Blog 4: Professor Jacob Hwang

Hello Students!

My name is Jacob Hwang and I will be your Applied Calculus professor for today. It has been my life long dream to become a professor of the great mathematics field. It is with my pleasure that I present to you the Price Elasticity of Demand.

Question:

• If a business wants to generate more revenue, should it raise the price of its product, or lower the price of its product? 
• Should a business increase or decrease prices in order to generate more revenue?

Answer: 

• It depends. Everything depends on the price sensitivity or elasticity of a certain good. 
• For example, if an electric company raised the prices of electricity, we would still need to pay it. However, if a lobster restaurant raised the prices of their dinner, people wouldn't want to spend the extra money.

Scenario:

• Before each purchase we make, we think to ourselves, "Is this item or product really worth the price?" 
• If it is, you'll buy it. If not, you won't. However, even if the product or item is expensive, if you really need it, you'll buy it no matter.
• This is essentially the idea behind the Price Elasticity of Demand. 

Definitions:

(Price) Elasticity of Demand measures the responsiveness of quantity demanded to a change in the product price.

Price Elasticity of Demand = % Change in Quantity Demanded/% Change in Price of the Good

                                          OR

E = [(p/q)] x [(Change in Quantity/Change in Price)]

But, WAIT! What do these numbers mean?

Essentially,

• When E < 1, demand is INELASTIC and revenue is increased by raising the price of an item
• When E > 1, demand is ELASTIC and revenue is increased by lowering the price of an item

Think about it this way. If a good is easily replaceable, you'll find that the demand of that replaceable good is usually elastic, meaning revenue is increased by lowering the price of an item. 

In general, finding the Price Elasticity of Demand can be very helpful to an organization to see what people readily buy at what price. For an organization, or a business, it can really show when you should lower or increase the price of an item to maximize revenue. 

Examples:

Elastic Goods: Luxury cars, Jewerly, Electronics, Designer Clothing

Inelastic Goods: Oil, Electricity, Metrofare, Water

Group Activity: 

Consider the following scenario:

If the Car Rental Service in Chicago, IL raises the price of renting their cars from $50 to $65 per day, this reduces their weekly sales from renting out 80 cars to 70 cars.

Given this information, 

A. Approximate the elasticity of demand for cars at a price of $50 per day.

B. Based on the results from part a, should Car Rental Service raise the price of their rooms? Explain why/why not?

_______________________________________________________________________________

Answer: 

A. .4167 = (50/80) * (10/15) 

B. Yes, the demand is inelastic because the elasticity of demand is below 1. Thus, revenue is increased by raising the price of renting the car. 

_______________________________________________________________________________

Think About it and Apply it!

At this point, please write down items and products that you think are elastic and inelastic that you use on a daily basis! Pick three for each category excluding the ones that I listed above. 

_______________________________________________________________________________

Answer:

Inelastic Goods: Medication, Bus fare, Food (in general) 

Elastic Goods: Coffe, Hamburgers, Televisions

________________________________________________________________________________

Game:

Match the following items to Elastic or Inelastic (Connect the items to respective category)

Louie Vuitton Handbag

Cigarettes

PlayStation 4      

Lobster/Crab                                                                                                 Elastic

Airplane Tickets

New MacBook                                                                                             Inelastic

Organic Fruit

Toothpaste

Water

_______________________________________________________________________________

I will not be providing you with the answers to the game above. There are some curveballs so watch out! 

If you made it this far, congratulations on your mastery of Price Elasticity of Demand! Now relay your knowledge to your fellow classmates and challenge each other! Here's a cookie!

https://www.youtube.com/watch?v=Pduf_fpshkU

This is a great resource to learn more about the Price Elasticity of Demand. It was made by Investopedia, a very well respected website that has loads of information on economics, finance, mathematics, and more.