Principle of Marketing Essay

1005 Words May 27th, 2014 5 Pages
School of Economics and Finance University of Tasmania
CRICOS Provider Code 00586B

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1. Elasticity
(For details of essential readings and key learning objectives see MyLO and Study Guide 6)

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Policy-makers:
◦ Need to understand how strong the effects on equilibrium price and quantity will be of various shifts in demand and supply, including policies that rely on changing the incentives that buyers and sellers face in markets. The strength of these effects will determine the welfare effects of such policies (i.e who are the winners and who are the losers?)



Business:
◦ What will the effect of a change in price have on revenue and how much will changes in market conditions effect demand and supply for their
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Because of the Law of Demand price elasticity will always be negative. For convenience we drop the negative sign. This means that a larger value of elasticity reflects a greater level of responsiveness of quantity demanded.



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What is the price elasticity of demand of hamburgers? o Initially
P

• P1 =$2/burger • Q1 = 1000 burgers/day
• P2 = $2.10/burger • Q2 = 990 burgers/day

2.10

New

o New

2

Initial

D

990

1000

Q

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Using initial price and quantity as base
Q Q1 Ed  P P1
P

Ed = (10/1000)/(.1/2)
Ed = 0.01/0.05 = 0.2

2.10

New

2

Initial

D

990

1000

Q



A 1% change in the price of burgers results in a 0.2% change in quantity demanded per day, ceteris paribus.

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When % change Q > % change P % change Q < % change P % change Q = % change P Change in P does not effect Q Small increase in price results in loss of all sales

Ed >1 1 (Ed increases as move up D curve)

Ed = 1 P/2

Ed < 1 (Ed decreases as move down D curve)

D 0 Q/2 Q Quantity/period

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Elastic Demand


=> % change Q > % change P

increase in price will reduce TR
◦ producer gets higher price per unit sold but this is more than offset by the loss in revenue due to reduced sales.



decrease in price will increase TR
◦ producer gets lower price per unit sold but

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