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Lecture Managerial accounting for manages (4e) - Appendix A: Pricing products and services - TRƯỜNG CÁN BỘ QUẢN LÝ GIÁO DỤC THÀNH PHỐ HỒ CHÍ MINH

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The price elasticity of demand measures the degree to which the unit sales of a product or service are.. affected by a change in unit price.[r]

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PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA

Copyright © 2014 by The McGraw-Hill Companies, Inc All rights reserved.

Pricing Products and Services

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Learning Objective A-1

Compute the profit-maximizing price of a product or service using

the price elasticity of demand and variable

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Pricing

Elasticity of Demand

Elasticity of Demand

Elasticity of Demand

Elasticity of Demand

The price elasticity of demand measures the degree to which the unit sales of a product or service are

affected by a change in unit price

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Price Elasticity of Demand

Demand for a product is inelastic if a change in price has little effect on the

number of units sold.

Example

Example

The demand for designer

The demand for designer

perfumes sold at cosmetic

perfumes sold at cosmetic

counters in department

counters in department

stores is relatively inelastic

stores is relatively inelastic

Example

Example

The demand for designer

The demand for designer

perfumes sold at cosmetic

perfumes sold at cosmetic

counters in department

counters in department

stores is relatively inelastic

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Price Elasticity of Demand

Demand for a product is elastic if a change in price has a substantial effect

on the number of units sold.

Example

Example

The demand for gasoline is

The demand for gasoline is

relatively elastic because if a

relatively elastic because if a

gas station raises its price,

gas station raises its price,

unit sales will drop as

unit sales will drop as

customers seek lower prices

customers seek lower prices

elsewhere

elsewhere

Example

Example

The demand for gasoline is

The demand for gasoline is

relatively elastic because if a

relatively elastic because if a

gas station raises its price,

gas station raises its price,

unit sales will drop as

unit sales will drop as

customers seek lower prices

customers seek lower prices

elsewhere

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Price Elasticity of Demand

As a manager, you should set higher

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Price Elasticity of Demand

Єd = ln(1 + % change in quantity sold)ln(1 + % change in price)

Natural log function

Natural log function

Natural log function

Natural log function

Price elasticity of

Price elasticity of

demand

demand

Price elasticity of

Price elasticity of

demand

demand

I can estimate the price elasticity of demand for a

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Apple Almond

Price Elasticity of Demand

Suppose the managers of Nature’s Garden

believe that every 10 percent increase in the

selling price of its apple-almond shampoo will

result in a 15 percent decrease in the number

of bottles of shampoo sold Let’s calculate the price elasticity of demand

For its strawberry glycerin soap, managers of Nature’s Garden believe that the company will

experience a 20 percent decrease in unit

sales if its price is increased by 10 percent

Suppose the managers of Nature’s Garden

believe that every 10 percent increase in the

selling price of its apple-almond shampoo will

result in a 15 percent decrease in the number

of bottles of shampoo sold Let’s calculate the price elasticity of demand

For its strawberry glycerin soap, managers of Nature’s Garden believe that the company will

experience a 20 percent decrease in unit

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Price Elasticity of Demand

Єd = ln(1 + % change in quantity sold)ln(1 + % change in price)

Єd = ln(1 + (-0.15))ln(1 + (0.10))

Єd = ln(0.85)ln(1.10) = -1.71-1.71

For Nature’s Garden apple-almond shampoo.

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Price Elasticity of Demand

Єd = ln(1 + % change in quantity sold)ln(1 + % change in price)

Єd = ln(1 + (-0.20))ln(1 + (0.10))

Єd = ln(0.80)ln(1.10) = -2.34-2.34

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