Quantitative skills Calculate PED and YED

Transcription

1 Price Elasticity of Demand (PED) Method Price elasticity of demand (PED) measures the responsiveness of demand to a change in price. The formula for calculating PED is: PED = Percentage change in quantity demanded Percentage change in price In order to work out a percentage change, the following formula is used: Difference between figures x 100 Original figure For example, the price charged by a beauty salon for eyebrow threading is 5. The owner of the salon chooses to increase the price to 7. The number of customers falls from per month when the price was at 5 to 800 per month when the price was increased. The following steps are needed to calculate the price elasticity of demand in this example: 1. Calculate the percentage change in demand: = x 100 = - 20% Calculate the percentage change in price 7 5 = 2 x 100 = 40% 5 1

2 3. Divide the answer in Step 1 by the answer in Step 2 (the PED formula). Now you have your answer! (PED is a unit free measure, so the answer is just expressed as a number). -20% = % NB: in the PED examples exercises below, you do not have to use the minus sign for the correct answer. Example 1 A sweet shop increases the price charged for a small bag of sweet from 40p to 45p. Sales fall from bags of sweets a year to bags of sweets a year. Calculate the PED to 2.d.p. Example 2 Hisham s Hat shop increases the price of their premium hats by 10%, resulting in a decrease in sales by 5%. Calculate the PED. 2

3 Example 3 A business selling all-inclusive holidays to Spain reduces their price from to The number of holidays purchased increases from 400 to 500. Calculate the PED Example 4 A business selling luxury pens for 150 increase their price by 10%. They experience a fall in average monthly sales from to pens. Calculate the PED to 2.d.p. 3

4 Example 5 Sales for a brand of economy beans sold at a supermarket chain increased from to per month when the price changed from 35p per tin to 33p per tin. Calculate the PED to 2 d.p. 4

5 Income Elasticity of Demand (YED) Method Income elasticity is the responsiveness of demand to changes in income. The formula for calculating YED is: YED = Percentage change in quantity demanded Percentage change in income In order to work out a percentage change, the following formula is used: Difference between figures x 100 Original figure For example, the average weekly income rises from 400 to 440 and sales of takeaway pizza increase for a local provider from to a week. The following steps are needed to calculate the income elasticity of demand in this example: 1. Calculate the percentage change in demand 300 x 100 = 25% Calculate the percentage change in income 40 x 100 = 10% Divide the answer in Step 1 by the answer in Step 2 (the YED formula). Now you have your answer! (YED is a unit free measure, so the answer is just expressed as a number remember with YED to include the minus sign, if appropriate). 25% = % 5

6 NB: You must include the minus sign, where appropriate, in the examples below. Example 6 Sleep Tight provides luxury hotel rooms in city centres. They found that the demand for their rooms increased by 10% when average incomes rose by 5%. Calculate the YED. Example 7 Incomes increased from a year to a year in a semi-affluent area. Basic Branded Baked Beans Ltd sells each can of beans for 18p. However, the demand for their beans fell from cans a week to 800 cans a week. Calculate the YED. 6

7 Example 8 Average monthly incomes in a small town decrease by 30 from The demand for the local chip shop increases from customers a month to 1,600 customers a month. Calculate the YED to 2.d.p. Example 9 Let s say that incomes rise by 3% in the UK. The demand for holidays abroad increase by 5%. Calculate the YED to 2.d.p. 7

8 Example 10 Weekly incomes increase from 500 to 525. The demand for bread increases from loaves a week to loaves a week at a local shop. Calculate the YED. 8

9 Answers Example 1 Example Example 2 Example Example 3 Example Example 4 Example Example 5 Example