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Unformatted text preview: ould show a negative slope, crossing the positively sloped supply curve at
the equilibrium point of $3 and 20 units. Surplus occurs in the area between the curves and above
the equilibrium point, while shortage occurs below the equilibrium point. PTS: 1
KEY: CB&E Model Pricing OBJ: 19-3 TOP: AACSB MSC: BLOOMS Synthesis 7. Define elasticity of demand and compare and contrast the three types of demand: elastic, inelastic,
and unitary. What would the demand curve for elastic and inelastic demand look like when
Elasticity of demand refers to consumers’ responsiveness or sensitivity to changes in price.
ELASTIC DEMAND occurs when consumers buy more or less of a product when the price
changes. The demand curve is almost horizontal or exactly horizontal if demand is perfectly
INELASTIC DEMAND means that an increase or a decrease in price will not significantly affect
demand for the product. The demand curve is almost vertical or exactly vertical if demand is
UNITARY ELASTICITY exists when the increase in sales exactly offsets a decrease in prices, so
total revenue remains the same.
KEY: CB&E Model Pricing OBJ: 19-3 TOP: AACSB MSC: BLOOMS Synthesis 8. List five factors that affect elasticity of demand and briefly describe how each affects demand.
AVAILABILITY OF SUBSTITUTES. When many product substitute products are available, the
consumer can easily switch from one product to another. This makes demand more elastic.
PRICE RELATIVE TO PURCHASING POWER. If a price is so low that it is an inconsequential
part of an individual’s budget, demand will be inelastic.
PRODUCT DURABILITY. Consumers often have the option of repairing durable products rather
than replacing them, thus prolonging their useful life. In other words, people are sensitive to the
price increase, and demand is elastic.
A PRODUCT’S OTHER USES. The greater the number of different uses for a product, the more
elastic demand tends to be. As price varies for a product with a wide variety of applications,
substitutability becomes an issue.
RATE OF INFLATION. Recent research has found that when a country’s inflation rate (the rate at
which the price level is rising) is high, demand becomes more elastic. In other words, rising price
levels make consumers more price sensitive.
KEY: CB&E Model Pricing OBJ: 19-3 TOP: AACSB MSC: BLOOMS Synthesis 9. Explain yield management systems (YMS) and discuss the types of industry where they are most
Yield management systems (YMS) are a technique for adjusting prices that use complex
mathematical software to profitably fill unused capacity by discounting early purchases, limiting early sales at these discounted prices, and overbooking capacity. YMS are used to raise prices to
maximize revenues. They were first used in the service industries—specifically the airline and
lodging industries—but have...
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This document was uploaded on 09/29/2013.
- Fall '13