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Pastimes : Austrian Economics, a lens on everyday reality
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To: Terry Maloney who wrote (4)12/1/2001 5:04:02 PM
From: Don Lloyd  Read Replies (1) of 445
 
Terry -

...I suspect that's a wrinkle that Don might throw in next (and no, I won't be trying it either, I'm no economist - g), but in the present example he specified that "a price of $1M produces a demand for 1 diamond per year, a price of $500K produces a demand for 2 diamonds per year, and so forth", from which I infer that there's no point in selling more than one a year.

This is correct. Although this is unrealistic, it is so specified so as to simplify the problem. Note that no difficult arithmetic is required to answer the question. I promise not to complicate the problem further. -g-

As an educational side note, the meaning of 'price elasticity of demand' is a measurement of how total revenue (unit quantity times price) is affected by price changes. Almost all economic goods demonstrate an increase in unit demand in response to a price decrease. The question that 'peod' answers is whether the increase in unit demand is large enough to outweigh the decrease in price that brings it about and thus increase total revenues. If it is, the 'peod' is greater than 1 and the result is called 'elastic'. If not, it is less than 1 and the result is called 'inelastic'. Unlike this problem, the 'peod' is usually applied to incremental changes, for example a decrease in price of .01% causing an increase in quantity of greater than .01%. Note that most economic goods do not have a specific 'peod', but typically demonstrate both elastic and inelastic behavior over different ranges of the price/demand curve.

Regards, Don
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