Varian Rule
The Varian Rule is a way to estimate how much the quantity of something will change if the price of that thing changes. Imagine you have a toy store and you sell a lot of toys. Let's say the price of one of your most popular toys goes up by 10%. If you use the Varian Rule, you can estimate how much the quantity demanded (how many of that toy people want to buy) will change.
Okay, let's break it down. First, you need to know what the price elasticity of demand is. This is a fancy way of saying how sensitive people are to price changes. Some things are very elastic, meaning people will change how much they buy a lot if the price changes even a little bit. Other things are inelastic, meaning people won't change how much they buy even if the price changes a lot.
For our toy store example, let's say we know that the price elasticity of demand for this popular toy is -2. This means that if the price goes up by 10%, we can expect the quantity demanded to go down by 20%. (We're multiplying the percentage change in price by the negative of the price elasticity of demand to figure out the percentage change in quantity demanded.)
So if we were selling 100 of these toys before the price increase, we can estimate that we'll only sell 80 after the price increase. The Varian Rule helps us plan for changes in demand caused by changes in price, which is important for any business to know!
Okay, let's break it down. First, you need to know what the price elasticity of demand is. This is a fancy way of saying how sensitive people are to price changes. Some things are very elastic, meaning people will change how much they buy a lot if the price changes even a little bit. Other things are inelastic, meaning people won't change how much they buy even if the price changes a lot.
For our toy store example, let's say we know that the price elasticity of demand for this popular toy is -2. This means that if the price goes up by 10%, we can expect the quantity demanded to go down by 20%. (We're multiplying the percentage change in price by the negative of the price elasticity of demand to figure out the percentage change in quantity demanded.)
So if we were selling 100 of these toys before the price increase, we can estimate that we'll only sell 80 after the price increase. The Varian Rule helps us plan for changes in demand caused by changes in price, which is important for any business to know!