CH6 Pricing, Costs, & Profits Flashcards
marginal value & what its used for
value that consumers place on items/products
to determine how much to consume
demand curve
tells you how much consumers will purchase at any given price
first law of demand
consumer purchases more as price falls
What happens when the marginal value of consuming a product increases?
the value of each item reduces the more you consume
consumer surplus
difference between total value & amount paid
As price declines, what happens to consumer surplus?
the difference between total value & amount paid increases
aggregate demand curve
added up individual demand curves
the relationship between price and the # of purchases made
As price falls…
quantity increases
If MR > MC, then you should
sell more & reduce the price
If MC > MR, then you should
sell less & increase price
What does marginal analysis tell us?
tells us where to price or how many units to sell
How do we estimate MR
measure quantity responses to past price changes
how much consumers would buy in response to price changes
Price Sensitivity equation
e = %change quantity demanded / %change Price
Price Sensitivity
how sensitive demand is to a change in price
When is a demand curve elastic?
when quantity changes more than price
When is a demand curve inelastic?
when quantity changes less than price
If demand is elastic then (e) must be
more than 1
if demand is inelastic then (e) must be
less than 1
Why is price elasticity always negative
because quantity and price move in opposite directions
What is the relationship between price and revenue
when price falls, revenue increases
If items are elastic what happens to revenue?
price increase - revenue decrease
price decreases - revenue increases
If items are inelastic what happens to revenue
price increases - revenue increases
price decreases - revenue decreases
