2.2. Price Elasticity of Demand and Revenue

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Из курса от партнера University of Illinois at Urbana-Champaign

Microeconomics Principles

614 оценки

University of Illinois at Urbana-Champaign

Microeconomics Principles

614 оценки

This course offers an introduction to the functions of individual decision-makers—both consumers and producers—within the larger economic system. Emphasis is on the nature and functions of product markets, the theory of the firm under varying conditions of competition and monopoly, and the role of government in promoting efficiency in the economy. Most people make the incorrect assumption that economics is ONLY the study of money. My primary goal in this course is to shatter this belief. During this course, we will be addressing the above questions as well as many more relating to: -the environment -love and marriage -crime -labor markets -education -politics -sports -business My main goal is to show you the way economists think and how to use this analytical system to answer questions related not only to these and other important human issues, but to anything you end up doing with your life after this class. After all, as you will quickly find out, I believe that everything is economics!

Из урока

Elasticities

Welcome to the fourth week! This module we will cover one of my favorite economics concepts: elasticity. It is one of my favorites because of how useful it is to analyze policy implications, as well as its usefulness for business managers. This will be obvious to you when you read one of the discussion topics for this module: Should we legalize marijuana?

2.1. Definition and Classifying Price Elasticities of Demand10:21

2.2. Price Elasticity of Demand and Revenue4:46

2.3. Determinants of Price Elasticity of Demand10:45

2.4. Price Elasticities of Demand and the Linear Demand Curve5:48

Познакомьтесь с преподавателями

Dr. José J. Vázquez-Cognet
Clinical Professor
Department of Economics

[music]. .

Alright, so now we know how to classify elasticities according to the value of the

elasticity, right? Let's go back and answer your question.

You increase the price of your product, in this case the sandwiches, by 10%.

Is that a good thing? Do you increase your sales or not?

And, again, two things can happen. And sometimes this diagram with arrows

work better. So, your total revenue, I will call it TR,

let's call that total revenue, of whatever you sell is going to be equal to two

parts. It's the price you charge times the

quantity of units you sell. Alright, that's your total revenue, and

that's what we're interested. We're trying to, we're trying to in some

way figure out if the price increase of your sandwich is going to increase you

total revenue. So we can say or to simplify this notation

here, let's put it right here in the middle.

We can say that the total revenue is going to be equal to P, which is the price,

times quantities. Two parts, price times quantity.

And then you're going to, let's say you increase the price, by 10%.

Well, two things could happen, or basically three things.

Your quantity will go down, for sure. But it could go down by exactly 10, by

less than 10 or by more than 10. And we know how to classify this.

Right? If it goes down by 5%, we know that this

is an inelastic demand. And in that case what's going to happen to

your total revenue? Well your total revenue clearly will go

up, because this arrow is actually larger than the down arrow and these go up.

This shouldn't be very difficult to come to understand, right?

If you increase your price by 10% and you don't lose a lot of customers, your

revenue goes up. So when you have an inelastic demand and

you increase your price, your revenue goes up.

Always, every time you have an inelastic demand if you know that the, that the

demand for your good is inelastic, you should increase the price to increase your

revenue. On the other hand, if you have a if you

decrease your price for an inelastic good, your, your revenue goes down, alright?.

So the revenue and, and, and the change in price go in the same direction.

Now the other alternative, right, is that you take your price, and once you increase

it by, let's say 10%, your quantity consumed actually goes down by a lot more

than that. Let's say it was improved by 15%.

Now in that case, what's going to happen to your total revenue?

Well, your total revenue will go down. This arrow is actually larger than that.

And what's happening here is that you're increasing your price, which is all well

and good. But you're losing so many customers then

the loss of customers are bringing your revenue down.

You're not, yeah, you're selling each sandwich at a higher price.

You're getting more revenue per sandwich, but you're not selling almost no

sandwiches compared to what you had before.

So your revenue from selling sandwich is actually lower than it was before then.

And, in this case here, this is a case where an elastic, right, because the

proportional change in, in I'm sorry, inelastic, because the proportional change

in quantities is lower than the proportional change in price.

And this is elastic because the proportional change in quantity is

smaller, is larger, than the proportional change in price.

So, if we want to kind of summarize all this stuff here, right, some statements,

we can say that if elasticity, is inelastic, then an increase in price

results in an increase in total revenue and vice versa, right?

And if E, the elasticity, is elastic, an increase in price will result in a

reduction in total revenue, because you lose too many customers compared to the

increase in the price and vice versa. And in the rare case that your elasticity

is equal to 1, its unitary, then your revenue stays the same.

[music]. .

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