1 Demand

2 Elasticity of Demand 1.Percentage change in Quantity Demanded given a percentage change in Price a.It represents the responsiveness of consumer reactions to price changes b.This is called an Elasticity c.% Change in Quantity Demanded/ % Change in Price

3 Calculate the Elasticity of Demand 1.For the price movement from $300 to $240 a.Elasticity is 2.0 b.This means that a 1% decrease in price will cause a 2.0% increase in quantity demanded (i.e., sales quantity) c.Numbers larger than 1 represent a relatively responsive change to price

4 Elasticities of Demand 1.If the elasticity is greater than 1 a.We call that “elastic” or relatively responsive to price changes 2.If the elasticity is less than 1 a.We call that “inelastic” or relatively unresponsive to price changes

5 Determinants of Elasticities 1.Elasticities vary along demand curve a.More elastic at high prices  Consumers respond a lot b.Less elastic (more inelastic) at lower prices  Consumers care less 2.Elasticity is determined by the quality and quantity of available substitutes

6 Elasticities and Total Revenue 1.Price and Total Revenue move in opposite directions on the elastic portion of the demand curve 2.Elastic example (2.0) a.At the high price of $300  Total revenue = $75,000  $300 x 250 b.At the low price of $240  Total revenue = $96,000  $240 X 400

7 OUTLINE 1. Introduction 2. Consumer (Producer) Behavior a. Price Value Tradeoffs b. An Example 3. Profit Maximizing Behavior 4.Summary and Questions

8 Price/Value Tradeoffs 1.Consider the impact of Price on PROFIT rather than just on Total Revenue 2.Assume each unit costs a seller $200 to purchase a.And that the elasticity of demand is relatively elastic  That is, consumers can find the same product elsewhere

9 Price/Value Tradeoffs 3. At the high price of $300 (250 units), total revenue = $75,000 a.Profit = $75,000 – ($200*250) = $25, At the lower price of $240 (400 units), total revenue = $96,000 a.Profit = $96,000 – ($200*400) = $16,000 5.Profit is 36% lower even though revenue increased a.You not only lowered price on the extra 150 units, you also lowered the price on those you would have sold at $300

10 Price/Quantity Tradeoffs

11 Price/Revenue Tradeoffs

12 Price/Profit Tradeoffs

13 Price/Quantity Tradeoffs