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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period. Substitution Effect Income Effect

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Individual Consumers Demand Qd X = f(P X, I, P Y, T) quantity demanded of commodity X by an individual per time period price per unit of commodity X consumers income price of related (substitute or complementary) commodity tastes of the consumer Qd X = P X = I = P Y = T =

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Qd X = f(P X, I, P Y, T) Qd X / P X < 0 Qd X / I > 0 if a good is normal Qd X / I < 0 if a good is inferior Qd X / P Y > 0 if X and Y are substitutes Qd X / P Y < 0 if X and Y are complements

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Market Demand Curve Horizontal summation of demand curves of individual consumers Bandwagon Effect Snob Effect

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Horizontal Summation: From Individual to Market Demand

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Market Demand Function QD X = f(P X, N, I, P Y, T) quantity demanded of commodity X price per unit of commodity X number of consumers on the market consumer income price of related (substitute or complementary) commodity consumer tastes QD X = P X = N = I = P Y = T =

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Demand Faced by a Firm Market Structure –Monopoly –Oligopoly –Monopolistic Competition –Perfect Competition Type of Good –Durable Goods –Nondurable Goods –Producers Goods - Derived Demand

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Linear Demand Function Q X = a 0 + a 1 P X + a 2 N + a 3 I + a 4 P Y + a 5 T PXPX QXQX Intercept: a 0 + a 2 N + a 3 I + a 4 P Y + a 5 T Slope: Q X / P X = a 1

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Price Elasticity of Demand Linear Function Point Definition

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Price Elasticity of Demand Arc Definition

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Marginal Revenue and Price Elasticity of Demand

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Marginal Revenue and Price Elasticity of Demand PXPX QXQX MR X

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Marginal Revenue, Total Revenue, and Price Elasticity TR QXQX MR<0MR>0 MR=0

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Determinants of Price Elasticity of Demand Demand for a commodity will be more elastic if: It has many close substitutes It is narrowly defined More time is available to adjust to a price change

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Determinants of Price Elasticity of Demand Demand for a commodity will be less elastic if: It has few substitutes It is broadly defined Less time is available to adjust to a price change

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Income Elasticity of Demand Linear Function Point Definition

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Income Elasticity of Demand Arc Definition Normal GoodInferior Good

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Cross-Price Elasticity of Demand Linear Function Point Definition

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Cross-Price Elasticity of Demand Arc Definition SubstitutesComplements

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PowerPoint Slides by Robert F. BrookerCopyright (c) 2001 by Harcourt, Inc. All rights reserved. Other Factors Related to Demand Theory International Convergence of Tastes –Globalization of Markets –Influence of International Preferences on Market Demand Growth of Electronic Commerce –Cost of Sales –Supply Chains and Logistics –Customer Relationship Management

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