Transcript Demand Price $300 $240 Demand 250 Quantity Elasticity of Demand 1. Percentage change in Quantity Demanded given a percentage change in Price a.

Demand
Price
$300
$240
Demand
0
250
400
Quantity
1
Elasticity of Demand
1. Percentage change in Quantity
Demanded given a percentage change
in Price
a. It represents the responsiveness of
consumer reactions to price changes
b. This is called an Elasticity
c. % Change in Quantity Demanded/
% Change in Price
2
Calculate the Elasticity of Demand
1. For the price movement from $300 to $240
a. Elasticity is 2.0
b. This means that a 1% decrease in price
will cause a 2.0% increase in quantity
demanded (i.e., sales quantity)
c. Numbers larger than 1 represent a
relatively responsive change to price
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Elasticities of Demand
1. If the elasticity is greater than 1
a. We call that “elastic” or relatively
responsive to price changes
2. If the elasticity is less than 1
a. We call that “inelastic” or relatively
unresponsive to price changes
4
Determinants of Elasticities
1. Elasticities vary along demand curve
a. More elastic at high prices
 Consumers respond a lot
b. Less elastic (more inelastic) at
lower prices
 Consumers care less
2. Elasticity is determined by the quality
and quantity of available substitutes 5
Elasticities and Total Revenue
1. Price and Total Revenue move in
opposite directions on the elastic
portion of the demand curve
2. Elastic example (2.0)
a. At the high price of $300
 Total revenue = $75,000
 $300 x 250
b. At the low price of $240
 Total revenue = $96,000
 $240 X 400
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OUTLINE
1.
Introduction
2.
Consumer (Producer) Behavior
a.
Price Value Tradeoffs
b.
An Example
3.
Profit Maximizing Behavior
4.
Summary and Questions
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Price/Value Tradeoffs
1. Consider the impact of Price
on PROFIT rather than just on
Total Revenue
2. Assume each unit costs a seller
$200 to purchase
a. And that the elasticity of demand
is relatively elastic
 That is, consumers can find the
8
same product elsewhere
Price/Value Tradeoffs
3. At the high price of $300 (250 units),
total revenue = $75,000
a. Profit = $75,000 – ($200*250)
= $25,000
4. At the lower price of $240 (400 units),
total revenue = $96,000
a. Profit = $96,000 – ($200*400)
= $16,000
5. Profit is 36% lower even though
revenue increased
a. You not only lowered price on the
extra 150 units, you also lowered
the price on those you would have9
sold at $300
Price/Quantity Tradeoffs
Comparison of Price to Quantity
320
280
260
240
220
500
475
450
425
400
375
350
325
300
275
200
250
Price Per Unit
300
Quantity
10
Price/Revenue Tradeoffs
Comparison of Price to Total Revenue
105,000
95,000
90,000
85,000
80,000
75,000
70,000
65,000
200
210
220
230
240
250
260
270
280
290
60,000
300
Total Revene
100,000
Price Per Unit
11
Price/Profit Tradeoffs
Comparison of Price to Profit
30,000
25,000
15,000
10,000
5,000
200
210
220
230
240
250
260
270
280
290
0
300
Profit
20,000
Price Per Unit
12
Price/Quantity Tradeoffs
Sale Quantities Needed To Maintain
$25,000 of Profit
900
800
600
500
400
300
200
100
230
240
250
260
270
280
290
0
300
Quantity Sold
700
Price Per Unit
13