Demand - Managerial Economics Essay Example | Topics and Well Written Essays - 1250 words

Demand - Managerial Economics - Essay Example The vertical axis lists the price per unit or per lot of the product. The demand curve in a model shows the firms theoretical sales level at various prices along the line. The downward curve is explained by the fact that as price falls there is a corresponding increase in the sales volume. The downward slope means that the elasticity coefficient drawn from the line is a negative number. However, economists have done away with the negative sign of that elasticity and have expressed it as an absolute number. Another point to remember is that the straight-line demand curve does not have a uniform elasticity of 1 (also termed unit elasticity) at all points of the line; rather, the curve is elastic above the mid-point and inelastic below that midpoint. Fig. 1 The demand curve in green shows a straight line with varying elasticities at different points (D2), while internal curved line in red shows a demand curve with uniform price elasticity of 1 (D1). companys pricing policies. The firm would use the demand curve in discussing the consequences of alternative output and pricing policies on the revenue targets over a certain future period. Since revenue is simply the product of price and output (see Fig. 1), management would explore the various price and output alternatives en route to decision making by its marketing and production departments Price elasticity (Ep) of demand is the ratio of the percentage change in quantity and the percentage change in a goods price, all other things remaining unchanged. Algebraically, this is expressed in the following simple equation: where P and Q are the price and quantity, respectively. This formula assumes point elasticity for the sake of simplicity, although an arc price elasticity, which uses average figures for each variable, may also be used. For this paper, the use of point elasticity would enable sufficient understanding of the elasticity