Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 2 homework Numbers 7, 10, and 13 Managerial Economics & Business Strategy Chapter 3 Quantitative Demand Analysis Anyone heard of ELASTICITY?? • How responsive is variable “G” to a change in variable “S” EG , S % G % S If EG,S > 0, then S and G are directly related. If EG,S < 0, then S and G are inversely related. If EG,S = 0, then S and G are unrelated. The Elasticity Concept Using Calculus • An alternative way to measure the elasticity of a function G = f(S) is EG , S dG S dS G If EG,S > 0, then S and G are directly related. If EG,S < 0, then S and G are inversely related. If EG,S = 0, then S and G are unrelated. Own Price Elasticity of Demand Q Px %QX %PX Px Qx d EQX , PX d x • Negative according to the “law of demand.” Elastic: EQ X , PX 1 Inelastic: EQ X , PX 1 Unitary: EQ X , PX 1 Perfectly Elastic & Inelastic Demand Price Price D D Quantity Perfectly Elastic ( EQX ,PX ) Quantity Perfectly Inelastic ( EQX , PX 0) What does this mean?? • EQ ,P = 3 x X A 1% increase in price will lead to a 3% decline in quantity demanded. Would a firm find this to be a problem? • EQ ,P = .3 x X A 1% increase in price will lead to a 0.3% decline in quantity demanded. Would a firm find this to be a problem? Why would a firm worry about elasticity? • Impacts units sold Total Revenue Price * Quantity • Elastic Increase (a decrease) in price leads to a decrease (an increase) in total revenue. • Inelastic Increase (a decrease) in price leads to an increase (a decrease) in total revenue. • Unitary Total revenue is unchanged Total revenue is maximized at the point where demand is unitary elastic. Elasticity, Total Revenue and Linear Demand P 100 TR Unit elastic Elastic Unit elastic 80 1200 60 Inelastic 40 800 20 0 10 20 30 40 50 Q 0 10 Elastic 20 30 40 Inelastic 50 Q What should the airlines do to increase cash flow?? • • • • Increase the price of tickets to raise money Decrease the price of tickets to raise quantity sold Elasticity = 1.8 Elastic!!! Reduce price to increase TR Factors Affecting Own Price Elasticity Available Substitutes • The more substitutes available for the good, the more elastic the demand. Time • Demand tends to be more inelastic in the short term than in the long term. • Find substitutes. Expenditure Share • Cost more??? Think about it more More elastic Cross Price Elasticity of Demand Q Py %QX %PY Py Qx d EQX , PY d x If EQX,PY > 0, then X and Y are substitutes. If EQX,PY < 0, then X and Y are complements. Predicting Revenue Changes from Two Products Suppose that a firm sells goods that are related (pizza and beer). If the price of beer (good X) changes, then total revenue will change by: R RX 1 EQX , PX RY EQY , PX %PX What??? • Suppose a firm’s revenues are derived from the sales of two products, X and Y. The firm’s revenue would be R = Rx + Ry, • Rx = PxQx denotes revenues from the sale of product X • Ry = PyQy denotes revenues from the sale of product Y. The impact of a given percentage change in the price of product X on the total revenue of the firm are given by the following formula: R Rx 1 EQx , Px Ry EQy , Px * %Px Can we do it?? • You are the owner of a bookstore, and earn revenues primarily from selling coffee and books. For the past two years you have consistently earned, on average, revenues of $500 per week from selling coffee and $1000 per week from selling books. If the own price elasticity of demand for coffee is -1.0 and the cross price elasticity of demand between books and coffee is -1.8, what would happen to your revenues if you lowered the price of coffee (if coffee is good X) by 10%?