## Business Economics Success – Price Elasticity and Total Revenues!

In order to explain the relationship between total revenue and the price elasticity of demand, people need to understand what total revenue is. Total revenue is the amount paid by buyers and received by sellers of a good. Total revenue is computed as the price of the good times the quantity sold. Since price is part of the equation for total revenue, it is easy to see the relationship between the two, and how a change in price could affect the total revenue of a firm.

By computing the price elasticity of demand, firms could determine if the product or service that they are selling is “price elastic” or “price inelastic.” If the price elasticity value is greater than 1, then the demand for that product is sensitive to price changes. If the price elasticity value equals to 1, then the demand is considered “unit elastic,” and if the price elasticity value is less than 1, then the demand is considered price inelastic to where the demand is not sensitive to price changes at all. When analyzing price elasticity, the absolute value should be used, therefore, ignoring the negative value.

The price elasticity of demand could also assist with determining if a product has “perfect elasticity” or “perfect inelasticity.” Perfect elasticity occurs when even the slightest change in price affects the quantity purchased by consumers. Perfect inelasticity refers to a scenario where customers demand the same quantity of a good no matter how much the price changes. Therefore, if a firm calculates the price elasticity of demand for a certain product and the value from the calculations is “infinite,” then the product has perfect elasticity. If the value from the price elasticity of demand calculation is zero, then the product is considered to have perfect inelasticity. These two concepts are important because if the firm is having difficulties selling a certain product, and they know that the product has perfect elasticity, they could lower the price of that product in an effort to increase the demand for that product, which is in accordance with the “law of demand.” In contrast, if a firm concludes that their product has an elasticity value of zero, then that product is considered as having perfect inelasticity, therefore, the firm would know that changing the price of that product would not affect the demand for that product.

Please note that the price elasticity of demand for a product can have a positive or negative impact on a firm’s total revenue. For example, if a firm determines that their product is price elastic, they could lower the price of that product to increase its’ demand. This would negatively impact the firm’s total revenue because lowering the price of any product automatically lowers the firm’s total revenue. Furthermore, because the firm is now producing more due to the lowered price, it would increase their costs of production due to the additional inputs that are required to produce the additional quantities. If a firm determines that their product is price inelastic, the firm could increase the price of that product to impact positively the firm’s total revenue because regardless of the price, consumers will still have the same demand for that product.

With this in mind, firms need to be careful when making adjustments to price based on the price elasticity of demand because of the impact on total revenue. One of the main goals of businesses owners is to have his or her product reach a state of equilibrium, both in price and in quantity, because they do not want to have a surplus or shortage of that product in the market.

In order to minimize some of the risks associated with the price elasticity of demand on total revenue, firms could use averages to calculate and forecasts future price and the quantity of a certain product. For example, the “midpoint method” could be used when calculating the price elasticity of demand between two points by dividing the percentage change by the midpoint (average) of the initial and final levels. Furthermore, firms need to make sure that they accurately calculate the marginal costs and marginal revenue for that product because of the impact that it has on the total revenue of a firm due to the additional units being produced. If the marginal revenue is greater than the marginal cost, then the firm would know to increase its output. If the marginal cost is greater than the marginal revenue, then the firm would know to decrease its output. In order for a firm to maximize its profits, it needs to produce the quantity at which the marginal cost equals the marginal revenue, thus impacting total revenue positively.

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Economics is one aspect of business that entrepreneurs should be familiar with. After all, business is run by economic trends. The law of supply and demand, for example, defines the prices of commodities. It also determines what particular goods are more saleable and what aren’t. The condition of the gross domestic product also gives investors insight as to what how healthy a country’s financial environment is. And it dictates how governments, banks and companies should and will act within the succeeding accounting year. Needless to say, a significant focus should be diverted by an entrepreneur to business economics. It is only this way that he will be able to weather any entrepreneurial problems.

Remember, business isn’t merely a numbers game. It is also influenced by certain economic conditions within the macro (country) and micro (individual and family) level. It can be that there is some diversity between the needs of a country and of its people. Therefore, a business cannot be assured that while it patronized one sector, it will also be supported by another.

Take bootleg products for instance. It’s actually a profitable industry because a lot of small consumers appreciate its affordability. Yes, it’s a given that quality of the product is compromised. But the difference in the costs is very much valued in the micro system. However, it’s a different story at the macro level. Since distributing pirated products is illegal and costs the country huge losses in tax collection and business permit payments, it is greatly frowned upon.

An entrepreneur applies business economic principles in order to weigh whether or not certain business decisions are smart or risky. It looks at possible changes and movements in the economic setting of a country in order to gather a more viable conclusion. Bottom line, knowledge in how certain circumstances affect the overall performance of the country’s economy gives entrepreneurs more control over their investments.

To understand the advantage derived by an entrepreneur from business economics, let’s play out a scenario here. Suppose an earthquake struck a commercial capital in a progressive country. It cost millions of dollars in damages and displaced thousands of people from their homes and work. Let’s say that this commercial capital produces some of the most essential goods supplied to other parts of the country. What would be its impact to the overall business dynamics? And how would you be able to make business given this situation?

Seeing through the lens of economics, the entrepreneur can predict that the collapse of factories and business centers as well as the displacement of workers will cause a cease in productivity. Now, since there is less supply of goods, their prices will sky rocket. This actually favorable and companies can benefit from this. But considering that there are less people in the vicinity, it is expected that there will be a decline in estimated profits as there are fewer consumers. Regardless, scarcity will create a need. Entrepreneurs just have to maneuver their marketing strategies with some consideration to customer’s conditions.

Rehabilitation focus will also diminish people’s purchasing power, thereby weakening economic activities. Since there are less work, less consumerism, and fewer businesses, the economic status of that capital will spiral down dramatically. This will affect how investors see it. In the long run, there will be fewer incoming finances. This is unhealthy.

So businessmen should not relish in scarcity for long. In order to recuperate and improve, entrepreneurs can apply for loans and start rebuilding infrastructures. But this will be a risk on their part as they have to work double time and guarantee that upon completion of rehabilitation, they will gain greater revenue. But they have to forecast, will their products and services still be embraced post disaster? Again, economics will answer this.

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If you wish you had known more before this economic recession hit and you find yourself brainstorming ways out of this mess, then perhaps pursing a Business Economics major is for you! At an economics college, you’ll learn about many aspects of business, management, finance, marketing and corporate planning, in addition to the money management issues of today. The majority of people working in applied economics hold positions as forecasters, analysts, market researchers, government workers and client support personnel.

As you may have heard, the choice of school and the pursuit of a degree are extremely important in determining your success in economics. Just about every school offers macro economics and microeconomics courses, but to really get ahead, you’ll want to get into a graduate school with the best department of Economics you can find. The best schools may offer more passionate teachers, better internship options, more extensive areas of study and the sort of prestige you’ll need when looking to start your career in the competitive labor market.

When choosing classes from a school’s department of Economics, the best advice is to take more math courses! It can be easy to fall behind in your studies if you aren’t crystal clear on the statistics, calculus and mathematical concepts. When you were trying to get your bachelor’s degree in economics, you were likely scanning the course options for “easy electives” and ways of pulling your GPA up. However, graduate schools care most about what hard classes you’ve taken and how well you did in them, rather than your GPA as a whole. Be sure you take real analysis, calculus and econometrics, as these classes will be vital to your understanding.

To get an undergrad degree in Business Economics, students attending an accredited economics university will need to take courses like macro economics, microeconomics, financial accounting and reporting, calculus, economics statistics, econometrics, money/banking/credit, business writing, the stock market, labor economics, monetary economics, international trade theory, law and economics, industrial organization, economics and business strategy, organizational psychology, formal organizations and politics and the economy.

The average starting salary for economists is \$38,000 for a bachelor’s degree, \$48,000 for a master’s and \$70,000 for a PhD, according to a 2002 National Association of Business Economics survey. The median income for the economics major is higher than any other major, experts say. Economics research also suggests that economics majors earn 20% more than business administration majors, 19% more than accounting majors, 18% more than marketing majors and 15% more than finance majors. When a potential employer sees this major on a resume, he or she immediately understands that you have a solid foundation of math, politics, business and economic theory. Your degree also shows that you have the capacity to process complex subjects and problem solve, which is valuable in any field.

According to US News & World Report, Harvard University in Boston, Massachusetts is the top-rated school for Business Economics. The second-best university in this field is Stanford in California and Northwestern University in Illinois. After the top-three, other economics college options include the University of Pennsylvania (Wharton) in Philadelphia, the Massachusetts Institute of Technology (Sloan) in Cambridge, the University of Chicago, UC-Berkeley in California, Dartmouth College in New Hampshire, Columbia University in New York City and Yale University in Connecticut. It’s highly recommended that individuals looking to remain competitive in their field pursue advanced education with Master’s or PhD’s.

Unlike undergrad, the department of Economics in grad schools looks to cultivate the best and brightest talent. Most students are granted a fellowship, assistantship, grant, tuition remission or monthly stipend to cover the cost of the program and living expenses. Be aware that you’ll be required to do a lot of dirty work for your money, like grading, teaching, lecturing, leading weekly section meetings, researching and writing. If a lot of students are admitted, then you may still need to pay or seek NSF grants on your own. The good news is that, after all their hard work, 99% of graduate students get placed into applied economics positions right out of grad school.

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