1. Why does rent control result in a shortage of rental units. 2. How does price elasticity of demand affect how much of a tax is passed on to the consumer and how much is absorbed by the seller. Show the effect with graphs. 3. Why can monopolistic firms make economic profit in the short run bot not in the long run. Explain and show graphically. 4. Your brother-in-law wants to borrow $1000 from you but he has a fit when you tell him he will have to pay you the same interest on the loan that the bank gives you. Are you justified? Why or Why not? 5. During the 1930s Jewish fighters dominated boxing. From the around 1975 until the present, blacks have dominated basketball. Explain the cause(s) underlying these two situations. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University Demand and Revenue Management * © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CHAPTER 12 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Price, Sales, and Consumer ChoiceProfit Revenue minus costRevenue Depends on the customer Consumer behavior - making choices Choices reveal preferences If people spend money on something and not on something else Revealing their preferences * © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Price, Sales, and Consumer ChoiceLaw of demand The quantity of a good or service that is purchased Will decline as the price of that good or service rises Everything else unchanged * © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. ElasticityPrice elasticity of demand Magnitude by which consumers alter the quantity of some product they purchase In response ...

1. 1. Why does rent control result in a shortage of rental units.
2. How does price elasticity of demand affect how much of a tax
is passed on to the consumer and how much is absorbed by the
seller. Show the effect with graphs.
3. Why can monopolistic firms make economic profit in the
short run bot not in the long run. Explain and show graphically.
4. Your brother-in-law wants to borrow $1000 from you but he
has a fit when you tell him he will have to pay you the same
interest on the loan that the bank gives you. Are you justified?
Why or Why not?
5. During the 1930s Jewish fighters dominated boxing. From the
around 1975 until the present, blacks have dominated
basketball. Explain the cause(s) underlying these two situations.
PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
Demand and Revenue
Management
*
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copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.

2. CHAPTER 12
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copied, scanned, or duplicated, in whole or in part, except for
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or service or otherwise on a password-protected website for
classroom use.
Price, Sales, and Consumer ChoiceProfit
Revenue minus costRevenue
Depends on the customer Consumer behavior - making choices
Choices reveal preferences
If people spend money on something and not on something else
Revealing their preferences
*
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Price, Sales, and Consumer ChoiceLaw of demand
The quantity of a good or service that is purchased
Will decline as the price of that good or service rises
Everything else unchanged
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3. use as permitted in a license distributed with a certain product
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ElasticityPrice elasticity of demand
Magnitude by which consumers alter the quantity of some
product they purchase
In response to a change in the price of that productThe more
price-elastic demand is
The more responsive consumers are to a price change
*
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ElasticityPrice elasticity of demand
Percentage change in the quantity demanded of a product
Divided by the percentage change in the price of that producted
= %ΔQ / %ΔP
%ΔQ = percentage change in quantity demanded

4. %ΔP = percentage change in price
*
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ElasticityPrice elasticity of demand
If between -1 and - ∞: elastic demand
If = -1: unit elastic demand
If between -1 and 0: inelastic demand Demand curve
Illustrates the quantity of an item that will be purchased at each
price
Relationship between the price and quantity demanded of a
good or service
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5. ElasticityShape of a demand curve
Depends on the price elasticity of demandPerfectly elastic
demand curve
Horizontal line
Consumers can purchase any quantity they want at the single
prevailing price
Even the smallest price change
Consumers switch to the producer with the lowest price
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ElasticityPerfectly inelastic demand curve
Vertical line
Consumers cannot or will not change the quantity of a good
they purchase when the price of that good is changedDownward
sloping demand curve
The steeper – the less elastic
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6. copied, scanned, or duplicated, in whole or in part, except for
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Figure 12.1
The demand curve is a graphic relationship between quantity
demanded and price. The graph is drawn with price on the
vertical axis and quantity on the horizontal axis. (a) Perfectly
elastic demand: Demand is so sensitive to price that even an
infinitesimal change leads to a total change in quantity
demanded. (b) Perfectly inelastic demand: The quantity
demanded is the same no matter the price. Demand is
completely insensitive to price. (c) Alternative demand curves:
and D2 represents straight downward-sloping demand curves.
D2 is said to be more elastic than D1 because at every single
price the elasticity of demand is higher at D2 than D1.
Demand Curves
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ElasticityPrice Elasticity and Revenue
Total revenue, TR = P × Q

7. Dollar value of sales
Price of a product multiplied by the quantity sold As price is
increased, total revenue:
Increases if demand is inelastic
Decreases if demand is elastic
Does not change if demand is unit-elastic
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ElasticityElasticity of demand depends on
How many substitutes and how good of substitutes they are
More substitutes – more elastic demand
Commoditization – price elasticity of demand is very large
Period over which we measure the price elasticity
Longer – more elastic demand
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8. classroom use.
Figure 12.2
Demand is perfectly elastic for Demand1. The firm cannot
charge more without losing all of its customers because the
product is a commodity—there are many perfect substitutes.
The firm undertakes an advertising campaign to change the
image of the product. If successful, consumers begin to think
the product is not a commodity, that there are not lots of perfect
substitutes. The demand curve then becomes steeper, as with
Demand2.
Changing Price Elasticity
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Business Insight
Price Elasticity of Demand for GasolinePrice elasticity of
demand for gasoline, US
Over a period of one year or less = −0.26
10% hike in the price of gasoline lowers quantity demanded by
2.6%
Long-run = −0.58

9. 10% hike in gasoline causes quantity demanded to decline by
5.8%
*
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Business Insight
Price Elasticity of Demand for Gasoline10% increase in
real price of fuel
Volume of traffic decline
By 1% within a year
By 3% in longer run (5 years)
Volume of fuel consumed decreases
By 2.5% within a year
By 6% in the longer run
Efficiency of use of fuel increases
By 1.5% within a year
By 4% in the longer run
*
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10. copied, scanned, or duplicated, in whole or in part, except for
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Other Demand ElasticitiesOther elasticity measures
Income elasticity of demand
Cross price elasticity of demand
Advertising elasticity
Promotion elasticity
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Figure 12.3
The demand curve is a relation between price and quantity
demanded, everything else held constant. The things held
constant are income, advertising, expectations, tastes,
preference, and anything else that could affect demand. When
one of these changes, the demand curve shifts. For instance,
Demand2 represents demand following an increased income.
The distance the demand curve shifts is reflective of the income
elasticity of demand.
Changes Other than Price

11. *
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Other Demand ElasticitiesU.S. economy
Has grown over the years
The growth has not been at a steady paceBusiness cycles
Upswing in business activity
Incomes are growing
Sales of many products are rising
Downswing
Incomes are not rising
Sales may be declining
*
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12. Figure 12.4
The real output or GDP of the U.S. economy each year is
pictured. The picture points out two things: The total output has
grown over the years, and the growth has not been a steady rise.
Economic Growth and the Business Cycle
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Figure 12.5
Taking out the growth part of Figure 12.4 leaves just the cycles.
Business Cycle
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13. Other Demand ElasticitiesIncome Elasticity of Demand
Responsiveness of consumer purchases to income changes
Percentage change in demand
Divided by the percentage change in income
Everything else held constant
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Other Demand ElasticitiesLuxury good
Very high income elasticity (>1.0)
1% increase in income will lead to a greater than 1% rise in
demand
As long as the economy is growing
And incomes are rising
Sales are rising
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Other Demand ElasticitiesNormal good
Positive but <1 income elasticity
As income rises, demand rises
Cyclical goodsInferior good
Negative income elasticity
As income rises, demand falls
Countercyclical goods
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Other Demand ElasticitiesComplements
Items used together Substitutes
Items used in place of each otherCross elasticity of demand
Measures whether goods and services are complements or
substitutes
*
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Other Demand ElasticitiesCross elasticity of demand
Percentage change in demand of one good
Divided by the percentage change in the price of a related good
Close substitutes: high positive cross elasticities
Complements: negative cross-price elasticities
Unrelated goods: zero cross-price elasticity
*
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Elasticity EstimatesComputer technology
Much better information about customers and the elasticities of
demand
Enabling many “low-margin” industries to improve their
margins
By knowing their customers better
Firms are increasing profits because they better understand the

16. customer
*
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Elasticity EstimatesElasticity models
Daily evaluation of pricing factors
Site by site
That are stored on a running database
Historical price, volume, and competitive data
Continual fine-tuning accomplished through daily data updates
*
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Elasticity EstimatesGasoline - typical elasticity estimates

17. For a single retailer
According to the pricing company MPSI Systems Inc.
6 for regular
4.5 for mid-grade
3 for premium
*
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Melissa Buehrlen
Business Economics
Instructor Somers
06/03/2013
Business Economics: Chp. 12
Directions: Answer all seven (7) questions; underneath all the
questions already listed. Use this document to answer the
following questions. Do not type a separate word document to
answer the following questions. Answer using complete
sentences and explain.
1.) For each of the following pairs of goods or services, identify
the one for which the price elasticity of demand is greater and
explain why.
· Coffee/Starbucks coffee.
· Tuition at a public university/tuition at a private university.
· Emergency room medical services/annual physical exam.
· Movies in the afternoon/movies at night.

18. · Prescription medicine/over the counter medicine.
2.) Although water is essential to life no matter where one lives,
the demand for water differs across regions. In one study, it
was found that the price elasticity of demand for water in all
regions of the United States ranged from 0.39 to 0.69.
a.) Why is the demand for water price-inelastic?
b.) In those regions where outdoor use of water makes up
relatively large portion of total use, the price elasticity is high.
Why?
c.) The demand for water in the summer months is greater than
in the winter months. Explain why.
3.) The income elasticity of demand for automobiles in the
United States was estimated by a government agency to be
between 2.5 and 3.9.
a.) What does this mean?
b.) If incomes rise by 10 percent, what happens to the purchase
of automobiles?
4.) Explain why the demand curve is a horizontal line in the
situation called perfect competition.
5.) The demand curve slopes downward. Explain.
6.) What would happen to the demand curve in each of the
following cases:
a.) Income rises.
b.) The number of customer rises.
c.) The number of substitutes increases.
d.) People expect that the price of the good will decline in the
near future.

19. e.) People expect that the price of the good will rise in the near
future.
7.) Using elasticity, explain what “market power” means.