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# Lec7 - Price goes up quantity demanded goes up TR goes up...

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February 8 Lecture 7 Price elasticity of demand Elasticity: how sensitive customers react to a change in price. How much would I have to reduce the price of my product in order to increase sales by 20%? It depends if lower price would attract a large customer. It depends on price elasticity of demand. Key: the availability of the competitive products Definitions of price elasticity of demand: Intuitively: the degree of responsiveness of quantity demanded to a change in price. Verbally: percentage change in quantity demanded divided by the percentage change in price. %Qd/%P When the math turn out to be greater than 2, then its price elasticity. Price reduce 10%, sale jumped 20% -> more revenue, that means price elasticity. E>1 = elastic, Price goes up, quantity demanded goes down, TR goes down.

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Unformatted text preview: Price goes up, quantity demanded goes up, TR goes up. Inelasticity: price goes up, TR goes up. Price goes down, TR goes down. UNITARY ELASTIC: % Qd=% P Determinants of elasticity: 1. Availability of substitutes The more the substitutes on the market, the more elasticity. 2. Habit (cigarette and alcohol)/ product loyalty 3. Percent of income spent on good. Must be proportional to the price of a good or service. a. More elasticity if they spend a large amount of their income on the good. 4. Time to adjust, more time to adjust, more price sensitive they become. More time to adjust, more elasticity. 5. As you go from a general area to a specific area, it becomes more elastic because of more substitutes. Inelasticity quiz:...
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