2014 mng609 demand analysis 2(1)

8/20/2019 2014 MNG609 Demand Analysis 2(1)

1/46

Micro Economics[MNG 609]

Trupti Mishra

Shailesh J Mehta School OfManagement

IIT om!a"


2/46

Session Outline

Elasticit" of #eman$

%rice ceiling an$ %rice &loor

'tilit" (nal"sis

%rice) Income an$ Su!stitution E*ect

+onsumer Surplus


3/46


%rice Elasticit" of #eman$

Income Elasticit" of #eman$

+ross Elasticit" of $eman$


4/46


Elasticity of Demand measures the $egreeof responsi,eness of the -uantit" $eman$e$of a commo$it" to a gi,en change in an" ofthe $eterminants of $eman$.

Price elasticity of demand is a measure ofho/ much the -uantit" $eman$e$ of a goo$respon$s to a change in the price of that goo$.

%ercentage change in -uantit" $eman$e$gi,en a percent change in the price.


5/46

% Q E

% P

∆=

∆

%rice elasticit" of $eman$

% 1 are in,ersel" relate$ !" the la/ of $eman$ so E is al/a"s negati,e.

The larger the a!solute ,alue of E) the more sensiti,e !u"ers are to a change in price


6/46

Degree of Price Elasticity of Demand

Inelastic #eman$

1uantit" $eman$e$ $oes not respon$ strongl" to price changes.

Elastic #eman$

1uantit" $eman$e$ respon$s strongl" to changes in price.

%erfectl" Inelastic

1uantit" $eman$e$ $oes not respon$ to price changes.%erfectl" Elastic

1uantit" $eman$e$ changes in2nitel" /ith an" change in price.

'nit Elastic

1uantit" $eman$e$ changes !" the same percentage as the price.


7/46

7

Perfectly Elastic

D

Price

Quantity

Perfectly Inelastic

D

Price

Quantity

Perfectly Elastic & Inelastic Demand


8/46

8

E < 1

0 Quantity

Price

100

1. A 25%increase inprice…

5.00

2. … Leads t a 10% decrease in !uantity de"anded.

De"and

#.00

$0

Inelastic Demand


9/46

$

E = 1

0 Quantity

Price

100


5.00


De"and

#.00

75

'nit Elastic #eman$


10/46

10

E > 1

0 Quantity

Price

100


5.00


De"and

#.00

50

Elastic Demand


11/46

Measurement of Price Elasticity of

Demand

% Q E

% P

∆=

∆

Q

Q

P

P

∆×

=∆

×

100

100

Q P

P Q

∆= ×

∆

Point Elasticity ofDemand

Q P E P Q

∆= ×

∆AverageAverage

ARC Elasticity of Demand


12/46

Determinants of Price Elasticity of

Demand Nature of +ommo$it" (,aila!ilit" an$ pro3imit" of Su!stitutes %roportion of Income Spent on the +ommo$it" Time #ura!ilit" of the +ommo$it" Items of a$$iction


13/46

1

Price

Quantity0 100

De"and

P & Q = #00

're(enue)

#.00

Total Revenue


14/46

1#

Price

Quantity0 80

De"and

.00

P & Q = 240 're(enue)

P & Q = 100 're(enue)

1.00

100

4o/ Total 5e,enue +hanges hen %rices+hanges7 Inelastic #eman$


15/46

15

Price

Quantity

Change in Total Revenue when Price Changes

0 50

De"and

#.00

5.00

20

*e(enue + 100

*e(enue + 200

4o/ Total 5e,enue +hanges hen %rices+hanges7 Elastic #eman$


16/46

1,

Elastic

Q-effect d"inates

nitary elastic

/ d"inant effect

Inelastic

P-effect d"inates

Pricerises

Pricefalls

* falls

* rises

/ cane in *

/ cane in *

* rises

* falls

% Q % P ∆ >∆ % Q % P ∆ =∆ % Q % P ∆


17/46

17

hen in,erse $eman$ is linear) P = A + BQ

Marginal re,enue is also linear) intersects the,ertical 8price a3is at the same point as

$eman$) is t/ice as steep as $eman$ MR = A + 2BQ

#eman$ Marginal 5e,enue


18/46

18

Linear Demand, MR, & Elasticity


19/46

1$

TR decreases as Q increases

TR is maximized

TR increases as Q

increases

3arinalre(enue tal re(enue

Price elasticity fde"and

MR > 0 Elastic ( E >

1)

MR = 0 Unit elastic

( E = 1)

MR < 0 Inelastic (

E

<1)

Unit elastic( E = 1)

Inelastic( E < 1)

Elastic

(

E

> 1)

M5) T5) %rice Elasticit"


20/46

Income elasticit" 8EM measures the responsi,eness

of -uantit" $eman$e$ to changes in income)hol$ing the price of the goo$ all other $eman$$eterminants constant.

%ositi,e for a normal goo$

Negati,e for an inferior goo$

:ero for a neutral goo$s

Income Elasticity ofDemand

d d

M

d

% Q Q M E

% M M Q

∆ ∆= = ×

∆ ∆


21/46

If Em ;


22/46

@@

+rossAprice elasticit" of $eman$ 8E XY measures

the responsi,eness of -uantit" $eman$e$ of goo$ X to changes in the price of relate$ goo$ Y )hol$ing the price of goo$ X all other $eman$$eterminants for goo$ X constant

%ositi,e /hen the t/o goo$s are su!stitutes

Negati,e /hen the t/o goo$s are complements

X X Y

XY

Y Y X

% Q Q P E % P P Q

∆ ∆

= = ×∆ ∆

Cross-Price Elasticity of demand


23/46

@B

#eman$ for co*ee C as follo/s7

1C?


24/46

@

Suppose$ that) %C? @) I= %2.&! PY= %1.'0! PS=%0.&0

and A = %1

e get 1C?


25/46

@D

&rom this info) the 2rm can 2n$ elasticit" of$eman$ for co*ee C /ith respect to its price)income) price of competiti,e co*ee H) price ofsugar an$ a$,ertising

E%? AB8@K@ ? AB

EI= 0.'(2.&)2* = 1

EXY= 2(1.')2* = 1.'

EXS= 0.6(0.&0)2* = 0.1& EA= 1.2(1)2* = 0.6

sing Elasticities in ManagerialDecision Ma!ing


26/46

@6

To estimateKforecast $eman$ for ne3t "ear.

Suppose the 2rm7

Lincrease price !" D.

Lincrease a$,ertisement !"


27/46

@

'sing le,el of sales 81C for this "ear of @ millionpoun$s) the 2rm can $etermine its sales for ne3t"ear7

1C? 1CF 1C8P%CK%CE%F 1C8PIKIEIF1C8P%HK%HECHF 1C8P%SK%SECSF 1C8P(K(E(

? @ F @8D8AB F @88


28/46

Go,ernment %olicies That (lter the %ri,ateMarQet Outcome

%rice controls

Price ceiling7 a legal ma3imum on the priceof a goo$ or ser,ice. E,aple- ren" con"rol.

Price "oor7 a legal minimum on the price ofa goo$ or ser,ice. E,aple- ini /ae.

Ta3es

The go,t can maQe !u"ers or sellers pa" aspeci2c amount on each unit !oughtKsol$.


29/46

T#e Mar!et for A$artments

E-m /Koprice

controls

E-m /Koprice

controls

P

Q D

S *entalprice f

apts

4800

00

Quantity fapart"ents


30/46

%o Price Ceilings A'ect Mar!et (utcomes

( price ceiling

a!o,e thee-m price isnot )inding

it has noe*ect on themarQet

outcome.

P

Q D

S

4800

00

Priceceilin

41000


31/46


The e-m price

800 is a!o,ethe ceiling an$thereforeillegal.

The ceilingis a )indingconstraint on the price)

an$ causesa shortage.

P

Q D

S

4800

Priceceilin

4500

250 #00

shortage


32/46


In the longrun) suppl"an$ $eman$are more

priceAelastic.So) theshortageis larger.

P

Q

D

S

4800

150

Priceceilin

4500

#50

shortage


33/46

Shortages an$ 5ationing

ith a shortage) sellers must ration the goo$samong !u"ers.

Some rationing mechanisms7 8


34/46

The MarQet for 'nsQille$ =a!or

E-m /Koprice

controls

E-m /Koprice

controls

W

L

D

S aepaid t

uns6illedr6ers

4#

500

Quantity funs6illed r6ers


35/46

%o Price *loors A'ect Mar!et (utcomes

W

L

D

S

4#

500

Priceflr

4

( price oor

!elo/ thee-m price isnot )inding

it has noe*ect on themarQetoutcome.


36/46

%o Price *loors A'ect Mar!et (utcomes

W

L

D

S

4#

Priceflr

45

The e-m /age

8 is !elo/ theoor an$thereforeillegal.

The ooris a )indingconstraint on the /age)

an$ causesa surplus8i.e.! unemplo"ment.

#00 550

labor

surplus


37/46

Min /age la/s$o not a*ecthighl" sQille$/orQers.

The" $o a*ectteen /orQers.

T#e Minimum +age

W

L

D

S

4#

3in.ae

45

#00 550

unemployment


38/46

Taes

The go,t le,ies ta3es on man" goo$s ser,ices to raise re,enue to pa" fornational $efense) pu!lic schools) etc.

The go,t can maQe !u"ers or sellers pa"the ta3.

The ta3 can !e a percentage of the goo$s

price) or a speci2c amount for each unitsol$.&or simplicit") /e anal"Ue perAunit ta3es onl".


39/46

S 1

P

Q

D1

410.00

500

Euili)rium it#out Ta


40/46

S 1

D1

410.00

500#0

A Ta on .uyers( ta3 on!u"ers

shifts the D cur,e $o/n!" theamount of

the ta3.

( ta3 on!u"ers

shifts the D cur,e $o/n!" theamount ofthe ta3.

P

Q

D2

411.00P B +

4$.50P S +

a&

Effects f a 41.50 per unit ta&n uyers

e price

uyers pay

rises9 teprice sellers

recei(e falls9

e!:" Q falls.

e price

uyers pay


recei(e falls9

e!:" Q falls.


41/46

#0

S 1

T#e Incidence of a Ta

4o/ the !ur$en of a ta3 is share$ amongmarQet participants

P

Q

D1

410.00

500

D2

411.00P B +

4$.50P S +

a&;ecause

f te ta&9

uyers pay

41.00 "re9

sellers et40.50 less.

;ecause

f te ta&9

uyers pay

41.00 "re9

sellers et40.50 less.


42/46

S 1

A Ta on /ellers

( ta3 on

sellersshifts the S

cur,e up !"the amount

of the ta3.

( ta3 on

sellersshifts the S cur,e up !"

the amount

of the ta3.

P

Q

D1

410.00

500

S 2

#0

411.00P B +

4$.50P S +

a&

Effects f a 41.50 per unit ta& nsellers

e price

uyers pay


recei(e falls9

e!:" Q falls.

e price

uyers pay


recei(e falls9

e!:" Q falls.

Th O I h S i h +


43/46

S 1

The Outcome Is the Same in oth +ases

hatmatters isthis7

( ta3 $ri,esa /e$ge!et/een theprice !u"ers

pa" an$ theprice sellersrecei,e.

P

Q

D1

410.00

500#0

4$.50

411.00P B +

P S +

a&

e effects n P and Q 9 and te ta& incidence are te

sa"e eter te ta& is i"psed n uyers r sellers<


44/46

Elasticity and Ta Incidence

+(SE


45/46


+(SE @7 #eman$ is more elastic than suppl"

P

Q

D

S

a&

;uyers: sare

f ta& urden

=ellers: sare

f ta& urden

Price if n ta&

P B

P S

In tis case9

sellers ear

"st f te

urden fte ta&.

In tis case9

sellers ear

"st f te

urden fte ta&.


46/46


If !u"ers price elasticit" ; sellers priceelasticit") !u"ers can more easil" lea,e themarQet /hen the ta3 is impose$) so !u"ers/ill !ear a smaller share of the !ur$en of

the ta3 than sellers. If sellers price elasticit" ; !u"ers price

elasticit") the re,erse is true.

2014 mng609 demand analysis 2(1)

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