...Elasticity of Demand refers to the degree of responsiveness of quantity demanded to the changes in the determinants of demand i.e. price of the good, consumer income and price of related goods. There are three quantifiable determinants of demand and hence elasticity of demand can be of three types; * Price Elasticity of Demand Price Elasticity of demand is the degree of responsiveness of demand to a change in its price. In technical terms it is the ratio of the percentage change in demand to the percentage change in price. There are a number of factors that determine the price elasticity of demand. * If close substitutes are available then there is a tendency for customers to shift from one product to another when the price increases and demand is said to be elastic. For example, demand for two brands of tea. If the price of one brand, say Brand 1, increases then the demand for the other brand, say brand B increases. In other words greater the possibility of substitution greater the elasticity. * The amount of income spent by the customer on a commodity plays a great role in determining the price elasticity. The elasticity of the commodity will be more when the proportion of income spent on it is more. * The usefulness of the commodity is an important factor in determining the elasticity. If the commodity can be put to many uses then the elasticity will be greater. * If two commodities are consumed jointly i.e. complements, then increase in...
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...1. Which is the relationship between own price elasticity of demand and third degree price discrimination? Own price elasticity of demand refers to the responsiveness of changes in demand due to changes in price. In contrast, third degree price discrimination refers to a pricing strategy under which firms with market power separate the market by charging lower price for consumer groups with elastic demand and a higher price for consumers with elastic demands. The relationship between them is the demand for the product differs according to the elasticity. For own price elasticity the price is determined by the elasticity and equilibrium whereas for third degree price discrimination, the firm determines the price based on elasticity only. 2. Refer to the graph in the file “Diffusion of innovation theory”. Which is the group with the highest elasticity to price? And the one with the lowest? Briefly motivate your answer. The group with the highest elasticity is the early majority. Since this group relies on evidence of the innovation and product quality before making a decision, their demand will be more responsive towards changes in price. If price is too high they will demand less and vice versa. The groups with the lowest elasticity are the innovators and laggards. Since innovators are risk takers their demand will not change irrespective of changes in price. Laggards on the other hand, are those who are conservative and skeptical of change, their demands will not...
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...TERM PAPER FIRST SEM MBA MANAGERIAL ECONOMICS “Kinds Of Elasticity Of Demand” “Factors Influencing Elasticity Of Demand” GROUP 2 ROLL NO | NAME | 7 | PRAVEEN KUMAR K L | 8 | PRAVEEN R | 9 | PRITHVI LINGH HONNESH | 10 | PRITHVI P M | 11 | PRIYA DARSHINI B A | 12 | PRIYANKA JAHAGIRDAR | ------------------------------------------------- ABSTRACT From the managerial point of view, the knowledge of nature of relationship between demand and its determinants alone is not sufficient. What is more important is the extent of relationship or the degree of responsiveness of demand to the changes in its determinants. The degree of responsiveness of demand to the change in its determinants is called elasticity of demand. The concept of elasticity of demand plays a crucial role in business-decisions regarding maneuvering of prices with a view to making larger profits. Almost most businessmen are intuitively aware of the elasticity of demand of the goods they make, however, the use of precise estimates of elasticity of demand will add precision to their business decisions. In this paper we will discuss * The various kinds of elasticity of demand * The nature of change and how it affects the decision taking. * How demand decisions in response to price changes vary for different types of goods? * Factors influencing the elasticity of demand INTRODUCTION Governments, business firms, supermarkets,...
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...A-Elasticity of Demand can be defined as the varying degree of demand of a service or good, with respect to its price fluctuation. In most scenarios, a drop in price can result in an increase and demand, and vice versa. Most secondary and tertiary needs will be subject to increased elasticity, however primary needs remain unchanged in most scenarios. High price elasticity indicates heavy dependency on price in determining demand. High price inelasticity is the precise opposite—when demand remains the same throughout price fluctuation, it’s demonstrative of inelasticity. Unit elasticity of demand occurs when proportionate shifts in price and demand are noted. B-Cross-price elasticity can be defined as the varying degree of demand in complementary or supplementary items as driven by price. When the price of one item is reduced, demand for a supplementary product increases. The increase in price in one product or service can impact complementary products or services accordingly as well. This makes sense, as the demand for a supplementary/complementary item is directly affected by the demand for the primary item. As an example, snowboards and snowboarding boots are complementary to each other. If snowboard prices dramatically dropped, demand for boots will increase. When substitute products are considered, this changes things. If milk prices soared, consumers may opt to purchase toaster pastries in lieu of cereal, opting for a lower priced product which...
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...Managerial Economics Case Number 6 Topic: Elasticity of Demand Objective: a) To apply the concept of elasticity of demand b) To correlate elasticity with decision making University fees – part I President Jones of Indian Institute of Business Economics (IIBE) is concerned about the financial state of his institution. Last year there was a loss of Rs.1.5 million and the trustees are getting restless. Currently there are 1000 full-time students, 700 of whom are degree students from their country and 300 of whom are the students from abroad. The present level of fees, including tuition, room and board, is Rs. 1,80,000 and Rs. 2,00,000 for foreign students per year. Jones is proposing a 10% increase for next year. On the basis of past experience he has estimated that the price elasticity of demand for degree students is -1.2 and for study-abroad students is 1.6. He is particularly worried about the effect of the fee increase. Jones is also considering a change in promotional expenditure. This currently amounts to 2% of total revenues and it is estimated that the promotional elasticity of demand is 0.1. It is also estimated that variable costs per student are Rs.60,000. Questions 1. Why might Jones’s estimates of the relevant price elasticities not be very reliable? 2. Estimate the effect of the proposed fee increase on the number of degree students and revenues from these students, stating any relevant assumptions. 3. Estimate the effect of the proposed fee increase on the total...
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...DEFINITION of 'Elasticity' A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which individuals (consumers/producers) change their demand/amount supplied in response to price or income changes. Economics Basics: Elasticity By Reem Heakal The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life. To determine the elasticity of the supply or demand curves, we can use this simple equation: Elasticity = (% change...
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...applications of economic tools and analysis. To analyse the market, we will examine the price elasticity demand and income elasticity demand of tobacco products the factors affecting each of these and the externalities caused by this product. Further, to explore further into the tobacco market, this blog post will discuss the theory of Rational Addiction, which contributes greatly to tobacco consumption. A. Elasticity of tobacco products Before analysing the elasticity of the tobacco market, it is important to know the fundamentals of elasticity. To start, elasticity refers to the degree of change of the demand or supply of a product in response to change in price of the product. The elasticity of products varies because consumers may find some products more essential than others. A good or service is considered to be highly price elastic if a price increase leads to a sharp change in the quantity demanded or supplied. Conversely, the demand and supply of price inelastic goods or services sees modest changes with any change in price. In most countries, the price elasticity of demand for tobacco products is fairly inelastic. This will be discussed further below. I. Calculating price demand elasticity To determine the price demand elasticity of a product’s demand curve, the following equation can be used. Elasticity, Ped = (% change in quantity / % change in price) If the elasticity value we obtain from the above formula is greater than or equal to 1, the demand curve...
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...Written Paper - 1 MBA 532: Managerial Economics By Taranpreet Singh Jaggi Wagiha Taylor July, 2010 Managerial Economics is branch of economics that apply micro 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...
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...Elasticities of Demand and Supply Summary Sheet Type of Elasticity | Price Elasticity of Demand (PED) | Income Elasticity of Demand (YED) | Definition | The degree of responsiveness of quantity demanded to a change in price of the good itself, ceteris paribus. | The degree of responsiveness of demand to change in income, ceteris paribus. | Formula | PED = %∆ Qdd / %∆ Price | YED = %∆ Qdd / %∆ Income | Initial change | Price | Income | Effect | Quantity Demanded | Demand | Sign(Significance of the sign) | Negative (Inverse Relationship) | Negative(Inferior Goods) | Positive(Normal Goods) | Range of values | PED>1 | PED<1 | YED<0 | 0 < YED < 1(Basic Necessities) | YED > 1(Luxury Goods) | Elastic/inelastic | Price Elastic | Price Inelastic | - | Income Inelastic | Income Elastic | Factors | * Availability and Closeness of Substitutes * Nature of demand (Luxury, addictive, necessity) * Time Period under consideration * Percentage of income spent on good | * Quality of good * Nature of good e.g. luxury, inferior | Application(Consider application to producers and the government) | * Producers: To increase total revenue * ** Split consumer groups, each have different PED. * Producers should increase price of good if good is price inelastic (no close substitutes). * Producers should decrease price of good or refine its quality if good is price elastic. (many close substitutes). * E.g. The increase in revenue due to the increase...
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...EGT1 Task Two A-Elasticity of Demand can be defined as the varying degree of demand of a service or good, with respect to its price fluctuation. In most scenarios, a drop in price can result in an increase and demand, and vice versa. Most secondary and tertiary needs will be subject to increased elasticity, however primary needs remain unchanged in most scenarios. High price elasticity indicates heavy dependency on price in determining demand. High price inelasticity is the precise opposite—when demand remains the same throughout price fluctuation, it’s demonstrative of inelasticity. Unit elasticity of demand occurs when proportionate shifts in price and demand are noted. B-Cross-price elasticity can be defined as the varying degree of demand in complementary or supplementary items as driven by price. When the price of one item is reduced, demand for a supplementary product increases. The increase in price in one product or service can impact complementary products or services accordingly as well. This makes sense, as the demand for a supplementary/complementary item is directly affected by the demand for the primary item. As an example, snowboards and snowboarding boots are complementary to each other. If snowboard prices dramatically dropped, demand for boots will increase. When substitute products are considered, this changes things. If milk prices soared, consumers may opt to purchase toaster pastries in lieu of cereal, opting for a lower...
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...MANAGERIAL ECONOMICS: SECTION A: PART ONE: MULTIPLE CHOICES: 1. A-MACRO ECONOMICS 2. C-DEMAND FUNCTION 3. B-ARC ELASTICITY 4. B-CONSUMER GOODS 5. C-THE INDIFFERENCE CURVE 6. A-FUTURE COSTS 7. C-EQUILIBRIUM 8. B-GROSS NATIONAL PRODUCT 9. B-PRODUCT APPROACH 10. C-GDP PART-TWO: 1. Concept of Demand Schedule: The inverse relationship between the price and the quantity demanded for the commodity per time period is called as the demand schedule for the commodity. 3. Various forms of Market Structure: The various forms of market structure are: Perfect Competition, Imperfect Competition and Monopoly 4. METHODS OF MEASURING NATIONAL INCOME: We can measure national income either at the production stage by measuring the value of output or the income accrual stage by measuring the amount of factor income earned or at the expenditure stage by measuring the size of total expenditure incurred in the economy. The following are the three methods of measuring national income. 1. Product Approach 2. Income Approach 3. Expenditure Approach SECTION C: APPLIED THEORY: 1. MONETARY POLICY: The monetary policy can be said to be controlled expansion of bank credit and money supply, with special attention to seasonal requirement for credit. The RBI regards money supply and the volume of bank credits as the two major intermediate variables, but it seeks to control the former through the latter. It is said that money supply doesn’t change on its own; it changes because of certain underlying...
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...TYPES OF ELASTICITY Elasticity is a term widely used in economics to denote the “responsiveness of one variable to changes in another.” In proper words, it is the relative response of one variable to changes in another variable. The phrase “relative response” is best interpreted as the percentage change. The quantity of a commodity demanded per unit of time depends upon various factors such as the price of a commodity, the money income of consumers, the prices of related goods, the tastes of the people, etc., etc. Whenever there is a change in any of -the-variables stated above, it brings about a change in the quantity of the commodity purchased over a specified period of time. The elasticity of demand measures the responsiveness of quantity demanded to a change in any one of the above factors by keeping other factors constant. When the relative responsiveness or sensitiveness of the quantity demanded is measured to changes in its price, the elasticity is said be price elasticity of demand. When the change in demand is the result of the given change in income, it is named income elasticity of demand. Sometimes, a change in the price of one good causes a change in the demand for the other. The elasticity here is called cross electricity of demand. The three Main types of elasticity are now discussed in brief. (1) Price elasticity of demand The concept of price elasticity of demand is commonly used in economic literature. Price elasticity of demand is the degree of responsiveness...
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...b) The objective of airline firms is to maximise profits. This can be achieved by maximising total sales and minimising total costs. The various demand elasticity concepts can be used to by the airline firms to maximise total revenue. Sales revenue refer to the total receipts from sales of a given quantity of goods/service. It is calculated by multiplying the quantity of good or services sold by the price of the good or services. Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity (market for air travel) to a change in the price of the good itself, ceteris paribus. Its formula is given by percentage change in quantity demanded of air travel over the percentage change in price of price of air travel. Ep is useful in helping the airline firms to determine the price that should be set or adopt appropriate pricing policy for its market for air travel, to maximise total revenue earned. For Ep, if the absolute value of the coefficient is greater than 1, this means that a given percentage change in price results in a larger percentage change in quantity demanded, ceteris paribus. The converse is true when demand is price inelastic. In this case, demand for air travel is price elastic. The two determinants affecting Ep for market for air travel are availability of substitutes and size of budget spent on good. The availability of substitutes of airplane is wide. For example, besides the airplane there are other alternatives as well...
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...Determinants of Price Elasticity of Demand Register for FREE to remove ads and unlock more features! Learn more A good's price elasticity of demand is largely determined by the availability of substitute goods. Learning Objectives • Explain how a good's price elasticity of demand may be different in the short term than in the long term. • Relate the existence of close substitutes to a good's price elasticity of demand. ________________________________________ Key Points o A good with more close substitutes will likely have a higher elasticity. o The higher the percentage of a consumer's income used to pay for the product, the higher the elasticity tends to be. o For non-durable goods, the longer a price change holds, the higher the elasticity is likely to be. o The more necessary a good is, the lower the price elasticity of demand. ________________________________________ Term • Substitute Good A good that fulfills a consumer need in a way that is similar to another good. Register for FREE to remove ads and unlock more features! Learn more Full Text The price elasticity of demand (PED) is a measure of how much the quantity demanded changes with a change in price. The PED for a given good is determined by one or a combination of the following factors: • Availability of substitute goods: The more possible substitutes there are for a given good or service, the greater the elasticity. When several close substitutes are available, consumers can easily switch from...
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...Price Discrimination Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopoly markets. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, market frictions in oligopolies such as the airlines, and even in fully competitive retail or industrial markets allow for a limited degree of differential pricing to different consumers. Price discrimination also occurs when it costs more to supply one customer than it does another, and yet the supplier charges both the same price. Although the term "discrimination" has negative (e.g. racist, sexist) connotations, the literal meaning of the word "discrimination" (from discriminatio, "a distinction") is neutral. "Price discrimination" is a technical term meaning only differentiation in price by customer, and is not intended as an accusation of criminal or unfairly biased behavior. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very...
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