1. The willingness and ability to buy
Demand
The willingness and ability to buy
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2. Demand learning objectives
Students should be able to
Describe and apply demand function and demand curve
Distinguish between change in quantity demanded and change in demand
Calculate and interpret demand elasticity
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3. Managerial Economics and Organizational Architecture, Chapter 4
Demand Function
A mathematical representation of the relationship between the quantity demanded and all factors influencing demand:
Q = f(X1, X2,… Xn)
where Q is quantity demanded and the Xis are the factors influencing demand
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4. Managerial Economics and Organizational Architecture, Chapter 4
Demand for PTC Tickets
Q = P Ps - 3.3Pr I
where P is PTC ticket price, Ps is price of symphony tickets, Pr is price of nearby restaurant meals, and I is average per capita income.
(Interpret each term of the above equation.)
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5. Managerial Economics and Organizational Architecture, Chapter 4
Variable values
Suppose the variables have the following values:
P = $30
Ps = $50
Pr = $40
I = $50,000
How many tickets will PTC sell?
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6. Managerial Economics and Organizational Architecture, Chapter 4
The demand curve
Substitute variable values (except for P) into the equation and simplify:
P = Q
This is the equation for the demand curve.
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7. Graphing the demand curve
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8. Managerial Economics and Organizational Architecture, Chapter 4
Demand elasticity
The price elasticity of demand is given by
[Note: the convention used here is to express the elasticity as a negative quantity so that, when calculated, the result is a positive number]
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9. Calculating elasticity arc price elasticity
Information requirements:
Quantity demanded before and after the price change Q1 Q2
Price before and after the price change P1 P2
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10. Calculating elasticity arc price elasticity
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11. Arc price elasticity example
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12. Calculating elasticity point price elasticity
Information requirements
Demand curve equation:
Q=a+bP, b=Q/P, b<0
Current price and quantity P Q
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13. Calculating elasticity point price elasticity
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14. Point price elasticity example
If the demand equation is Q= P, P=35*, and Q=167, then elasticity is
*This price is midway between the two prices in the arc elasticity calculation.
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15. Range of price elasticities
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16. Determinants of price elasticity
Availability of substitutes
few substitutes for milk
many substitutes for milk at the supermarket
Size of good in consumer budget
consider salt versus a Lexus
Time period for consumer adjustment
given enough time, how do we adjust to higher fuel prices?
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17. Price changes and total revenue
PTC’s total revenue is TR=PQ 
The inverse demand curve is P=60-.15Q 
 Substituting, TR=(60-.15Q)Q=60Q-.15Q2 
 From this we can derive marginal revenue 
(MR=TR/Q=60-.30Q)
(Well, OK, we did use a little calculus for that last step. Trust us.)
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18. Elasticity, prices, and total revenue
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19. Demand, total revenue, & marginal revenue linear demand curve
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20. Other demand influences
Complements versus substitutes
Cross price elasticity of demand
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21. Other demand influences
Income
Normal goods
Inferior goods
Income elasticity
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22. Managerial Economics and Organizational Architecture, Chapter 4
Product life cycle
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23. Omitted variables problem
1998
1999
2000
Income (I)
$3,000
$4,000
$3,500
Advertising (A) 2 3
2.5
Price (P) 10
Sales (S)
236
284
260
True demand
S=120-2P+8A+0.04I
Estimated demand
S=140+48A
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24. Estimating demand the identification problem
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