Cambridge International as and a level Economics Ebook

SELF-ASSESSMENT TASK 
2.8
What would have happened to the demand for PCs if, 
following the same change in the price of laptops, the 
XED had been 
+
2? Redraw 
Figure 2.7
 to illustrate this.
Now consider that the average price of soft ware (a 
complement) falls by 5% – this encourages extra sales of 
PCs so that demand for PCs rises to 101 per day at the 
original price and the demand curve shift s from 
D
0 
to 
D
2
.
Th
e cross elasticity calculation is:
XED
1% increase in sales of PCs
5% fall in price of software
=
= −
0 2
.
Note that the sign indicates the nature of the relationship 
(a negative one between complements), and the numerical 
value indicates the strength of that relationship.
SELF-ASSESSMENT TASK 
2.9
1
What would happen if demand for PCs had risen 
to 110 units per day? Calculate the XED and 
redraw 
Figure 2.7
 to illustrate what has happened.
2
Th
e owner of a local golf course loans out 
equipment to non-members who want to play 
occasional rounds. He estimates that in June and 
July, if he lowers the hire price of clubs by 10%, 
the number of non-members playing will increase 
by 25%. Calculate and comment on the XED. 
What other factors should the owner consider if 
he wants to increase demand from non-members?
TOP TIP
When calculating any of the three elasticity estimates, 
remember that the numerator in the formula is always 
the % change in quantity demanded.
Business relevance of demand 
elasticities
Price elasticity of demand
Knowledge of PED is useful to help understand price 
variations in a market, the impact of changing prices on 
consumer expenditure, sales revenue and government 
indirect tax receipts.
A very good example of price variations in a market 
is the price of tickets to watch a major sporting event. In 
2012, the UK hosted the Olympic Games. Th
e price of 
tickets to watch athletics events ranged from $140 to $650, 
the cheapest tickets being for the heats of fi eld and track 
events with the most expensive being for the last day when 
medals were being awarded for the main events.
Variations in price elasticity of demand can also be 
used to explain:
■ 
the diff erence between peak and off peak rail travel in some 
countries
■ 
why it is usually cheaper to purchase airline tickets a few 
months rather than a few days ahead of travel
■ 
why restaurant meals are more expensive during religious 
festivals.
In all of these cases, businesses are using price variations to try 
to maximise their revenue. Th
ey are well aware that there are 
variations in price elasticity of demand in their markets and 
therefore trying to exploit the opportunities presented to them.
Price (US$)
Quantity demanded of PCs
1000
98
100 101
D
1
D
0
D
2