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Chapter 2 homework

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”. If E G,S > 0, then S and G are directly related.

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Chapter 2 homework

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  1. Chapter 2 homework Numbers 7, 10, and 13

  2. Managerial Economics & Business Strategy Chapter 3 Quantitative Demand Analysis

  3. Anyone heard of ELASTICITY?? • How responsive is variable “G” to a change in variable “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.

  4. The Elasticity Concept Using Calculus • An alternative way to measure the elasticity of a function G = f(S) is 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.

  5. Own Price Elasticity of Demand • Negative according to the “law of demand.” Elastic: Inelastic: Unitary:

  6. Perfectly Elastic & Inelastic Demand Price Price D D Quantity Quantity

  7. What does this mean?? • EQx,PX = 3 • A 1% increase in price will lead to a 3% decline in quantity demanded. • Would a firm find this to be a problem? • EQx,PX = .3 • A 1% increase in price will lead to a 0.3% decline in quantity demanded. • Would a firm find this to be a problem?

  8. 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.

  9. Elasticity, Total Revenue and Linear Demand P TR 100 Unit elastic Elastic Unit elastic 80 1200 60 Inelastic 40 800 20 30 40 50 Q Q 0 10 20 30 40 50 0 10 20 Elastic Inelastic

  10. 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

  11. 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

  12. Cross Price Elasticity of Demand If EQX,PY > 0, then X and Y are substitutes. If EQX,PY < 0, then X and Y are complements.

  13. 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:

  14. 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:

  15. 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%?

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