class quiz on chapter 7, 8, 9 and 10
Chapter 11.
Price elasticity of demand
(PED)
Lesson 2
Objectives
► AO1 Understand the meaning of PED and an calculation of price
elasticity of demand (PED)
► AO2 Be able to interpret PED values
► AO3 Be able to use PED values to make recommendations to firms and
government
PED
Definition
► Price elasticity of demand (PED) is the responsiveness of quantity
demanded to a change in price. PED is calculated using the following
formula:
% change in Qd = (New demand – old demand /old demand) * 100
% Change in quantity demanded
% change in price = (New price – old price /old price) * 100
% Change in price
PED indicators
► PED is always negative – because of the law of demand - an increase in price
will always result in a decrease in demand
► PED between 0 and -1 is inelastic. A change in price will result in a
proportionally smaller change in demand. Assume PED = -0.5 then a 5%
increase in price will result in a 2% decrease in sales.
► PED greater than -1 is elastic. A change in price will result in a proportionately
bigger change in demand. Assume PED is -2 then a 5% increase in price will
result in a 10% decrease in sales
► If PED = 1 (i.e. the percentage change in demand is exactly the same as the
percentage change in price), then demand is said to unit elastic. A 5%
increase in price will result in a 5% decrease in sales.
PED example 1.
► When the price of CD increased from $20 to $22, the quantity of CDs demanded decreased
from 100 to 87.
► What is the price elasticity of demand for CDs?
Calculating a Percentage
The price increases from $20 to $22.
► Therefore % change = 2/20 = 0.1 (10%)
0.1 = 10% (0.1 *100)
► Quantity fell by 13/100 = – 0.13 (13%)
► Therefore PED = 13/-10
► Therefore PED = -1.3
► In this case demand is price elastic.
► Elastic demand occurs when % change in quantity is greater than % change in price; when PED >1
Example 2 – Phone app
► Price rises from $15 to $30
100% rise in price
► Quantity falls from 100 to 80
(20% fall)
► What is the PED?
► -20/100 = -0.2
► What is the change in revenue?
Class activity
Discussion on ‘Worked example’ on book page 48.
Calculate PED…show working in the book
Elastic PED
Inelastic PED
Perfectly elastic PED
The end
Revise today’s lesson
Chapter 11.
Price elasticity of
demand (PED)
Lesson 3
Recap
► What is PED
► How its is calculated
► What do you mean by elastic and inelastic demand?
Perfectly inelastic PED
Unitary PED
Question 1– PED of a chocolate bar
► Price changes from 50p to 60p
► =10/50 = 0.2 = 20%
► Demand falls from 100 to 50 units
► = -50/100 = 0.5 = -50%
► Calculate PED?
Answer– PED of a chocolate bar
► Price changes from 50p to 60p
► =10/50 = 0.2 = 20%
► Demand falls from 100 to 50 units
► = -50/100 = 0.5 = -50%
► What is the PED?
► 20/50
► PED = -2.5
Question 2. PED of a packet of
cigarettes
► Price increases from $10 to $15
(50%)
► Quantity moves from 88 to 80 units
(-10%)
► What is the PED?
Answer. PED of a packet of cigarettes
-10/50 = – 0.20
► What is the change in revenue?
(10 x 88) = $880. (15 x 80) = $1200
1200 – 880 = $320.
► If the price increase was due to a government tax how much revenue
would the government collect?
Total revenue = revenue x 50% = 1200 X 50% = $600 in taxes.
Homework
Exam style question on book page 50 – in manuscripts
Chapter 11.
Price elasticity of
demand (PED)
Lesson 4
Recap
► What is PED
► How do we calculate PED?
► What does 0.4 PED mean?
► Elastic, Inelastic, perfectly elastic, perfectly inelastic, unitary PEDs
Determinants of PED
► The number of close substitutes
► The degree of necessity or whether the good is a luxury
► The proportion of a consumer's income allocated to spending
on the good
► The time period allowed following a price change
► How dependent the consumer is on the product – addiction
Firms using PED to maximise revenu
e
If PED is elastic >-1 then firm should lower
price until unit elastic is reached
If PED is inelastic <-1 then firm should
increase price until unit elastic is reached
Unit elastic = maximum revenue
Assumptions:
Maximising revenue is objective for firm
Once unit elastic is met then firms will
advertise causing and outward shift of the
demand curve.
Firms and PED
► The effect of a change in price on the total revenue & expenditure on a
product
► A business contemplating a tactical price-war or planning a promotional
discount based on price (e.g. 50% off for a limited period) will want to
know how responsive customer demand will be to the pricing tactics
used
The government and PED
► Taxing products and services. Demand for cigarettes is inelastic so the fall in demand will be
proportionately less than the increase in price.
If the PED is -0.2 and the government increases price by 20% then the demand for cigarettes will
fall by:
4%.
► Subsidising products and services. Demand for education is inelastic so the increase in demand
will be proportionately smaller than the decrease in price.
If the PED is –0.4 and the government reduces the cost of education by 40% then the demand will
increase by:
16%
► Consumers often seek short-term satisfaction in their consumption and are unaware of the long-
term harm related to too much short-term consumption. The opportunity cost of a packet of
cigarettes might be an hour at the gym or the beginning of a college education which may lead
to a far more enjoyable life style.
The consumer and PED
► The PED gives us an indication of consumer behaviours
► If the PED is inelastic then the good/service is needed by the consumer.
► it is addictive
► a necessity
► takes up a small proportion of income
► very few substitutes
► If the PED is elastic then the consumer does not need this product/service
► luxury items are not needed
► if there are substitutes (Pepsi and Coke)
► if it takes up a large proportion of income.
Study tip
Lesson Homework
Case study (Toyota Motors) and Activity question on book page 53 and
exam style question on book page 56
The End
