1 / 13

Demand

Demand. Elasticity of Demand. Percentage change in Quantity Demanded given a percentage change in Price It represents the responsiveness of consumer reactions to price changes This is called an Elasticity % Change in Quantity Demanded/ % Change in Price. 2.

ellema
Download Presentation

Demand

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Demand

  2. Elasticity of Demand • Percentage change in QuantityDemanded given a percentage change in Price • It represents the responsiveness of consumer reactions to price changes • This is called an Elasticity • % Change in Quantity Demanded/ % Change in Price 2

  3. Calculate the Elasticity of Demand • For the price movement from $300 to $240 • Elasticity is 2.0 • This means that a 1% decrease in price will cause a 2.0% increase in quantity demanded (i.e., sales quantity) • Numbers larger than 1 represent a relatively responsive change to price 3

  4. Elasticities of Demand • If the elasticity is greater than 1 • We call that “elastic” or relatively responsive to price changes • If the elasticity is less than 1 • We call that “inelastic” or relatively unresponsive to price changes 4

  5. Determinants of Elasticities • Elasticities vary along demand curve • More elastic at high prices • Consumers respond a lot • Less elastic (more inelastic) at lower prices • Consumers care less • 2. Elasticity is determined by the quality and quantity of available substitutes 5

  6. Elasticities and Total Revenue • Price and Total Revenue move in opposite directions on the elastic portion of the demand curve • Elastic example (2.0) • At the high price of $300 • Total revenue = $75,000 • $300 x 250 • At the low price of $240 • Total revenue = $96,000 • $240 X 400 6

  7. OUTLINE • Introduction • Consumer (Producer) Behavior • Price Value Tradeoffs • An Example • Profit Maximizing Behavior • Summary and Questions

  8. Price/Value Tradeoffs • Consider the impact of Price on PROFIT rather than just on Total Revenue • Assume each unit costs a seller $200 to purchase • And that the elasticity of demand is relatively elastic • That is, consumers can find the same product elsewhere 8

  9. Price/Value Tradeoffs • 3. At the high price of $300 (250 units), total revenue = $75,000 • Profit = $75,000 – ($200*250) • = $25,000 • 4. At the lower price of $240 (400 units), total revenue = $96,000 • Profit = $96,000 – ($200*400) • = $16,000 • Profit is 36% lower even though revenue increased • You not only lowered price on the extra 150 units, you also lowered the price on those you would have sold at $300 9

  10. Price/Quantity Tradeoffs

  11. Price/Revenue Tradeoffs

  12. Price/Profit Tradeoffs

  13. Price/Quantity Tradeoffs

More Related