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chapter six spring 2011

# chapter six spring 2011 - MG2 302 Applied Economics Chapter...

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MG2 302: Applied Economics Chapter 6: Elasticity and Demand Skeleton Notes 1

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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, cross-elasticity, and income elasticity 2
Show how elasticity affects revenue. 3

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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

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Present demand curves of varying elasticity Perfectly inelastic: despite an increase in price, consumers still purchase the same amount. The price elasticity of an addict’s demand for heroin or a diabetic’s 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.

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