lecture5

Introduction to Price Elasticity

• Introduction to the concept of price elasticity in economics, focusing on its significance in understanding consumer behavior in response to price changes.

Chapter 4: Elasticities of Demand and Supply

• Overview of Chapter 4, emphasizing the importance of demand and supply elasticity in economic analysis in the context of the course material.

Own Price Elasticity of Demand

• Demand curves are typically downward sloping.

• Price increase leads to a decrease in quantity demanded.

• Price elasticity quantifies this relationship between price and quantity demanded.

Demand for Rugby Tickets

• Example of demand elasticity using rugby ticket prices.

• Table of prices, ticket demand (in thousands), and price elasticity of demand:

  • Price $12.50: 0 tickets demanded (Elasticity: -∞)

  • Price $10.00: 20 tickets (Elasticity: -4)

  • Price $7.50: 40 tickets (Elasticity: -1.5)

  • Price $5.00: 60 tickets (Elasticity: -0.67)

  • Price $2.50: 80 tickets (Elasticity: -0.25)

  • Price $0.00: 100 tickets (Elasticity: 0)

Definition of Price Elasticity of Demand (PED)

• Measures how sensitive the quantity demanded is to changes in price.

• Mathematical equation and explanation for calculating elasticity.

Calculating Price Elasticity of Demand (PED)

• Example provided for calculating PED using rugby tickets and the effects of a price change:

  • 10% price drop leads to an increase in demand by 8,000 tickets.

  • At $10, quantity demanded is 20,000 tickets; calculation of percentage change in quantity and elasticity.

Methods to Calculate Elasticity

• Percentage change formula and its application in this context.

• Introduction to alternative methods such as arc elasticity and point elasticity.

• Focus on percentage change formula in this module.

Categories of Price Elasticity of Demand

• Three classifications based on elasticity measures:

  • Elastic when |PED| > 1

  • Unit elastic when |PED| = 1

  • Inelastic when |PED| < 1

• Key question: Which change is greater, price change or quantity demanded change?

Elastic Demand

• Definition: Demand is elastic when % change in quantity demanded exceeds % change in price.

• Example provided: A 7% drop in quantity in response to a 5% price increase yields an elasticity of -1.4.

Examples of Elastic Demand

• Case study of Apple reducing iPhone prices resulting in tripled quantity sold.

• EasyJet founder's approach to pricing strategy based on elasticity insights, achieving 85% sold seats compared to 75% of competitors.

Inelastic Demand

• Definition: Demand is inelastic when % change in quantity demanded is less than % change in price.

• Example given: If a 5% price increase results in a 3.5% quantity drop, calculations provided.

Unit Elastic Demand

• Definition: Demand is unit elastic when % changes in quantity and price are equal, yielding |PED| = 1.

• Example: 5% drop in quantity for a 5% price increase.

Price Elasticity for Linear Demand Curve

• Discussion on how elasticity varies along a straight-line demand curve and implications for revenue.

Price Elasticity for Rugby Tickets

• Graphical representation of demand for rugby tickets at various prices and the associated quantities demanded.

Price Elasticity for Nonlinear Demand Curve

• Explanation of how elasticity differs for non-linear demand curves, including the impact of equal price changes on quantity demanded.

Determinants of Price Elasticity

• Key factors influencing price elasticity:

  • Availability of substitute goods leads to higher elasticity.

  • Example comparison between specific brands versus general categories (e.g., detergent).

Farmers and Elasticity

• Impact of elasticity on farmers:

  • A poor harvest can increase revenue if demand is inelastic.

  • Individual farmer crop demand is elastic due to substitutability (buying from neighbors).

Elasticity Over Time

• Demand generally is more elastic in the long run compared to the short run, emphasizing consumer adaptability over time.

• Illustrations of inelastic and elastic demand across different timeframes.

Expectations for This Lecture

• Objectives include:

  • Understanding and applying definitions of price elasticity of demand.

  • Differentiating between elastic, inelastic, and unit elastic scenarios.

  • Practicing elasticity calculations using percentage changes.

  • Exploring determinants that affect elasticity.