ECO100Y1 Lecture 3: lecture 3-3
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You sell sparkling water, which you obtain from your own spring at no cost. Since your costs are zero, your profit equals your total revenue (number of bottles sold times price per bottle). If you raise the price: (1) customers who continue to buy your water would pay more (thus, increasing total revenues) But (2) you would have fewer customers due to the (cid:862)law of downward-sloping demand(cid:863) (thus, reducing revenues) We need more information about the demand curve in order to answer the question. Answer: it is unanswerable whether we should increase the price or not. (price) elascticity of demand. Measures responsiveness of quantity demanded to a change in price. P ( q =average quantity) ( p =average price) Insight: same result if go up demand curve from a to b or down demand curve from b to a. Answer: quantity demanded is very responsive to a change in price.