Find a Nice Price

ex: own price elasticity of demand for apples
P(initial) $1.50 lb Q (int) = 6 lbs of apples
P (final) $2.00/lb Q (fin) = 2 lbs of apples

M apples = [(2.00-1.50)*1.50] / [2.00/6] = (2/3) / (1/3)

If /M/ =	Demand	In Other Words
< 1 (m > 1)	Inelastic	People NOT sensitive to price change
= 1	“Unit elastic”
> 1 (m < -1)	Elastic	People ARE sensitive to change in price

What Impacts Elasticity      

 1) Time

2) Budget

3) Substitues

Quantity Response vs. Price Response = Nothing significant about 1

Changes not instant - plan, save $ for later, buy cottage? Short run vs. long run

ex: Gas goes up to $7, will not go down

Short term: buy lots of gas

Long term: carpool, move closer to work, get better fuel efficiency

-Substitutes impact change demand elasticity

Steep Demand = Inelastic
Flatter Demand = Elastic
-Consider the Law of Demand, when expensive, consume less
-Compare, minivan, Ford minivan, red Ford minivan => the availability of substitutes matters

Total Recipts = P * Q 

If price increases, quantity decreases

If price decreases, quantity increases

Consider: tradeoffs of the firm

-Raise price, some people will pay more, but probably will lose customers

-Lower price, maybe gain revenue?

ex: TR initial: $500 TF final = $320

loss of customers: 6 x 50 = $300

gains from existing: 4 x 30 = $120

==> Lost $180

-find elasticity of demand of customers, sensitive to price change?

  -make $ by lowering the price

Expenditures NOT the same thing as cost

ex: MRI didn't exist in 1980s, do we consider them a cost? No, it is an expenditure