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ELASTICITY OF DEMAND
Microeconomics Made Easy
by
William Yacovissi
Mansfield University
©William Yacovissi All Rights Reserved
ELASTICTY
 A very important issue for all business is what will
be the impact of a price change.
 Changing the price always involves a tradeoff
 Lowering the price may attract additional
customers, but you’ve reduced the price to your
existing customers as well.
ELASTICITY
 If you raise the price you lose customers,
but those remaining now pay a higher price.
 Ultimately the impact of a price change
depends on the how much quantity
demanded changes when the price changes.
ELASTICITY & REVENUE
 You are manager of the local small town
cinema. It’s a typical Tuesday night and
there are 100 people in your 300 seat
theater. Should you lower your price from
$5.00 to $4.00 to increase attendance.
 This depends on whether lowering the price
attracts enough new customers.
ELASTICITY & REVENUE
 At $5.00 a ticket you earn $500 in revenue.
At $4.00 a ticket you need 125 customers to
earn $500.
 Lowering the price to $4.00 is a good idea if
you attract more than 25 additional
customers.
ELASTICITY OF DEMAND
 Needless to say, firms try predict the impact
of a price change on sales before they
actually change the price.
 Elasticity of demand provides a framework
for studying these issues
ELASTICITY OF DEMAND
 Elasticity of Demand is a complex concept
 Elasticity changes with price.
 It changes with the amount of time the consumer
has to adjust to price changes
 It changes with the number of substitutes that
become available.