Chapter 4

Using the Elasticity Shortcut

In This Chapter

arrow Grasping the basics of elasticity

arrow Understanding and calculating quantity demanded changes

arrow Identifying the effect of price changes on revenue

arrow Examining how income, other goods’ prices, and advertising influence demand

This chapter brings you up to speed on the concept of elasticity and how it works. It explains how elasticity determines a business’s revenue side and tells you what price to charge, how much advertising to do, and how changes in other prices or income affect your sales. If you remember only one concept in managerial economics, elasticity is it. The fact that a single concept provides all this information makes it magical. Calculating an elasticity value is like pulling a rabbit out of a hat; one number tells nearly everything to the amazement of those watching (your coworkers). And when you combine elasticity and revenue information with production costs, you can determine how the firm will maximize its profit.

Using Elasticity Is The Key to Flexibility

The law of demand states that increasing a good’s price reduces ...

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