Topic 3 demand and supply decisions and elasticity

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Topic 3demand and supply decisions and elasticity
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the price elasticity of demand
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elastic and inelastic demand

• ELASTIC demand
• INELASTIC demand
• UNIT ELASTIC demand
• Elasticity is strongly influenced by

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• INELASTIC demand
• when the price elasticity lies between

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• UNIT ELASTIC demand
• when the price elasticity is exactly -1

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Price elasticity for a linear demand curve

• The price elasticity varies along the length of a
  
• straight-line demand curve.

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What determines the price elasticity?
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Elasticity is higher in the long run
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Elasticity and revenue
When price is changed, the impact on a firms
total revenue (TR) will depend upon the price
elasticity of demand.
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Elasticity and tube fares
How should tube fares be changed to increase
revenues?

• Passengers can use buses, taxis, cars etc
• so demand may be ? (e.g. ? )
• and an ? in fares will ? the number
  of journeys demanded and total spending
• If passengers do not have travel options
• demand may be ? (eg ?)
• so raising fares will have less effect on
  journeys demanded
• and revenue will ?

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Price elasticities in the UK
with respect to a 1 price change in
Percentage change in the quantity demanded of
Clothing
Transport
Food
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0.1
Food
Clothing and footwear
0.1
0.1
Travel and communications
0.3
0.1
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demand elasticities and changes in spending
Price elasticity of demand
Changes in total spending induced by
Inelastic (e.g. -0.3)
Elastic (e.g. -3)
Unit elastic (-1)
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the cross price elasticity of demand
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the income elasticity of demand
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normal and inferior goods

• A NORMAL GOOD has a --------- income elasticity
  of demand
• An INFERIOR GOOD has a --------- income
  elasticity of demand
• A LUXURY GOOD has an income elasticity of demand
  greater than ?

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income and the demand curve
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understanding demand decisions

• Two effects of a price change

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Student checklist

• Do you understand the term elasticity
• Do you understand how elasticity affects revenue
• Do you understand what determines elasticity
• Do you understand the substitution and income
  effects