Own price elasticity and total revenue changes

Slides:



Advertisements
Similar presentations
C HAPTER Elasticity of Demand and Supply price elasticities of demand and supply, income and cross elasticities of demand, and using elasticity to forecast.
Advertisements

FIRMS IN COMPETITIVE MARKETS
1 CHAPTER.
Policy & the Perfectly Competitive Model: Consumer & Producer Surplus
Chapter 6: Elasticity.
1 Market Demand from Individual Demand. 2 In this section we want to think about market demand as the result of adding up demands from many individuals.
Sales and Excise taxes.
1 Excise Tax. 2 Change in supply If non-price determinants of supply should change the supply curve will shift and we say there has been a change in supply.
Chapter Fifteen Market Demand. From Individual to Market Demand Functions Think of an economy containing n consumers, denoted by i = 1, …,n. Consumer.
Copyright © 2004 South-Western 5 Elasticity and Its Applications.
Business Calculus Other Bases & Elasticity of Demand.
This is an example of government intervention in a market.
Firms and Competitive Markets
The Relationship Between Total and Marginal Values
Break-Even Analysis TR TR TC VC FC Costs/Revenue
Income and substitution effects
AAEC 3315 Agricultural Price Theory Chapter 3 Market Demand and Elasticity.
Labor Demand in the market in the short run.
Demand And Supply Demand
Module 8 Price Elasticity of Demand 1. price elasticity of demand,  Define the price elasticity of demand, understand why it is useful, and how to calculate.
Advanced Pricing Ideas 1. 2 We have looked at a single price monopoly. But perhaps other ways of pricing can lead to greater profits for the sports team.
Economics 103 Lecture # 15 Price Searching. Here we are going to make another minor adjustment to our model. Rather than assume firms face a perfectly.
Labor Supply and Elasticity
1 Revenue Here we study a general idea of how a firm’s revenue is dependent on the demand for the firm’s product. Concepts related to revenue are also.
Monopsony Monopsony is a situation where there is one buyer – you have seen Monopoly, a case of one seller. Here we want to explore the impact on the.
Elasticity.
1 A PART OF THE INVISIBLE HAND Do you see it?. 2 There is a story in economics that competitive market outcomes are efficient. Efficiency means two things.
Elasticity & Total Revenue Chapter 5 completion…..
Price elasticity of demand
Elasticity of Demand and Supply
Elasticity and Its Application
1 Price elasticity of demand and revenue implications Often in economics we look at how the value of one variable changes when another variable changes.
Here we see what a monopoly is and its revenue potential.
1 Competitive Industry in the Short Run. 2 operating rule case 1 $/unit Q or units MC AC AVCb c The firm is a price taker - say it takes P If firm operatesif.
Multiplant Monopoly Here we study the situation where a monopoly sells in one market but makes the output in two facilities.
1 1 st degree price discrimination A form of Monopoly Power.
1 Perfect Competition in the Short Run. 2 Perfect competition Firms in the real world make either one product or make more than one product. They also.
Elasticity and Its Application
1 Price elasticity of demand and revenue implications Often in economics we look at how the value of one variable changes when another variable changes.
1 Competitive Industry in the Short Run. 2 operating rule case 1 $/unit Q or units MC AC AVCb c The firm is a price taker - say it takes P If firm operatesif.
Supply and Demand: How Markets Work
Principles of Microeconomics 4 and 5 Elasticity*
Economics Chapter Supply, Demand, and Elasticity Combined Version
Price Elasticity of Demand
1 1 st degree price discrimination A form of Monopoly Power.
The Use of Price Elasticity of Demand Why Elasticity matters?
REVENUE THEORY IB Business & Management A Course Companion 2009 THE THEORY OF THE FIRM: COSTS, REVENUES AND PROFITS.
Price Elasticity of Demand
Module 8 Price Elasticity of Demand 1. price elasticity of demand,  Define the price elasticity of demand, understand why it is useful, and how to calculate.
Willingness to Pay, MB and Consumer Surplus
1 Elasticity Chapter 5. 2 ELASTICITY elasticity A general concept used to quantify the response in one variable when another variable changes.
Lecture notes Prepared by Anton Ljutic. © 2004 McGraw–Hill Ryerson Limited Elasticity CHAPTER FOUR.
1 Elasticity of Demand and Supply CHAPTER 5 © 2003 South-Western/Thomson Learning.
Economics Unit Three Part I: Demand. Demand Essentially, demand is the willingness (or desire) to buy a good or service and the ability to pay for it.
Lesson Objectives: By the end of this lesson you will be able to: *Explain the law of supply. *Interpret a supply schedule and a supply graph. *Examine.
Chpt. 3: Supply. Supply Quantity supplied –The amount of the good or service that producers are willing and able to sell at the current price Law of demand.
Supply.
Elasticity and Its Application
Copyright © 2004 South-Western 5 Elasticity and Its Applications.
Markets Markets – exchanges between buyers and sellers. Supply – questions faced by sellers in those exchanges are related to how much to sell and at.
1 Price Elasticity and Tax Incidence CHAPTER 5 Appendix © 2003 South-Western/Thomson Learning.
Elasticity and its Application CHAPTER 5. In this chapter, look for the answers to these questions: What is elasticity? What kinds of issues can elasticity.
1.2.4 Price elasticity of demand - syllabus Students should be able to: Define price elasticity of demand (PED) Calculate and interpret numerical values.
Revenue. Lesson Objectives To understand what revenue is To understand the concepts of average, marginal and total revenue To be able to calculate AR,
A perfect competitor is a price taker, so it must accept the price dictated by the market Thus, the individual business’s demand curve is different than.
Elasticity of Demand and Supply
3.14 Operational Strategies: location
Elasticity of Demand and Supply
Price Elasticity and Total Revenue
Price Elasticity and Tax Incidence
Presentation transcript:

Own price elasticity and total revenue changes Total revenue (TR) is price times quantity. Along the demand curve P and Q move in opposite directions. Knowledge of Ed assists in knowing how TR will change.

Elasticity and total revenue relationship When we look at the collection of consumers in the market, at this time in our study we assume each consumer pays the same price per unit for the product. Also at this time in our study the total expenditure of the consumers in the market would equal the total revenue (TR) to the sellers. So, here we look at the whole demand side of the market in general.

Elasticity and total revenue relationship TR in the market is equal to the price in the market multiplied by the quantity traded in the market. In this diagram TR equals the area of the rectangle made by P1, Q1 and P1 Q Q1 the horizontal and vertical axes. We know from math that the area of a rectangle is base times height and thus here that means P times Q.

Elasticity and total revenue relationship We will want to look at the change in values of a variable and in order to do so we want to have a consistent measure of change. In this regard let’s say the change in a variable is the later value minus the earlier value. Thus if the price should change from P1 to P2, then the change in price is P2 - P1, or similarly if the TR should change the change in TR is TR2 - TR1.

Elasticity and total revenue relationship Now in this graph when the price is P1 the TR = a + b(adding areas) and if the price is P2 the TR = b + c. The change in TR if the price should fall P1 P2 a b c Q Q1 Q2 from P1 to P2 is (b + c) - (a + b) = c - a. Similarly, if the price should rise from P2 to P1 the change in TR is a - c. I will focus on price declines next.

Elasticity and total revenue relationship Since the change in TR is c - a, the value of the change will depend on whether c is bigger or smaller, or even equal to, a. In this diagram we see c > a and thus the change in TR > 0. P1 P2 a b c Q Q1 Q2 This means that as the price falls, TR rises. I think you will recall that in the upper left of the demand the demand is price elastic. Thus if the price falls in the elastic range of demand TR rises.

Elasticity and TR You will note on the previous screen that I had c - a. In the graph c is indicating the change in TR because we are selling more units. The area a is indicating the change in TR when there is a price change. We have to bring the two together to get the change in TR. Thus a lower price has a good and a bad. Good - sell more units. Bad - sell at lower price.

Elasticity and total revenue relationship Now in this graph when the price is P1 the TR = a + b(adding areas) and if the price is P2 the TR = b + c. In this diagram we see c < a and thus the change in TR < 0. P1 P2 a b c Q Q1 Q2 I think you will recall that in the lower right of the demand the demand is price inelastic. Thus if the price falls in the inelastic range of demand TR falls.

Elasticity and total revenue relationship Now in this graph when the price is P1 the TR = a + b(adding areas) and if the price is P2 the TR = b + c. In this diagram we see c = a and thus the change in TR = 0. P1 P2 a b c Q Q1 Q2 I think you will recall that in the middle of the demand the demand is unit elastic. Thus if the price falls in the unit elastic range of demand TR does not change.

Marginal revenue Marginal revenue is defined as the change in total revenue as the number of units cold changes. In the demand graph we have seen that in order to sell more the price has to be lowered. So, there is a relationship between elasticity and marginal revenue. If price falls and demand is elastic we know TR rises so MR is positive. If Price falls and demand is inelastic we know TR falls and so MR is negative. If price fall and demand is unit elastic we know TR does not change.

formula The relationship between elasticity and marginal revenue is MR = P{(1 + Ed)/Ed}. Price is a positive amount, Ed is a negative amount. Let’s take some examples. Ed = -2 (demand is elastic), then MR = P(-1/-2) = .5P ( a positive number) and so MR > 0 and MR < P. Ed = -1 (demand is unit elastic), then MR = 0 and MR < P. Ed = -.5 (demand is inelastic), then MR = P(.5/-.5) = -1P (a negative number) and MR < P.

Elasticity and MR P Elastic range Unit elastic Inelastic range D Q MR