Review Key Points of Elasticity

1. Review Key Points of Elasticity Ted Mitchell

2. What are the Three Classic Uses of the Elasticity Index? • 1) for comparing the sensitivity of changes in a variables across situations using different units of measure (e.g., apple and orange markets) • 2) for estimating the consequences of making a change in one variable (price) on another variable (quantity sold) • 3) for estimating the direction a variable (price) should be changed if an outcome (revenue) is to be maximized

3. Three Classic Uses of the Elasticity Index • 1) for comparing the sensitivity of changes in a variables across situations using different units of measure (e.g., apple and orange markets) • 2) for estimating the consequences of making a change in one variable (price) on another variable (quantity sold) • 3) for estimating the direction a variable (price) should be changed if an outcome (revenue) is to be maximized

4. How does the Price Elasticity Relate to The Price That Maximizes Revenue? • If you have the optimal Price for maximizing revenue, then the elasticity will be -1. • True or False.

5. Revenue looks like R = aP - bP2 Revenue Price Elasticity -0.5 -0.75 -1 - 1.25 -1.5 -1.75 0 Price a/2b TJM

6. Why is it so common for business to find that there price elasticity is more negative than -1?

7. Most Firms Have Variable Costs and are Trying to make Profits. Profit -0.5 -0.75 -1.0 -1.5 -2.0 -2.5 Z 0 P Price

8. Exam Question • If the price elasticity of your market is -2.75, then an increase in your selling price will decrease your revenue. True or false? • A) True is correct • B) False

9. Revenue looks like R = aP - bP2 Revenue Price Elasticity -0.5 -0.75 -1 - 1.25 -1.5 -1.75 0 Price a/2b TJM

10. Not all elasticitieshave the property of indicating the direction a variable has to move for another to reach a maximum • Price Elasticity for Maximum Revenue • ROME Elasticity for Maximum Advertising Profit • Markup Elasticity for Maximum Pricing Proift