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Managerial Economics - FG > Topic 3 > Flashcards

Topic 3 Flashcards

1
Q

Impacts on Elasticity

A
  • Availability of substitutes (key determinant)
  • Time horizon (time to adapt to price changes)
  • Narrowness of product category (specific or broad, Nurafen vs ibuprofen)
  • Necessities vs Luxuries
  • Purchase Impact (impact on budget)
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2
Q

Elasticity of Demand: Purpose

A

Measure responsiveness to:

  • Good’s own price
  • Other goods prices
  • People’s income
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3
Q

Elasticity of Demand: Formula

A

Elasticity = (% change in Quantity Demanded) / (% change in Price)

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4
Q

Inelastic Demand Curve

A
  • < 1 (or less than -1)
  • Steeper Demand Curve
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5
Q

Elastic Demand Curve

A
  • > 1 (or greater than -1)
  • Flatter demand curve
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6
Q

Unit Elastic Demand Curve

A
  • = 1
  • 45 degree gradient
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7
Q

Elasticity Midpoint Forumula

A
* Used to eliminate relative directional impact
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8
Q

Revenue Impact from from Price move when Elasticity is < 1

A

Price and Revenue Move Together

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9
Q

Revenue Impact from from Price move when Elasticity is > 1

A

Price and Revenue Move in Opposition

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10
Q

Revenue Impact from from Price move when Elasticity is = 1

A

Price moves but Revenue stays the same

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11
Q

Point Elasticity vs Arc Elasticity

A
  • Point: % change at a single point
    • ie (Q1-Q2/Q2 …)
  • Arc: uses midpoint formula
    • ie (Q1-Q2/Avg(Q1+Q2) …)
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12
Q

Elasticity Along a Straight Line Demand Curve

A
* Increases to the left * Decreases to the right
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13
Q

Cross-price elasticity

A

% change in quantity demanded of A / % change in price of B

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14
Q

Income Elasticity of Demand

A

% change in quantity demanded / % change in income

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15
Q

Types of good

A
  • Normal
  • Inferior
  • Luxury
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16
Q

Normal Good

A
  • Positive income elasticity of demand
    • Increase in income -> increase in quantity demanded
17
Q

Inferior Good

A
  • Negative income elasticity of demand
    • Increase in income -> decrease in quantity demanded
18
Q

Luxury Good

A
  • Positive income elasticity of demand, > 1
    • Increase in income -> increase in quantity demanded
19
Q

Network Effects

A

For some goods or services the benefit is proportional to the number of other customers
* eg. two-sided market platform
* User content based platform (eg instagram)
* Review based platform (eg. trip advisor)

20
Q

Infinitely / Perfectly Elastic Curve

A
Horizontal Line
21
Q

Perfectly Inelastic Curve

A
Looks like an 'I', for Inelastic
22
Q

Continuously Elastic Curve

23
Q

Cross Elasticity of Demand - Goods Relationships

A
  • Substitutes - CED is Positive
  • Complements - CED is Negative
  • Unrelated - CED = 0
24
Q

Profit Maximising Pricing Formula

A

( Price - Marginal Cost) / Price = 1/Elasticity.

Managerial Economics - FG (6 decks)

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