Price elasticity of demand
- IGCSE Economics
- Theme 2: The allocation of resources
Speaker notes: Introduce the topic and its relevance to the syllabus.
Learning objectives
- Define price elasticity of demand (PED)
- Calculate PED using the formula
- Identify the determinants of PED
- Explain the relationship between PED, consumer expenditure and firms’ revenue
- Discuss the significance of PED
Speaker notes: Outline what students will learn during the lesson.
Starter: Real-world scenario
- Imagine a 10% price increase for luxury cars and essential medicines. Which product's quantity demanded would fall more? Why?
Speaker notes: Encourage students to think about the different impacts of price changes on demand for various products.
Definition of PED
- Measures the responsiveness of quantity demanded to a change in price
- Calculated as the percentage change in quantity demanded divided by the percentage change in price
- Can be elastic (>1), inelastic (<1), or unitary elastic (=1)
Speaker notes: Explain that PED helps us understand how consumers respond to price changes and introduce the concepts of elastic, inelastic, and unitary elastic demand.
Calculation of PED
- Formula: PED = (% change in quantity demanded) / (% change in price)
- Remember: Percentage change = (New value - Old value) / Old value x 100
- Calculate the percentage changes in quantity demanded and price first
Speaker notes: Walk students through the formula and show them how to calculate percentage changes. You may want to use an example to illustrate the calculation process.
Determinants of PED
- Availability of substitutes
- Proportion of income spent on the good
- Time period considered
- Necessities vs. luxuries
- Definition of the market
Speaker notes: Discuss each determinant and provide examples to help students understand how they influence PED. Encourage students to think about real-world products and how their PED might be affected by these factors.
PED and consumer expenditure
- If demand is elastic, a price decrease leads to a larger percentage increase in quantity demanded, increasing total revenue
- If demand is inelastic, a price decrease leads to a smaller percentage increase in quantity demanded, decreasing total revenue
Diagram explained
The diagram shows a relatively flat demand curve. The vertical axis is price and the horizontal axis is quantity demanded. The flat slope indicates that a small percentage change in price leads to a larger percentage change in quantity demanded, so demand is elastic. For example, a price decrease causes a proportionally larger increase in quantity demanded.
- Note the flat slope of the demand curve
- A price change leads to a larger percentage change in quantity demanded
- This is elastic demand
Speaker notes: Explain the relationship between PED and consumer expenditure. Use examples to illustrate how changes in price and quantity demanded affect total revenue.
PED and firms’ revenue
- Firms with elastic demand may benefit from price decreases, as this leads to an increase in total revenue
- Firms with inelastic demand may benefit from price increases, as this leads to an increase in total revenue
- Understanding PED helps firms make informed pricing decisions
Diagram explained
The diagram shows a relatively steep demand curve. The vertical axis is price and the horizontal axis is quantity demanded. The steep slope indicates that a percentage change in price leads to a smaller percentage change in quantity demanded, so demand is inelastic. For example, a price increase causes a proportionally smaller decrease in quantity demanded.
- Note the steep slope of the demand curve
- A price change leads to a smaller percentage change in quantity demanded
- This is inelastic demand
Speaker notes: Discuss the implications of PED for firms' pricing strategies and revenue. Encourage students to think about real-world examples of firms that may have elastic or inelastic demand for their products.
Significance of PED
- Helps businesses make pricing and production decisions
- Informs government policy on taxation and subsidies
- Assists in predicting the impact of price changes on consumer spending and market equilibrium
Speaker notes: Highlight the importance of PED in various real-world contexts, such as business decision-making, government policy, and market analysis.
Worked example: Calculating PED
- Initial price = £10, New price = £12 (20% increase)
- Initial quantity demanded = 100 units, New quantity demanded = 80 units (20% decrease)
- PED = (% change in quantity demanded) / (% change in price) = (-20%) / (20%) = -1
Speaker notes: Walk students through the calculation of PED using the given example. Encourage them to ask questions and clarify any doubts they may have.
Common mistakes and exam tips
- Remember to use the midpoint formula for percentage changes to avoid large discrepancies in your calculations
- Be careful with the signs: PED is always negative, but we often ignore the negative sign when describing demand as elastic or inelastic
- Practice calculating PED using different examples to improve your understanding and skills
Speaker notes: Share common mistakes students make when calculating PED and provide tips on how to avoid them. Encourage students to practice and seek help when needed.
Key terms
- Price elasticity of demand (PED)
- Elastic demand
- Inelastic demand
- Unitary elastic demand
- Total revenue
Speaker notes: Review the key terms introduced during the lesson and ensure students understand their meanings.
Plenary: Quick-check questions
- What is the formula for calculating PED?
- Give an example of a product with elastic demand and one with inelastic demand
- How does a price decrease affect total revenue when demand is elastic?
- What are the determinants of PED?
Speaker notes: Ask students these questions to assess their understanding of the topic. Encourage peer discussion and provide feedback as needed.
Plenary: One-line summary
- Price elasticity of demand measures the responsiveness of quantity demanded to a change in price, helping consumers, firms, and governments make informed decisions.
Speaker notes: Summarise the key takeaways from the lesson in one line. Encourage students to reflect on what they have learned and how it can be applied in real-world situations.