Transcript demand4
DEMAND ANALYSIS • Various perspectives • Consumer choices • Elasticity ratios • Defining the market Prof. Patrick GOUGEON, ESCP-EAP DEMAND ANALYSIS Different perspectives Consumer choices (utility theory) Individual Demand aggregation Market Demand Demand to the firm Prof. Patrick GOUGEON, ESCP-EAP Consumer choices • n goods or services available on the market: i = 1,…..n • Prices : p1,…..pi,……pn •Quantity consumed of each: x1, …..xi,…..xn • Budget: R = Σ pi xi • Objective Maximise consumer satisfaction: Max U(x1, …..xi,…..xn) under budget constraint: R = R° • a change in pi (Dpi), other prices and budget remaining the same, result in a change in the quantity purchased of good i (Dxi) Individual Demand corresponds to the function that describes the relation between the price and the quantity of a good purchased by an individual maximising his satisfaction for a given level of income and other prices being held fix. Prof. Patrick GOUGEON, ESCP-EAP Demand Curves Individual Demand p p p q q p q q aggregation Market Demand p q Prof. Patrick GOUGEON, ESCP-EAP Market Demand p The lower the price level considered, the higher the number of consumers, and/or the higher the quantity purchased by each p0 p1 q q0 q1 Except the « marginal consumer », most consumers will pay a price which is lower than the maximum price they would accept. This is the origin of the « consumer surplus » Question what do you suggest companies should do to capture this surplus ? Prof. Patrick GOUGEON, ESCP-EAP Elasticity ratios Dq q Price elasticity: ep = Dp p Market demand p p0 p1 <0 Depends how easy it is to find a substitute q q0 q1 Income elasticity: eY= Cross elasticity: ei/j = Prof. Patrick GOUGEON, ESCP-EAP Dq q DY Y Dqi qi Dpj pj > 1 ; superior goods < 1 ; inferior goods Its value has a strong influence on the allocation of income growth within the economy, and the volatility of an activity > 0 ; substitutes Useful to define tha market scope < 0 ; complements