Using Ads for Loss Leaders to Introduce Cross Elasticity of Demand

Document created by Eric Chiang on Dec 16, 2015Last modified by Lindsay Neff on Jul 26, 2019
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At the start of each school term, office supply stores tend to offer fantastic deals on school supplies. The following ad is a great example to show.

Show this ad after you discuss how elasticity affects total revenue, and then ask "If school supplies are an inelastic good, why would stores discount them instead of raise prices to maximize total revenue?"

This is a good way to introduce the idea that office supply stores use these ads to draw customers into the store. Indeed, some customers will buy only the school supplies on sale, which would result in a loss for the store. But as long as one out of every 5 or 10 customers who comes in buys a printer, office chair, or other higher priced item, the store would more than make up for the loss leader. I then use this example to calculate the cross-elasticity of demand for substitutes and complements.