3.6: Concluding Comments

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To this point in the course, you have learned important concepts related to the demand and supply side of the market. The elasticities covered in this chapter reinforce these concepts. Moreover, they allow questions such as those posed in the introductory section to the chapter to be answered with much more precision. Problem sets 2 and 3 represent plausible business decisions that can be answered with elasticities. In problem set 2, you are asked whether you should increase price by a given amount. In problem set 3, you will need to use an advertising elasticity to determine whether to increase advertising expenditures. Later, you will learn that provided you have a precise estimates of demand elasticities, you can answer these types of question much more accurately. In fact, if you have a good estimate of the elasticity of demand facing the firm, you can calculate the actual price that maximizes profits. This will be addressed further in Chapter 7.

In the next chapter, you will put elasticities to work in earnest. Elasticities will be used in models of equilibrium to understand and estimate how markets respond to shocks to demand or supply. You know about demand and you know about supply. It is time to put them together to understand markets. This is the topic of Chapter 4.