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Unformatted text preview: MG2 302: Applied Economics Chapter 6: Elasticity and Demand Skeleton Notes 1 Important concepts: Several implications on Sales Revenue Managing Cash flows Pricing Strategy Impact of changes in competitors prices Market Response to Shocks: Impacts of economic boons and recessions. And lots more Upon completion of this chapter, students should be able to: Define and measure elasticity both ways of calculating elasticity Understand determinants of elasticity Apply the concepts of price elasticity, crosselasticity, and income elasticity 2 Show how elasticity affects revenue. 3 Price Elasticity of Demand (E) Price elasticity is defined the percentage change in the quantity of a product demanded divided by the percentage change in the price causing the change in quantity. Price elasticity of demand indicates the degree of consumer response to variation in price. 4 This ratio is called the elasticity coefficient. ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ The precise definition between elastic and inelastic can be determined by the elasticity coefficient. 5 Present demand curves of varying elasticity Perfectly inelastic: despite an increase in price, consumers still purchase the same amount. The price elasticity of an addicts demand for heroin or a diabetics demand for insulin in some price range might be approximated by this curve. Relatively inelastic A percentage increase in price result a smaller percent reduction in sales. The demand for cigarettes has been estimated to be highly inelastic. 6 Unitary elastic The percentage change in quantity is equal to the percent change in price. A curve of decreasing slope results. Sales revenue (price tomes quantity) is constant. Perfectly elastic Demand is horizontal curve. A firm can sell as many units of its product at it wishes to at the going market price. Price and marginal revenue are equal. Consumer will buy all of they want at the market price, but none will be sold above the market price....
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This note was uploaded on 08/30/2011 for the course MGE 302 taught by Professor Isse during the Fall '08 term at SUNY Buffalo.
 Fall '08
 ISSE

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