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Is professional education price elastic?

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IS PROFESSIONAL EDUCATION PRICE ELASTIC?

Submitted To:

Dr Alam Raza

Submitted By:

Sadaf khan (11388)

Ghani-Ur-Rehman

Submission Date:

17-04-2010(SATURDAY)


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IS PROFESSIONAL EDUCATION PRICE ELASTIC?


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LETTER OF ACKNOWLEDGEMENT

Dr. Alam Raza taught us very well and in a very friendly environment. We would like to extend

our thanks to Dr. Alam Raza who conducted our Microeconomics course providing us with this

opportunity of practically analyzing the statement that IS PROFESSIONAL EDUCATION

PRICE ELASTIC?

This has definitely been a unique learning experience for us.

We are very thankful to her for her guidance and help which she has extended throughout the

course of this report.

We are grateful to her for the valuable time she has given us for this report in particular and for

the over all learning experience.

As per the topic appointed by her IS PROFESSIONAL EDUCATION PRICE ELASTIC?

We have tried to do our best in presenting this project report .

This information has been compiled with relative information on the internet and with the

questionnaires filled by the people. A brief introduction has been presented about elasticity and

its types and affects on demand and supply.

Sincere regards

Sadaf Khan (11388)

Ghani-Ur-Rehman ()


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LETTER OF TRANSMITTAL

17 April 2010

Dr.Alam Raza

Microeconomics

IQRA University

Dear Madam

This report is submitted to you, within the context comprising of

The purpose of the report is to present an overview of ADVERTISMENT MAKES DEMAND

OF A GOOD PRICE INELASTIC?

The content of this report describes the topic, its causes, related issues, etc

Sincerely,

Mohammad Najeeb (11742)


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Executive Summary

Elasticity is the ratio of the percent change in one variable to the percent change in another

variable. It is a tool for measuring the responsiveness of a function to changes in parameters in a

relative way. Commonly analyzed are elasticity of substitution, price and wealth. Elasticity is a

popular tool among empiricists because it is independent of units and thus simplifies data

analysis.

An "elastic" good is one whose price elasticity of demand has a magnitude greater than one.

Similarly, "unit elastic" and "inelastic" describe goods with price elasticity having a magnitude

of one and less than one respectively.

The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity.

Elasticity varies among products because some products may be more essential to the consumer.

Products that are necessities are more insensitive to price changes because consumers would

continue buying these products despite price increases. Conversely, a price increase of a good orservice that is considered less of a necessity will deter more consumers because the opportunity

cost of buying the product will become too high.

A good or service is considered to be highly elastic if a slight change in price leads to a sharp

change in the quantity demanded or supplied. Usually these kinds of products are readily

available in the market and a person may not necessarily need them in his or her daily life. On

the other hand, an inelastic good or service is one in which changes in price witness only modest

changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are

more of a necessity to the consumer in his or her daily life.


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TABLE OF CONTENT

SERIAL

NUMBERDESCRIPTION

PAGE

NUMBER

1 Theoretical Background

2 Articles

3 Introduction

4 Questionnaire

5 Bar diagrams And Pie charts

6 Analyses and Conclusion

7 Bibliography


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Elasticity

Elasticity is concerned with the extent to which one variable, for example, demand, responds to a

change in another variable, for example, price.

Price Elasticity of Demand Price Elasticity of Supply Income Elasticity of Demand Cross Elasticity of Demand

Elasticity of Demand

Price Elasticity of demand refers to the responsiveness of quantity demanded to a change in

price. Where quantity demanded is very responsive to price change a small change in price

leading to a relatively large change in quantity demanded. Whereas when quantity demanded is

relatively unresponsive to price changes, demand is inelastic.

If demand curve is elastic, total revenue falls when price rises. If demand curve is inelastic, total revenue rises as price rises.

Symbolically:

Price Elasticity of Demand:


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Perfectly Inelastic Quantity demanded does not respond to price changes. If quantity demanded is completely unaffected by a price change, then

You would say that demand isperfectly inelastic at that price, to reflect the fact thatquantity demanded is completely unresponsive to a change in price. On a graph withprice on they-axis, perfectly inelastic demand appears as a vertical demand curve. Itsslope is negative infinity, which leads toEd = 0.


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Perfectly Elastic Quantity demanded changes infinitely with any change in price. If quantity demanded changes by a very large percentage as a result of a tiny

percentage change in price, then you will have (in the extreme case)

You would say that demand isperfectly elastic, to reflect the fact that quantitydemanded is extremely responsive to even a small change in price. On a graph,perfectly elastic demand appears as a horizontal demand curve. Its slope is 0,which leads toEd = negative infinity. Technically, the elasticity in this extremecase would be undefined but it approaches negative infinity as demand becomesmore elastic.

The graph above illustrates that at prices above $20, quantity demanded is zero.However, when price is set below $20, quantity demanded increases infinitely.

This demand curve may be extreme, but it is exactly the demand that a firm in aperfectly competitive market faces. If a firm tries to sell above the market price, itsells nothing. If the firm prices at or below the market price, it can sell as much as

it wants.


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Unit Elastic Quantity demanded changes by the same percentage as the price. If quantity demanded changes by exactly the same proportion when price

changes, then

You would say that demand is unit elastic at that price. Any percentage change inprice is matched by an equal percentage change in quantity demanded.


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Elastic Demand

That increases or decreases (stretches or contracts) as the price of an item goesdown or up.

When price elasticity of demand equals to 1. For example, change in price from10 to 11 (+10%) causes change in quantity from 10 to 9 (-10%). 10%/10%=1.


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Inelastic Demand

Situation where the demand for a product does not increase or decrease correspondinglywith a fall or rise in its price. From the supplier's viewpoint, this is a highly desirable

situation because price and total revenue are directly related; an increase in price

increases total revenue despite a fall in the quantity demanded.

An economic term used to describe the situation in which the supply and demand for agood are unaffected when the price of that good or service changes.

When a price change has no effect on the supply and demand of a good or service, it isconsidered perfectly inelastic. An example of perfectly inelastic demand would be a life

saving drug that people will pay any price to obtain. Even if the price of the drug were to

increase dramatically, the quantity demanded would remain the same.


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Elasticity of supply

Price Elasticity of Supply refers to the responsiveness of quantity supplied to a change in price.

When quantity supplied is very responsive to price change it is said to be elastic.

Price inelastic supply Perfectly elastic supply Perfectly inelastic supply Unitary elastic supply

Income Elasticity of Demand

Income elasticity of demand measures how much the quantity demanded of a goodresponds to a change in consumers income.

Higher income raises the quantity demanded for normal goods but lowers the quantitydemanded for inferior goods.

Goods consumers regard as necessities tend to be income inelastic. Goods consumersregard as luxuries tend to be income elastic.

It is computed as the percentage change in the quantity demanded divided by thepercentage change in income.

Symbolically:

Incomein

hangeercentage

emandeduantity

inhangeercentage

emandolasticityIncome


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Cross Elasticity of Demand

Cross elasticity refers to the responsiveness of the quantity demanded of a commodity tothe change in the price of other goods i.e. substitute or complementary goods.

Symbolically:Cross Elasticity= % change in the quantity demanded

_________________________________

% change in the price of other good

Ec = Qx/ Qx X100

Py/Py X100


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An empirical analysis of national and local advertising effect on price

elasticity

Journal Marketing Letters

Publisher Springer Netherlands

ISSN 0923-0645 (Print) 1573-059X (Online)

Issue Volume 1, Number 2 / June, 1990

DOI 10.1007/BF00435298

Pages 149-160

Subject Collection Business and Economics

SpringerLink Date Monday, December 06, 2004

PETER T. L. POPKOWSKI LESZCZYC

The University of Texas at DallasRAM C. RAO

The University of Texas at Dallas

Key words: Price, Lags, Advertising, Interaction, Consumer Nondurable, Econometrics

.-January 1989, Revised July, November 1989

Abstract

This paper investigates the interaction effect of advertising and price on the market share of aConsumer nondurable product. We postulate a model in which local advertising is thought to primarily affect the consumers purchase by making the demand more price sensitive, and

national advertising to affect the consumers preference, thus making the demand less pricesensitive. Moreover, we hypothesize that local advertising interaction will have more immediateeffect, while national advertising interaction will have longer term interaction effects. We applythese ideas empirically, and find support for our hypotheses. Thus, the interaction effect ofadvertising and price can be characterized by both increased and decreased price sensitivity,depending on the type of advertising. Moreover, these effects may be present simultaneously forthe same product.


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There are numerous studies addressing the effect of advertising on sales. See, forexample, Assmus, Farley, and Lehmann (1984), Bass and Clarke (1972), Lambin(1976), Rao (1986), and Winer (1980), and the references cited therein, for a discussionof the same. While these address the effects of advertising on sales, thereremains the question of what the impact of advertising on the price elasticity of

demand is. The extant research on this topic is large but it does not lead to conclusiveor unambiguous results. In particular, there appear to be instances whereadvertising causes demand to be more price sensitive, and others in which justthe opposite obtains. One way of attempting to reconcile this seeming contradictionis to recognize the multifaceted role of advertising in marketing. For example,marketing researchers distinguish between informative, persuasive, and reminderadvertising (Kotler, 1984). Further distinctions include comparison and reinforcementadvertising. While all forms of advertising are presumed to ultimately increasethe firms profits, advertisings interaction effect on other marketing mixvariables, such as price, are likely to be more complex. Thus, the interactioneffect must be examined with some knowledge of the advertising goal. Of

course, in a particular situation there may only be one advertising goal. It is clearthat empirical findings may substantially differ depending on both whether thereare multiple advertising goals and what these goals are.


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Advertisement makes demand inelastic

Elasticity is basically the responsiveness of quantity demanded to a change in price.

Advertising elasticity of demand is the measure of how advertising affects the demand of a

certain product. It is the percentage change in the sales of the advertised product as opposed to

the percentage change in its advertising expenses..

Advertising can be used as an affective technique to increase demand, as through it more andmore people become aware of the product and may also be inclined to buy the product. But it has

certain limitations like high cost associated with it, advertisement not being good enough tocatch attraction of the target audience/group.Also not all goods can be advertised and sales of all goods can not be increased throughadvertising. Like for example goods like drugs can not be advertised.

The purpose to carry out this survey is to find out if the statement that Advertisementmakes demand inelastic is correct or not and if its correct then to what extent.

I got people to fill out questionnaires so that I can find out how advertisements effect people,what type of advertisements do people prefer, what type of advertisements make the most impacton peoples buying habit. The questionnaires will also help me find out that to what extent people

are influenced and tempted to buy a product because of what is shown in the advertisement. Thiswill ultimately help me get the answer that DOES ADVERTISMENTS MAKE DEMANDINELASTIC.

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