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薄利多銷 ?

薄利多銷 ?. Total expenditure (Total sales) = P × Q Total Cost = direct cost + indirect cost Profit = Total sales - Total Cost 薄利 implies lowering price 多銷 means more sales. 嚴刑重罰 Or 寓禁於徵 ?. What do you think?

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薄利多銷 ?

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  1. 薄利多銷? • Total expenditure (Total sales) = P × Q • Total Cost = direct cost + indirect cost • Profit = Total sales - Total Cost • 薄利 implies lowering price • 多銷 means moresales NCCU 2006

  2. 嚴刑重罰 Or 寓禁於徵 ? • What do you think? • Could reducing the supply of illegal drugs cause an increase in drug-related burglaries? NCCU 2006

  3. Total Expenditure = P x Q S $250 = $50 x 50 S’ $320 = $80 x 40 S’ 80 S 50 D 40 50 The Effect of Extra CustomPatrols on the Market for Illicit Drugs P($/ounce) Q(1,000s of ounces/day) NCCU 2006

  4. Using Price Elasticity of Demand: The War on Drugs • Every year U.S. Government spends about $20 billion on efforts to restrict the supply of drugs • Figure (a) • Market for heroin without government intervention • Figure (b) • Result of government efforts to restrict supply (current policy) • Figure (c) • Results of an effective policy of reducing demand NCCU 2006

  5. (a) (b) (c) Price Price Price S 2 per per per Unit Unit Unit B S S S 1 1 1 P 2 A A A P P P 1 1 1 C P 3 D D D 1 1 1 D 2 Q Q Q Q Q 1 3 1 2 1 Quantity Quantity Quantity 3 conditions in the War on Drugs NCCU 2006

  6. Price Elasticity of Demand • Elasticity • A measure of the extent to which quantity demanded and quantity supplied respond to variations in price, income, and other factors. • 中文定義: 對價格之敏感度 NCCU 2006

  7. Price Elasticity of Demand • Defined • Generally • A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good • Formally • The percentage change in the quantity demanded that results from a 1 percent change in its price NCCU 2006

  8. Price Elasticity of Demand • Measuring Price Elasticity of Demand NCCU 2006

  9. Price Elasticity of Demand • Assume • The price of pork falls by 2% and the quantity demanded increases by 6% • Then the price elasticity of demand for pork is NCCU 2006

  10. Price Elasticity of Demand • Measuring Price Elasticity of Demand • Observations • Price elasticity of demand will always be negative (i.e., an inverse relationship between price and quantity) • For convenience we drop the negative sign NCCU 2006

  11. > 1: elastic When is < 1: inelastic = 1: unit elastic Price Elasticity of Demand • Measuring Price Elasticity of Demand NCCU 2006

  12. Unit elastic Inelastic Elastic Elastic and Inelastic Demand Price elasticity of demand 0 1 2 3 NCCU 2006

  13. Price Elasticity of Demand • What is the elasticity of demand for pizza? • Originally • Price = $1/slice • Quantity demanded = 400 slices/day • New • Price = $0.97/slice • Quantity demanded = 404 slices/day, then NCCU 2006

  14. Price Elasticity of Demand • What is the elasticity of season ski passes? • Originally • Price = $400 • Quantity demanded = 10,000 passes/year • New • Price = $380 • Quantity demanded = 12,000 passes/year, then NCCU 2006

  15. Determinants of Price Elasticity of Demand • Substitution Possibilities • Budget Share • Time NCCU 2006

  16. Price Elasticity (in US) Estimates for Selected Products Good or service Price elasticity Green peas 2.80 Restaurant meals 1.63 Automobiles 1.35 Electricity / gasoline? 1.20 Beer 1.19 Movies 0.87 Air travel (foreign) 0.77 Shoes 0.70 Coffee 0.25 Theater, opera 0.18 WHY? NCCU 2006

  17. Question? • Why is the price elasticity of demand more than 14 times larger for green peas than for theater and opera performances? NCCU 2006

  18. Discussion • Economic Naturalist • Will higher taxes on cigarettes curb teenage smoking? • Why was the luxury tax on yachts such a disaster? NCCU 2006

  19. A Graphical Interpretationof Price Elasticity • For small changes in price Where Q is the original quantity and P is the original price NCCU 2006

  20. A Graphical Interpretationof Price Elasticity • Example • Originally • Price (P) = $100 • Quantity (Q) = 20 • New • Price (P) = $105 • Quantity (Q) = 15 NCCU 2006

  21. A P P P - P Q D Q Q + Q A Graphical Interpretation of Price Elasticity of Demand Price Quantity NCCU 2006

  22. D A Calculating Price Elasticity of Demand 20 16 12 Price 8 4 1 2 3 4 5 Quantity NCCU 2006

  23. D Question What is the price elasticity of demand when P = $4? A Calculating Price Elasticity of Demand 20 16 12 Price 8 4 1 2 3 4 5 Quantity NCCU 2006

  24. 12 D1 6 4 D2 4 6 12 Price Elasticity and the Steepness of the Demand Curve What is the price elasticity of demand when P = $4? Price Quantity NCCU 2006

  25. For D2when P = $1 12 D1 6 4 D2 1 4 6 10 12 Price Elasticity and the Steepness of the Demand Curve Price Quantity NCCU 2006

  26. Observation If two demand curves have a point in common, the steeper curve must be less elastic with respect to price at that point 12 D1 6 Price 4 D2 1 4 6 10 12 Quantity Price Elasticity and the Steepness of the Demand Curve NCCU 2006

  27. Observation Price elasticity varies at every point along a straight-line demand curve a a/2 b/2 b Price Elasticity Regions along a Straight-Line Demand Curve Price Quantity NCCU 2006

  28. Price Quantity Perfectly Elastic Demand Curve NCCU 2006

  29. Price Quantity Perfectly Inelastic Demand Curve NCCU 2006

  30. What is the price elasticity of demand? 6 A 4 P Q B 3 4 6 12 Two Points on a Demand Curve Price 0 Quantity NCCU 2006

  31. A Graphical Interpretationof Price Elasticity • The Midpoint Formula and NCCU 2006

  32. 6 A 4 P Q B Price 3 0 4 6 12 Quantity Two Points on a Demand Curve Then the price elasticity of demand between A and B: NCCU 2006

  33. Elasticity and Total Expenditure • Total Expenditure = P x Q • Market demand measures the quantity (Q) at each price (P) • Total Expenditure = Total Revenue NCCU 2006

  34. D Total Expenditure = $1,000/day A The Demand Curve for Movie Tickets 12 10 8 6 Price ($/ticket) 4 2 0 1 2 3 4 5 6 Quantity (100s of tickets/day) NCCU 2006

  35. D Total Expenditure = $1,600/day B The Demand Curve for Movie Tickets 12 10 8 6 Price ($/ticket) 4 2 0 1 2 3 4 5 6 Quantity (100s of tickets/day) NCCU 2006

  36. Elasticity and Total Expenditure • What do you think? • Will increasing the market price always increase total revenue? NCCU 2006

  37. Again,薄利多銷? NCCU 2006

  38. Total Expenditure = $1,600/day D The Demand Curve for Movie Tickets 12 10 8 6 Price ($/ticket) 4 2 0 1 2 3 4 5 6 Quantity (100s of tickets/day) NCCU 2006

  39. Total Expenditure = $1,000/day D The Demand Curve for Movie Tickets 12 10 8 6 Price ($/ticket) 4 2 0 1 2 3 4 5 6 Quantity (100s of tickets/day) NCCU 2006

  40. Elasticity and Total Expenditure • General Rule • A price increase will increase total revenue when the % change in P is greater than the % change in Q. NCCU 2006

  41. 12 10 8 6 Price ($/ticket) 4 2 0 1 2 3 4 5 6 Quantity (100s of tickets/day) The Demand Curve for Movie Tickets NCCU 2006

  42. Total Expenditure as a Function of Price Price ($/ticket) Total expenditure ($/day) 12 0 10 1,000 8 1,600 6 1,800 4 1,600 2 1,000 0 0 NCCU 2006

  43. 12 1,800 1,600 10 8 1,000 6 Total expenditure ($/day) Price ($/ticket) 4 2 0 0 2 4 6 8 10 12 1 2 3 4 5 6 Price ($/ticket) Quantity (100s of tickets/day) Total Expenditure as a Function of Price Total revenue is at a maximum at the midpoint on a straight-line demand curve NCCU 2006

  44. Elasticity and Total Expenditure • What do you think? • Should a rock band raise or lower its price to increase total revenue? • Assume NCCU 2006

  45. Elasticity and Total Expenditure • What do you think? • Should a rock band raise or lower its price to increase total revenue? • Then • Total revenue = $20 x 5,000 = $100,000/week • If P is increased 10%, Q will decrease 30% • Total revenue = $22 x 3,500 = $77,000/week • If P is lowered 10%, Q will increase 30% • Total revenue = $18 x 6,500 = $177,000/week NCCU 2006

  46. Elasticity and Total Expenditure • Rule • When price elasticity is greater than 1, changes in price and changes in total expenditures always move in opposite directions. • When price elasticity is less than 1, changes in price and changes in total expenditures always move in the same direction. NCCU 2006

  47. Elasticity and Total Expenditure • Cross-Price Elasticity of Demand • The percentage by which quantity demanded of the first good changes in response to a 1 percent change in the price of the second good NCCU 2006

  48. Elasticity and Total Expenditure • Cross-Price Elasticity of Demand • Substitute Goods • When the cross-price elasticity of demand is positive • Complement Goods • When the cross-price elasticity of demand is negative NCCU 2006

  49. Elasticity and Total Expenditure • Income Elasticity of Demand • The percentage by which quantity demanded changes in response to a 1 percent change in income NCCU 2006

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