HBX Core Economics for Managers
1. You need a benchmark, find out what people are willing to pay: What is the
demand?
2. willingness to pay
*maximum price you are willing to pay for a product or service.
** it does not relate to you necessarily
***WTP AND PRICE are two totally different concepts: WTP
3. paying more than WTP: irrationality
4. = WTP: Actual value
5. Differences in consumer WTP that arise from differences in, say, age, gen-
der, income, or education are what we call "extrinsic" or "observable" differ-
ences
Other differences are "intrinsic"—things that you couldn't know about a per-
son without asking him or her. They're hard to observe (and for that reason
are also referred to as "unobserved differences"). For example, a person's
tolerance for risk, his or her wish to fit in with others or stand out from others,
or even the intensity of his or her passion for Taylor Swift or the New England
Patriots.: intrinsic vs extrinsic
6. your WTP does not change: if there is a sale going on
7. flip graph, create steps, inversely related
demand curve- quantity on x axis, price on y axis: The demand curve
8. the rectangle under demand
price x number of consumers: revenue
9. You recall that the demand curve is nothing more than a depiction of
many people's WTP. So as people's WTP changes, the demand curve will also
change. Specifically, when a factor that affects people's WTP changes, the
demand curve will shift (left or right) in response. Why? Because now, at any
given price the number of people with a WTP equal to that price will be different
(higher or lower, depending on the event).
A cautionary note: notice that price is not a factor that shifts the demand
curve: shifting demand curve
10. usually people are willing to pay less for the second ticket, even less for
the third, etc etc. that is diminishing marginal return, its like 8,6,4,2,...etc.: di-
minishing marginal returns
11. steep: quantity demanded is not sensitive to price
flat: customers are much more sensitive to price changes: steep vs flat
1/9
, HBX Core Economics for Managers
12. close substitutes
necessity vs luxury
time horizon: But what factors determine whether the demand curve for a product
is steep or flat?
13. Colloquially, we sometimes refer to steep demand curves as "inelastic"
curves, and to flat demand curves as "elastic" ones. (In the next lesson, we'll
get more precise about this terminology and the concept of price elasticity.)-
: inelastic vs elastic
14. both are downward sloping because diminishing marginal returns: individ-
ual vs. aggregate demand curve
15. So far we have learned that a steep curve is associated with low price-sen-
sitivity, and that a flat curve is associated with high price-sensitivity. However
there is a problem with using slope as a measure of price sensitivity because
the slope is dependent on the units of measurement. In addition, we can't
see how significant the change in price is.: demand curve tell you about price
sensitivity?
16. The elasticity of a demand curve is the percentage change in quantity
demanded divided by the percentage change in price. *The elasticity of a
demand curve is the percentage change in quantity demanded divided by the
percentage change in price. Here's the formal definition
Percentage change: (New Old)/Old
formula takes the absolute value: The Definition of Elasticity
17. elasticity of 1~: Revenue-Maximizing Prices and Demand Elasticity
18. When demand is elastic, you can't afford to raise prices. When demand
is inelastic, you surely can!: And that illustrates how "optimal prices" are closely
linked to elasticities.
19. When elasticity of demand = 1, revenue is maximized.
When elasticity of demand is less than 1, demand is inelastic and lowering
price will lower revenue.
When elasticity of demand is greater than 1, demand is elastic and lowering
price increases revenue.: elasticity of demand and revenue!
20. Recall, one formula for slope is Rise / Run: slope
21. A negative income elasticity of demand implies that a consumer will buy
less of a good as his or her income increases. This could be the case for
cheaper foods such as rice. A consumer with a higher income might be
2/9
1. You need a benchmark, find out what people are willing to pay: What is the
demand?
2. willingness to pay
*maximum price you are willing to pay for a product or service.
** it does not relate to you necessarily
***WTP AND PRICE are two totally different concepts: WTP
3. paying more than WTP: irrationality
4. = WTP: Actual value
5. Differences in consumer WTP that arise from differences in, say, age, gen-
der, income, or education are what we call "extrinsic" or "observable" differ-
ences
Other differences are "intrinsic"—things that you couldn't know about a per-
son without asking him or her. They're hard to observe (and for that reason
are also referred to as "unobserved differences"). For example, a person's
tolerance for risk, his or her wish to fit in with others or stand out from others,
or even the intensity of his or her passion for Taylor Swift or the New England
Patriots.: intrinsic vs extrinsic
6. your WTP does not change: if there is a sale going on
7. flip graph, create steps, inversely related
demand curve- quantity on x axis, price on y axis: The demand curve
8. the rectangle under demand
price x number of consumers: revenue
9. You recall that the demand curve is nothing more than a depiction of
many people's WTP. So as people's WTP changes, the demand curve will also
change. Specifically, when a factor that affects people's WTP changes, the
demand curve will shift (left or right) in response. Why? Because now, at any
given price the number of people with a WTP equal to that price will be different
(higher or lower, depending on the event).
A cautionary note: notice that price is not a factor that shifts the demand
curve: shifting demand curve
10. usually people are willing to pay less for the second ticket, even less for
the third, etc etc. that is diminishing marginal return, its like 8,6,4,2,...etc.: di-
minishing marginal returns
11. steep: quantity demanded is not sensitive to price
flat: customers are much more sensitive to price changes: steep vs flat
1/9
, HBX Core Economics for Managers
12. close substitutes
necessity vs luxury
time horizon: But what factors determine whether the demand curve for a product
is steep or flat?
13. Colloquially, we sometimes refer to steep demand curves as "inelastic"
curves, and to flat demand curves as "elastic" ones. (In the next lesson, we'll
get more precise about this terminology and the concept of price elasticity.)-
: inelastic vs elastic
14. both are downward sloping because diminishing marginal returns: individ-
ual vs. aggregate demand curve
15. So far we have learned that a steep curve is associated with low price-sen-
sitivity, and that a flat curve is associated with high price-sensitivity. However
there is a problem with using slope as a measure of price sensitivity because
the slope is dependent on the units of measurement. In addition, we can't
see how significant the change in price is.: demand curve tell you about price
sensitivity?
16. The elasticity of a demand curve is the percentage change in quantity
demanded divided by the percentage change in price. *The elasticity of a
demand curve is the percentage change in quantity demanded divided by the
percentage change in price. Here's the formal definition
Percentage change: (New Old)/Old
formula takes the absolute value: The Definition of Elasticity
17. elasticity of 1~: Revenue-Maximizing Prices and Demand Elasticity
18. When demand is elastic, you can't afford to raise prices. When demand
is inelastic, you surely can!: And that illustrates how "optimal prices" are closely
linked to elasticities.
19. When elasticity of demand = 1, revenue is maximized.
When elasticity of demand is less than 1, demand is inelastic and lowering
price will lower revenue.
When elasticity of demand is greater than 1, demand is elastic and lowering
price increases revenue.: elasticity of demand and revenue!
20. Recall, one formula for slope is Rise / Run: slope
21. A negative income elasticity of demand implies that a consumer will buy
less of a good as his or her income increases. This could be the case for
cheaper foods such as rice. A consumer with a higher income might be
2/9
