Page 178 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 3 Marketing

Increases Demand Price Increases
OR

Price Decreases Decreases Demand
Figure 12.7 Price elasticity of demand

The relationship between price and demand can be shown on a demand graph like
the one below.
Price

Demand

Quantity
Figure 12.8 Simple demand curve

KEY TERM As we have seen in the above examples of cinema tickets and bottled water, how
much demand decreases or increases following an increase or decrease in price will
Price elasticity of demand:
measures by how much demand not be the same for every product.

(sales) for a product changes The demand for cinema tickets will change by a greater amount following a
when there is a change in its price. change in price than the demand for bottled water will. This is because the demand

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Price inelastic demand: the for some goods and services is more responsive to price changes than others. Th is is
percentage change in demand known as the price elasticity of demand.
(sales) is less than the percentage
Products that are not very responsive to changes in their price have price inelastic
change in price.
demand. This means that the percentage change in demand will be lower than the

Price elastic demand: the

percentage change in price. This is the case for the demand for bottled water.
percentage change demand
is greater than the percentage Products that are more responsive to changes in their price have price elastic

change in price. demand. This means that the percentage change in demand is bigger than the

percentage change in price. This is the case for the demand for cinema tickets.
ACTIVITY 12.7
Read the following newspaper reports.
Petrol prices set to rise by 5% by the end of next week!

The country’s four main petrol retailers Car user, Innocent Pfupa, when asked how he
have announced that, due to shortage of will be affected by the increase in petrol prices
supplies, petrol prices will rise by 5% in replied: ‘I need my car for work, so will just
the next few days. A spokesman for one of have to pay the higher price. However, I might
the petrol retailers said ‘the price increase try to reduce my petrol usage by using my car
is outside of our control. We expect the less for leisure journeys. It will also mean I
effect of this increase to reduce our sales by have less money to spend on other goods and
services, especially the little luxuries in life.’
around 2%.’