Transcript Ch. 4.3 Notes: Elasticity of Demand

Ch. 4.3 Notes: Elasticity of
Demand
I.
Demand Elasticity > determines whether
a change in product price(lower) will
result in increased, decreased, or same
revenue/earnings
X
$3.99
X
$900.00
$500.00
$2.99
II.
Total Revenue Test > determines
whether it was a good idea to change the
price of a product by looking at total
revenue = how much money was made
Big Mac Meal = $6.49
X
$4.99
Today: $6.49 x 10 sold = $60.49 TR
Tomorrow: $4.99 x 13 = $64.87 TR
Or
Tomorrow: $4.99 x 11 = $54.89 TR
A. 3 step test
1. Old Price x Old Quantity Demanded
= Original Total Revenue
2. New P x new Q Demanded = new TR
3. Based on above, Demand will be….
a. Elastic if P and TR go in
opposite directions
* good idea to lower P because a lot
of people “react” to P change
b. Inelastic if P and TR go
in the same direction
* bad idea to lower P because not a lot of
people “react” P change
c. Unit Elastic if price changes and
revenue stays the same
* doesn’t matter if price is lowered
III. Examples
A. see board
B. Today, I rent DVDs for $2. At this price, I can rent 20
DVDs per day. In hopes of increasing my
earnings potential, tomorrow I raise the DVD
rental price to $3. Now, I am able to rent 15
DVDs per day.
1. Go through 3 step test to determine if it was
a good idea to change the price
IV. Demand is …….
A. more elastic if there are substitutes.
B. more inelastic if purchase can be delayed
C. more inelastic if it’s already expensive
Bugatti Veyron
Super Sport
1,950,000 Euros