...Exercise 6 Solution Chapter 6 Elasticity: The Responsiveness of Demand and Supply 6.1 The Price Elasticity of Demand and Its Measurement 1) Price elasticity of demand measures A) how responsive suppliers are to price changes. B) how responsive sales are to changes in the price of a related good. C) how responsive quantity demanded is to a change in price. D) how responsive sales are to a change in buyers' incomes. Answer: C Comment: Recurring Diff: 1 Page Ref: 168-169/168-169 Topic: Price Elasticity of Demand Objective: LO1: Define price elasticity of demand and understand how to measure it. AACSB: Reflective Thinking Special Feature: None 2) If the percentage increase in price is 15 percent and the value of the price elasticity of demand is -3, then quantity demanded A) will increase by 45 percent. B) will increase by 5 percent. C) will decrease by 45 percent. D) will decrease by 5 percent. Answer: C Comment: Recurring Diff: 2 Page Ref: 168-169/168-169 Topic: Price Elasticity of Demand Objective: LO1: Define price elasticity of demand and understand how to measure it. AACSB: Analytic Skills Special Feature: None 3) If demand is inelastic, the absolute value of the price elasticity of demand is A) one. B) less than one. C) greater than one. D) greater than the absolute value of the slope of the demand curve. Answer: B Comment:...
Words: 3501 - Pages: 15
...response to the demand of a product or service following a change in price, sales may increase when a price goes down. Sales may also decrease when the prices goes up. A2. The response or change in demand when the price of either a substitute product or complementary product increases or decreases. If two products are substitutes and the price of one of the substitutes increases we would expect to see purchases increase for the other substitute. In the case of complements as the price rises in one we would expect to see the purchases decrease for both. A3. Income elasticity is the measure of the rate of response of quantity demand due to an increase or decrease in a consumer’s income. For most goods an increase in income creates an increase in demand for items that are considered an indulgence, like name brand clothes, new cars and electronic equipment. Equally the demand for these goods decreases if income decreases. These goods whose demands vary based on income are called superior or normal goods. Most products are considered normal goods, however there are exceptions. When incomes increase to a certain point the demand for used or less popular items like second hand clothes and used cars decreases. These goods that vary inversely with money income are called inferior goods. B. The coefficient for elasticity of demand measures the relationship between two variables. The formula used is percentage in change of quantity /percentage change in price. Q/P. if the numerator...
Words: 1318 - Pages: 6
...strategies remains a complex issue for revenue managers. Their goal, ultimately, is to maximize companywide revenue and profits while building strong hotel partner relationships within their marketplace. The emergence of rate optimization has made strides to demystify pricing practices and help revenue managers understand the demand characteristics of their products, understand the price sensitivity of demand and design a rate spectrum that is tuned to all these. This allows hoteliers to take full advantage of their business opportunities, ensuring that they are capturing the maximum revenue at all times through an optimized rate spectrum. Beyond the scope of regular revenue management practices such as selecting the correct overbooking, rate restrictions and best available rate, lies the challenge of selecting the correct rates to choose from in the first place. Rate Optimization is the practice of selecting the rates offered in a rate spectrum based on the historical price sensitivity of demand. The goal of rate optimization is to understand the demand characteristics of products and the price sensitivity of demand and define a rate spectrum that will capture the maximum revenue over time. Dr. Ravi Mehrotra President, IDeaS Revenue Optimization Price Sensitivity, or Elasticity of Demand The Price Sensitivity of Demand is a measure of the change in demand to a change in price. If a small change in price is accompanied by a large change in demand, the product is said to be elastic...
Words: 2045 - Pages: 9
...Law of Demand In Economics, the law of demand is understood as when the price of a product or service increases, demand decreases; and when the price lowers, demand will increase (Comstock, 2015; McConnell, Brue, & Flynn, 2015). It is the customer’s who control demand, individuals make decisions regarding what to purchase with their money. Therefore, price changes are the only issue that will change the amount of demanded goods. For example, diamonds and air conditioners are conspicuous goods in which the law of demand does not apply; nor does it apply to potatoes and rice. Rice and potatoes are giffen goods; plus the law of demand does not apply to speculation or future price expectations. It is the consumer’s willingness to purchase products based on their income, preferences, advertisements and even taste. On the other hand, in Economics, the law of supply can be understood as prices rise the amount of supply will increase; and as prices decrease so does the supply (McConnell, et al, 2015; Supply and Demand, 2014). Price elasticity explains the amount of demand as it decreases when prices increase or the amount of demand as prices decrease (McConnell, et al, 2015; Montgomery, & Rossi, 1999). This concept, involves the laws of supply and demand by determining the amount of supply and demand based price and other factors (Comstock, 2015; McConnell, et al, 2015). Normally, elasticity equates to the relative changes of supply and demand according to price as it changes;...
Words: 1056 - Pages: 5
...strategies remains a complex issue for revenue managers. Their goal, ultimately, is to maximize companywide revenue and profits while building strong hotel partner relationships within their marketplace. The emergence of rate optimization has made strides to demystify pricing practices and help revenue managers understand the demand characteristics of their products, understand the price sensitivity of demand and design a rate spectrum that is tuned to all these. This allows hoteliers to take full advantage of their business opportunities, ensuring that they are capturing the maximum revenue at all times through an optimized rate spectrum. Beyond the scope of regular revenue management practices such as selecting the correct overbooking, rate restrictions and best available rate, lies the challenge of selecting the correct rates to choose from in the first place. Rate Optimization is the practice of selecting the rates offered in a rate spectrum based on the historical price sensitivity of demand. The goal of rate optimization is to understand the demand characteristics of products and the price sensitivity of demand and define a rate spectrum that will capture the maximum revenue over time. Dr. Ravi Mehrotra President, IDeaS Revenue Optimization Price Sensitivity, or Elasticity of Demand The Price Sensitivity of Demand is a measure of the change in demand to a change in price. If a small change in price is accompanied by a large change in demand, the product is said to be elastic...
Words: 2045 - Pages: 9
...Price elasticity of demand From Wikipedia, the free encyclopedia Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall. Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded. Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis. Contents [hide] * 1 Definition...
Words: 3410 - Pages: 14
... 1. Elasticity of demand measures the change in the quantity demanded due to the price changes in the market. This can also be characterized as a change in percentage to both the quantity demanded and the price. Durable items, such as appliances or automobiles, show elasticity of demand because these products can be bought infrequently and are not a consumer necessity. These durables can be purchased at leisure or when the prices are low. Elasticity of demand is measured by the number of substitutes available, the degree of necessity, and the price of a good as a proportion of income. Cross-price elasticity is a measure between the price changes or demand for one good affects the change in the price of another good. When the cross-price elasticity is negative, goods are referred to as complements. If there is an increase in price of a good that results in the decrease of the quantity demanded of another product, then both products are considered to be complements of each other. When the cross-price elasticity is positive, goods are called substitutes. If there is an increase in the price of one product that results in the increase of the quantity demanded of another product, then both products are seen as substitutes. Because of cross-price elasticity, goods that compete with one another are often paired together in the market (economics.about.com). Income elasticity measures the change between the quantity of a good demanded and a change in income. Income elasticity is the...
Words: 2372 - Pages: 10
...terms A1. Elasticity of Demand is the consumers response or sensitivity to a change in price. It is classified as elastic, inelastic, or unit elasticity. Elastic demand is when a specific percentage change in price results in a larger percentage change in quantity demand. Inelastic demand is when a specific change in price produces a smaller percentage change in quantity demand, Unit elasticity is when the percentage in change in price is the same as the percentage change in demand. A2. Cross Elasticity of Demand is the ratio of percentage change in quantity demand of one good to the percentage in the price of some other good. A positive coefficient indicates the tho products are substitutes a negative coefficient indicates the two products are complementary. A zero or near zero cross elasticity means the products are considered independent. A3.Income Elasticity of Demand is the ratio of the percentage change in the quantity demand of a good to a percentage change in consumer income; it measures the responsiveness of consumer purchases to income changes. A positive coefficient means more of the product is in demand as income rises, they are known as normal goods. A negative coefficient mean purchasing of a product decreases as income rises means the product is an inferior good. B. Explain the elasticity coefficients for each of the three terms defined in part A. B1. Elasticity of Demand. If the coefficient is greater then 1 it is Elastic Demand , if the coefficient...
Words: 1708 - Pages: 7
...Chapter 7: Elasticity 1 What you will learn in this chapter 1. Define and measure elasticity of demand and elasticity of supply. 2. Determine the relationship between demand elasticity and total revenue. 3. Understand the factors that determine elasticity of demand and elasticity of supply. Punchline • Imagine that some event drives up the price of gasoline (think about two examples) • How would consumers respond to the higher price? • By how much would consumption of gasoline fall? Answer to the gasoline question • Many studies have examined consumers’ response to gasoline prices. • Consumption responds more in the long run than it does in the short run. • A 10% increase in the gasoline prices reduces gas consumption by about 2.5% after a year and about 6% after five years. Roadmap 1. Elasticity of demand 2. Measurement of price elasticity 3. Elasticity and total revenue 4. Determinants of price elasticity of demand 5. Other demand elasticity measures 6. Elasticity of supply 7. Determinants of price elasticity of supply Elasticity of demand • The price elasticity of demand is a measure of how much consumers respond to changes in price. • Total revenue that one receives from selling a good is the price of the good times the quantity sold: TR = P*Q • Seller’s dilemma: raise or lower the price? • Can be solved by knowing the elasticity of demand. Measurement of price elasticity • Problem: we cannot measure consumers’ responsiveness to changes in price by looking at...
Words: 1298 - Pages: 6
...4 Elasticity: A Measure of Responsiveness Chapter Summary This chapter explored the numbers behind the laws of demand and supply. The law of demand tells us that an increase in price decreases the quantity demanded, ceteris paribus. If we know the price elasticity of demand for a particular product, we can determine just how much less of it will be purchased at the higher price. Similarly, if we know the price elasticity of supply for a product, we can determine just how much more of it will be supplied at a higher price. Here are the main points of the chapter: • The price elasticity of demand—defined as the percentage change in quantity demanded divided by the percentage change in price—measures the responsiveness of consumers to changes in price. • Demand is relatively elastic if there are good substitutes. • If demand is elastic, the relationship between price and total revenue is negative. If demand is inelastic, the relationship between price and total revenue is positive. • The price elasticity of supply—defined as the percentage change in quantity supplied divided by the percentage change in price—measures the responsiveness of producers to changes in price. • If we know the elasticities of demand and supply, we can predict the percentage change in price resulting from a change in demand or supply. Applying the Concepts After reading this chapter, you should be able to answer these four key questions: 1. How does the price elasticity of demand vary over time? 2...
Words: 6227 - Pages: 25
...Task 309.1.2-08,09 A. Elasticity of demand measures consumer responsiveness to price changes for a good. In other words, how does the consumers purchasing habits change when the price of a good increases or decreases. Business owner’s value knowing consumers purchasing response to price changes and they use this information to influence their business decisions. A formula is used to calculate the elasticity of demand and the result of this calculation is referred to as a coefficient. The coefficient is always expressed in absolute value. The resulting coefficient is then compared to a critical threshold of the number one. Depending on the evaluation of the coefficient against that threshold, the good is categorized as either elastic, inelastic or unit elastic. Elastic goods have a coefficient greater than one, inelastic goods have a coefficient less than one and goods with a coefficient equal to one are categorized as unit elastic. The formula used to calculate the elasticity of demand is the % change in quantity demanded divided by the % change in price. Simply put, if the change in demand for smoothies increases by 20% as the result of a 10% reduction in price, this would equate to 0.2 divided by 0.1 equaling a coefficient of 2. In this case, the smoothie would be categorized as elastic. Goods with elastic demand indicate that the consumer is sensitive to a price change, meaning that a change in price influences consumer’s reaction to purchasing the...
Words: 2061 - Pages: 9
...PART A – Definitions Elasticity of Demand Elasticity of Demand was developed by Alfred Marshall for measuring consumer’s reaction to demand of a change in price of goods or services. It is measured in percentages of demand requirements of a product after a price has changed even slightly. Cross-price Elasticity Cross – Price Elasticity occurs when the price change of a product affects the consumer demand of a completely different product. In the case of substitute products, cross-price elasticity happens when a substitute product is entered in to the market at a higher price than the original product and consumers continue to purchase the lower priced product. If the products are complements of each other, the rise in price of one of the products will cause both products demand to fall. For example, if the price of eggs rises the demand for bacon will decrease because of the association of eggs and bacon. Income Elasticity Income Elasticity measures the response of quantity demand of consumers as their incomes either rise or fall. Normal goods are products where demand increases with the increase of consumer income and decreasing demand when income levels fall while prices stay the same. Income elasticity is positive when associated with normal goods. Normal goods are classified as either necessity goods (food, power, and housing) or superior goods (caviar, luxury cars). Inferior goods are associated with a negative elasticity of demand because when consumers’...
Words: 2753 - Pages: 12
...Questions and Answers from Lesson I-7: Elasticity Practice Questions and Answers from Lesson I-7: Elasticity The following questions practice these skills: Use the midpoint method for calculating percent change. Compute price elasticity of demand. Identify elastic and inelastic demand according to the price elasticity of demand. For elastic demand, apply the negative relation between price and revenue. For inelastic demand, apply the positive relation between price and revenue. Remember demand is more elastic when there are more substitutes or closer substitutes. Compute the price elasticity of supply. Compute cross-price elasticities of demand. Relate cross-price elasticities of demand to gross substitutes and gross complements. Identify elastic and inelastic portions of a linear demand curve. Compute income elasticity of demand. Question: Amazon.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Amazon.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount. Group A (sales per week) 1.55 million 1.65 million Group B (sales per week) 1.50 million 1.70 million Volume of sales before the 10% discount Volume of sales after the 10% discount a. Using the midpoint method, calculate the price elasticities of demand for group A and group B. b. Explain...
Words: 4184 - Pages: 17
...| | | | In business, revenue or turnover is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, revenue is referred to as turnover. Some companies receive revenue from interest, royalties, or other fees.[1] Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in "Last year, Company X had revenue of $42 million." Profits or net income generally imply total revenue minus total expenses in a given period. In accounting, revenue is often referred to as the "top line" due to its position on the income statement at the very top. This is to be contrasted with the "bottom line" which denotes net income.[2] The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income. Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold. Revenue is also known as "REVs." Marginal revenue From Wikipedia, the free encyclopedia Jump to: navigation, search Typical marginal revenue R' and average revenue (price) <R> curves for a firm that is not in perfect competition In microeconomics, marginal revenue (R') is the additional revenue that will be generated by increasing...
Words: 3607 - Pages: 15
...economics tools like demand and cost, monopoly and competition, the allocation of resources, and economic tradeoffs to help managers in taking better decisions. Managerial economics is the science of directing scarce resources to manage effectively. These may be decisions with regard to customers, suppliers, competitors or the internal working of the organization. It does not matter whether the setting is a business, non profit organization or a home. It is the application of micro economics to the managerial issues (Wikipedia, 2010) Written Paper on — Demand Analysis and Optimal Pricing The term demand signifies the ability or the willingness to buy a particular commodity at a given point of time. Demand is the desire to own anything and the ability to pay for it. In short, the demand function shows, in equation form, the relationship between the quantity sold of a goods or service and one or more variables (Blogspot, 2010). Q = f (P, P0, Y) The demand function does not indicate the exact quantitative relationship between Q and P, P0, and Y. Q = quantity demanded P = price of the product P0 = price of the other product Y = income of the consumer The demand equation can be used to test the changes in any of the explanatory variables. The demand curve is a special sub case of the demand function in which ceteris paribus applies to all independent variables except the price of the product in question. The demand curve expresses the relationship between Qx and Px with all...
Words: 2198 - Pages: 9
