In the real world, price elasticities depend on many factors. As a rule of thumb, you have a done a good job if the price elasticity of your product is closer to zero than highly negative. It means that your customers are rather loyal to your product and service and that you are able to charge a better price.
- In the real world,…price elasticities depend on many factors…like the switching costs of the customer.…Low switching costs indicate…that the customer can easily switch…from one supplier to another…and vice versa.…If it is difficult for me to change where I'm buying,…we consider the switching costs to be high.…Grocery shopping is a good example…of low switching costs.…A 5% price increase…that results in a 15% demand reduction…has a elasticity of minus three.…
The mathematical equation is…change in demand…divided by change in price…equals elasticity.…On the other hand,…if you spend hundreds of dollars on iTunes…for music and videos,…your costs to switch…to an android phones are significant.…An increase in price of 10%…that results in only a 2% demand reduction…has an elasticity of minus zero point two.…So, if it's very easy for the customer to switch suppliers,…demand is considered to be elastic,…which can be any number…between minus one and minus infinity.…
If it difficult for customers to switch suppliers,…the demand is considered to be inelastic,…
- 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.
Lynda.com is a PMI Registered Education Provider. This course qualifies for professional development units (PDUs). To view the activity and PDU details for this course, click here.
The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.
- 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