142_2 - Demand curves. Demand curves describe the...

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Villas-Boas – Lecture 2 EEP 142 Page 1 Demand curves. – Demand curves describe the relationship between the price and the quantity customers would be willing to purchase at that price. – A demand curve can be drawn for a single firm or for a whole industry. – Firms sometimes take explicit steps to learn their demand curves (e.g. Amazon’s randomized pricing experiment or airlines computer reservation systems). – More often, managers have some sense for how demand for their product would change if they changed their price.
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Villas-Boas – Lecture 2 EEP 142 Page 2 A demand curve graphically. An example: Q = 25 – P P = 25 – Q 0 5 10 15 20 25 30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Q P
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Villas-Boas – Lecture 2 EEP 142 Page 3 Demand elasticity. The demand elasticity measures the percent change in quantity for a given percent change in price: Q A /Q A P A /P A ε =
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Villas-Boas – Lecture 2 EEP 142 Page 4 Demand elasticity calculation. Demand function Q = 25 – P Demand at P = 10 is? – Q = 15 at P = 10 Elasticity (small change, say P = 1) – For Δ P = 1, Δ Q = -1 – Elasticity ( Δ Q/Q)/( Δ P/P) = – (-1/15)(1/10) = .66666 What is Elasticity at P = 15?
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Villas-Boas – Lecture 2 EEP 142 Page 5 Demand elasticity measures the sensitivity of quantity demanded to price. elastic inelastic Perfectly inelastic Perfectly elastic P Q P P P Q Q Q
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EEP 142 Page 6 Elasticity rules of thumb. Rule-of-thumb 1: Elasticities are higher (in absolute value) on luxuries than necessities. Food vs. Armani suits. NOTE: DON’T CONFUSE ELASTICITIES WITH PRICE LEVELS. Rule-of-thumb 2: Elasticities are lower (in absolute value) in the short run than in the long run. Gasoline.
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This note was uploaded on 09/11/2011 for the course EEP 142 taught by Professor Villas-boas during the Spring '11 term at University of California, Berkeley.

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142_2 - Demand curves. Demand curves describe the...

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