Tabl. 4. The Price Elasticity of Demand for Football Tickets

PRICE (£ /ticket)	Quantity of tickets demanded (thousands/game)	Price elasticity of demand
12, 50 10, 00 7, 50 5, 00 2, 50 0	0 20 40 60 80 100	-4 -1, 5 -0, 67 -0, 25 0

We have to look at column one. As you can see, this shows price cuts of two pounds fifty. By considering the effects of price cuts of two pounds fifty we can calculate the price elasticity of demand at each price. This price is shown in column three. But how have we calculated this? Let's, as an example, take the price of ten pounds, which you can see in the table. There is a corresponding quantity of twenty thousand tickets demanded. If we consider a price cut to seven pounds fifty, there is a price change here of- 25%, from ten pounds to seven pounds fifty. Now look at the corresponding change in the quantity of tickets demanded, in the next column, column two. The change in the quantity of tickets demanded is a 100%, from 20, 000 tickets to 40, 000 tickets.

There is a 100% change in demand, and a 25% change in price. So we divide a 100 by – 25, which gives the answer – 4. So we say the demand elasticity at ten pounds is – 4. You calculate other elasticities in the same way, that is by dividing the percentage change in quantity by the corresponding percentage change in price.

Notice one thing here in the table. That is when we begin from the price of twelve pounds fifty the demand elasticity is minus -infinity. It's simply because the percentage change looks like this. Any positive number divided by zero yields plus infinity. When we then divide by the minus twenty per cent change in price, that's from twelve pounds fifty to ten pounds, we obtain or get, minus infinity as the demand elasticity at this price.

There's one more thing to be said at this stage. We say demand elasticity is high, when it is a large negative number. And we say demand elasticity is tow, when it is a small negative number, and when the quantity demanded is relatively insensitive to price. It follows from this that the words high and low refer to the magnitude of the elasticity ignoring the minus sign. The demand elasticity falls when it becomes a smaller negative number and quantity demanded becomes less sensitive to price.

VOCABULARY NOTES

to investigate – исследовать, рассматривать

to reproduce the data – представлять данные price cuts – сокращения цены

a corresponding quantity – соответствующее количество

a corresponding change in the quantity – соответствующее изменение ко­личества

infinity – бесконечность

to yield – приносить, давать

magnitude – величина, размер

Assignments

I. Suggest the Russian equivalents

a price change of minus 25 per cent; high/low demand elasticity; to be insensitive to price; magnitude

II. Fill in the gaps with the words and expressions from the text

1. By considering the effects of price cuts of two pounds fifty we can calculate__ of demand at each price.

2. You calculate other elasticities by dividing __ in quantity by the corresponding percentage change in price.

3. When we divide by the minus twenty per cent change in price we obtain minus __ as the demand elasticity at this price.

4. Demand elasticity is __, when it is a large negative number.

5. Demand elasticity is __, when it is a small negative number.

6. __ falls when it becomes a smaller negative number and quantity demanded becomes less sensitive to price.

III. Find in the text English equivalents for the following

снижение цены на... фунтов; соответствующее количество; разделить сотню на 25; встретить понятие; процентное изменение в количестве; про­центное изменение в цене; минус бесконечность/плюс бесконечность

IV. Answer the questions

1. How is the demand elasticity calculated?

2. Why is the demand elasticity minus infinity in the example?

3. In what case can we speak of high/ low demand elasticity?

4. What does the insensitivity of the quantity demanded to the price mean?

5. When does the demand elasticity fall?

V. Translate into English using all the active possible

1. Безграничная эластичность – это такая эластичность спроса, при кото­рой изменение в количестве спрашиваемых или предлагаемых товаров и услуг будет приводить к увеличению дохода. Такая эластичность характерна для условий совершенной конкуренции, когда отдельная фирма не имеет возможности оказывать влияние на рыночную цену и имеет кривую спроса на свой товар или услуги в виде горизонтальной прямой.

 

ELASTIC AND INELASTIC DEMAND (ЭЛАСТИЧНЫЙ И НЕЭЛАСТИЧНЫЙ СПРОС)

Although elasticity typically falls as we move down the demand curve, an important dividing line occurs at the demand elasticity of – 1.

Demand is elastic if the price elasticity is more negative than -1. Demand is inelastic if the price elasticity lies between -1 and 0.

In Tabl. 4 demand is elastic at all prices of £ 7, 50 and above and inelastic at all prices of £ 5-00 and below. If the demand elasticity is exactly -1, we say that demand is unit-elastic.

Later in this section we'll see that a cut in prices raises revenue from football ticket sales if demand for football tickets is elastic but lowers revenue if demand is inelastic. Whether or not demand is elastic is the key piece of information required in setting the price of football tickets in this example.

Although the price elasticity of demand typically changes as we move along demand curves, economists frequently talk of goods with high or low demand elasticities. For example, they will say that the demand for oil is price-inelastic (price changes have only a small effect on quantity demanded) but the demand for foreign holidays is price-elastic (price changes have a large effect on quantity demanded). Such statements refer to parts of the demand curve corresponding to prices (adjusted for inflation) that are typically charged for these goods and services. They do not necessarily describe the demand elasticity at points on the demand curve corresponding to real prices, which have never been observed historically.

The Determinants of Price Elasticity. Основные факторы ценовой эластичности спроса

What determines whether the price elasticity of demand for a good is high (say, -5) or low (say, -0, 5)? Ultimately, the answer must be sought in consumer tastes. If it is considered socially essential to own a television, higher television prices may have little effect on quantity demanded. If televisions are considered a frivolous luxury, the demand elasticity will be much higher. Psychologists and sociologists may be able to explain more fully than economists why tastes are as they are. Nevertheless, as economists, we can identify some considerations likely to affect consumer responses to changes in the price of a good. The most important consideration is the ease with which consumers can substitute another good that fulfils approximately the same function.

Consider two extreme cases. Suppose first that the price of all cigarettes is raised 1 per cent, perhaps because the cigarette tax has been raised. Do you expect the quantity of cigarettes demanded to fall by 5 per cent or by 0, 5 per cent? Probably the latter. People who can easily quit smoking have already done so. A few smokers may try to cut down but this effect is unlikely to be large. In contrast, suppose the price of one particular brand of cigarettes is increased by 1 per cent, all other brand prices remaining unchanged. We should now expect a much larger quantity response from buyers. With so many other brands available at unchanged prices, consumers will switch away from the more expensive brand to other brands that basically fulfil the same function of nicotine provision. For a particular cigarette brand the demand elasticity could be quite high.

Ease of substitution implies a high demand elasticity for a particular good. In fact this example suggests a general rule. The more narrowly we define a commodity (a particular brand of cigarette rather than cigarettes in general or oil rather than energy as a whole), the larger will be the price elasticity of demand.

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