badm4300-module3
TRANSCRIPT
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MANAGERIAL
ECONOMICS
BADM 4300 UNIT III
DEMAND ANALYSIS:Functions &
Elasticities
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DEMAND FUNCTIONS&
ELASTICITIES OF DEMAND
Definition ofDEMAND:Refers to the number of units of a particular good or
service that consumers are willing to buy under stated conditions oftime, place, price, and so forth.(Ceteris Paribus)
Thus demand is a function of a number of independent
variables or demand determinants; it can be expressed as an
algebraic equation or by a graph ortable.
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Demand Applications Problem #1: The Pueblo Viejo Company, a department
store, conducted a study of the demand for mens ties. Itfound out that the average daily demand, Q, in terms ofprice, P, is given by the following equation:
Q = 60 5P.a) How many ties per day can the store expect to sell at a price
of $3 per tie?
b) If the store wants to sell 20 ties per day, what price should itcharge?
c) What would be the demand if the store offered to give the
ties away?d) What is the highest price that anyone would be willing to
pay for these ties?
e) Plot the demand curve.
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Demand Applications
Problem #2: Digimill, Inc.
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Answer to Problem #1
a) Replace P by 3 in the equation:
Q = 60 5(3)
Q = 60 15
Q = 45 ties
b) Replace Q by 20 in the equation:
20 = 60 5P
20 60 = -5P
-40 = -5P
$8 = P
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Answer to Problem #1
c) We should assume that P = 0, and substitute P by its value inthe equation:
Q = 60 5(0)
Q = 60 0Q = 60 ties
d)We should assume that the highest price that someone will bewilling to pay is the price to buy the minimum units, that is 1:
1 = 60 5P1 60 = -5P
-59 = -5P
P = $11.80
Continuation
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Answer to Problem #1
P Q TR MR
12$
10
8
64
2
0
DEMAND TABLE
Continuation
Use the following equation to fill on the TR column: TR = P x Q
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P Q TR MR
12$ 0
10 10
8 206 30
4 40
2 50
0 60
Substituting Pby its corresponding value in the demandequation, Q = 60 - 5P, you can fill the Q column.
DEMAND TABLE
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P Q TR MR
12$ 0 0
10 10 100
8 20 1606 30 180
4 40 160
2 50 100
0 60 0
Multiplying column 1 and 2, you obtain the resultsfor the 3rd. Column: TR = P x Q
DEMAND TABLE
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Demand Equation
Qd = 60 5P Demand Table Demand Curve
0
2
4
6
810
12
14
Quantity
Price
P Q
12$ 0
10 10
8 20
6 30
4 40
2 500 60
20 40 60
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DEMAND LAW
Inverse relationship between price (P) and
quantity demanded (Qd):
When Price increases, quantity demanded decreases. P Qd
When price decreases, quantity demanded increases.
P
Qd
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DEMAND LAW
Continuation There are 2 effects which explain the inverse
relationship between the price of a product and the
quantity demanded: 1. The Substitution Effect:
When the price of a product decreases, new buyers will enter
the market. The product will be cheaper relative to other
products and the consumers will substitute them for the
product whose price has decreased,
2. The Income Effect:
Consumers will by more when the price is lower.
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QUANTITY DEMANDED
VS
CHANGE IN DEMAND Change in Quantity Demanded( Qd):
Movement along the demand curve from point A to pointB and is caused only by a change in the price of the
product. Change in Demand ( D):
A shift in the demand curve caused by a change in any ofthe factors determinants of demand (Ceteris Paribus),
other than the price of the product, such as: Number of consumers in the market. Tastes and preferences of the consumers,
Consumers income,
Price of other products,
Price expectations.
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ELASTICITIES OF DEMAND
Price elasticity of demand
d = % Qd / % P
Income elasticity of demand
d = % Qd / % TR
Cross elasticity of demand
dx/y = % Qdx / % Py
Advertising elasticity
d = % Qd / % PE
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DETERMINANTS OF
DEMAND The determinants of demand are variables
that affect the amount of a product
purchased. 1. Number of Consumers:
More consumers in a market, greater demand,
Less consumers in a market, less demand
2. Consumers Tastes & Preferences:Mode or Fad
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DETERMINANTS OF
DEMAND Continuation 3. Consumers Income
Normal Goods: goods for which demand is
positively (directly) related to income, e.g., steak,
clothes, leisure time.
Income elasticity of demand dis positive
Inferior Goods: goods for which demand isnegatively (inversely) related to income, e.g.,
potatoes, bread.
Income elasticity of demand dis negative
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DETERMINANTS OF
DEMAND Continuation 4. Price of Closely Related Goods
A) Substitutes. If products A and B are substitutes, a price increase in A will generate anincrease in the demand for B.Example, when the price of beef increases, the demand forchicken increases.
Cross elasticity of demand dx/y is positive. B) Complements. If products a and B are complements, a price increase in A will
generate a decrease in the demand for
B.Example, when the price of bread increases, the demand for jelly decreases.
Cross elasticity of demand dx/y is negative
5. Consumer Expectations
Do consumers expect incomes and prices to increase or decrease in the near future?
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PRICE ELASTICITY OF
DEMANDDefined as a percentage of change in the
quantity demanded that is caused by a one percent
change in price, ceteris paribus.
General Formula:
d = % Qd / % P
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DETERMINANTSof
PRICE-ELASTICITY 1)Luxury Goods - more elastic and
Necessity Goods less elastic.
2) Expensive Goods more elastic andCheap Goods less elastic.
3) More Substitutes more elastic and
Less Substitutes less elastic. 4) Time Period: the longer the time period more elastic.
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TYPES OF ELASTICITY
MEASUREMENTS Point-Elasticity Formula
Q1 Q0 P1 P0 or Q/Q0
Q0 P0 P/P0
Arc-Elasticity Formula
Q1 Q0 P1 P0 Q1 + Q0 P1 + P0
2 2
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ELASTIC VS INELASTIC
If =, demand is perfectly elastic
If
> 1, demand is elastic If = 1, unitary elasticity
If < 1, demand is inelastic
If = 0, perfectly inelastic
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DEMAND, REVENUE &
PRICE ELASTICITY Elastic Demand:
If Price increases, Total Revenue decreases
If Price decreases, Total Revenue increases
Unitary elasticity: If Price increases, Total Revenue constant
If Price decreases, Total Revenue constant
Inelastic Demand If Price increases, Total Revenue increases If Price decreases, Total Revenue decreases
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MARGINAL REVENUE &
PRICE ELASTICITY Elastic Demand:
Marginal Revenue is positive
As P , Qdand TR.
Unitary elasticity:
Marginal Revenue is equal to 0
As TRreaches it maximum.
Inelastic Demand
Marginal Revenue is negative
As P , Qdand TR.
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Page 27 Cross-Elasticity of Demand