1 / 22

Understanding Demand and Elasticity: Pricing Strategy and Profit Maximization

Explore price elasticity of demand, determining elasticity values, arc elasticity, price level impact, price elasticity measures, marginal revenue, special cases, and important observations regarding revenue changes based on demand elasticity.

mead
Télécharger la présentation

Understanding Demand and Elasticity: Pricing Strategy and Profit Maximization

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Demand and Elasticity

  2. Consider the following cases: • Making Sales Targets • A Public Transportation Problem: Can the daily ridership fluctuations be controlled through a pricing strategy? • The Airliners’ Pricing Problem: How can an airliner fill its plains while maximizing its profit?

  3. TR 0 = 220 x 120 = 26,400TR1= 180 x 140 = 25,200TR2 = 180 x 200 = 36,000 D 2 D 1 220 180 Q 0 140 200 120

  4. Note: Slope and Scale o o B A

  5. Elasticity A general definition: “Elasticity” is a (standard) measure of the degree of sensitivity ( or responsiveness) of one variable to changes in another variable. Thepriceelasticity of Demand The (self) price elasticity of demand is a measure of the degree of sensitivity of demand to changes in the (self) price, ceteris paribus.

  6. Determining Price Elasticity Percentage Change in Quantity Ep = Percentage Change in Price Change in Quantity Quantity Ep = Change in Price Price

  7. P a 10 b 8 Ep (a --- b) = (10/8)/(-2/10) = -6.25 Ep (c ---d ) = (10/80)/(-2/4) = -.25 c 4 d 2 D Q 80 90 8 18

  8. What does the elasticity “measure” really measure? • The elasticity measure is a ratio between two percentage measures: the percentage change in one variable over the percentage change in another variable • A price elasticity of -6.25 means that for each one percent change in price the quantity demanded will change by 6.25 percent.

  9. P Note that if we increased the price, (from 8 to 10 or 2 to 4) the original P and Q would be 2 and 8 and 18 and 90, respectively. Ep = (-10/18)/(2/8) = -2.22 Ep = (-10/90)/(2/2) = -.11 Arc (Price) Elasticity a b 10 8 c 4 d 2 D Q 8 18 80 90

  10. Arc Elasticity To get the average elasticity between two points on a demand curve we take the average of the two end points (for both price and quantity) and use it as the initial value: Q2-Q1 10 (Q1+Q2) 8+18 Ea = = -3.49 P2-P1 -2 (P1+P2) 10+8

  11. Along a linear demand curve as the price goes up, |elasticity | increases. Note that between points "a" and "b" the (arc) elasticity of the above demand curve is -3.49, whereas between "c" and "d" it is -.17. P Elasticity and the Price Level | Ep | > 1 : Elastic | Ep | < 1 : Inelastic | Ep | = 1 : Unit-elastic a E =-3.49 b 10 8 E = -.17 c 4 d D 2 8 18 80 90

  12. Point Elasticity Q --------- Q1+Q2 QP1+P2 Q P E = ------------ = ------- . ------- = ------- . ------ P P Q1+Q2 P Q --------- P1+P2 dQ P Or, = ------ . ----- dP Q

  13. P,MR Q = C - b P C 1 P = ----- - ----- Q b b C 2 MR = ------ - ------ Q b b | E | = 1 D MR Q 0 TR C Note: In the demand equation dQ/dP = -b That means P E p = -b ----- Q Q 0

  14. A note about marginal revenue: Recall: TR = P.Q ; P = f (Q ) • Marginal Revenue = Change in TR resulting from producing (selling) one additional unit of output. TR (P.Q) d P d Q MR = ------ = -------- = ------ .Q + ------ .P Q Q d Q d Q d P Q P 1 = ( -----. ----- + ------ ).P = P. ( ------- + 1 ) d Q P P E

  15. Q = C - b P dQ P P E = ----- . ----- = -b . ------ d p Q Q dQ ---- = - b d p P, MR 1 MR = P. ( 1 + ---- ) E Slope= -1/b Slope=-2/b D MR Q 0 C

  16. Special Cases P D D 0 Q Q 0 Infinitely (price) elastic Infinitely price inelastic

  17. Important Observations • When demand is elastic, a decrease in price will result is an increase in the revenue (sales). • When demand is inelastic, a decrease in price will result is a decrease in the revenue (sales). • When demand is unit-elastic, an increase (or a decrease) in price will not change the revenue (sales).

  18. What Determines Elasticity • Necessities versus luxuries Eating at restaurants Groceries • Availability of substitutes Chicken versus beef • How much of our income a good takes Salt versus Nike sneakers • The passage of time

  19. Elasticity and Passage of Time P Do D1 D3 D2 Q O Qo Q’o Q2 Q1 Q3

  20. Other Elasticity Measures Recall: “Elasticity” is a (standard) measure of the degree of sensitivity ( or responsiveness) of one variable to changes in another variable. • Income Elasticity: a measure of the degree of sensitivity of demand for a good (or service) to changes in consumers’ (buyers’) income • Cross Price Elasticity: a measure of the degree of sensitivity of demand for a good (or service) to changes in the price of another good or service

  21. Income Elasticity of Demand A measure of the degree of responsiveness of demand (for a good) to a change in income, ceteris paribus. (Shift of the demand curve) Q2-Q1 Q2+Q1 d Q I EI = = or = ------ . ------ I2-I1 d I Q I1+I2

  22. Cross (Price) Elasticity A measure of the degree of responsiveness of the demand for one good (X) to a change in the price of another good (Y): (Shift of demand curve) Qx2- Qx1 Qx2+Qx1 d Qx Py Ec = or = ----------- . ------- Py2- Py1 d Py Qx Py1+Py2

More Related