5.While reading the text match the questions to the answers.

• What is the relationship between elasticity and revenues?

• What are the determinants of demand elasticity?

• What is demand elasticity?

• How can we determineelasticity?

• How do we determine total expenditures? Why is it very important?

Text A

Why is Demand Important?

Fortunately, the concept of demand iseasy to understand because it involves onlytwo variables - the price and quantity of aspecific product at a given point in time.

So, when it comes to demand, there are twotypes of changes that can occur. When the price of a productchanges while all other factors remainthe same, we have a change in the quantitydemanded. Sometimes other factors changewhile the price remains the same -when this happens, we see a changein demand.

Only a change in price can cause a change in quantity demanded.When the price goes down, the quantity demanded increases. Whenthe price goes up, the quantity demanded decreases. Both changesappear as a movement along the demand curve.

Change in quantity demanded

Sometimes other factors change whilethe price remains the same. When this happens,people may decide to buy differentamounts of the product at the same price.This is known as a change in demand. Asa result, the entire demand curve shifts - tothe right to show an increase in demand, orto the left to show a decrease in demand.Therefore, a change in demandresults in anentirely new demand curve, while a changein quantity demandedis a movement alongthe original demand curve.Demand can change because ofchanges in the determinants of demand:consumer income, consumer tastes, theprice of related goods, expectations, andthe number of consumers.

Change in demand

1.________________________________Consumers react to a change in price bychanging the quantity demanded, althoughthe size of their reaction can vary. Thisresponse is known as demand elasticity -the extent to which a change in price causesa change in the quantity demanded. There are elastic, inelastic and unit elastic demand elasticity.

To estimate elasticity, it is useful to look atthe impact of a price change on total expenditures,or the amount that consumers spendon a product at a particular price. This issometimes called the total expenditures test.

2. ________________________________We find total expenditures by multiplyingthe price of a product by the quantitydemanded for any point along the demandcurve. To illustrate, the total expenditureunder point a in Panel A of Figure 1 is $6,which is determined by multiplying twounits times the price of $3. Likewise, thetotal expenditure under point b in Panel Ais $8, or $2 times four units. By observingthe change in total expenditures when theprice changes, we can test for elasticity.

The relationship between changingprices and total expenditures is summarizedin the four panels of Figure 1. The figure shows howa decrease in price from $3 to $2 impactstotal expenditures for each of the demandcurves. In each case, the change in expendituresdepends on the elasticity of thedemand curve.

Figure 1.

Panel A.Elastic demand.When the price drops by $1 per unit, theincrease in the quantity demanded is largeenough to raise total expenditures from $6to $8. The relationship between the changein price and total expenditures for the elasticdemand curve is described as “inverse.”In other words, when the price goes down,total expenditures go up.

Panel B.Inelastic demand.In this case, when the price drops by $1, theincrease in the quantity demanded is sosmall that total expenditures fall below $6.For inelastic demand, total expendituresdecline when the price declines.

Panel C.Unit elastic Demand. Thistime, total expenditures remain unchangedwhen the price decreases from $3 to $2.

3. __________________________________The relationship between the change inprice and the change in total expendituresis shown in Panel D. If thechanges in price and expenditures move inopposite directions, demand is elastic. Ifthey move in the same direction, demandis inelastic. If there is no change in expenditure,demand is unit elastic.

4.____________________________________While this discussion about elasticity mayseem technicaland somewhat unnecessaryto you, knowledge of demand elasticity isextremely important to most businesses.Suppose, for example, that you run yourown business and want to do somethingthat will raise your revenues. You could tryto stay open longer, or you could try toadvertise in order to increase sales. Youmight, however, also be tempted to raise theprice of your product in order to increasetotal revenue from sales.

This might actually work in the case of table salt or medical services, because thedemand for both products is generallyinelastic. However, what would happen ifyou sold a product with elastic demand? Ifyou raise the price, your total revenue -which is the same as consumer expenditures -will go down instead of up. Thisoutcome is exactly the opposite of whatyou intended!

This is exactly why some businessesexperiment with different prices when theyintroduce a new product to the market.They may adjust prices repeatedly to seehow customers respond to new prices. If abusiness can determine a new product’sdemand elasticity, it can find the price thatwill maximize total revenues. This is why

demand elasticity is more important thanmost people realize.

5._________________________________What makes the demand for a specificgood elastic or inelastic? To find out, wecan ask three questions about the product.The answers will give us a reasonably goodidea about the product’s demandelasticity.

Can the Purchase Be Delayed?Sometimes consumers cannot postponethe purchase of a product. This tends tomake demand inelastic, meaning that thequantity of the product demanded is notespecially sensitive to changes in price.

Are Adequate SubstitutesAvailable?If adequate substitutes are available,consumers can switch back and forthbetween the product and its substitute totake advantage of the best price.

Does the Purchase Use a LargePortion of Income?The third determinant is the amount ofincome required to make the purchase. Ifthe amount is large, then demand tends tobe elastic. If the amount of income is small,demand tends to be inelastic.

Words and phrases to be remembered:

variable - змінна величина

to occur - відбуватися

to remain - залишатися

to cause - спричиняти

to appear - з'являтися

a movement – рух

toshift - переміщатися

original -початковий

adeterminant - визначник

consumertastes - споживчі смаки

relatedgoods - супутні товари

expectations - очікування

tovary - мінятися

aresponse - відповідь

anextent - ступінь

toestimate - оцінювати

animpact - вплив

totalexpenditures - загальні витрати

tomultiply -множити

toobserve – спостерігати

relationship – зв'язок, взаємовідносини

inverse - зворотний

adirection - напрямок

torun a business -займатися підприємницькою діяльністю

revenues - надходження

to advertise - рекламувати

tobe tempted -спокушатися

tointroduce - вводити

toadjust - коректувати

to delay (syn. topostpone) - відкладати

to switch back and forth between - переключатися