Analyzing Elasticity_Brown,LaVern

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1 Analyzing Elasticity LaVern Brown Indiana Wesleyan University ECON-510-01: Economic Analysis for Managers Professor Oladele Omosegbon January 29, 2024

2 Analyzing Elasticity The Midpoints formula for price elasticity (Ep) is calculated using the following formula: Ep=(P2−P1)/(2(P2+P1))(Q2−Q1)/(2(Q2+Q1) I will be applying the formula using the provided values:  Initial Quantity (Q ): 600 units ₁  Final Quantity (Q ): 300 units ₂  Initial Price (P ): $150 ₁  Final Price (P ): $275 ₂ Ep= (275−150)/(2(275+150))(300−600)/(2(300+600)) Ep=125/212.5−300/450 Ep=−0.6667 Therefore, the coefficient of price elasticity (Ep) for Smitty’s sales of glass block windows, calculated using the Midpoints formula, is -0.6667. The negative sign indicates that the good is elastic, meaning the quantity demanded is responsive to changes in price. The coefficient of price elasticity (Ep) for Smitty’s sales of glass block windows is - 0.6667. Since the calculated value of ∣ Ep ∣ is greater than 1, the demand for Smitty’s glass block windows is considered elastic. In practical terms, this means that the quantity demanded for the glass block windows is relatively more responsive to changes in price. If Smitty were to increase the price further, it could result in a proportionately larger decrease in the quantity demanded. Therefore, Smitty’s window sales are elastic.

3 Given that the demand for Smitty’s glass block windows is elastic with a calculated price elasticity coefficient Ep of -0.6667, where ∣ Ep ∣ >1, Smitty should exercise caution when considering further price increases. In an elastic market, a price increase is likely to lead to a proportionately larger decrease in the quantity demanded. Customers are more responsive to price changes, and raising prices could result in a noticeable reduction in sales. While higher prices may contribute to increased revenue per unit sold, the potential decrease in the number of units sold could offset these gains. Smitty needs to carefully weigh the impact of price increases on total revenue. Smitty should also consider the pricing strategies of competitors. If other suppliers offer similar products at a more competitive price, customers might be more inclined to switch, further impacting Smitty’s sales. Excessive or frequent price increases may lead to negative perceptions among customers, affecting brand loyalty. Smitty should assess how pricing changes may impact the overall customer experience and satisfaction. Smitty should also evaluate broader market conditions, including the economic environment and consumer purchasing power. External factors can influence how customers respond to price changes. The Midpoints formula for price elasticity is given by: Ep=(P2−P1)/(2(P2+P1))(Q2−Q1)/(2(Q2+Q1) So I incorporated the formula again with the values below.  Initial Quantity (Q ): 600 units ₁  Final Quantity (Q ): 300 units ₂

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4  Initial Price (P ): $150 ₁  Final Price (P ): $275 ₂ Ep= (275−150)/(2(275+150))(300−600)/(2(300+600) Ep=125/212.5−300/450 Then Ep=0.5882−2/3 Results: Ep=−0.6667 Therefore, the complete derivation of the coefficient of price elasticity is Ep=−0.6667. The negative sign indicates elasticity, and the magnitude (absolute value) greater than 1 signifies that the demand is elastic.

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