Demand

In this lesson

1. 0:00 Price and demand relationship explained
2. 1:04 Understanding price elasticity of demand
3. 2:18 Common PED calculation mistakes
4. 3:09 Elastic versus inelastic demand
5. 4:22 Factors influencing price elasticity
6. 5:52 Calculating PED: worked example

About this lesson

You'll explore the key factors that influence elasticity—necessity, availability of substitutes, and price as a proportion of income—and work through a practical example calculating PED for a coffee business. Understanding demand elasticity is essential across CIMA and ACCA papers, particularly in Performance Management and Strategic Business Leader, where pricing decisions directly impact revenue and strategy. The video starts by establishing that demand typically falls as price rises, a relationship you can visualise on a demand curve. You'll then learn to quantify this relationship using the price elasticity of demand formula: percentage change in quantity demanded divided by percentage change in price. A critical point here is accuracy—both numerator and denominator must be percentage changes, not absolute changes, a common student error. The formula output tells you whether demand is elastic (PED greater than 1, meaning demand changes more than price), inelastic (PED less than 1, meaning demand changes less than price), or unitary (PED equals 1). The video explores why different products have different elasticity profiles. Necessities like food remain in demand even when prices rise, creating inelastic demand. Products with many substitutes—leisure activities, for example—have elastic demand because customers can easily switch. Price as a proportion of income also matters: low-cost items like shoe polish show inelastic demand because price changes barely register in household budgets. The worked example brings this together: when a coffee shop drops prices from $3 to $2.80 and demand rises from 1200 to 1250 cups, the PED calculation yields 0.625, classifying coffee as inelastic. This tells you that price cuts won't dramatically boost sales, but they might still make strategic sense depending on other business factors. This framework helps you make informed pricing recommendations in case studies and exam scenarios.

Duration: 8m