4.1 price responsiveness of demand

• A downward-sloping demand curve means that as prices go down, people buy more of the good, and as prices go up, people buy less.
• • The demand curve is a graph that shows how many units of a product people will buy at different prices.
  • It usually slopes downward, which means as prices go down, people want to buy more of the product.
• The price elasticity of demand (PED) is a way to measure how much the quantity demanded changes when the price changes.
• Price elasticity of demand measures the responsiveness of quantity demanded given a change in price.
• PED = %∆Qd / %∆P
• %∆ = difference / original x 100
• Price elasticity of demand will always be negative because of the law of demand , if price goes up the quantity demanded goes down, they move in opposite directions
• If the value of PED is > 1 demand is price elastic
• If the value of PED < 1 demand is price inelastic
• If the value of PED = 0 demand is perfectly price inelastic
• if the value of PED = ∞, demand is perfectly price elastic
• if the value of PED = 1 Demand is unit price elastic
• the price of a pack of cigarettes increase from £4 to £5, the quantity demanded decreases from 150 packs to 135 packs, how much is PED?

  %∆ of price = 5-4/4 x 100 =25%

  %∆ of quantity demanded = 150-135/135 x 100 = -10% (to nearest whole no.)

  
  

  PED = -10/25 = -0.4

  so cigarettes are price inelastic
• the price of a sofa decreases from £1000 to £800

  and quantity demanded goes from 2000 to 3,800, what is the PED?

  PED = 90/-20 = -4.5

  price elastic
• if a good is price inelastic the change in quantity demanded is proportionately less to price
• if a good is price elastic the change in quantity demanded is proportionately more to price
• the more substitutes there are the more price elastic demand will be
• greater the percentage of income the price change takes the more price elastic the demand will be
• luxuries have more price elastic demand
• addictive/habit goods have price inelastic
• time period: in the short run demand is inelastic, in the long run it is elastic as consumers find alternatives
• • A straight demand curve means that the same price change leads to the same quantity change, no matter where you are on the curve.
• A curved demand curve means that a price change will have different effects on quantity, depending on where you are on the curve.
• • Elasticity (how sensitive quantity is to price changes) doesn’t change along a straight line.
• Non-linear (curved) demand curves mean that price changes cause different effects depending on whether you start at a high price or a low price
• for curved demand curves we need to find the point elasticity
• The slope of the demand curve is constant for a linear demand curve, but the elasticity isn’t constant because the P/Q ratio changes as you move along the curve.
• • At high prices, demand is very elastic (PED < -1), meaning small price changes lead to large changes in quantity demanded.
  • As prices decrease, elasticity decreases. At low prices, demand becomes inelastic (PED > -1 but less than 0), meaning quantity demanded doesn’t respond much to price changes.
• • Unit elasticity means that the percentage change in price leads to an equal percentage change in quantity demanded.
  • This happens when PED = -1.
• Elastic demand means that consumers are very responsive to price changes. If the price goes up or down, people will significantly change how much they buy.
• Inelastic demand means that consumers are not very responsive to price changes. If the price goes up or down, people will not change how much they buy by much.
• Elasticity is more negative than -1 (e.g., -2). This means a 1% increase in price will cause a greater than 1% decrease in quantity demanded.
• • Inelastic demand has an elasticity between -1 and 0. This means a 1% increase in price will cause a less than 1% decrease in quantity demanded.
• Unit elasticity means that the percentage change in price leads to an equal percentage change in quantity demanded.

  This happens when PED = -1.
• demand is unit elastic a 1% change in price leads to a 1% change in quantity demanded.
• the point elasticity formula is used to find the elasticity at a specific price.
• Elastic demand means that consumers are very responsive to price changes. If the price goes up or down, people will significantly change how much they buy. For example, if the price of a luxury good, like a designer handbag, goes up, people will buy a lot less.
• Inelastic demand means that consumers are not very responsive to price changes. If the price goes up or down, people will not change how much they buy by much. An example is gasoline. Even if prices go up, people still need to drive and will keep buying it.
• Elasticity is more negative than -1 (e.g., -2). This means a 1% increase in price will cause a greater than 1% decrease in quantity demanded.
• Inelastic demand has an elasticity between -1 and 0. This means a 1% increase in price will cause a less than 1% decrease in quantity demanded.