![]() ![]() Ironically, some of the most popular bands could make more revenue by setting prices so high that the arena is not filled-but those who buy the tickets would have to pay very high prices. These bands can, if they wish, keep raising the price of tickets. Of course, if the 15,000-seat arena is all that is available or if a larger arena would add substantially to costs, then this option may not work.Ĭonversely, a few bands are so famous, or have such fanatical followings, that demand for tickets may be inelastic right up to the point where the arena is full. ![]() What if the band keeps cutting price, because demand is elastic, until it reaches a level where all 15,000 seats in the available arena are sold? If demand remains elastic at that quantity, the band might try to move to a bigger arena, so that it could cut ticket prices further and see a larger percentage increase in the quantity of tickets sold. Will the Band Earn More Revenue by Changing Ticket Prices? Ī given % rise in P will be more than offset by a larger % fall in Q so that total revenue (P × Q) falls.Ī given % rise in P will be exactly offset by an equal % fall in Q so that total revenue (P × Q) is unchanged.Ī given % rise in P will cause a smaller % fall in Q so that total revenue (P × Q) rises. If demand has a unitary elasticity at that quantity, then a moderate percentage change in the price will be offset by an equal percentage change in quantity-so the band will earn the same revenue whether it (moderately) increases or decreases the price of tickets. However, if demand is inelastic at that original quantity level, then the band should raise the price of tickets, because a certain percentage increase in price will result in a smaller percentage decrease in the quantity sold-and total revenue will rise. If demand is elastic at that price level, then the band should cut the price, because the percentage drop in price will result in an even larger percentage increase in the quantity sold-thus raising total revenue. The three possibilities are laid out in Table 5. Imagine that the band starts off thinking about a certain price, which will result in the sale of a certain quantity of tickets. Total revenue is price times the quantity of tickets sold. The key concept in thinking about collecting the most revenue is the price elasticity of demand. How should the band set the price for tickets to bring in the most total revenue, which in this example, because costs are fixed, will also mean the highest profits for the band? Should the band sell more tickets at a lower price or fewer tickets at a higher price? (The same insights apply if ticket prices are more expensive for some seats than for others, but the calculations become more complicated.) The band knows that it faces a downward-sloping demand curve that is, if the band raises the price of tickets, it will sell fewer tickets. Finally, assume that all the tickets have the same price. Assume further that the band pays the costs for its appearance, but that these costs, like travel, setting up the stage, and so on, are the same regardless of how many people are in the audience. To keep this example simple, assume that the band keeps all the money from ticket sales. Imagine that a band on tour is playing in an indoor arena with 15,000 seats. Read this article for an example of price elasticity that may have affected you.ĭoes Raising Price Bring in More Revenue? A 10% increase in the price of housing will cause a slight decrease of 1.2% in the quantity of housing demanded. If the price of the restaurant meal increases by 10%, the quantity demanded will decrease by 22.7%. Note that necessities such as housing and electricity are inelastic, while items that are not necessities such as restaurant meals are more price-sensitive. Transatlantic air travel (business class) Table 4 shows a selection of demand elasticities for different goods and services drawn from a variety of different studies by economists, listed in order of increasing elasticity. But first, let’s look at the elasticities of some common goods and services. Let’s explore how elasticity relates to revenue and pricing, both in the long run and short run. Studying elasticities is useful for a number of reasons, pricing being most important. Explain how the elasticity of demand and supply determine the incidence of a tax on buyers and sellers. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |