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Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity

Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity. Ted Mitchell. Exam Question. What Is the Price that maximizes Revenue If The Demand For The Product Is Q = a - bP. Optimal Price Max Rev. Quantity Sold. Demand Equation Q = a - bP. Maximum Revenue. a/2.

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Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity

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  1. Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell

  2. Exam Question • What Is the Price that maximizes Revenue If The Demand For The Product Is • Q = a - bP

  3. Optimal Price Max Rev Quantity Sold Demand Equation Q = a - bP Maximum Revenue a/2 Price per Unit a/2b TJM

  4. Optimal price Max Rev Quantity Sold Demand Equation Q = 5000 – 500P Maximum Revenue = $5 X 2,500 = $12,500 a/2 = 5000/2=2,500 Price per Unit a/2b = 5000/2(500) = $5 TJM

  5. $4 x 3,000 =12,000 Quantity Sold Demand Equation Q = a - bP 3,000 2,500 Price per Unit $4 $5 TJM

  6. Lower Price Sells More Units $4 x 3,000 =12,000 Quantity Sold Demand Equation Q = a - bP Maximum Revenue = $5 X 2,500 = $12,500 3,000 2,500 Price per Unit $4 $5 TJM

  7. Revenue in Period 2 $4 x 3,000 =12,000 Quantity Sold Revenue in Period 1$5 X 2,500 = $12,500 3,000 2,500 Price per Unit $4 $5 TJM

  8. Impact Analysis • Impact of a Change in Price on the Change In Revenue • Impact of a Change in Quantity on the Change in Revenue

  9. Lower Price Sells More Units Gain =$4 x 500 =$2,000 Quantity Sold Demand Equation Q = a - bP Loss is2,500 x-$1= -$2,500 3,000 2,500 Price per Unit $4 $5 TJM

  10. Price Elasticity = • Customer Sensitivity to Price Change = • Sensitivity of Changes in the Quantity purchased for a Change in Price • = %∆Q/%∆P

  11. Price Elasticity = -1 -0.5 -0.75 -1 -1.25 -1.5 -1.75 Quantity Sold Maximum Revenue a/2 Price per Unit a/2b TJM

  12. 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

  13. Eqp = -0.8 -0.5 -0.75 -1 -1.25 -1.5 -1.75 Quantity Sold 3,000 2,500 Price per Unit $4 $5 TJM

  14. Revenue looks like R = aP - bP2 Revenue Arc Price Elasticity = -0.8 -0.5 -0.75 -1 -1.25 -1.5 -1.75 0 Price $4 $5 TJM

  15. Three Big Uses for Price Elasticity • 1) Forecasting Qty change for a change in Price • 2) Comparing Price Sensitivity Across Markets • 3) Indicates if a price change will increase or decrease revenue

  16. Exam QuestionIf your price elasticity is -1.5 then a price increase increase your revenue? True or False TJM

  17. Exam QuestionIf your price elasticity is -1.5 then a price increase increase your revenue? True or False -0.5 -0.75 -1 -1.25 -1.5 -1.75 TJM

  18. Exam QuestionIf your price elasticity is -1.5 then a price increase increase your revenue? True or False Revenue -0.5 -0.75 -1 -1.25 -1.5 -1.75 0 Price TJM

  19. Exam Question # 2If your price elasticity is -1.5 then a small price decrease will increase your revenue? True or False TJM

  20. Exam Question # 2If your price elasticity is -1.5 then a small price decrease will increases your revenue? True or False Revenue -0.5 -0.75 -1 -1.25 -1.5 -1.75 0 Price TJM

  21. Price Elasticity is Almost Never Used to discuss a price change increasing or decreasing Revenue! • True • BUT Why!!!

  22. The Price That Maximizes Profit is always ≥ the Price that maximizes Revenue $ Pr* Pz* 0 Price TJM

  23. The Elasticity of Price that maximizes profit is always more negative than the price that maximizes revenue $ -0.5 -0.75 -1 -1.25 -1.5 -1.75 Pr* Pz* 0 Price TJM

  24. Most firms are maximizing profit most of the time • Most manager expect a revenue increase if they decrease their selling price

  25. Price Elasticity in Most markets most of the time is between • Eqp = -1.20 and -2.75

  26. The Elasticity of Price that maximizes profit is always more negative than the price that maximizes revenue $ -0.5 -0.75 -1 -1.25 -1.5 -1.75 Pr* Pz* 0 Price TJM

  27. Don’t Need A Max Revenue Indicator • What we want is a NEW Elasticity That Indicates if a change in price will increase the Profits or not!

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