3 - 3. Quantitative Demand 3.1 Calculate and interpret own...

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3. Quantitative Demand 3.1 Calculate and interpret own price elasticity. Elasticity of Demand measures responsiveness of demand (or supply) to changes in an underlying factor (e.g. price, income, other prices). Own-Price elasticity of demand = % change in quantity demanded/% change in price eP > 1 in magnitude (< -1) Suppose eP = -1.5 and you are currently buying 30 lbs. of beef/yr. at $3/lb. If beef prices increase to $3.15 per pound (a 5% increase), how much beef do you consume? Answer: The % change in beef consumption is -7.5% (-1.5 x 5%) The amount of beef consumed falls 2.25 pounds to 27.75 What happens to your expenditures on beef? They fall from $90 ($3 x 30) to $87.40 ($3.15 x 27.75) RULE: Elastic: ↑P ↓Revenue eP < 1 in magnitude (> -1) Suppose eP = -.5 and you are currently buying 1500 gals. of gasoline/yr. at $1/gal. If gasoline prices increase to $1.05 per gallon (a 5% increase), how much gasoline do you consume? Answer: The % change in gasoline consumption is -2.5% (-.5 x 5%) The amount of gasoline consumed falls 37.5 gallons to 1462.5 gallons13 What happens to your expenditures on gasoline? They rise from $1500 ($1 x 1500) to $1525.625 ($1.05 x 1462.5)14 RULE: Inelastic: ↑P ↑Revenue As you move along a linear demand curve, the price elasticity of demand changes. Price elasticity of demand If your marginal cost is 0, what price will you set if you are facing a demand Q=16- 2P? What is the elasticity of demand at that price
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3.2 Distinguish elastic, inelastic, and unitary elastic demand; and explain the relationship between own price elasticity and changes in revenue. 3.3 Identify factors influencing price elasticity and their application in business. A) Availability of direct or indirect substitutes Pricing differently according to the availability of substitutes Walk-in price vs. booking price  Domestic/international shipping charge at Amazon.com Developing features that substitutes don’t have  Textbooks online content/ used book  Anti-virus software free update/ pirated software Reducing the availability of substitutes  Anti-piracy, anti-fakes campaign Movie theater/popcorn, drinks B) Cost/benefit of economizing Dollar General, Japanese store. People differ in their costs of economizing Design promotion scheme to target those whose cost of economizing (shopping around) is small. Design premium products and make them easily accessible to those whose cost of economizing is high. C) Buyers prior commitment Creating prior commitment through Making it a tradition: wedding rings, photos, moon-cakes, flowers for special occasions Promotion price on leading item and gradually providing accessories, Free (low cost) initial access to let consumers experience the product/service:
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cable TV/HBO, cell phones, HP computer/ UST ownership program, Loyalty program: mileage program, stamps for redeeming prizes Design a better product (service) for those with prior commitment and charge a
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This note was uploaded on 12/21/2011 for the course ECON 214 taught by Professor Bayemichael during the Spring '09 term at HKU.

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3 - 3. Quantitative Demand 3.1 Calculate and interpret own...

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