hi there in this topic video we're going to take a look at an important Marketing Concept it's called the price elasticity of demand now we all buy lots of different products and services but to what extent are we influenced in terms of that Demand by the price and what happens if the price changes do we demand more do we demand less what would happen for example if any of those products on screen suddenly decided to increase their prices by 20% would you continue to buy the same quantity of Ms bars if you already do would you look to switch to something else if wton bread was 20% more expensive would you try to switch to a a cheaper brand and what about Apple products are you like me you'd pay whatever price Apple decided to charge I'm very insensitive to any price changes it's those kind of questions that we consider when we look at this concept of price elasticity of demand what is is it well the key thing to remember about elasticity is it's about measuring how sensitive or responsive uh demand is to a change in a variable and typically we look at two variables one is price which is the subject of this video and the other is income which we'll look at in a separate video so elasticity is all about the sensitivity or the responsiveness of demand to a change in a variable and price elasticity of demand demand measures the extent to which the quantity demanded changes in response to a change in price when we calculate price El assage demand we're going to be have to be comfortable with the uh the concept of percentage changes um and the reason for this is that price elasticity or as it's commonly shortened to ped ped is calculated by dividing one percentage change by another we calculate the percentage change in the quantity demanded and we divide it by the percentage change in price so ped is the percentage change in quantity demanded divided by the percentage change in price what we'll do now is we'll have a look at an example of that just to show you the calculations and consider the implications so let's look at a simple example uh we've got a product here product X and originally at the price of4 per unit the quantity demanded was 1,000 units now what happens when we change the price well in this case we've changed the price from £4 to5 the price has increased and what's happened as a result of the price increase is that the quantity demanded has fallen it's fallen from 1,000 units to 800 units in order to calculate the price elasticity of demand we need to calculate the percentage changes in demand and the percentage changes in price so let's look at demand first demand has fallen it's Fallen by 200 units expressed as a percentage of the original demand which was 1,00 200 divided by 1,000 Times by 100 that is a fall of 20% a 20% fall in demand what's happened to price the price has risen by a pound originally it was4 so the change is a pound expressed as the original price1 divided by4 price has increased by 25% if you work that calculation out so we have the data that we can use to calculate peed a fall in demand of 20% as a result of an increase in price of 25% so let's work the numbers there they are on screen screen our fall in demand of 20 our increasing price of 25 we know that ped is calculated as a percentage change in quantity demand divided by the percentage change in price we don't have to worry too much about the positives and negatives here it's just about calculating the percentage changes if we divide one by the other we get .8 or minus 0.8 if you include the the negative number but the important point is in this calculation the elasticity of demand based on price the PED is 0.8 now how do you interpret that number what does 0.8 mean well this is a really useful table to remember and to consider as you calculate different price elasticities a product is set to said to be price elastic if when you calculate ped it's more than one ignoring the minus sign it's more than one and what this means is that if p is more than one the ch change in demand is going to be higher than the change in price conversely if peed is less than one then the change in demand the percentage change in demand is less than the percentage change in price and if we have what's known as unitary price elasticity where when we calculate peed it's exactly one it means that the change in price and the change in demand both those two percentages are the same now those PDS have some quite important implications for businesses and that's why it's important for businesses to understand what their price elasticity is for example if p is more than one then if you increase the price and demand changes in this case Falls by more than the increase in price that would have the effect of overall cutting your revenues because the change in demand is more than the increase in the price you're getting conversely for an inelastic product where p is less than one if for example you increase the price by 10% the change in demand will be less than 10% so therefore over most of most ranges of that price changes you should expect revenues to increase but of course it won't always happen there'll come a point at which a a price in elastic product becomes elastic because the price is simply too high so that's how we calculate ped one of the important important things is just to remember uh some of the factors that influence the extent to which a product has a an elastic or an inelastic price elasticity for example what we tend to find is that products that have strong loyalty in particular heavily branded strong branded products and strong reputations tend to be price inelastic the the business can raise the price but actually the fall in demand will won't be anywhere near as significant because the customers remain loyal to the product um similarly a price inelastic product that is really a necessity something you have to have again the demand doesn't change as much as the change in price because we simply have to have it uh and same to for products and services that we consume as a matter of habit however products that have lots of different Alternatives or substitutes where it's easy to switch to a better priced product they tend to have a higher price elasticity they tend to be what's done as price elastic elastic so let's just look at a couple of examples of those uh products that have elastic demand I more than one and tend to be products where there are lots of Alternatives and it's easier to switch so if cabri twirl increase its prices by 20% chances are I'd be looking for an alternative maybe a Twix maybe a Mars bar similarly if Hovis bread increased its prices by 30% I'd be straight into the aisle where war button's or Tesco or waitr's own brand bread was on display and I'd be looking for a slightly cheaper alternative unless I was so loyal to Hovis that I accepted whatever price they charged and the same thing with newspapers that's why often you find newspapers engaged in price Wars because customers are very sensitive to the price that they're paying for their daily news but there are loads of examples out there were actually the the demand is price in elastic we mentioned habit so of course those consumers who are habitual consumers of products like uh the tobacco are pretty inelastic well their demand is pretty anelastic regardless of what the government do in terms of the taxes that are placed on cigarettes similarly if you simply have to get from fedix to London each day or you have to have a season ticket there's not a lot you can do when the price of the season ticket goes up the chances are you're still going to demand it or if you've got products that you simply can't do without in the Leisure sector so maybe your monthly sky or BT Sports subscription or if you absolutely have to have a season ticket to go watch man united or harri at town again those are products that are pricing elastic you'll take whatever price the club decide to charge unless there's a point at which you say no that's too much so what we've done there is we've done a provided a brief introduction to this concept called price elasticity of demand and don't forget the key is to calculate it by calculating the percentage changes in quantity demand and the percentage change in price and then seeing whether that elasticity is more or less than one