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Understanding Price and Income Elasticity

Apr 23, 2025

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Lecture on Price Elasticity of Demand (PED) and Income Elasticity of Demand (YED)

Introduction to the Session

  • Date and Time: Wednesday 11:00 AM
  • Event: First session of the six global business live streams in 48 hours.
  • Focus: Deep dive into PED and YED, crucial for A-Level business across all exam boards.
  • Upcoming Event: Grade Booster sessions in two weeks at Westfield Stratford and West London.

Business Case Study: B&Q

  • Founded: 1969 in Southampton
  • Ownership: Owned by Kingfisher plc
  • Clues: 303 stores, orange logo, Richard Block and David Quail founders.

Key Concepts of PED and YED

  • PED Formula: Percentage change in quantity demanded / Percentage change in price.
  • YED Formula: Percentage change in quantity demanded / Percentage change in income.
  • PED Coefficient: Measures sensitivity of demand to price changes.
  • YED Coefficient: Measures how quantity demanded changes with income changes.

PED and YED Applications

  • Tesco Example: Uses PED to set prices; price elastic items might reduce prices to increase sales.
  • Factors Affecting PED: Availability of substitutes, brand loyalty, necessity, addiction.
  • Factors Affecting YED: Type of product (luxury, necessity), expected income changes, brand strength.

Calculations and Examples

  • PED Calculation:
    • Example: Vinyl records price reduction from £25 to £23 leads to demand increase from 150 to 168.
    • Result: PED = -1.5, indicating price elasticity.
  • YED Calculation:
    • Example: Sourdough bread demand increases from 60 to 66 units with a 5% income increase.
    • Result: YED = +2.0, classifying it as a luxury good.

Mini Case Study: Leafit to Me

  • Context: Landscape and gardening business with PED of -2
  • Strategy: Given price elasticity, the business should consider reducing prices to increase demand and sales revenue.

Conclusion

  • Understanding Elasticity: Crucial for setting prices and predicting consumer behavior.
  • Upcoming Sessions: More live streams covering various aspects of business and economics.

This session provided a comprehensive understanding of the importance of PED and YED in business decisions and included practical calculations and applications that are highly relevant for A-Level business students. The emphasis on real-world application ensures that students can relate theoretical concepts to actual business scenarios.

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