Module 1 Flashcards
The ____ curve tells the business how many people will be willing to buy the product at a given price.
Demand
What are the x-axis and y-axis of a demand curve?
Inverse of frequency distribution. X-axis: Number of consumers and Y-axis: Price.
____ is also computed from the demand curve.
Revenue
Price * number of customers willing to buy for a given price.
What causes WTP to change?
Intrinsic (unobservable) or Extrinsic (observable) factors
What are intrinsic differences?
Things about a person that you cannot determine without asking them. Example: Risk tolerance, the need to be accepted, and intensity of their passion for Taylor Swift (or) PAT.
What are extrinsic differences?
Observable differences that you can generally determine about people without asking them such as age, gender, income, education etc.
What happens to the demand curve when WTP changes?
Curve shifts left (when WTP lowers) and curve shifts right (when WTP increases)
________ does not affect the shift of the demand curve
Price. It affects the quantity demanded but does not change the underlying WTP or demand.
What is diminishing marginal returns?
Economic relationship states that a customer’s willingness to pay for a product should decrease for additional units of a product. (i.e., the tenth milkshake will not taste as good as the first).
What is the implication of diminishing marginal returns?
- Sets natural limits on how large a business might be
- Managers should think about how diminishing marginal returns affects their product and have a strategy to overcome it.
For a _____ demand curve, quantity demanded is not sensitive to price
Steep
Producers can raise prices, without losing too many customers
For a ______ demand curve, quantity demanded is very sensitive to price
Flat
With increase in prices, quantity demanded will fall greatly.
What are the factors determining the slope of the demand curve?
- Does the product have close substitutes?
- Is the product a necessity or a luxury?
- Time horizon (ex: in the shorter run, gasoline has a steep demand curve, but it can flatten our over time when customers make alternate lifestyle choices).
A steep demand curve is sometimes called an ________ curve
Inelastic demand curve
________ demand curve is called an “elastic” demand curve.
Flat
Key points (4) about the demand curve
- Demand curve is a representation of the customer’s willingness to pay
- Demand curves can have a steep slope (where demand is not affected by price) or flat curve (where demand is affected by price)
- Demand curve moves over time
- We can think of a demand curve for an individual rather than a market or company. Diminishing marginal returns will cause this curve to slope downwards.
What is the problem of using the slope of the demand curve to determine elasticity?
Slope depends on the units of measurement. Change in the units can cause a change in the sloped.
The elasticity of the demand varies along a linear demand curve, reflecting the idea that price sensitivity varies along the curve. But the slope of a curve is exactly the same at any two different points in a straight line.
What is elasticity?
Helps to determine:
How sensitive revenues are to price changes (how fragile/robust is the current revenue position for the company
Revenue impact of pricing changes
Revenue impact of changes in competitive conditions.
Formula: Percentage change in quantity demanded divided by the percentage change in price.
% change = (New - old) /Old.
Elasticity = % change of quantity / % change in price.
What is cost-plus pricing?
Take the cost you incurred on a product, add a markup value (say 10%) and figure out what price to change.
____ is price setting based on WTP rather than costs.
“Value Based Pricing”.
_____ was a company that provided consistently 25% return on investment to its shareholders between 1985 to 2013.
Danaher
When ________ is elastic, you cannot afford to raise prices
Demand
What is the volume-profit tradeoff?
You gain customers by lowering prices, but that reduces revenues for all your existing customers as well.
You need to ensure that the loss from existing customers will be more than offset by the revenues you gain from new customers.
Why is there revenue maximization for a linear curve when elasticity hits one?
When demand is inelastic, it pays to increase prices. When it is elastic, it pays to lower prices. When elasticity is 1, it does not pay to either raise or lower prices.
What are “iso-elastic” demand curves?
Demand curves where elasticity is 1 at every point. No matter where you price the demand curve always will be the same.
How can we extend price elasticity to other factors?
Simple - replace change in price by change in any factor (x) in the elasticity formula.
What is cross-price elasticity?
Tells how sensitive is demand of your product to the changes in prices of other products.
What does negative elasticity mean?
It means that the consumer will by less of the good as his/her factor increases. Example, as income increases, a person may not buy more rice and opt to other expensive items.
Willingness to pay is very different from _________.
Price. There are a lot of factors - price, income, weather, demographics, intrinsic factors that affect the willingness to pay.
What is the difference between “Shift” vs. “Shape” of the demand curve?
Shift results when the WTP changes
Shape of the curve is related to elasticity (flat or steep) demand curves.
