elasticity of demand class...

8/11/2019 Elasticity of Demand Class jld;lsk;ldk;ask;dk;asd;as;dk;las;dkas;kld;as;dk;ask;ldkals;kdl;skl;dkal;sk;ld

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Price, Income

and Cross Elasticity


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Consider the following cases:

Making Sales Targets

A Public Transportation Problem:Can the daily ridership fluctuations be controlled

through a pricingstrategy?

The AirlinersPricing Problem:

How can an airliner fill its plains while

maximizing its profit?


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Elasticitythe concept The responsiveness of one variable to changes

in another

When price rises, what happensto demand?

Demand falls

BUT!

How much does demand fall?


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Elasticitythe concept If price rises by 10% - what happens to

demand?

We know demand will fall By more than 10%?

By less than 10%?

Elasticity measures the extent to which

demand will change


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Elasticity 4 basic types used:

Price elasticity of demand

Price elasticity of supply

Income elasticity of demand

Cross elasticity


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Elasticity Price Elasticity of Demand

The responsiveness of demand

to changes in price Where % change in demand

is greater than % change in priceelastic

Where % change in demand is less than % change

in price - inelastic


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ElasticityThe Formula:

Ped =% Change in Quantity Demanded___________________________

% Change in Price

If answer is between 0 and -1: the relationship is inelastic

If the answer is between -1 and infinity: the relationship is elastic

Note: PED has sign in front of it; because as price risesdemand falls and vice-versa (inverse relationship betweenprice and demand)


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ElasticityPrice ()

Quantity Demanded

The demand curve can be arange of shapes each of whichis associated with a differentrelationship between price andthe quantity demanded.


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ElasticityPrice

Quantity Demanded (000s)

D

The importance of elasticityis the information itprovides on the effect ontotal revenue of changes inprice.

5

100

Total revenue is price xquantity sold. In thisexample, TR = 5 x 100,000= 500,000.

This value is represented bythe shaded rectangle.

Total Revenue


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ElasticityPrice

Quantity Demanded (000s)

D

If the firm decides todecrease price to (say) 3,the degree of priceelasticity of the demandcurve would determine theextent of the increase indemand and the change

therefore in total revenue.5

100

3

140

TotalRevenue

TR 220 120 26 400


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220

TR 0 = 220 x 120 = 26,400

TR1= 180 x 140 = 25,200

TR2= 180 x 200 = 36,000

120

180

0 Q

D 2D 1

140 200


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ElasticityPrice ()

Quantity Demanded

10

D

5

5

6

% Price = -50%

% Quantity Demanded = +20%

Ped = -0.4 (Inelastic)

Total Revenue would fall

Producer decides to lower price to attract sales

Not a good move!


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ElasticityPrice ()

Quantity Demanded

D

10

5 20

Producer decides to reduce price to increase sales

7

% in Price = - 30%

% in Demand = + 300%

Ped = - 10 (Elastic)Total Revenue rises

Good Move!


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Elasticity

If demand is priceelastic:

Increasing price would

reduceTR (% Qd >% P)

Reducing price wouldincreaseTR

(% Qd > % P)

If demand is price

inelastic:

Increasing price would

increaseTR

(% Qd < % P)

Reducing price would

reduceTR (% Qd 1.

If total expenditure moves in the same direction

as change in price, e < 1.


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Measuring e (cont.)

Percentage method

Point e

Arc e = -((Q1Q) / (Q1 + Q)) X ((P1 + P) / (P1P))

Revenue method = A / (A-M)

Point e = Lower portion of curve / Upper

portion of curve

elasticity of demand class...

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