Supply And Demand Conditions And Price Elasticity Of Demand

I am working on part two of my paper for microeconomics. It is due this evening (11/26/17) by 9:00 MST. The document will need to be about the company of my choosing (in this case it is Netflix) and will need to discuss supply and demand along with price elasticity of demand . I am acting as a consultant for the company so it will also need to include recommendations for the company’s continued success. The paper also requires a graph (I have completed and it is attached). I am also attaching the milestone tips which provides greater detail and a document to help with elasticity of demand.

OVERVIEW

There are some important points regarding elasticity of demand that, if you can master, will see

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you through an introductory microeconomics course and, more importantly, help you apply the

concept in the business world. The text does a very good job of explaining elasticity, but there is

also a great deal of detail that is provided which may obscure the most significant points.

Therefore, this paper will focus on the most critical points regarding elasticity of demand that

you need to know.

 

THE LAW OF DEMAND

First of all, we know that price and quantity demanded are inversely related because of the Law of

Demand. Therefore, an increase in price will always result in a decrease in quantity demanded and,

conversely, a decrease in price will always result in an increase in quantity demanded. We take that

as a given.

The implications of the Law of Demand for revenue are as follows:

When price increases, we will gain revenue from the price increase, but we will lose

revenue from a decrease in quantity demanded.

When price decreases, we will lose revenue from the decrease in price, but we will gain

revenue from an increase in quantity demanded.

The net effect on revenue, i.e., whether total revenue will increase or decrease, will depend upon

the elasticity of demand, all other things being equal. Elasticity of demand will tell us the

magnitude of the response of quantity demanded to a price change and answer the question of which

is greater…the change in quantity demanded or the change in price. With that information, we can

determine the impact on revenue of all price changes.

 

ELASTIC DEMAND

Elasticity greater than 1 (in absolute value because we always ignore the sign) indicates that

when there is a change in price, the change in quantity demanded will be greater than the change

in price, i.e., %ΔQD > %ΔP.

Revenue implications of elastic demand:

When price increases, the loss in revenue from the decrease in quantity demanded will be

greater than the gain in revenue from the increase in price and, therefore, total revenue

will decrease.

 

 

When price decreases, the gain in revenue from the increase in quantity demanded will

exceed the loss in revenue from the price decrease and, therefore, total revenue will

increase.

Summary: A price increase will cause total revenue to fall and a price decrease will cause

revenue to rise when demand is elastic. Just remember that when demand is elastic, revenue and

price will move in the opposite direction. ↑P → ↓R and ↓P → ↑R

 

INELASTIC DEMAND

Elasticity between 0 and 1 (absolute value) indicates that when there is a change in price, the

change in quantity demanded will be less than the change in price, i.e., %ΔQD < %ΔP.

Revenue implications of inelastic demand:

When price increases, the gain in revenue from the price increase will exceed the loss in

revenue from the decrease in quantity demanded, and, therefore, revenue will increase.

When price decreases, the loss in revenue from the price increase will exceed the gain in

revenue from an increase in quantity demanded and, therefore, revenue will decrease.

Summary: A price increase will cause total revenue to increase. However, a price decrease will

result in a decrease in revenue. Therefore, when demand is inelastic, revenue and price will move in

the same direction. ↑P →↑R and ↓P → ↓R

 

UNIT ELASTICITY

Elasticity of 1 (absolute value) indicates that when there is a change in price, the change in

quantity demanded will be the same, i.e., %ΔQD = %ΔP.

Revenue implications of unit elasticity of demand:

When price increases, the loss in revenue from the decrease in quantity demanded will be

equal to the gain in revenue from the increase in price and, therefore, total revenue will

not change.

When price decreases, the gain in revenue from the increase in quantity demanded will be

equal to the loss in revenue from the price decrease and, therefore, total revenue will not

change.

Summary: With unit elasticity, price changes will result in no change in revenue.

 

 

 

 

 

 

 

 

PERFECTLY INELASTIC DEMAND

Elasticity of zero indicates perfectly inelastic demand. When there is a change in price, there

will be no change in quantity demanded. The result is a vertical demand curve.

 

 

PERFECTLY ELASTIC DEMAND

Perfectly elastic demand occurs when the coefficient of price elasticity of demand is infinite.

The result is a horizontal demand curve. Responses to changes in price are infinite. When price

increases, demand will be zero. When price decreases, demand will be infinite and all available

quantities will be sold.

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