Quantitative Demand Analysis Example Problem

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Presentation transcript:

Quantitative Demand Analysis Example Problem Managerial Economics Kyle J. Anderson Kelley School of Business Indiana University

The Elasticity of Jeans Kelley School of Business

The Own Price Elasticity of Demand for Jeans: Demand Equation: Qx = 300 – 8Px + 2Py + 5M Py = $35, M = $40 What is the own price elasticity of demand? At the current price of $40. Simplifying: Qx = 300 – 8Px + 2(35) + 5(40) Qx = 570 – 8Px Kelley School of Business

The Own Price Elasticity of Demand for Jeans: Demand Equation: Qx = 570 – 8Px What is the elasticity of demand at Px = $40 Demand is on the elastic portion of the demand curve. Kelley School of Business

The Own Price Elasticity of Demand for Jeans: What about at a price of $50?: Qx = 570 – 8Px What is the elasticity of demand at Px = $50? With a higher price, demand is more elastic. Kelley School of Business

Elasticity and Linear Demand As we slide up the demand line, demand is more elastic. P=50, E = -2.35 Price P=40, E = -1.28 Elastic Unitary Elastic Inelastic D Quantity Kelley School of Business