Question

Video on How would Markets Respond to Zombie

Respond to the questions

1.Should a business owner lower the prices if they want to generate additional revenue? Explain and provide an example. (use different example than in the video).

2. How do we measure elasticity?

3. If the absolute value of the elasticity of demand is less than 1, would you rise the price or lower the price? Provide an example (different than in the video)

4. After watching Zombies clip- what economics concepts were you thinking about? Give an example.

Answer 1

Since the video clip is not there. But we can provide the answers to your question because these are direct questions.

Ans 1: It is not always necessary to lower the price in order to raise the total revenue. It depends upon the elasticity of demand for a product. There exists a relation between elasticity of demand and total revenue, which is given below:

• When elasticity of demand is elastic (more than 1), then in this case, if the firm lower the price of product by small amount, the quantity demanded will rise by more amount, so that total revenue rises in this case.

Example: Consider the demand for potatoes. Its demand is elastic (more than 1).

Initial price = $10, quantity demanded = 50 units. Total Revenue = $500

New price = $8, quantity demanded = 100 units. Total Revenue = $$800

• When elasticity of demand is inelastic (less than 1), then in this case, if the firm lower the price of a product by large amount, the quantity demanded will rise by very small amount, so that total revenue falls in this case.

Example: Consider the demand for t-shirts. Its demand is inelastic (less than 1).

Initial price = $40, quantity demanded = 200 units. Total Revenue = $8,000

New price = $20, quantity demanded = 350 units. Total Revenue = $7,000

• When elasticity of demand is unit elastic (e=1), then in this case, if the firm lower the price by some amount, the quantity demanded will rise by the same amount, so that the total revenue remains same, constant in this case.

Example: Consider the demand for jeans. Its demand is unit elastic (equal to 1).

Initial price = $50, quantity demanded = 200 units. Total Revenue = $10,000

New price = $25, quantity demanded = 400 units. Total Revenue = $10,000

Ans 2: The formula for measuring elasticity of demand: % change in quantity demanded for a product / % change in price of the product.

The elasticity of demand is the degree of responsiveness to change in quantity demanded due to change in its own price of the product.

Ans 3: If the elasticity of demand is less than 1, means inelastic, so we would raise the price by large amount, so that quantity demand falls by less amount, and the total revenue rises in this case.

Example: Consider the demand for milk. Its demand is inelastic (less than 1).

Initial price = $10, quantity demanded = 100 units. Total Revenue = $1,000

New price = $12, quantity demanded = 95 units. Total Revenue = $1,140

Ans 4: Since the video clip is not available, so it is difficult to answer this question. However, it seems that the video is trying to provide the relation between elasticity of demand and total revenue.