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3/7/13

3/7/13. Warm-up: Imagine you are a business owner who would like to generate more revenue. Should you raise or lower prices? Explain. It Depends!. Learning Goal.

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3/7/13

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  1. 3/7/13 • Warm-up: Imagine you are a business owner who would like to generate more revenue. Should you raise or lower prices? Explain.

  2. It Depends!

  3. Learning Goal • SWBAT: define price elasticity of demand, identify the determinants of elasticity, and illustrate elasticity in the market graph.

  4. Consider… • How would you respond if the price of cell phone service doubled? • How would you respond if the price of jeans doubled?

  5. Price Elasticity of Demand

  6. Price Elasticity of Demand • A measure of how sensitive or responsive the quantity demanded of a good of service is to a change in price

  7. Price Elasticity of Demand • If there is a big change in quantity demanded for a good or service when the price changes, it is said to have an elastic demand • If there is a very small change in quantity demanded for a good or service when the price changes, it is said to have an inelastic demand

  8. Your task • Rank the goods/services in terms of price elasticity of demand • The first item should be the one for which consumers would be most sensitive/responsive to a change in price • The last item should be the one for which consumers would be least sensitive/responsive to a change in price

  9. Most Elastic to Most Inelastic • Fresh Tomatoes (4.6) • Foreign Travel (4.0) • Restaurant Meals (2.3) • Tires (0.95) • DVDs (0.9) • Physician Services (0.6) • Tobacco (0.45) • Coffee (0.25) • Gasoline (0.2) • Salt (0.1)

  10. Calculating Price Elasticity of Demand % change in quantity demanded % change in price *all negative signs are dropped – absolute values only

  11. For example… • Imagine the quantity of Good A demanded fell by 80% as a result of a 20% increase in price • Good A’s price elasticity of demand would be 4 • (80% ÷ 20%)

  12. Perfect Inelasticity • When quantity demanded does not respond at all to changes in price • Price elasticity of demand = 0 • Air, water, electricity, insulin, drugs (for an addict)

  13. Perfect Elasticity • When quantity demanded will drop to zero as a result of a price increase • price elasticity of demand = ∞ • Goods in a perfectly competitive market

  14. Unit Elastic • When the quantity demanded changes by the same percentage as a change in price • Price elasticity of demand = 1 • Downward sloping demand curve • Most goods/services have a price elasticity of demand between .5 and 1.5

  15. Relative Elasticity

  16. Most Sensitive to Least Sensitive • Fresh Tomatoes (4.6) • Foreign Travel (4.0) • Restaurant Meals (2.3) • Tires (0.95) • DVDs (0.9) • Physician Services (0.6) • Tobacco (0.45) • Coffee (0.25) • Gasoline (0.2) • Salt (0.1)

  17. 3/7/13 • Warm-up: Imagine you are a business owner who would like to generate more revenue. Should you raise or lower prices? Explain.

  18. Total Revenue Test • If D for a good is unit elastic an  in price does not change total revenue • If D for a good is inelastic  in price leads to an  total revenue • If D for a good is elastic  in price leads to a  total revenue

  19. Why might the Demand for some goods be more elastic than others? What factors matter?

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