ECO

• Price elasticity of demand


  The responsiveness of consumers to a price change
• Price Elasticity of Demand coefficient


  ed = percentage change in quantity demanded of product X / Percentage change in price of product X
• Elastic Demand


  Coefficient is greater than 1. A one percent change in price results in more than one percent change in quantity demanded.
• Inelastic Demand


  Coefficient is less than 1. A one percent change in price results in less than one percent change in quantity demanded.
• Unitary Demand


  Coefficient is equal to 1. A one percent change in price results in one percent change in quantity demanded.
• Price elasticity of supply


  If the quantity supplied by producers is responsive to the price changes supply is elastic, if insensitive to price changes then it is inelastic.
• Elastic supply


  Coefficient is greater than 1. A one percent change in price results in more than one percent change in quantity supplied.
• Inelastic supply


  Coefficient is less than 1. A one percent change in price results in less than one percent change in quantity supplied.
• Unitary supply


  Coefficient is equal to 1. A one percent change in price results in one percent change in quantity supplied.
• Degree of price elasticity of supply


  • Depends on how fast producers can shift resources between alternative uses
  • The easier and faster producers can shift resources between alternative uses, the greater the price elasticity of supply
• Market period


  The period that occurs when time immediately after a change in market price is too short for producer to respond with a change in quantity
• Price elasticity of supply in the short run


  The period of time too short to change plant capacity but long enough to use the fixed -sized plant more or less intensively
• Price elasticity of supply in the long run


  The period of time long enough for firms to adjust plant sizes and for new firms to enter or exit firms to leave the industry
• Cross elasticity of Demand

  Measures how sensitive consumer demand of one product (X) to a change in the price of some other product (Y)
• Complementary goods


  If cross elasticity is negative the two goods are complementary
• Substitute goods


  If cross elasticity is positive the goods are substitutes
• Unrelated goods


  A zero cross elasticity connotes the two goods are unrelated
• Income elasticity of demand

  The responsiveness of consumer purchases relative to a change in income
• Normal goods


  If income elasticity is positive the goods is a normal goods
• Inferior goods


  If income elasticity is negative the goods is an inferior goods
• Elastic demand


  Big change: If there is a price increase then the decrease in quantity is bigger than the increase in price, the revenue decrease. If there is a price decrease then the increase in quantity is bigger than the decrease in price, the revenue increase.
• Inelastic demand


  Small change: If there is a price increase then the decrease in quantity is smaller than the increase in price, the revenue increase. If there is a price decrease then the increase in quantity is smaller than decrease in price, the revenue decrease.
• Factors that affect demand elasticity and optimal pricing

  • More elastic demand of products happens if the products have more close substitutes
  • Products brand individual demand is more elastic than industry aggregate demand
  • There is less elastic demand if the products have many complements
  • Demand curves become more elastic in the long run horizon
  • Demand becomes more elastic as price increases
• Elasticity refers to how much the quantity demanded changes in response to a change in price. When demand is elastic, it means that small changes in price lead to larger changes in the quantity demanded. So, if the price of a good increases and consumers quickly switch to alternatives, we say that the demand for that good is elastic.
• Compounding


  The reverse of discounting
• Rule of 72


  If you invest at a rate of 8 percent, divide 72 by 8 percent to get the number of years it takes to double your money, which is 9 years
• Determining investment profitability


  1. Discount the future value of an investment

  2. Compare with current cost of the investment

  3. Use the net present value (NPV) decision rule
• NPV (net present value)


  If the net present value of discounted cash flow is larger than zero, then the investment earns more than the cost of capital
• Breakeven analysis


  A way to determine investment profitability through the breakeven quantity
• Breakeven quantity


  The quantity wherein there is no loss and no gain, i.e. zero profit. If you could sell more than the breakeven quantity then it is now profitable since the revenue exceeds the cost.
• Buyer's value


  The amount of money an individual is willing to give up to acquire a good or service
• Seller's value


  The cost of the goods
• Buyer buys


  If the price is below his value
• Seller sells


  If the price is above his/her value
• Seller surplus


  The difference between the price agreed upon and seller's value
• Buyer surplus


  Buyer's value less the agreed price
• Total surplus


  The gain in the transaction: buyer surplus plus seller surplus
• Voluntary transactions of both parties (buyer and seller) either create wealth or no wealth creation at all, or a very minimal wealth creation
• Understanding consumer behavior


  Necessary in determining the price of certain goods
• Law of demand


  • A consumer purchases more if price decreases
  • A consumer purchases less if price increases