Managerial Economics Chapter 6: Simple Pricing
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The slope of a demand curve measures______________
The change in the number of units of a good demanded when its price changes.
What can cause the slope of a demand curve to change?
Price measures, quantity measures, and time periods over which the demand for a product is measured.
Price elasticity of demand (e) definition.
Percentage change in quantity demandeddivided by percentage change in price
e = % change in Q / % change in P
Price inelastic (definition)
Buyers do not respond much to a change in price.
Percentage change in the quantity of x demanded is smaller than the percentage change in the price of x.
(0< /e/ <1)
IF price is lowered, price-inelastic consumers buy more units, but not enough to offset price discount, resulting in a decrease in sales revenue.
Price - elastic (definition)
The percentage change of the quantity of x demanded is greater than the percentage change in the price of x.
(/e/ > 1)
If /e/ > 1, a typical consumer will purchase ____ units of x when the price falls, and she will end up spending _________ money on X than before.
When /e/ > 1, % change in Q is greater than % change in P. The units purchased by a price-elastic consumer will increase more than enough to offset discount, resulting in an increase in sales revenue after the discount.
If 0 < /e/ < 1, then a typical consumer will purchase _______ units of X when the price of X falls, but she will end up spending ________ money on X.
If sales revenue increased after you sold more units as a result of a discount, the price elasticity of the demand for your product is ___________ in absolute values.
Greater than 1.
IF sales revenue remained unchanged after you sold more units as a result of a discount, the price elasticity of the demand for your product is __________
Equal to 1.
(Units purchased by consumers increase just enough to offset price discount.)
- % change Q = % change P
- /e/ = % change in Q / % change in P = 1
IF sales revenue decreased after you sold more units as a result of a discount, the price elasticity of the demand for your product is
Less than 1.
"% change Q" < "% change P"
/e/ < 1
After a bar increased the price of beer by 10%, the amount of beer purchased decreased by 5%. Based on this data, total revenues would _____ because demand is
A decision to incrrease prices should be based on assumption that demand is
IF price elasticity of the demand for a product is estimated to be -1.5, you should _____
the price and sell ________ to increase sales revenue.
How is marginal revenue (MR) related to price (P) and price elasticity of demand /e/ ?
Marginal Revenue = Price * [1- 1/ /e/].
So if you're given price and /e/, you can calculate MR.
If you're given P, /e/, and marginal cost, and question asks what firm should do about price and production...
- Use P and /e/ to calculate MR, then compare MR to MC - remember:
- If MR > MC, lower price and sell more
- (if /e/ > 1)
- IF MR < MC, raise price and sell less.
Profit margin per dollar (formula)
Profit margin = P - MC divided by P
Other things being equal, the price elasticity of demand for a good tends to be more ___________ the fewer the available substitutes.
IF buyers perceive there to be few close substitutes for an item, it would likely make it less________.
- (or more price-inelastic)
What are some factors that affect the price elasticity of demand for a product?
- The number of substitutes.
- The amount of time consumers have to adapt to price changes.
- The percentage of the consumer's budget spent on the product.
Income elasticity of demand (ei) (equation)
If demand rises when income rises, a good is considered to be _____
If ei is less than 1, _______.
then % change in Q demanded increases less than % change in income.
If ei is greater than 1, _______.
then % change in Q demanded increases more than % change in income.
If income elasticity of demand (ei) for x is estimated to be 2.5, the quantity of x purchased will_________as income increases, adn the share of income spent on x will
If ei is postive, then x is a ____ good.
If ei > 1, demand for x is __________.
If income elasticity of the demand for x is 1.5, and income elasticity of the demand for y is 2.0, and an economic boom is forecasted, one should invest more in ________.
If the cross price elasticity of demand is negative between 2 goods, they are ____.
A good whose demand increases when the price of another good decreases. Examples include a parking lot and shopping mall or a hamburger and a hamburger bun.
IF the cross price elasticity of demand is positive between 2 goods, they are _____.
A good whose demand increases when price of another good increases. Two brands of cola soft drinks are substitutes.
Cross-price elasticity of demand (definition)
The cross-price elasticity of demand for Good A with respect to the price of Good B measures the percentage change in demand of Good A caused by a percentage change in the price of Good B.
Midpoint formula to determine price elasticity:
e = % change Q / % change P
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