Scribd Logo
Upload

Welcome to Scribd!

  • 17 views

    Managerial Economics: An Analysis of Business Issues

    Uploaded by

    Jean
    now the market demand will be shared by a larger number of firms. In this situation demand curve will shift downwards and the new demand curve will be DD2. The number of firms in the market wi

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd

    Managerial Economics: An Analysis of Business Issues

    Uploaded by

    Jean
    17 views16 pages
    now the market demand will be shared by a larger number of firms. In this situation demand curve will shift downwards and the new demand curve will be DD2. The number of firms in the market wi

    Original Title

    Lecture 4

    Copyright

    © © All Rights Reserved

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    now the market demand will be shared by a larger number of firms. In this situation demand curve will shift downwards and the new demand curve will be DD2. The number of firms in the market wi

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    17 views16 pages

    Managerial Economics: An Analysis of Business Issues

    Uploaded by

    Jean
    now the market demand will be shared by a larger number of firms. In this situation demand curve will shift downwards and the new demand curve will be DD2. The number of firms in the market wi

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 16

    MANAGERIAL ECONOMICS

    An Analysis of Business Issues

    1
    Lecture 4:
    Demand and Elasticity
    Objectives:
    After studying the chapter, you should understand:
    1. The determinants of demand and its elasticity
    2. The relationship between revenue and elasticity
    3. The link between elasticity and the power of
    buyers

    2
    The Determinants of Demand
    Demand is the quantity of a product that purchasers
    are willing and able to purchase in a specified period
    It is determined by
    Own Price - Po
    Price of other products, especially close substitutes and
    complements, Pc,s
    Consumers disposable incomes, Yd
    Consumers tastes, T
    The amount spent on advertising the product, Ao
    The amount spent on advertising complements and
    substitutes, A c,s
    Interest rates (i) and credit availability (C)
    Expectations of future prices and supply conditions(E)
    3
    These Relationships May be
    Represented As:
    A demand function - the general
    mathematical form
    Qd = f(Po,Po,Ps,Yd,Ao,Ac,As,I,C,E)
    A demand curve
    The demand curve shows the quantity that would be
    Price
    bought at each price, for some fixed combination of
    all other factors

    Quantity Demanded

    4
    The Demand Curve
    D-curve shifts when anything except own-
    price changes
    A demand-curve shows the quantities sold at each
    Own Price price, assuming other things do not change. Assume
    here does not mean we believe this to be true but
    simply if. We know the other things change but we
    can only show two dimensions on a diagram.

    Quantity Demanded

    5
    Concepts of Elasticity
    Own price elasticity is:
    percentage change in quantity demanded, divided by percentage
    change in price:

    If demand is price-elastic, revenue increases with lower prices.


    If demand is price-inelastic, revenue decreases with lower prices

    Cross-price elasticity of demand between substitutes is positive


    Income-elasticity determines how demand changes with customers incomes.
    For most goods income-elasticity is positive.
    Advertising elasticity is important in deciding on advertising budgets. It is
    positive. As the level of advertising increases, we would expect advertising
    elasticity to fall.

    6
    The Demand-Curve:Examples

    Zero-elasticity at all prices


    Price

    Ed = 0

    Quantity

    7
    The Demand-Curve:Examples

    Infinite elasticity at all prices


    Price

    Ed =

    Quantity

    8
    The Demand-Curve:Examples

    Unitary elasticity at all prices


    Price
    This curve is a rectangular hyperbola
    Ed = -1 such that price x quantity is a constant

    Quantity

    9
    The Demand-Curve:Examples

    A Linear Demand Curve


    Ed = -
    Price

    Ed = -1

    Ed = 0
    Quantity

    10
    Demand and Marginal Revenue

    A Linear Demand Curve


    Ed = -
    $

    Ed = -1

    Ed = 0
    Quantity

    Marginal Revenue

    11
    Determinants of Own-price
    Elasticity
    Substitutes: how close and at what prices?
    How narrowly defined is the product? The more
    narrowly defined the more close substitutes
    Proportion of consumers income spent on
    the product (or % of industrial buyers costs
    accounted for)
    Time. Demand is more elastic over longer
    periods of time

    12
    Determinants of Other
    Elasticities
    Income Elasticity
    Type of good
    necessities - salt, drinking water, zero elasticity
    luxuries, zero at low levels of income then high when
    income thresholds exceeded
    inferior goods - negative, purchase less as income rises -
    bus travel, low-grade margarine, paraffin
    Cross-price elasticity
    substitutes or complements,and how close?
    An industry is a group of firms producing products
    with high positive cross-elasticities
    13
    The Demand Curve for an
    Individual Firm
    Depends on the conditions of competition
    For a monopoly, industry demand curve is the
    firms demand-curve
    Under perfect competition, demand is
    infinitely elastic at the market price
    Where competition is amongst a few firms it
    depends on each firms market share and
    rivals reactions

    14
    Elasticity and the Power of
    Buyers
    Buyer power has two components
    price sensitivity of buyers (looser version of
    the elasticity concept)
    bargaining power of buyers

    15
    Price Sensitivity of Buyers Is
    Determined By:
    Purchases of product as % of total purchases
    Product differences and brand identity
    Impact of product on the quality of the buyers
    product or service
    Customers own profitability
    Decision-makers incentives
    THIS USEFULLY EXTENDS THE ANALYSIS OF
    DEMAND AWAY FROM CONSUMERS TO
    INDUSTRIAL BUYERS AND PROVIDES A LINK TO
    MARKETING

    16

    You might also like