1. Elasticity and Its Application

9. Computing the Price Elasticity of Demand Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as:

12. A Variety of Demand Curves Because the price elasticity of demand measures how much quantity demanded responds to the price, it is closely related to the slope of the demand curve.

13. Perfectly Inelastic Demand - Elasticity equals 0 Quantity Price 2. ...leaves the quantity demanded unchanged. 4 5 Demand 100 1. An increase in price...

14. Inelastic Demand - Elasticity is less than 1 Quantity Price 4 5 1. A 25% increase in price... 100 90 2. ...leads to a 10% decrease in quantity.

15. Unit Elastic Demand - Elasticity equals 1 Quantity Price 4 5 1. A 25% increase in price... 100 75 2. ...leads to a 25% decrease in quantity.

16. Elastic Demand - Elasticity is greater than 1 Quantity Price 4 5 1. A 25% increase in price... 100 50 2. ...leads to a 50% decrease in quantity.

17. Perfectly Elastic Demand - Elasticity equals infinity Quantity Price Demand 4 1. At any price above 4, quantity demanded is zero. 2. At exactly 4, consumers will buy any quantity. 3. At a price below 4, quantity demanded is infinite.

20. Demand is Unitary elastic As price falls, the quantity demanded increases, But the total outlay remains constant. Hence, elasticity of demand is equal to unity. Price ( in Rs.) Quantity demanded Total expenditure 4.50 4 18 4.00 4.5 18 3.00 6 18

21. Demand is Elastic As price falls, the quantity demanded increases, And the total outlay also increases. Hence, demand is elastic. ( Greater than unity) Price ( in Rs.) Quantity demanded Total expenditure 4.50 6 27 4 7 28 3 10 30

22. Demand is inelastic As price falls, the quantity demanded increases, but the total outlay decreases. Hence, demand is inelastic. ( Lesser than unity) Price ( in Rs.) Quantity demanded Total expenditure 4.50 4 18 4 4.25 17 3 5 15

23. Midpoint Formula The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.

24. Computing the Price Elasticity of Demand Example: If the price of an ice cream cone increases from 2.00 to 2.20 and the amount you buy falls from 10 to 8 cones the your elasticity of demand, using the midpoint formula, would be calculated as:

27. Perfectly Inelastic Supply - Elasticity equals 0 Quantity Price 2. ...leaves the quantity supplied unchanged. 4 5 Supply 100 1. An increase in price...

28. Inelastic Supply - Elasticity is less than 1 Quantity Price leads to a 10% increase in Supply 4 5 1. A 25% increase in price... 90 100

29. Unit Elastic Supply - Elasticity equals 1 Quantity Price leads to a 25% increase in Supply 4 5 1. A 25% increase in price... 75 100

30. Elastic Demand - Elasticity is greater than 1 Quantity Price 4 5 Leads to a 50% increase in quantity supplied 1. A 25% increase in price... 50 75

31. Perfectly Elastic Supply Elasticity equals infinity Quantity Price Supply 4 1. At any price above 4, quantity supplied is infinite. 2. At exactly 4, Producers will sell any quantity. 3. At a price below 4, quantity supplied is zero.

32. Elasticity Price Quantity Demanded D The importance of elasticity is the information it provides on the effect on total revenue of changes in price. 5 100 Total revenue is price x quantity sold. In this example, TR = 5 x 100 = 500. This value is represented by the shaded rectangle. Total Revenue

33. Elasticity Price Quantity Demanded D If the firm decides to decrease price to (say) 3, the degree of price elasticity of the demand curve would determine the extent of the increase in demand and the change therefore in total revenue. 5 100 3 140 Total Revenue

34. Elasticity Price Quantity Demanded 10 D 5 5 6 % Δ Price = -50% % Δ Quantity Demanded = +20% Ped = -0.4 (Inelastic) Total Revenue would fall Producer decides to lower price to attract sales Not a good move!

35. Elasticity Price (£) Quantity Demanded D 10 5 20 Producer decides to reduce price to increase sales 7 % Δ in Price = - 30% % Δ in Demand = + 300% Ped = - 10 (Elastic) Total Revenue rises Good Move!

48. User’s Expectations Consumer and industrial companies often poll their actual or potential customers. Some Industrial manufacturers ask about the quantities of products their customers may purchase in future and take this as their forecast.

49. Delphi Method Administering a series of questionnaires to panels of experts. This method gathers information from all experts and the opinion of all the experts is shared by all other experts. In case if an expert finds that his own forecast is unrealistic, after going through the opinion of other experts, there is a chance for corrections.

52. Naïve Method Next Year’s Sales = This Year’s Sales X This Year’s Sales Last Year’s Sales

53. Moving Average Moving averages are used to allow for marketplace factors changing at different rates and at different times.

54. EXAMPLE OF MOVING-AVERAGE FORECAST P ERIOD S ALES V OLUME S ALES FOR THREE- Y EAR P ERIOD T HREE- Y EAR M OVING A VERAGE 1 200 2 250 3 300 750 4 350 900 300 5 450 1100 ( 3) = 366.6 6 ? Period 6 Forecast = 366.6

55. Trend Projections – Least Squares Eyeball fitting is simply a plot of the data with a line drawn through them that the forecaster feels most accurately fits the linear trend of the data.

56. A TREND FORECAST OF SALES

57. Categories of New Products New-To-The-World New Product Lines Product Line Additions Improvements/Revisions Repositioned Products Lower-Priced Products Six Categories of New Products