4/15/2023 0 Comments Elasty case![]() ![]() (For simplicity, we’ll assume that Henry’s mother buys all of the ingredients and gives them to him for free, so his costs are zero and do not change with the number of glasses he sells.) Suppose that on any given Saturday he sells ten glasses, so that his total revenue is $0.50 × 10 = $5.00. To illustrate the importance of a price elasticity of demand, consider a young boy, Henry, who sells lemonade on Saturdays for 50 cents a glass from a stand in his front yard in Austin, Texas. This type of elasticity, called the “price elasticity of demand,” is probably the most intuitive and readily accessible type, and so serves as the best introduction into the subject. ![]() In what follows below, we will emphasize the type of elasticity relevant to the first example given above, in which a manager wants to know how the quantity demanded of a product will change in response to a change in price. There are many different types of elasticities distinguished by the pair of variables that each one considers, but at their core they are all simply comparisons of how one thing changes in response to changes in another.īecause all elasticities perform the same function, just with different variables, focusing on one type allows us to reduce clutter and confusion while exploring how elasticities work and why they are useful. In economics, an elasticity is a measurement of the responsiveness of one variable to a change in another variable. ![]() These considerations and countless others you might imagine all involve how one change leads to other changes. A government considering an increase in tax rates needs to know how much the higher rates will shrink the tax base in order to determine whether the amount of revenue generated will rise or fall. If the firm sells several products, he will also need to consider how the change in one product’s price will affect the sales of the other products. For instance, in order for a firm’s manager to know whether he should lower the price on the firm’s product, he needs to have an idea of how many new customers will be attracted by the lower price. Knowing how some economic factors will react to a decision made regarding other economic factors is fundamental to figuring out what the best decisions are. Economics is all about determining what choices concerning resources, rules, time, and effort will lead to the best outcomes. ![]()
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