Transcript Quantitative Demand Analysis

http://managerialandeconomics.wordpress.com/
Quantitative Demand
Analysis
The Elasticity Concept

Elasticity:
a measure of the responsiveness of one
variable to changes in another variable; the
percentage change in one variable that arises
due to a given percentage change in another
variable.
Own Price Elasticity Of Demand

Own price elasticity:
a measure of the responsiveness of the
quantity demanded of a good to a change in
the price of that good; the percentage change
in quantity demanded divided by the
percentage change in the price of the good
EQx, Px = (% DQx) / (% DPx)
Own Price Elasticity Of Demand
(continued)
Qx = f (Px, Py, M, H).
EQx, Px = (dQx / dPx) (Px / Qx)
Elastic demand:
Absolute (EQx,Px) > 1
Inelastic demand:
Absolute (EQx,Px) < 1
Unitary elastic demand:
Absolute (EQx,Px) = 1
Elasticity And Total Revenue

Figure 3-1 Page 77.
Factors Affecting The Own Price
Elasticity:
- Available substitutes,
--the more substitutes available for the good,
the more elastic the demand for it.
--when there few close substitutes for a good,
demand tends to be relatively inelastic.
Example:
Market
Own price elasticity
Transportation
-0.6
Motor vehicles
-1.4
Motorcycles and bicycles
-2.3
Food
-0.7
Cereal
-1.5
Clothing
-0.9
Women’s clothing
-1.2
Factors Affecting The Own Price
Elasticity (continued):
- Time,
-- demand trends to be more inelastic in the
short term than in in the long term.
-- the more time consumers have to react to a
price change, the more elastic the demand
for the good.
Example:
Market
Transportation
Short term own
price elasticity
-0.6
Long term own
price elasticity
-1.9
Food
-0.7
-2.3
Alcohol and
tobacco
Recreation
-0.3
-0.9
-1.1
-3.5
Clothing
-0.9
-2.9
Factors Affecting The Own Price
Elasticity (continued):
- Expenditure share,
-- goods that comprise a relatively small share
consumer’s budgets tend to be more
inelastic, than goods for which consumers
spend a sizeable portion of their incomes.
Marginal Revenue And The Own Price
Elasticity Of Demand

Figure 3-3 Page 83.
MR = P {(1 + E)/E}
MR: marginal revenue
P: price
E: demand elasticity
Cross Price Elasticity:
A measure of the responsiveness of the
demand for a good to changes in the price of
related good;
The percentage change in the quantity
demanded of one good divided by the
percentage change in the price of a related
good.
Cross Price Elasticity (continued):
EQx, Py = (% DQx) / (% DPy)
Qx = f (Px, Py, M, H).
EQx, Py = (dQx / dPy) (Py / Qx)
Example:
Cross price elasticity
Transportation and
recreation
-0.05
Food and recreation
0.15
Clothing and food
-0.18
Income Elasticity:
A measure of the responsiveness of the
demand for a good to changes in consumer
income;
The percentage change in quantity demanded
divided by the percentage change in income.
Income Elasticity (continued):
EQx, M = (% DQx) / (% DM)
Qx = f (Px, Py, M, H).
EQx, Py = (dQx / dM) (M / Qx)
Example:
Income elasticity
Transportation
1.80
Food
0.80
Ground beef, nonfed
-1.94
Obtaining Elasticities From Demand
Functions
Qx = a0 + a1 Px + a2 Py + a3 M + a4 H
Own price elasticity:
EQx, Px = a1 (Px / Qx)
Cross price elasticity:
EQx, Py = a2 (Py / Qx)
Income elasticity:
EQx, M = a3 (M / Qx)
Case:

Qdx = 100 – 3 Px + 4 Py – 0.1 M + 2Ax
the own price elasticity?
the cross price elasticity?
the income elasticity?