50 31250 30000 30000 25 25 50 maximum maximum total

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Unformatted text preview: 312.50 300.00 300.00 25 25 50 Maximum Maximum total revenue total 250.00 250.00 200.00 150.00 100.00 50.00 0 When demand is When elastic, price cut increases total revenue revenue 25 25 When demand is inelastic, is a price incease will increase price total revenue Quantity (pizzas per hour) 50 Elasticity of Demand Elasticity • Elasticity and total revenue (TR = P × Q) test When demand is ↑ Price causes – – – inelastic (η < 1) unit elastic (η = 1) elastic (η > 1) ↑ TR no change TR ↓ TR Factors That Affect Price Elasticity of Demand • Substitutes (necessities vs. luxuries) • Habit • Income, proportion, spent on the good • Time elapsed since the price change Acronym courtesy of John Palmer Cross Elasticity of Demand Cross • measures responsiveness of quantity demanded good A to ∆ P good B ∆ = % change quantity demanded of product A ∆ % change price of product B · elasticity > 0 substitutes · elasticity < 0 complements Income Elasticity Income • Responsiveness of quantity demanded to a change in income = % change in quantity % change in income Income Elasticity Income When ηy > 1 Demand is income elastic (normal good) 0 < ηy < 1 good) • ηy < 0 income inelastic (normal • negative income elasticity (infe...
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This document was uploaded on 03/13/2014.

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