Based on the following graph, estimate the ownprice...

Based on the following graph, estimate the ownprice elasticity between points $A$ and $B$ and the own-price elasticity between points $B$ and $C$. Are they elastic or inelastic? Why are the elasticities different? To increase revenue, at least in the short run, would you recommend a price increase or a price decrease? (GRAPH CAN'T COPY)

Key Concepts

Own-Price Elasticity of Demand

This concept measures the responsiveness of the quantity demanded of a good to a change in its own price, calculated as the percentage change in quantity demanded divided by the percentage change in price. It is fundamental in understanding how consumers will react when prices move, and is a crucial tool for firms and policymakers to predict market behavior.

Elastic and Inelastic Demand

Elasticity classifications describe how responsive the quantity demanded is to price changes. Demand is considered elastic when a small change in price leads to a relatively larger change in quantity demanded (elasticity greater than one in absolute value), and inelastic when quantity demanded is relatively unresponsive to price changes (elasticity less than one in absolute value). This distinction is vital for determining pricing strategies in different market conditions.

Variability of Elasticity Along the Demand Curve

In many cases, particularly with linear demand curves, elasticity is not constant along the curve. Different sections of the demand curve can exhibit different elasticities because the proportionate changes in quantity and price vary at different points. This concept explains why the elasticity estimated between one pair of points can differ from that estimated between another pair.

Revenue Maximization and Price Strategy

Revenue maximization involves adjusting prices to maximize total revenue, which is influenced by the demand elasticity. When demand is inelastic, raising prices can lead to higher revenue because the percentage drop in quantity demanded is less than the percentage rise in price. Conversely, when demand is elastic, lowering prices may boost revenue as the increase in quantity demanded is proportionally greater.

Transcript

00:01 So the question begins by asking us to grab the given data.

00:05 So we start with the price quantity curve, where the y -axis is price and the x -axis is quantity.

00:21 So now we see in the table that for a given price of $5, the consumer only by a quantity of one.

00:28 For $4, it's $2, $3, it's $3, for $2, $2 ,000 it's $4, and for $5.

00:37 Or excuse me, for $1, it's $5.

00:39 So this gives us a basic demand curve, the slope of negative 1, and we can see that it's linear.

00:48 So the next part of the question asks us to use the midpoint formula for the elasticity of demand, which is as follows.

01:00 It's going to equal the change in quantity divided by the average quantity, and that is going to be divided by the change of price over the average price.

01:26 So now this midpoint formula allows it that it adjusts for the up and down differences.

01:37 So if we're considering a change from $5 to $4 and a corresponding quantity of 1 to 2, this is the same as evaluating a change from $4 to $5.

01:49 So in the equation in this case, it's going to be the change in quantity, which is 1, since we're only moving from 1 to 2, divided by the average quantity, which is the midpoint between 1 and 2, easy enough to calculate, it's 1 .5, divided by the change in price, which again is 1, divided by the midpoint between the price points of $5 or $4, which is $4 .5.

02:14 And this will equal to 0 .67 divided by 0 .22, which is about 3.

02:23 And now we can do this for every single price point.

02:26 So let's continue on.

02:30 We can do from now $4 to $3, which is going to equal 1, as that is the difference in price.

02:43 And we know now we're going from a quantity of 2 to 3.

02:48 So the difference of quantities is 2 to 3 divided by the midpoint between 2 and 3, which is 2 .5, divided by, again, the difference in price, which is 1, over the midpoint of price, which is 3 .5.

03:02 And this will equal 0 .4 divided by 0 .29 approximately equals about 138.

03:13 And now we can do it for $3 to $2, corresponding quantity change of 3 to 4...

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