Mankiw's Principles of Microeconomics Chapter 5

1.      This is one of the most practical chapters you ever read in an economics text. Many years ago when I was an economist for GTE (not Verizon) we spent significant amounts of time estimating cross-price elasticities as the basic decision-making tool for package design --deciding whether or not to package call-waiting or caller ID with other phone features for example.  Including features consumers really want with other, not-so-popular features in a package can increase sales of all features. Give an example of sales based on price elasticities that you have seen or used.  Why do you think it worked (or didn't work)? 

Soon the holiday season will be upon us. Prior to the infamous Black Friday sales, many of us will receive newspapers that are less news and more ads. In those ads we will more than likely see prices of goods drastically reduced. For example, USB flash cards that normally go for $15 priced at $5, or laptop computers that normally sell for $800 priced at $250. Hopefully for the retailers, these sales will lead to an increase in demand of not only the products on sale, but also other products in the store. 

Since retailers are all about increasing total revenue for their business (P x Q), they will analyze the price elasticity of demand of the products they put on sale. In order to increase profitability, a retailer’s goal in setting price should be to obtain unit elasticity, meaning that on a percentage basis, the increase in demand of a product is equal to any increase in price. In the case of Black Friday sales, retailers will often take a loss on a few products that are drastically reduced; however, if priced correctly they’ll make up for those losses because of the increased demand on other products in their store. 

What topic made the least sense to you in this chapter?

Naturally, as a consumer I had an easier time understanding price elasticity of demand. I found the concept of elasticity of supply harder to grasp since you have to take it from the perspective of a business owner.