Price elasticity of demand

A similar model is provided by what is called Ramsey pricing, after the economist Frank Ramsey.1213 This author showed that if the above conditions for market segmentation are fulfilled, social welfare is maximized in a particular market when the profit margin that is added to the marginal cost of production in order to determine the ex-factory price is inversely proportional to the price elasticity of demand. In other words, the price is always fixed above the marginal cost in order to recover the sunk costs, but this margin is inversely proportional to the sensitivity of demand in that market. Formally, this can be expressed as follows ... 

Voluntary insurance would be the market solution to uncertainty for risk-averse individuals. In this context, the user chooses the optimum co-insurance rate. Theory offers some analytical results on optimal health insurance contract designs.1 The consumer decides the extent of the coverage and the optimum co-insurance rate, and ultimately the price to be paid for the premium. In competitive markets, with actuarially fair premiums, the optimum co-insurance rate varies between individuals and depends on the risk of falling sick and the price elasticity of demand. 

The phenomenon of moral hazard, and the consequent welfare loss, occurs when the demand of the insured party shows price elasticity, and the greater the elasticity the greater the moral hazard. Recall that the price elasticity of demand is defined as follows ... 

If we say, for example, that it stands at -0.2, we mean that if the price rises by 1 per cent, the quantity demanded will decrease by 0.2 per cent. In fact, the price elasticity of demand measures the potential for moral hazard.9 In Figure 7.1, the slope of the demand function for 100 per cent copayment is what ultimately determines the shaded area, which as we already know, corresponds to the welfare loss of total coverage pharmaceutical insurance. 

In addition to this, however, as the reader can see from Figures 7.1 and 7.2, the price elasticity of demand increases as the co-payment rate increases. 

Furthermore, the price elasticities of demand for pharmaceuticals are likely to differ depending on individuals income. If low-income households have a more price-elastic demand, an increase in co-payment will cause them to make a proportionally larger reduction in their pharmaceutical consumption than high-income households. The same thing could happen if we make the comparison in terms of levels of health. We are faced with equity problems, to which we will return below. 

In Spain the price elasticity of demand for pharmaceuticals is low, according to available estimates. Puig-Junoy26 has estimated that the figure stands... 

One of the classical topics of pharmaceutical economics, the price elasticity of demand when there is co-payment or shared financing between the insurer and the user, is addressed by Cruz-Roche20 with some calculations on this elasticity. The same topic is developed by Puig-Junoy,21 applied to the Spanish case. This study includes a review of the international literature with empirical content, a detailed description of co-payment in Spain, its regulation since 1978, the main data and estimates of the effect of the switching of prescriptions from the employed to pensioners, and the price elasticity of demand (which is found to be small). 

Table 6.7 Own and cross price elasticities of demand for organic and conventionally produced dairy products in Denmark...

Table 6.8 provides a more comprehensive set of estimates of own-price elasticities of demand for organic products, compared to the conventional equivalent, this time for the UK. In all cases the response of consumption of organic products to change in price is about double that for conventional produce. 

These studies must make assumptions about changes in, for example, future input and output prices, yields, subsidy and premium levels, the way consumers and producers will react to changes in prices (price elasticities of demand and supply), population increase or decrease and level of adoption. The possible outcomes are too numerous to summarise here, so only a few results are presented as examples. 

Once the proportion of cost increase that is passed on to customers is known, the impact on profits from a decrease in margins can be established relatively easily. The magnitude of this effect is given by the sensitivity of demand to price, the own-price elasticity of demand . Estimates of this elasticity are available in the economic literature. 

The data required to run the model were substantial. They included financial data of individual companies, fuel use and C02 emissions per product, in addition to the price of an average product. Other data inputs included the own-price elasticity of demand, the total volume of product consumed, the number of firms manufacturing the product, and the proportion of total consumption supplied by imports. 

Sales of these products also demonstrate what a complete fiction is the story that the average physician pays no attention to prices in writing prescriptions. Product 11 among the anti-infectives languished at 0.1% of the market for 5 years until it had cut its price by 47%. At that point, its market share rose to 0.7%, a sixfold increase. Another 14% price cut raised its market share another 170%. Still further cuts over the next three years amounting to 12% raised its market share by still another 68%. This would seem to demonstrate a remarkably high price elasticity of demand for a branded patented product particularly in view of the price cuts of competitive products. 

Sharppencil I ll go home and do a few calculations and give you the pricing strategy to yield the maximum profit. You d also like to know the new price, the forecast of volume, and your new profit picture. I ll throw in other goodies, such as the price elasticity of demand, the cost elasticity of production, the average cost formula, the marginal cost formula. .. Bigelow No formulas please, just the facts next week. 

Price Elasticity of Demand A measure of the sensitivity of quantity demanded to a change in the price of platinum. It provides a quantitative measure of the price responsiveness of quantity demanded along a demand curve. The greater the elasticity, the greater the effect that a price change will have on the quantity demanded. 

Once again, the question of whether the market output and accumulation constant will be greater than the socially optimal level boUs down to an empirical question about the nature of demand (just as in the previous section see equation (7.5)) - does the price elasticity of demand increase or decrease as the accumulation constant of the chemical rises ... 

The objective of this section has been to investigate the effect of industry structure on the output and product characteristics decisions of chemical manufacturers. When the number of firms in the industry is small, then each firm realises that it is able to influence the price it receives by its output and accumulation constant choices. If increasing the accumulation constant of their product decreases the price elasticity of demand, then firms will produce too much of chemicals with socially excessive persistence. In this case, firms reduce the amoimt of competition that they face (the lower the price elasticity, the lower the degree of competition) by increasing accumulation. Output decisions are also distorted, so that each firm produces too much (compared to the social optimum). These distortions unambiguously decrease welfare. The presence of externalities means that few firm conclusions can be drawn. The production distortion caused by imperfect competition maybe socially desirable when chemical use gives rise to damages. 

Technically, the direction of the inequality in equation (7.5) is determined by the variation of the price elasticity of demand with the accumulation constant of the chemical (which in turn is determined by the sign of a third-order cross partial derivative of the farmers production function). 

A second measure of demand sensitivity is cross price elasticity of demand, which measures the responsiveness of demand for a product or service relative to a change in price of another product or service. Cross price elasticity of demand is the degree to which the quantity of one product demanded will increase or decrease in response to changes in the price of another product. If this relation is negative, then, in general, the two products are complementary if the relation is positive, then, in general, the two products are substitutes. 

Products that can be readily substituted for each other are said to have high cross price elasticity of demand. This point applies not only to brands within one product class but also to different product classes. For example, as the price of ice cream goes up, consumers may switch to cakes for dessert, thereby increasing the sales of cake mixes. 

Price discrimination, 681-682 Price elasticity of demand, 668 Price fixing, 680-681 Price index, 2395... 

Price elasticity of demand = % change in demand/% change in price... 

This study assumes that demand and prices are two independent random parametral which are based on the distribution of their own can be t>btained through the analysis of the historical data, not considering the price elasticity of demand conditions. 

Impact. Using a simple partial equilibrium model of rice supply and demand, Minten and Dor-osh (2006) show that lowering the rice import tariff by 10 percentage points would have had only a small effect on total revenues collected, because even with inelastic overall consumer demand, import demand is price elastic. The reduction in the tariff increases the demand for rice by 14 to 24 percent, depending on the assumed magnitude of the own-price elasticity of demand. If producers are also price responsive, the effect on total tariff revenue is even smaller only a 6 percent decline. The net benefits of this policy for net consumers would be between US 8.5 million and US 8.8 million, although the net benefits to all the poor, including rural surplus households, are only US 0.6 million to US 1.3 million. 

It is not any one of these things which cause high oil prices, but their interaction. Take, for example, the case of speculators bidding up the price of oil futures. The speculators ability to turn a profit depends on the price elasticity of demand for oil, as well as on the inability of producers to radically increase production. What s... 

Lastly, 4% of the demand for oil goes to make chemical feedstocks for the manufacture of synthetic plastics, elastomers, and many chemicals, some of which are rubbercompounding chemicals. Of course, this 4% is extremely critical to the world economy. In this world economy, the price mechanism is used to determine the allocation of the crude petroleum distribution among its many uses. For example, if the price of the oil used to make styrene and butadiene to copolymerize into SBR (styrene butadiene rubber) becomes too high, there might be some substitution over to natural rubber if it is technically feasible. While the price elasticity of demand for petroleum for use in the rubber industry is rather inelastic, many times it is just as inelastic for use by the transportation sector or the residential markets. 

In the short run, the price elasticity of demand for lead is fairiy low, either because it represents a small part of the total value of the product in which it is used, or because in those cases where the share of final value is significant (as in SLI batteries, for instance), the price elasticity of the fabricated product may itself be relatively low. In addition, the use of lead in many of its applications is essentially determined by technical factors, rather than its relative price. 

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