Inelastic & Elastic Deman Curves

[moeshiznit]

Why is it that a profit-maximizing businessman would always raise prices when facing an inelastic demand curve, but might or might not raise prices when facing an elastic demand curve?

What do ya'll think?

 

[eagleseven]

The more elastic the curve, the more sensitive the market is to price.

If the market is elastic, a change in prices will dramatically change demand (think groceries). If the market is inelastic, a change in prices will barely change demand (think automobiles).

This is why a businessman will often offer a discount on eggs, but rarely on BMWs.

 

[The Rabbi]

What Eagleseven said.

 

[☭proletarian☭]

?

Clarification request.

 

[☭proletarian☭]

The more elastic the curve, the more sensitive the market is to price.

If the market is elastic, a change in prices will dramatically change demand (think groceries). If the market is inelastic, a change in prices will barely change demand (think automobiles).

This is why a businessman will often offer a discount on eggs, but rarely on BMWs.

Explain these curves, what the represent, and what is meant by their flexibility.

 

[eagleseven]

Explain these curves, what the represent, and what is meant by their flexibility.

Neoclassical Microeconomics:

The demand curve represents the demand for a given good at a range of prices in an economy, and elasticity refers to the rate of change of this curve.


In math-speak, the demand curve is an aggregate, and its elasticity is the first derivative.

 

[☭proletarian☭]

Oh... demand...

and here I though Deman was some guy....

Demand makes a lot more sense...

So, basically, it's the demand for goods at a given cost to the consumer?

Higher flexibility: more people will purchase more of the goods if the cost is reduced

Lower flexibility: The demand for a good remains relatively constant unless the change in cost is severe.

?


Question about your example, though: Shouldn't the demand for BMWs also increase with a reduction in cost, since the main reason they sell in such low numbers is their higher cost compared to other vehicles? The overall demand for motorvehicles might remain unchanged, but the demand for a given line of vehicals would be influenced by the consumer cost of that line, no?


Wouldn't it be eggs that would actually be the other way 'round, as the over demand for eggs (more or less a staple food) would remain about the same. Sales, of course, would be influenced, but only because they effect the supply side of the supply/demand interplay.

So wouldn't it make more sense to lower the price on the BMWs, selling more at a lower profit margin, than the eggs, which are of a nature that demand is likely to stay high, even with an increase in consumer cost (within reason) across the entire market?

 

[eagleseven]

Oh... demand...

and here I though Deman was some guy....

Demand makes a lot more sense...

Most people's eyes glaze over when discussing the dismal science, don't worry...

 

[☭proletarian☭]

Of course, this'd be more true of true staples such as rice and grain, though eggs should also experience a similar effect, yes?

 

[eagleseven]

Of course, this'd be more true of true staples such as rice and grain, though eggs should also experience a similar effect, yes?

If you're interested, the US Government maintains databases of demand elasticities for almost every good in our economy, and many others. Businessmen and consultants use this data to aid companies in pricing their goods.

Commodity and Food Elasticities: Demand Elasticities from Literature

 

[Baruch Menachem]

Commodity prices are very elastic. You can shop around for the same good and get a better price.

Brand names are a way for a businessman to move his elasticiy curve and almost make a monopoly.

A purse is an elastic commodity item, a louis Vitton handbag dosnt suffer substitution effects.

So a four passenger car can have a more elastic price if you are willing to settle for a Korean job, because a car is just transportation and marginal cost=marginal revenue. When you are talking brand name like BMW, you essentially wind up paying 20,000 for a radiator cap.

 

[eagleseven]

Question about your example, though: Shouldn't the demand for BMWs also increase with a reduction in cost, since the main reason they sell in such low numbers is their higher cost compared to other vehicles? The overall demand for motorvehicles might remain unchanged, but the demand for a given line of vehicals would be influenced by the consumer cost of that line, no?

The elasticity of the demand curve changes with the price...ie the second derivative. Elasticity isn't constant, but businessmen who manage to maintain a high elasticity make billions (Bill Gates and Steve Jobs, for example)

Take two situations for the BMW:

1. BMWs cost $500,000 per unit.

2. BMWs cost $5,000 per unit.

In situation #1, increasing the price of the BMW by $5,000 will not change demand, as people who can afford $500k, can afford $505k. The BMW in that range is inelastic.

In situation #2, that same $5,000 increase will dramatically change demand, for obvious reasons. At this lower price, the market is far more elastic.




The natural elasticity of a good depends upon the settled market price, and the nature of the good. Essentials tend to be highly inelastic, while luxuries tend to be elastic. We may pass up on that $10 gallon of soda, but we won't pass up that $10 gallon of gas.

Wouldn't it be eggs that would actually be the other way 'round, as the over demand for eggs (more or less a staple food) would remain about the same. Sales, of course, would be influenced, but only because they effect the supply side of the supply/demand interplay.

So wouldn't it make more sense to lower the price on the BMWs, selling more at a lower profit margin, than the eggs, which are of a nature that demand is likely to stay high, even with an increase in consumer cost (within reason) across the entire market?

The problem is, that eggs are not a necessity. If a eggs went from $1.50 a dozen, to $15.00 a dozen, people would stop buying them (including me).

When I say necessity above, I mean goods that are absolutely essential to our survival. Gasoline is an excellent example, because our economy would crash if we ran out of gasoline. Clean water is another example, in that we'll pay anything to avoid dying of thirst.

Though food is essential, there are far too many substitutes for the market to be inelastic. If eggs are too expensive, buy a cheaper food!

 

[uscitizen]

The more elastic the curve, the more sensitive the market is to price.

If the market is elastic, a change in prices will dramatically change demand (think groceries). If the market is inelastic, a change in prices will barely change demand (think automobiles).

This is why a businessman will often offer a discount on eggs, but rarely on BMWs.

But competitors will offer a cheaper alternatives to a BMW.

Bowell Movement Workx

 

[eagleseven]

But competitors will offer a cheaper alternatives to a BMW.

Those in the market for luxury vehicles aren't interested in cheaper alternatives.

 

[☭proletarian☭]

Man, the last time I got into economics was when I cracked open Keynes' General theory. Less than twenty pages in, when he presented what sounded all too much like the Labour Theory of Value, I threw the book down, convinced the man was a fool. How anyone can follow any system that fails to recognize the subjective nature of value placed upon goods, services, and resources, I'll never understand.

I read a few books a long time ago that explained Ricardian and Neoclassical economics, but I didn't retain much of the details. Very tedious and too much of it is BLATANTLY WRONG ON THE FACE OF IT.

idK...


The only bits that made any sense when I was reading up on economic thought were Subjective Theory of Value and Austrian Business Cycle Theory. Too much of the neoclassical (or maybe it was classical?) struck me as classical liberal idealism, entirely too dependent on the honesty of the capitalist (something the last 200 or so years proved to not be the case).

 

[☭proletarian☭]

But competitors will offer a cheaper alternatives to a BMW.

Those in the market for luxury vehicles aren't interested in cheaper alternatives.

Status symbols, basically. Subjective value and all that. Like paying $250 for a pair of jeans that last half as long as a pair of Carhartts.

 

[eagleseven]

Man, the last time I got into economics was when I cracked open Keynes' General theory. Less than twenty pages in, when he presented what sounded all too much like the Labour Theory of Value, I threw the book down, convinced the man was a fool. How anyone can follow any system that fails to recognize the subjective nature of value placed upon goods, services, and resources, I'll never understand.

Keynes never liked dealing with the details, which is why he pioneered macroeconomics. He approached the economy from the perspective of the central planner, not from the individual actors.

I read a few books a long time ago that explained Ricardian and Neoclassical economics, but I didn't retain much of the details. Very tedious and too much of it is BLATANTLY WRONG ON THE FACE OF IT.

The fundamental flaw of classical economics is that it assumes that all market actors are logical, so they readily fit mathematical models. Humans aren't very logical, especially with money.

The Austrians argue that human psychology is too complex to fit into neat models, and so approach economics from a philosophical perspective. While this viewpoint offers amazing insights, it is lacking when it comes to developing concrete policies.

The person who can unite the Austrian school with Neoclassical models will likely win a Nobel Prize, and reform the field of economics.

The only bits that made any sense when I was reading up on economic thought were Subjective Theory of Value and Austrian Business Cycle Theory. Too much of the neoclassical (or maybe it was classical?) struck me as classical liberal idealism, entirely too dependent on the honesty of the capitalist (something the last 200 or so years proved to not be the case).

If you were reading classical economics, I can understand why you were so disgusted. More and more, Neoclassical economists are turning to the Austrian school to explain things the model cannot predict.

The Keynesians, however, are still telling the Austrians and the Neoclassical folk to go to hell.

 

[enigmablue]

When you consider elasticity then you are looking, in detail, at forces in the market place and those which influence the consumer. You can't sell where there's no perceive demand or need. Yeah ... it comes back, to a degree, to advertising. It's necessary to create a need to sell a product.

 

[☭proletarian☭]

Man, the last time I got into economics was when I cracked open Keynes' General theory. Less than twenty pages in, when he presented what sounded all too much like the Labour Theory of Value, I threw the book down, convinced the man was a fool. How anyone can follow any system that fails to recognize the subjective nature of value placed upon goods, services, and resources, I'll never understand.

Keynes never liked dealing with the details, which is why he pioneered macroeconomics. He approached the economy from the perspective of the central planner, not from the individual actors.

That explains so much about Keyensian practices...

I read a few books a long time ago that explained Ricardian and Neoclassical economics, but I didn't retain much of the details. Very tedious and too much of it is BLATANTLY WRONG ON THE FACE OF IT.

The fundamental flaw of classical economics is that it assumes that all market actors are logical, so they readily fit mathematical models. Humans aren't very logical, especially with money.

The Austrians argue that human psychology is too complex to fit into neat models, and so approach economics from a philosophical perspective. While this viewpoint offers amazing insights, it is lacking when it comes to developing concrete policies.
The person who can unite the Austrian school with Neoclassical models will likely win a Nobel Prize, and reform the field of economics.

'Unite'? Are not they two mutually exclusive things, based on their very natures?

 

[☭proletarian☭]

When you consider elasticity then you are looking, in detail, at forces in the market place and those which influence the consumer. You can't sell where there's no perceive demand or need. Yeah ... it comes back, to a degree, to advertising. It's necessary to create a need to sell a product.

So you get into treating economics as a matter largely dealing with human psychology? Isn't that about where the Austrian line of thinking comes into play?