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ELASTICITY OF DEMAND Microeconomics Made Easy by William Yacovissi Mansfield University ©William Yacovissi All Rights Reserved ELASTICTY A very important issue for all business is what will be the impact of a price change. Changing the price always involves a tradeoff Lowering the price may attract additional customers, but you’ve reduced the price to your existing customers as well. ELASTICITY If you raise the price you lose customers, but those remaining now pay a higher price. Ultimately the impact of a price change depends on the how much quantity demanded changes when the price changes. ELASTICITY & REVENUE You are manager of the local small town cinema. It’s a typical Tuesday night and there are 100 people in your 300 seat theater. Should you lower your price from $5.00 to $4.00 to increase attendance. This depends on whether lowering the price attracts enough new customers. ELASTICITY & REVENUE At $5.00 a ticket you earn $500 in revenue. At $4.00 a ticket you need 125 customers to earn $500. Lowering the price to $4.00 is a good idea if you attract more than 25 additional customers. ELASTICITY OF DEMAND Needless to say, firms try predict the impact of a price change on sales before they actually change the price. Elasticity of demand provides a framework for studying these issues ELASTICITY OF DEMAND Elasticity of Demand is a complex concept Elasticity changes with price. It changes with the amount of time the consumer has to adjust to price changes It changes with the number of substitutes that become available.