1. Price Elasticity Using Coffee Example
Ted Mitchell

2. Why Elasticity?
If we know the slope we have a measure of price sensitivity.
Why do we need elasticity?

3. Why Use Elasticity?
1) To compare the sensitivity in different markets?
2) To estimate the percentage change in sales if we change the price by one percent.
3) Guide to changing price to Maximize Revenues

4. Price Elasticity Customer Sensitivity to Price Changes
See pages in the text

5. Coffee Sold
Demand for Coffee
Price per Unit

6. Coffee Sold
Demand for the Starbucks environment
Demand for Big M Environment
Price per Unit

7. Change in Coffee Sold
Elasticity is Customer Sensitivity to a 1% change in Price
-1.9%
Segment Demand
-2.26%
Segment Demand 1%
$ $4.04
Price per Cup

8. Coffee Sold
THE AMOUNT OF REVENUE CHANGES
Sales Revenue, R = Price, P x Quantity sold, Q
Segment Demand
Price per Unit, P

9. Shoes Sold
THE AMOUNT OF REVENUE CHANGES
Sales Revenue, R = Price, P x Quantity sold, Q
Segment Demand
Price per Unit

10. Shoes Sold
THERE Is A PRICE, P* FOR A MAXIMUM REVENUE
R* = P* X Q*
Segment Demand
Price per Unit

11. $
Revenue
Price P*

12. $
Revenue
Profit
Price P*

13. $
Revenue
Profit
Price P*
Price range where profits get larger and revenues get smaller

14. Exam Question Yes. It Is True!!!
When a firm has a variable cost per unit, there is a point during the process of increasing the selling price that revenues are coming down and profits are going up.
True or False
Yes. It Is True!!!

15. -0.5 -1 -2
-3.0 $
inelastic
elastic
Revenue
Profit
Price

16. 210 Exam You need to know That elasticity means
The percentage change in units sold for a 1% change in price

17. Change In Price
A firm, selling 1000 units a week, is considering a price reduction strategy. A 5% price reduction should increase unit sales (Q) and the price elasticity(Ep) is estimated at What percentage increase in unit sales is anticipated?

18. Change In Price
A firm, selling 1000 units a week, is considering a price reduction strategy. A 5% price reduction should increase unit sales (Q) and the price elasticity(Ep) is estimated at What percentage increase in unit sales is anticipated?
(Ep)(-5%) = (-1.7)(-5%) = 8.5%
or 8.5%(1000) = 85 new units

19. The Crucial Question?
Will there be an increase or decrease in Revenue?
Elasticity is -1.7 and this is considered to be part of an elastic or sensitive range where a decrease in price causes an increase in revenue.
When price elasticity is = -1 then revenue is at the maximum

20. The Crucial point?
When price elasticity is = -1 then revenue is at the maximum
THEN ANY PRICE CHANGE WILL LOWER THE REVENUE

21. -0.5 -1 -2
-3.0 $
inelastic
elastic
Revenue
Profit
Price

22. Any Questions on Elasticity