{"id":4881,"date":"2017-07-01T02:51:21","date_gmt":"2017-07-01T02:51:21","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-macroeconomics\/chapter\/reading-elasticity-and-total-revenue\/"},"modified":"2018-05-09T14:45:46","modified_gmt":"2018-05-09T14:45:46","slug":"elasticity-and-total-revenue","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/oldwestbury-wm-macroeconomics\/chapter\/elasticity-and-total-revenue\/","title":{"raw":"Elasticity and Total Revenue","rendered":"Elasticity and Total Revenue"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Objectives<\/h3>\r\n<ul>\r\n \t<li>Explain how differences in elasticity affect total revenue<\/li>\r\n<\/ul>\r\n<\/div>\r\n<h2>Total Revenue and Elasticity of Demand<\/h2>\r\nStudying elasticities is useful for a number of reasons, pricing being the most important. Imagine that a band on tour is playing in an indoor arena with 15,000 seats. To keep this example simple, assume that the band keeps all the money from ticket sales. Assume further that the band pays the costs for its appearance, but that these costs, like travel, setting up the stage, and so on, are the same regardless of how many people are in the audience. Finally, assume that all the tickets have the same price. (The same insights apply if ticket prices are more expensive for some seats than for others, but the calculations become more complicated.) The band knows that it faces a downward-sloping demand curve; that is, if the band raises the price of tickets, it will sell fewer tickets. How should the band set the price for tickets to bring in the most total revenue, which in this example, because costs are fixed, will also mean the highest profits for the band? Should the band sell more tickets at a lower price or fewer tickets at a higher price?\r\n\r\nThe key concept in thinking about collecting the most revenue is the price elasticity of demand. <strong>Total revenue<\/strong> is price times the quantity of tickets sold (TR = P x Qd). Imagine that the band starts off thinking about a certain price, which will result in the sale of a certain quantity of tickets. The three possibilities are laid out in Table 1. If demand is elastic at that price level, then the band should cut the price, because the percentage drop in price will result in an even larger percentage increase in the quantity sold\u2014thus raising total revenue. However, if demand is inelastic at that original quantity level, then the band should raise the price of tickets, because a certain percentage increase in price will result in a smaller percentage decrease in the quantity sold\u2014and total revenue will rise. If demand has a unitary elasticity at that quantity, then a moderate percentage change in the price will be offset by an equal percentage change in quantity\u2014so the band will earn the same revenue whether it (moderately) increases or decreases the price of tickets.\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"3\"><strong>Table 1. Price Elasticity of Demand<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>If demand is . . .<\/strong><\/td>\r\n<td><strong>Then . . .<\/strong><\/td>\r\n<td><strong>Therefore . . .<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Elastic<\/td>\r\n<td>% change in Qd is greater than\u00a0% change in P<\/td>\r\n<td>\r\n<ul>\r\n \t<li>A given % rise in P will be more than offset by a larger % fall in Q so that total revenue (P times\u00a0Q) falls.<\/li>\r\n \t<li>A given % fall in P will be more than offset by a larger rise in Q so that total revenue (P times Q) rises.<\/li>\r\n<\/ul>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Unitary<\/td>\r\n<td>% change in Qd is equal to % change in P<\/td>\r\n<td>\r\n<ul>\r\n \t<li>A given % rise or fall in P will be exactly offset by an equal % fall in Q so that total revenue (P times Q) is unchanged.<\/li>\r\n<\/ul>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Inelastic<\/td>\r\n<td>% change in Qd is less than % change in P<\/td>\r\n<td>\r\n<ul>\r\n \t<li>A given % rise in P will cause a smaller % fall in Q so that total revenue (P times Q) rises.<\/li>\r\n \t<li>A given % fall in P\u00a0will cause a smaller % rise in Q so that total revenue (P times Q) falls.<\/li>\r\n<\/ul>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf demand is elastic at a given\u00a0price level, then should a company cut its price, the percentage drop in price will result in an even larger percentage increase in the quantity sold\u2014thus raising total revenue. However, if demand is inelastic at the original quantity level, then should the company raise its\u00a0prices, the\u00a0percentage increase in price will result in a smaller percentage decrease in the quantity sold\u2014and total revenue will rise.\r\n\r\nLet's explore some specific examples.\u00a0In both cases we\u00a0will\u00a0answer the following questions:\r\n<ol>\r\n \t<li>How much\u00a0of an impact do we think\u00a0a price change will have on demand?<\/li>\r\n \t<li>How would we calculate the elasticity, and does it confirm our assumption?<\/li>\r\n \t<li>What impact does the elasticity have on total revenue?<\/li>\r\n<\/ol>\r\n<div class=\"textbox exercises\">\r\n<h3>Example 1: The Student Parking Permit<\/h3>\r\n[caption id=\"attachment_7066\" align=\"alignright\" width=\"300\"]<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/345\/2017\/02\/10195646\/rent-a-car-664986_1920-1024x768.jpg\"><img class=\"wp-image-7066 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/01025118\/rent-a-car-664986_1920-1024x768-300x225.jpg\" alt=\"Cars packed tightly in a parking lot.\" width=\"300\" height=\"225\" \/><\/a> <strong>Figure 1<\/strong>. Parking is often a hot commodity on campus.[\/caption]\r\n\r\nHow elastic is the demand for student parking passes at your institution?\r\n\r\nThe answer to that question likely varies based on the profile of your institution, but we are going to explore a particular example.\u00a0Let's consider a community college campus where all of the students commute to class. Required courses are spread throughout the day and the evening, and most of the classes require classroom attendance (rather than online participation). There is a reasonable public transportation system with busses coming to and leaving campus from several lines, but the majority of students drive to campus. A student parking permit costs $40 per term. As the parking lots become\u00a0increasingly congested, the college considers raising the price of the parking passes in hopes that it will encourage more students to carpool or to take the bus.\r\n\r\nIf the college increases the price of a parking permit from $40 to $48,\u00a0how many\u00a0fewer students will buy parking permits?\r\n\r\nIf you think\u00a0that the change in price will cause many students to decide not to buy a permit, then you are suggesting that the demand is elastic\u2014the students are quite sensitive to price changes. If you think\u00a0that the change in price will not impact student permit purchases much, then you are suggesting that the demand is inelastic\u2014student\u00a0demand for permits is\u00a0insensitive to price changes.\r\n\r\nIn this case, we can all argue that students are very sensitive to increases in costs <em>in general<\/em>, but the determining factor in their demand for parking permits is more likely to be the quality of alternative solutions. If the bus service does not allow students to travel between home, school, and work in a reasonable amount of time, many students will resort\u00a0to buying a parking permit, even at the higher price. Because students don't generally have extra money, they may grumble about a price increase, but many will still have to pay.\r\n\r\nLet's add some num<span style=\"color: #333333;\">bers and test our thinking. The college implements the proposed increase of $8, taking the new price to $48.\u00a0Last year the college sold 12,800 student parking passes. This year, at the new price, the college sells 11,520 parking passes.\u00a0<\/span>\r\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{percent change in quantity}=\\frac{11,520-12,800}{(11,520+12,800)\\div{2}}\\times{100}=\\frac{-1280}{12160}\\times{100}=-10.53[\/latex]<\/p>\r\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{percent change in price}=\\frac{48-40}{(48+40)\\div{2}}\\times{100}=\\frac{8}{44}\\times{100}=18.18[\/latex]<\/p>\r\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{Price Elasticity of Demand}=\\frac{-10.53\\text{ percent}}{18.18\\text{ percent}}=-.58[\/latex]<\/p>\r\n<span style=\"color: #333333;\">First, looking only at the percent change in quantity and the percent change in price we know\u00a0that an 18% change in price will resulted in an 11% change in demand. In other words, a large change in price created a comparatively smaller change in demand. We can also see that the elasticity is 0.58. When the absolute value of the price elasticity is &lt; 1, the demand\u00a0is inelastic. In this example, student demand for parking permits is inelastic.<\/span>\r\n\r\nWhat impact does the price change have on the college and their goals for students? First, there are 1,280 fewer cars taking up\u00a0parking places. If all of those students are using alternative transportation to get to school and this change has relieved parking-capacity issues, then the college may\u00a0have achieved its goals. However, there's more to the story: the price change also has an effect on the college's revenue, as we can see below:\r\n<p style=\"padding-left: 30px;\">Year 1: 12,800 parking permits sold x $40 per permit = $512,000<\/p>\r\n<p style=\"padding-left: 30px;\">Year 2: 11,520 parking permits sold x $48 per permit = $552,960<\/p>\r\nThe college earned an additional $40,960 in revenue. Perhaps this can be used to expand parking or address other student transportation issues.\r\n\r\nIn this case, student demand for parking permits is inelastic. A significant change in price leads to a comparatively smaller change in demand. The result is lower sales of parking passes but more revenue.\r\n\r\nNote: If you attend an institution that offers courses completely or largely online, the price elasticity for parking permits might\u00a0be perfectly inelastic. Even if the institution gave away\u00a0parking permits, students might\u00a0not want them.\r\n\r\n<\/div>\r\n<div class=\"textbox exercises\">\r\n<h3>Example 2: Helen's Cookies<\/h3>\r\nHave you been at the counter of a convenience store and seen\r\n\r\n[caption id=\"attachment_10874\" align=\"alignright\" width=\"300\"]<img class=\"wp-image-10874 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/09144443\/biscuits-406943_1920-300x197.jpg\" alt=\"Stacked rows of cookies.\" width=\"300\" height=\"197\" \/> <strong>Figure 2.<\/strong> Would a small raise in price deter you from a cookie?[\/caption]\r\n\r\ncookies for sale on the counter? In this example we are going to consider a baker, Helen, who bakes these cookies and sells them for $2 each. The cookies are sold in a convenience store, which has several options on the counter that customers can choose as a last-minute impulse buy.\u00a0All of the impulse items range between $1 and $2 in price. In order to raise revenue, Helen decides to raise her price to $2.20.\r\n\r\nIf Helen\u00a0increases the cookie price from $2.00 to $2.20\u2014a 10% increase\u2014will fewer customers buy cookies?\r\n\r\nIf you think\u00a0that the change in price will cause many buyers to forego a cookie, then\u00a0you are suggesting that the demand is elastic, or that the buyers\u00a0are sensitive to price changes. If you think\u00a0that the change in price will not impact sales much, then you are suggesting that the demand for cookies\u00a0is inelastic, or insensitive to price changes.\r\n\r\nLet's assume that this price change does impact customer behavior. Many customers choose a $1 chocolate bar or a $1.50 doughnut over the cookie, or they simply resist the temptation of the cookie at the higher price. Before we do any math, this assumption suggests that the demand for cookies is elastic.\r\n\r\nAdding in the numbers, we find that Helen's\u00a0weekly sales drop from 200 cookies to 150 cookies. This is a 25% change in demand on account of\u00a0a 10% price increase. We immediately see that the change in demand is greater than the change in price. That means that demand is elastic. Let's do the math.\r\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{percent change in quantity}=\\frac{150-200}{(150+200)\\div{2}}\\times{100}=\\frac{-50}{175}\\times{100}=-28.75[\/latex]<\/p>\r\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{percent change in price}=\\frac{2.20-2.00}{(2.00+2.20)\\div{2}}\\times{100}=\\frac{.20}{2.10}\\times{100}=9.52[\/latex]<\/p>\r\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{Price Elasticity of Demand}=\\frac{-28.75\\text{ percent}}{9.52\\text{ percent}}=-3[\/latex]<\/p>\r\nWhen the absolute value of the price elasticity is &gt; 1, the demand\u00a0is elastic. In this example, the demand for cookies\u00a0is elastic.\r\n\r\nWhat impact does this have on Helen's objective to increase revenue? It's not pretty.\r\n<p style=\"padding-left: 30px;\">Price 1: 200 cookies sold x $2.00 per cookie = $400<\/p>\r\n<p style=\"padding-left: 30px;\">Price 2: 150 cookies sold x $2.20 = $330<\/p>\r\nShe is earning less revenue because of the price change. What should Helen\u00a0do next? She has learned that a small change in price leads to a large change in demand. What if she lowered the price slightly from her original $2.00 price? If the pattern holds, then a small reduction in price will lead to a large increase in sales. That would give her\u00a0a much more favorable result.\r\n\r\n<\/div>\r\n<div class=\"textbox tryit\">\r\n<h3>Try It<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/7167\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/7168\r\n\r\n<\/div>\r\n<div class=\"textbox tryit\">\r\n<h3>Try It<\/h3>\r\nThese questions allow you to get as much practice as you need, as you can click the link at the top of the first question (\u201cTry another version of these questions\u201d) to get a new set of questions. Practice until you feel comfortable doing the questions.\r\n\r\n[ohm_question]152047-152048-152049[\/ohm_question]\r\n\r\n<\/div>\r\n<div class=\"textbox learning-objectives\">\r\n<h3>Glossary<\/h3>\r\n[glossary-page][glossary-term]Total revenue:\u00a0[\/glossary-term]\r\n[glossary-definition]the price of an item multiplied by the number of units\u00a0sold: TR = P x Qd [\/glossary-definition][\/glossary-page]\r\n\r\n<\/div>\r\n&nbsp;","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Objectives<\/h3>\n<ul>\n<li>Explain how differences in elasticity affect total revenue<\/li>\n<\/ul>\n<\/div>\n<h2>Total Revenue and Elasticity of Demand<\/h2>\n<p>Studying elasticities is useful for a number of reasons, pricing being the most important. Imagine that a band on tour is playing in an indoor arena with 15,000 seats. To keep this example simple, assume that the band keeps all the money from ticket sales. Assume further that the band pays the costs for its appearance, but that these costs, like travel, setting up the stage, and so on, are the same regardless of how many people are in the audience. Finally, assume that all the tickets have the same price. (The same insights apply if ticket prices are more expensive for some seats than for others, but the calculations become more complicated.) The band knows that it faces a downward-sloping demand curve; that is, if the band raises the price of tickets, it will sell fewer tickets. How should the band set the price for tickets to bring in the most total revenue, which in this example, because costs are fixed, will also mean the highest profits for the band? Should the band sell more tickets at a lower price or fewer tickets at a higher price?<\/p>\n<p>The key concept in thinking about collecting the most revenue is the price elasticity of demand. <strong>Total revenue<\/strong> is price times the quantity of tickets sold (TR = P x Qd). Imagine that the band starts off thinking about a certain price, which will result in the sale of a certain quantity of tickets. The three possibilities are laid out in Table 1. If demand is elastic at that price level, then the band should cut the price, because the percentage drop in price will result in an even larger percentage increase in the quantity sold\u2014thus raising total revenue. However, if demand is inelastic at that original quantity level, then the band should raise the price of tickets, because a certain percentage increase in price will result in a smaller percentage decrease in the quantity sold\u2014and total revenue will rise. If demand has a unitary elasticity at that quantity, then a moderate percentage change in the price will be offset by an equal percentage change in quantity\u2014so the band will earn the same revenue whether it (moderately) increases or decreases the price of tickets.<\/p>\n<table>\n<tbody>\n<tr>\n<td colspan=\"3\"><strong>Table 1. Price Elasticity of Demand<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>If demand is . . .<\/strong><\/td>\n<td><strong>Then . . .<\/strong><\/td>\n<td><strong>Therefore . . .<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Elastic<\/td>\n<td>% change in Qd is greater than\u00a0% change in P<\/td>\n<td>\n<ul>\n<li>A given % rise in P will be more than offset by a larger % fall in Q so that total revenue (P times\u00a0Q) falls.<\/li>\n<li>A given % fall in P will be more than offset by a larger rise in Q so that total revenue (P times Q) rises.<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<tr>\n<td>Unitary<\/td>\n<td>% change in Qd is equal to % change in P<\/td>\n<td>\n<ul>\n<li>A given % rise or fall in P will be exactly offset by an equal % fall in Q so that total revenue (P times Q) is unchanged.<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<tr>\n<td>Inelastic<\/td>\n<td>% change in Qd is less than % change in P<\/td>\n<td>\n<ul>\n<li>A given % rise in P will cause a smaller % fall in Q so that total revenue (P times Q) rises.<\/li>\n<li>A given % fall in P\u00a0will cause a smaller % rise in Q so that total revenue (P times Q) falls.<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>If demand is elastic at a given\u00a0price level, then should a company cut its price, the percentage drop in price will result in an even larger percentage increase in the quantity sold\u2014thus raising total revenue. However, if demand is inelastic at the original quantity level, then should the company raise its\u00a0prices, the\u00a0percentage increase in price will result in a smaller percentage decrease in the quantity sold\u2014and total revenue will rise.<\/p>\n<p>Let&#8217;s explore some specific examples.\u00a0In both cases we\u00a0will\u00a0answer the following questions:<\/p>\n<ol>\n<li>How much\u00a0of an impact do we think\u00a0a price change will have on demand?<\/li>\n<li>How would we calculate the elasticity, and does it confirm our assumption?<\/li>\n<li>What impact does the elasticity have on total revenue?<\/li>\n<\/ol>\n<div class=\"textbox exercises\">\n<h3>Example 1: The Student Parking Permit<\/h3>\n<div id=\"attachment_7066\" style=\"width: 310px\" class=\"wp-caption alignright\"><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/345\/2017\/02\/10195646\/rent-a-car-664986_1920-1024x768.jpg\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-7066\" class=\"wp-image-7066 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/01025118\/rent-a-car-664986_1920-1024x768-300x225.jpg\" alt=\"Cars packed tightly in a parking lot.\" width=\"300\" height=\"225\" \/><\/a><\/p>\n<p id=\"caption-attachment-7066\" class=\"wp-caption-text\"><strong>Figure 1<\/strong>. Parking is often a hot commodity on campus.<\/p>\n<\/div>\n<p>How elastic is the demand for student parking passes at your institution?<\/p>\n<p>The answer to that question likely varies based on the profile of your institution, but we are going to explore a particular example.\u00a0Let&#8217;s consider a community college campus where all of the students commute to class. Required courses are spread throughout the day and the evening, and most of the classes require classroom attendance (rather than online participation). There is a reasonable public transportation system with busses coming to and leaving campus from several lines, but the majority of students drive to campus. A student parking permit costs $40 per term. As the parking lots become\u00a0increasingly congested, the college considers raising the price of the parking passes in hopes that it will encourage more students to carpool or to take the bus.<\/p>\n<p>If the college increases the price of a parking permit from $40 to $48,\u00a0how many\u00a0fewer students will buy parking permits?<\/p>\n<p>If you think\u00a0that the change in price will cause many students to decide not to buy a permit, then you are suggesting that the demand is elastic\u2014the students are quite sensitive to price changes. If you think\u00a0that the change in price will not impact student permit purchases much, then you are suggesting that the demand is inelastic\u2014student\u00a0demand for permits is\u00a0insensitive to price changes.<\/p>\n<p>In this case, we can all argue that students are very sensitive to increases in costs <em>in general<\/em>, but the determining factor in their demand for parking permits is more likely to be the quality of alternative solutions. If the bus service does not allow students to travel between home, school, and work in a reasonable amount of time, many students will resort\u00a0to buying a parking permit, even at the higher price. Because students don&#8217;t generally have extra money, they may grumble about a price increase, but many will still have to pay.<\/p>\n<p>Let&#8217;s add some num<span style=\"color: #333333;\">bers and test our thinking. The college implements the proposed increase of $8, taking the new price to $48.\u00a0Last year the college sold 12,800 student parking passes. This year, at the new price, the college sells 11,520 parking passes.\u00a0<\/span><\/p>\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{percent change in quantity}=\\frac{11,520-12,800}{(11,520+12,800)\\div{2}}\\times{100}=\\frac{-1280}{12160}\\times{100}=-10.53[\/latex]<\/p>\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{percent change in price}=\\frac{48-40}{(48+40)\\div{2}}\\times{100}=\\frac{8}{44}\\times{100}=18.18[\/latex]<\/p>\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{Price Elasticity of Demand}=\\frac{-10.53\\text{ percent}}{18.18\\text{ percent}}=-.58[\/latex]<\/p>\n<p><span style=\"color: #333333;\">First, looking only at the percent change in quantity and the percent change in price we know\u00a0that an 18% change in price will resulted in an 11% change in demand. In other words, a large change in price created a comparatively smaller change in demand. We can also see that the elasticity is 0.58. When the absolute value of the price elasticity is &lt; 1, the demand\u00a0is inelastic. In this example, student demand for parking permits is inelastic.<\/span><\/p>\n<p>What impact does the price change have on the college and their goals for students? First, there are 1,280 fewer cars taking up\u00a0parking places. If all of those students are using alternative transportation to get to school and this change has relieved parking-capacity issues, then the college may\u00a0have achieved its goals. However, there&#8217;s more to the story: the price change also has an effect on the college&#8217;s revenue, as we can see below:<\/p>\n<p style=\"padding-left: 30px;\">Year 1: 12,800 parking permits sold x $40 per permit = $512,000<\/p>\n<p style=\"padding-left: 30px;\">Year 2: 11,520 parking permits sold x $48 per permit = $552,960<\/p>\n<p>The college earned an additional $40,960 in revenue. Perhaps this can be used to expand parking or address other student transportation issues.<\/p>\n<p>In this case, student demand for parking permits is inelastic. A significant change in price leads to a comparatively smaller change in demand. The result is lower sales of parking passes but more revenue.<\/p>\n<p>Note: If you attend an institution that offers courses completely or largely online, the price elasticity for parking permits might\u00a0be perfectly inelastic. Even if the institution gave away\u00a0parking permits, students might\u00a0not want them.<\/p>\n<\/div>\n<div class=\"textbox exercises\">\n<h3>Example 2: Helen&#8217;s Cookies<\/h3>\n<p>Have you been at the counter of a convenience store and seen<\/p>\n<div id=\"attachment_10874\" style=\"width: 310px\" class=\"wp-caption alignright\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-10874\" class=\"wp-image-10874 size-medium\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2043\/2017\/07\/09144443\/biscuits-406943_1920-300x197.jpg\" alt=\"Stacked rows of cookies.\" width=\"300\" height=\"197\" \/><\/p>\n<p id=\"caption-attachment-10874\" class=\"wp-caption-text\"><strong>Figure 2.<\/strong> Would a small raise in price deter you from a cookie?<\/p>\n<\/div>\n<p>cookies for sale on the counter? In this example we are going to consider a baker, Helen, who bakes these cookies and sells them for $2 each. The cookies are sold in a convenience store, which has several options on the counter that customers can choose as a last-minute impulse buy.\u00a0All of the impulse items range between $1 and $2 in price. In order to raise revenue, Helen decides to raise her price to $2.20.<\/p>\n<p>If Helen\u00a0increases the cookie price from $2.00 to $2.20\u2014a 10% increase\u2014will fewer customers buy cookies?<\/p>\n<p>If you think\u00a0that the change in price will cause many buyers to forego a cookie, then\u00a0you are suggesting that the demand is elastic, or that the buyers\u00a0are sensitive to price changes. If you think\u00a0that the change in price will not impact sales much, then you are suggesting that the demand for cookies\u00a0is inelastic, or insensitive to price changes.<\/p>\n<p>Let&#8217;s assume that this price change does impact customer behavior. Many customers choose a $1 chocolate bar or a $1.50 doughnut over the cookie, or they simply resist the temptation of the cookie at the higher price. Before we do any math, this assumption suggests that the demand for cookies is elastic.<\/p>\n<p>Adding in the numbers, we find that Helen&#8217;s\u00a0weekly sales drop from 200 cookies to 150 cookies. This is a 25% change in demand on account of\u00a0a 10% price increase. We immediately see that the change in demand is greater than the change in price. That means that demand is elastic. Let&#8217;s do the math.<\/p>\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{percent change in quantity}=\\frac{150-200}{(150+200)\\div{2}}\\times{100}=\\frac{-50}{175}\\times{100}=-28.75[\/latex]<\/p>\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{percent change in price}=\\frac{2.20-2.00}{(2.00+2.20)\\div{2}}\\times{100}=\\frac{.20}{2.10}\\times{100}=9.52[\/latex]<\/p>\n<p style=\"padding-left: 60px; text-align: left;\">[latex]\\displaystyle\\text{Price Elasticity of Demand}=\\frac{-28.75\\text{ percent}}{9.52\\text{ percent}}=-3[\/latex]<\/p>\n<p>When the absolute value of the price elasticity is &gt; 1, the demand\u00a0is elastic. In this example, the demand for cookies\u00a0is elastic.<\/p>\n<p>What impact does this have on Helen&#8217;s objective to increase revenue? It&#8217;s not pretty.<\/p>\n<p style=\"padding-left: 30px;\">Price 1: 200 cookies sold x $2.00 per cookie = $400<\/p>\n<p style=\"padding-left: 30px;\">Price 2: 150 cookies sold x $2.20 = $330<\/p>\n<p>She is earning less revenue because of the price change. What should Helen\u00a0do next? She has learned that a small change in price leads to a large change in demand. What if she lowered the price slightly from her original $2.00 price? If the pattern holds, then a small reduction in price will lead to a large increase in sales. That would give her\u00a0a much more favorable result.<\/p>\n<\/div>\n<div class=\"textbox tryit\">\n<h3>Try It<\/h3>\n<p>\t<iframe id=\"lumen_assessment_7167\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=7167&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_7167\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><br \/>\n\t<iframe id=\"lumen_assessment_7168\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=7168&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_7168\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<div class=\"textbox tryit\">\n<h3>Try It<\/h3>\n<p>These questions allow you to get as much practice as you need, as you can click the link at the top of the first question (\u201cTry another version of these questions\u201d) to get a new set of questions. Practice until you feel comfortable doing the questions.<\/p>\n<p><iframe loading=\"lazy\" id=\"ohm152047\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=152047-152048-152049&theme=oea&iframe_resize_id=ohm152047&show_question_numbers\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n<div class=\"textbox learning-objectives\">\n<h3>Glossary<\/h3>\n<div class=\"titlepage\">\n<dl>\n<dt>Total revenue:\u00a0<\/dt>\n<dd>the price of an item multiplied by the number of units\u00a0sold: TR = P x Qd <\/dd>\n<\/dl>\n<\/div>\n<\/div>\n<p>&nbsp;<\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4881\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Elasticity and Price Changes. <strong>Provided by<\/strong>: Lumen Learning. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/courses.candelalearning.com\/marketingxwaymakerxspring2016\/chapter\/reading-elasticity-and-price-changes\/\">https:\/\/courses.candelalearning.com\/marketingxwaymakerxspring2016\/chapter\/reading-elasticity-and-price-changes\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Elasticity and Pricing. <strong>Authored by<\/strong>: OpenStax College. <strong>Provided by<\/strong>: Rice University. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:bt3KwPgz@3\/Elasticity-and-Pricing\">https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:bt3KwPgz@3\/Elasticity-and-Pricing<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em>. <strong>License Terms<\/strong>: Download for free at http:\/\/cnx.org\/content\/col11627\/latest<\/li><li>Parking Lot. <strong>Provided by<\/strong>: Pixabay. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/en\/rent-a-car-automobiles-parking-lot-664986\/\">https:\/\/pixabay.com\/en\/rent-a-car-automobiles-parking-lot-664986\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><li>cookies. <strong>Authored by<\/strong>: Life of Pix. <strong>Provided by<\/strong>: Pixabay. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/en\/biscuits-cookies-crackers-belgium-406943\/\">https:\/\/pixabay.com\/en\/biscuits-cookies-crackers-belgium-406943\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":29,"menu_order":14,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Elasticity and Pricing\",\"author\":\"OpenStax College\",\"organization\":\"Rice University\",\"url\":\"https:\/\/cnx.org\/contents\/vEmOH-_p@4.44:bt3KwPgz@3\/Elasticity-and-Pricing\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"Download for free at http:\/\/cnx.org\/content\/col11627\/latest\"},{\"type\":\"original\",\"description\":\"Elasticity and Price Changes\",\"author\":\"\",\"organization\":\"Lumen Learning\",\"url\":\"https:\/\/courses.candelalearning.com\/marketingxwaymakerxspring2016\/chapter\/reading-elasticity-and-price-changes\/\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Parking Lot\",\"author\":\"\",\"organization\":\"Pixabay\",\"url\":\"https:\/\/pixabay.com\/en\/rent-a-car-automobiles-parking-lot-664986\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"cookies\",\"author\":\"Life of Pix\",\"organization\":\"Pixabay\",\"url\":\"https:\/\/pixabay.com\/en\/biscuits-cookies-crackers-belgium-406943\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"0f5a8a2a-e18a-43b0-a786-99d9ca595fe8, 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