Price elasticity describes how much the demand for a product or a service changes, if its price changes. Most entrepreneurs and executives want to charge the highest possible price for their product and service, without losing too many customers. Without knowing or at least assuming a price elasticity, you can never find the best price for your service and product.
- Price elasticity describes how much the demand…for a product or a services changes…if the price changes.…If a price change a huge impact on the demand,…we call this demand very elastic.…However, if a price change has little…or no impact on the demand,…such a demand would be considered inelastic.…Let's say you are a graphic designer…charging an average of $60 per hour.…If you bill 150 hours a month,…you will realize a total revenue of $9,000.…
Your fixed cost are $2,000,…so your gross profit is $7,000.…Your tax accountant tells you that you are too cheap…and you should increase your prices.…Well, since charges $120 an hour…and drives a very fancy car, let's consider her suggestion.…If you were to charge 10% more for your service,…would your business be more profitable,…or at the rate of $66 per hour will you lose customers?…So, here's the managerial decision you have to take.…
Are you keeping your fee at $60,…or are you raising it to $66?…In order to answer the question and figure out…which price leads to the higher profit,…
- What are customers buying? (demand theory)
- What should we produce? (production theory)
- Which costs do I need to worry about now? (cost theory)
- What market am I in? (competition theory)
- What should we charge for it? (pricing theory)
To understand what managerial economics looks like in practice, Stefan explains how Google's auction-based advertising system employs the principles of game theory and how understanding this can help decision makers to outmaneuver their competitors.
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- Using economics to solve business problems
- Understanding price elasticity
- Demand curve shifts
- Economics of scale vs. scope
- Break-even and what-if analysis
- Profit maximization
- Economics in action