Lecturecast 5

Economics for Managers

 Business in a
Market Environment
Price Elasticity of Demand
The responsiveness of quantity demanded to a change in price
the responsiveness of demand for an individual firm
the responsiveness of market demand
Defining price elasticity of demand (Pd):
%QD / %P
the use of proportionate or percentage changes
the sign (positive or negative)

the value (greater or less than one)

Price Elasticity of Demand

The determinants of price elasticity of demand

the number and closeness of substitute goods
▪ closeness of one product to another

▪ closeness of one brand to another

the proportion of income spent on the good

time
Importance of Price Elasticity of Demand
to Business Decision Making
Price elasticity of demand and a firm’s sales revenue
(TR = P x Q)
effects of a price change on sales revenue
▪ elastic demand
– TR changes in same direction as quantity
▪ inelastic demand
– TR changes in same direction as price
▪ applications to price decisions
special cases
▪ totally inelastic demand
▪ infinitely elastic demand
▪ unit elastic demand
Other Elasticities of Demand
Income elasticity of demand: %QD / %Y
measurement
determinants
▪ degree of ‘necessity’ of the good
▪ rate at which desire is satisfied
▪ level of income of consumers
applications to business
▪ importance of perceptions of the product
▪ repositioning a product
Other Elasticities of Demand
Cross-price elasticity of demand:
%QDa / %Pb
measurement
determinants
▪ closeness of complements or substitutes
▪ time period
applications to business
▪ effects of changes in competitors’ pricing strategy
▪ strategies to make a product less cross-price elastic
Price Elasticity of Supply
Meaning of price elasticity of supply
Measuring price elasticity of supply
%QS / %P
elastic and inelastic supply

Determinants of price elasticity of supply

amount that costs rise as output increases
time period
▪ immediate
▪ short run
▪ long run
 The Time Dimension of Market Adjustment
Short-run and long-run price adjustment
short- and long-run demand curves

short- and long-run supply curves

Price expectations and speculation

stabilising speculation

destabilising speculation

speculation is self-fulfilling
Dealing with Uncertainty
Uncertainty and risk
defining risk and uncertainty
reducing risks by holding stocks

Dealing in futures markets

sellers
▪ spot prices
▪ future prices
buyers
the determinants of the future price
role of speculators in forward markets
Economics for Managers

That concludes this lecturecast

Thank you

I hope you found it useful