Lecture 9-131008

Question 1

What is the 1st factor that determines price elasiticity

Answer 1

1. # of substitutes ( Price elasticity will go up) –What this means is that the customer’s sensitivity (elasticity) to price increase is higher when they have other options. The less substitutes the more differentiated the product is thus making it more acceptable to raise prices without losing customers.

Question 2

What is the 2nd factor that determines price elasiticity

Answer 2

2. % of portion of customers income spent on a particular product or service ( Price elasticity will increase)- What this means is the higher the portion of income uses to buy your product or service the more sensitive the customer will be to an increase in price of your product

Question 3

What is the 3rd factor that determines price elasticity

Answer 3

3. Time frame (The longer the time frame, the more elastic things will be. – What this means is if you give more time after your price increase to analyze impact it had on demand, you are giving customers more time to find alternatives.

Question 4

What is the 4th factor that determines price elasticity?

Answer 4

4. Price elasticity for an entire industry differs from an individual firm. – What this means is that if you measure elasticity for an industry there are less fluctuations within all firms, whereas if you look at it from an individual firm you are most likely to be missing information.

Question 5

What is arc elasticity

Answer 5

→ it is the change in quantity over the average of both quantities (new price and old price)

Question 6

What is the relationship of between income elasticity sensitivity and type of product demanded?

Answer 6

Income Elasticity → ey= (% change in quantity demanded) / (% quantity changed in income)

Normal Good; Necessity 	0< ey < 1

Normal Good; Superior or Luxury 	ey>1

Inferior Good 	ey<0

Question 7

What is arc elasticity

Answer 7

When calculating elasticity, a complication occurs in reversing the quantity demanded numbers. The solution to this is to take the average

Question 8

Explain what a normal, superior, and inferior goods are in terms of elasticity

Answer 8

Goods that are described by the responsiveness between the percent change in quantity demanded and percent change in income of the consumer. If e is between 0 and 1, it is a normal good; if it is greater than 1, it is a superior/luxury good; if it is less than 0, it is an inferior good (hamburger and potatoes).

Question 9

Talk about cross-price elasticity.

Answer 9

Cross Price Elasticity → if change in price of a product, how does this affect demand for our product? A negative sign in the equation shows that these two products are complementary. Equation for cross price elasticity: ePy=(% change in Demand for our product X) / (% change in Price of Product Y) What this means is that depending on the price elasticity between our product X and the change in price in product Y we are able to determine how badly (or not) this will affect demand for our product.