Page 86 - DECO405_MANAGERIAL_ECONOMICS

Unit 5: Elasticity of Demand

4. Analysis of consumption and saving behavior: the way consumers respond to the Notes
change in prices or other determinants of demand, determines their consumption
pattern and savings pattern. For example, a consumer purchases 2 bottles of cold
drinks instead to 4, when price rose from 10 to 15. Other things remaining
constant, he is saving more money than before.
5. If the elasticity of the firm's sales with reference to advertisement expenditure is
positive and higher than for its expenditure on product quality and customer service,
then the firms would find it more beneficial to concentrate its sales efforts on
advertising rather than on product quality and customer service.

Case Study Student’s Dilemma

small state university is faced with a critical financial problem. At present tuition
rates, the university is loosing 5 crore per year. The head of the university
Aurges that there should be a 25% increase in tuition fee. Based on the total students
enrolled, he projects that this increase would cover the 5 crore deficit in revenues.
Student leaders protest but it falls on deaf ears. Students realise that their only hope is to
demonstrate that the tuition hike is not in the best interest of the university. What can they
do?

Students find a journal article that discusses the price elasticity of demand for college
education. The author estimates that the elasticity of enrollment at state universities
is –1.3 with respect to tuition charges. That is, a 1% increase in tuition would decrease
enrollments by 1.3%. The data are current. Based on the elasticity estimate, the students
calculate that the proposed tuition hike of 25% would decrease enrollment by 32.5%. This
would result in a decrease in total revenue even after tuition increase.
The university is given this information and it is forced to withdraw its proposed hike and
find alternative ways to meet the deficit.
Question
Evaluate the ultimate decision of the university to withdraw the proposed hike.
Source: Atmanand, Managerial Economics, 2nd Edition, Excel Books.

Case Study The Perks of Pump Avoidance

Ralph Vartabedian
Higher gasoline prices are cleaning out the wallets of motorists, but there may be a silver
lining: Traffic is somewhat lighter on the heavily congested freeways and surface streets
of Southern California.
It only makes sense that the sharply higher prices at the pump are leading some people to
avoid discretionary trips with their cars, carpooling when possible and shifting to public
transportation.

Contd...

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