Elasticity is a measure of responsiveness, in the case of price elasticity of demand. It is the responsiveness of demand of a commodity given the change in price. Also, it can be described as the percentage change in the value of quantity demanded due to a unit change in price. The responsiveness in change in price can either be elastic, inelastic or unit elastic. Elastic demand means that the unit change in quantity demanded is greater than the change in price while inelastic demand means the change in demand is lower than the change in price.

Based on the article “NFL Scrambles to Fill Seats,” the demand of the ticket sales is relatively price elastic as a change in price results to a higher level change in the demand of the commodity. According to the article, the ticket sales have fallen by 4.5% since 2007. At the same time watching the games from home has gotten cheaper and better such that the viewers maximize their utility by watching the games at home. Consequently, the ticket sales have increased from an average of $72.20 to $77.34 during last year. The costs associated with watching a game have also increased with beer costing $7.20, hot dog $4.77 and parking costs at $25.77.

Income Effect

If the income of an individual changes to a new income bracket, the individual’s demand for products reflects the change in income. The effects of a rise in income on demand depends on whether it is a necessity good, normal good, inferior good, or a luxury good. Attending NFL games can be described as consumption of a luxury or superior good. As such, the elasticity on the demand of the tickets will be greater than one. It means that the ticket sales will rise if the income of fans increases. However, if the income falls, the ticket sales will also fall since the fans have the option of watching the games at home, and also it is considered a luxury.

Wrigley Increasing Gum Prices

The agricultural products demand is rising hence increasing the costs of purchasing the products. In gum manufacturing some of the products are applied and this means that Wrigley is incurring high costs. As such, increasing the price of the gum may be the solution to the rising costs since the gum has price inelastic demand. As a result, the rise in the price of the gum will lead to a reduction in the demand of the gum. However, the reduction will be lower than the rise in the price. Hence, the company will see a rise in total revenue capable of cautioning the rise in costs.

Calculation of Profits

Joanne’s total revenue

total revenue= units sold* price per unit

TR= P*Q 

1000* 400= 400,000

Joanne Explicit costs

explicit costs= units sold* cost per unit

1000* 280= 280,000

Joanne’s accounting profit

total revenue- total explicit costs

$400,000- $280,000= $120,000

From the above calculations, Joanne is making $120,000 accounting profits from her investment in commuter service. However, the above calculations have left other costs that Joanne incurs. Joanne loses her yearly income of $29,000. Thus, this is an opportunity cost, which is forgone so that she can carry out her own business. In addition, she cashed in $40,000 in corporate bonds to start the business, this was the initial cost.

Joanne’s pure economic profits

total revenue - implicit costs- explicit costs

$400,000- $280,000-$29,000-$40,000

$51,000

Thus, Joanne makes an economic profit of $51,000

Inputs that are either Fixed or Variable in the Short Run

Input

Output

Meat

In

Hamburgers

Fire insurance

In

Dry cleaning

Tires

In

Automobiles

Property tax

For

Restaurants

Gasoline

In

Trucking

Depreciation

In

Boat Production

Meat is a key component in the making of hamburgers. As such, in the short run the amount of meat used in making the hamburgers will be fixed, since only fixed components are used in the short run.

The amount of money paid for fire dry cleaning insurance will be fixed in the short run because risks will be predetermined when paying for the insurance.

The automobile tires will be variable, as the use of the automobiles will determine the depreciation of the tires in use. Also, the automobiles have different requirement in tires depending on the size of the automobile.

Property tax for restaurants will be variable in the short run as the value of property tax is dependent on the value of property that the restaurant is operating from.

In the short run, gasoline will be variable as it will depend on the usage of the trucks. The price of gasoline is affected by demand and supply thus it changes frequently.

Depreciation in boat production will be variable in the short run as the depreciation will depend on a depreciation rate that might vary with time.

Why would suppliers be willing to accept prices that cover variable costs, but do not cover total costs?

A firm’s goal is either to maximize profit or minimize costs. To maximize the profits, the firm should operate in a way that makes marginal costs equal to marginal revenue. In addition, to minimize costs the firms evaluates the shut down options available. Suppliers are willing to accept prices that cover variable costs in order to minimize the costs that would be incurred in case of a shut down. Thus, a firm’s average variable cost is equal to the price so that it can continue its operations in the short term.

The above figure shows lose minimizing level of output. The shaded area shows the amount of loss that the firm is making. P1 is the output minimizing level for the firm.

Why All Businesses Do not Price Discriminate

Price discrimination is the selling of identical products at different prices. There are different forms of price discrimination. There is first degree, second degree, and third degree price discrimination. Firms use price discrimination so as to maximize profits depending on the preference of different consumers. However, for a firm to discriminate its prices it must make sure that middle men will not take advantage of the differences in price. Therefore, the firm must differentiate the markets and have immense information regarding the consumers. 

Monopolistically competitive firms charge different prices for their products and Oligopolies tend to all charge the same price?

The monopolistic and oligopolistic firms face imperfect competition. In monopoly, products are distinguished through branding, quality and location of the products. In the short run, these firms behave like monopolists. As a result, they are able to control the prices in the market. However, in the long run the market becomes very competitive and the firms become price takers. In case of oligopolistic competitive firms, there are few sellers in the market. As such, each firm is aware of the actions of the other firms. The actions of one firm will significantly impact the other firms. As a result, each firm has a kinked demand function, this means that if a firm increases its price the other firms will not follow. However, if a firm reduces prices, the others follow. Thus, the best option for these firms is to produce at a constant price.

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