impact of ∆p and ∆q on changing revenue and measuring price elasticity ted mitchell
TRANSCRIPT
![Page 1: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/1.jpg)
Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity
Ted Mitchell
![Page 2: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/2.jpg)
Exam Question
• What Is the Price that maximizes Revenue If The Demand For The Product Is
»Q = a - bP
![Page 3: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/3.jpg)
Optimal Price Max Rev
Price per Unita/2b
Quantity
Sold
a/2
Demand Equation
Q = a - bP
TJM
Maximum Revenue
![Page 4: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/4.jpg)
Optimal price Max Rev
Price per Unita/2b = 5000/2(500) = $5
Quantity
Sold
a/2 = 5000/2=2,500
Demand Equation
Q = 5000 – 500P
TJM
Maximum Revenue = $5 X 2,500 = $12,500
![Page 5: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/5.jpg)
Price per Unit$4 $5
Quantity
Sold
2,500
Demand Equation
Q = a - bP
TJM
3,000
$4 x 3,000 =12,000
![Page 6: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/6.jpg)
Lower Price Sells More Units
Price per Unit$4 $5
Quantity
Sold
2,500
Demand Equation
Q = a - bP
TJM
3,000
$4 x 3,000 =12,000
Maximum Revenue = $5 X 2,500 = $12,500
![Page 7: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/7.jpg)
Price per Unit$4 $5
Quantity
Sold
2,500
TJM
3,000
Revenue in Period 2 $4 x 3,000 =12,000
Revenue in Period 1$5 X 2,500 = $12,500
![Page 8: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/8.jpg)
Impact Analysis
• Impact of a Change in Price on the Change In Revenue
• Impact of a Change in Quantity on the Change in Revenue
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Period 1 Period 2 Change Impact of Change on price
Quantity, Q 2,500 3,000 ∆Q= 500 I∆Q =$4(500) = $2,000
Price, P $5 $4 ∆P = -$1 I∆P =2,500(-$1) =-$2,500
Joint Impact 0
Revenue $12,500 $12,000 ∆R= -$500 ∆R = I∆Q+I∆P = -$500
Arc or Average price Elasticity = I∆Q/I∆P = $2,000/$2.500 = -0.8
![Page 10: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/10.jpg)
Lower Price Sells More Units
Price per Unit$4 $5
Quantity
Sold
2,500
Demand Equation
Q = a - bP
TJM
3,000
Gain =$4 x 500 =$2,000
Loss is2,500 x-$1= -$2,500
![Page 11: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/11.jpg)
• Price Elasticity =• Customer Sensitivity to Price Change = • Sensitivity of Changes in the Quantity
purchased for a Change in Price• = %∆Q/%∆P
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Price Elasticity = -1
Price per Unita/2b
Quantity
Sold
a/2
TJM
Maximum Revenue
-0.5 -0.75 -1 -1.25 -1.5 -1.75
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Revenue looks like R = aP - bP2
Revenue
Price0
TJM
-0.5 -0.75 -1 -1.25 -1.5 -1.75Price Elasticity
a/2b
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Period 1 Period 2 Change Impact of Change on price
Quantity, Q 2,500 3,000 ∆Q= 500 I∆Q =$4(500) = $2,000
Price, P $5 $4 ∆P = -$1 I∆P =2,500(-$1) =-$2,500
Joint Impact 0
Revenue $12,500 $12,000 ∆R= -$500 ∆R = I∆Q+I∆P = -$500
Arc or Average price Elasticity = I∆Q/I∆P = $2,000/$2.500 = -0.8
![Page 15: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/15.jpg)
Price per Unit$4 $5
Quantity
Sold
2,500
TJM
3,000
-0.5 -0.75 -1 -1.25 -1.5 -1.75Eqp = -0.8
![Page 16: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/16.jpg)
Revenue looks like R = aP - bP2
Revenue
Price0
TJM
-0.5 -0.75 -1 -1.25 -1.5 -1.75Arc Price Elasticity = -0.8
$4 $5
![Page 17: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/17.jpg)
• Three Big Uses for Price Elasticity• 1) Forecasting Qty change for a
change in Price• 2) Comparing Price Sensitivity
Across Markets• 3) Indicates if a price change will
increase or decrease revenue
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Exam QuestionIf your price elasticity is -1.5 then a price increase increase your revenue? True or False
TJM
![Page 19: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/19.jpg)
Exam QuestionIf your price elasticity is -1.5 then a price increase increase your revenue? True or False
TJM
-0.5 -0.75 -1 -1.25 -1.5 -1.75
![Page 20: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/20.jpg)
Exam QuestionIf your price elasticity is -1.5 then a price increase increase your revenue? True or False
Revenue
Price0TJM
-0.5 -0.75 -1 -1.25 -1.5 -1.75
![Page 21: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/21.jpg)
Exam Question # 2If your price elasticity is -1.5 then a small price decrease will increase your revenue? True or False
TJM
![Page 22: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/22.jpg)
Exam Question # 2If your price elasticity is -1.5 then a small price decrease will increases your revenue? True or False
Revenue
Price0TJM
-0.5 -0.75 -1 -1.25 -1.5 -1.75
![Page 23: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/23.jpg)
• Price Elasticity is Almost Never Used to discuss a price change increasing or decreasing Revenue!
• True
• BUT Why!!!
![Page 24: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/24.jpg)
The Price That Maximizes Profit is always ≥ the
Price that maximizes Revenue
$
Price0TJM
Pr* Pz*
![Page 25: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/25.jpg)
$
Price0TJM
Pr* Pz*
-0.5 -0.75 -1 -1.25 -1.5 -1.75
The Elasticity of Price that maximizes profit is always more negative than the price that maximizes revenue
![Page 26: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/26.jpg)
• Most firms are maximizing profit most of the time
• Most manager expect a revenue increase if they decrease their selling price
![Page 27: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/27.jpg)
• Price Elasticity in Most markets most of the time is between
• Eqp = -1.20 and -2.75
![Page 28: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/28.jpg)
$
Price0TJM
Pr* Pz*
-0.5 -0.75 -1 -1.25 -1.5 -1.75
The Elasticity of Price that maximizes profit is always more negative than the price that maximizes revenue
![Page 29: Impact of ∆P and ∆Q on Changing Revenue and Measuring Price Elasticity Ted Mitchell](https://reader036.vdocuments.us/reader036/viewer/2022062314/56649d935503460f94a7b12b/html5/thumbnails/29.jpg)
Don’t Need A Max Revenue Indicator
• What we want is a NEW Elasticity That Indicates if a change in price will increase the Profits or not!