Review Key Points of Elasticity

1. Review Key Points of Elasticity Ted Mitchell

2. What are the Three Classic Uses of the Elasticity Index?

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 1) Price Elasticity for Maximum Revenue 2) ROME Elasticity for Maximum Advertising Profit 3) Markup Elasticity for Maximum Profit

11. Elasticities that do not hint at max revenue or max profit • Elasticity of advertising • Elasticity of sales force calls • Elasticity of product selection • Elasticity of shelf facings • Elasticity of Exposures • Q = k(Marketing Efforte) • e = elasticity of marketing effor • e = %∆Q/%∆Effort

12. Wooden-Box Inc. makes wooden boxes and sells them at a price that provides a unit contribution, (P-V)= $5 per box. The market research department has estimated the function that predicts the number of boxes that are sold because of the advertising. The number of boxes sold due to the size of the advertising expenditure can be estimated by the function • Q = 1,500A0.44 • where Q = quantity sold • A = the amount of money spent on advertising • If the optimal amount of advertising is spent, then what is the profit after advertising (aka marketing profit)?

13. Elasticity of advertising • If demand due to advertising is • Q = 500A 0.8 • What is the elasticity of Advertising? • Elasticity of Advertising = %∆Q/%∆A = 0.8

14. If quantity sold due to advertising is • Q = 500A 0.8 And the selling price is P = $100 per unit What is the Revenue? Revenue = P x Q Revenue = $100(500A0.8 )

15. If quantity sold due to advertising is • Q = 500A 0.8 And the selling price is P = $100 per unit And the variable cost per unit is V = $25 What is the gross profit? Gross Profit = (P-V) x Q Gross profit = ($100-$25)(500A0.8 )

16. If quantity sold due to advertising is • Q = 500A 0.8 And the selling price is P = $100 per unit And the variable cost per unit is V = $25 The advertising expense is A What is the profit after Advertising? Marketing Profit = ((P-V) x Q) - A Marketing profit = (($100-$25)(500A0.8 )) -A