Managerial Economics and Organizational Architecture, Chapter 4 Demand The willingness and ability to buy

Managerial Economics and Organizational Architecture, Chapter 4 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

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(X 1, X 2,… X n ) where Q is quantity demanded and the X i s are the factors influencing demand

Managerial Economics and Organizational Architecture, Chapter 4 Demand for PTC Tickets Q = P P s - 3.3P r I where P is PTC ticket price, P s is price of symphony tickets, P r is price of nearby restaurant meals, and I is average per capita income. (Interpret each term of the above equation.)

Managerial Economics and Organizational Architecture, Chapter 4 Variable values Suppose the variables have the following values: P = $30 P s = $50 P r = $40 I = $50,000 How many tickets will PTC sell?

Managerial Economics and Organizational Architecture, Chapter 4 The demand curve Substituting variable values (except for P) into the equation and simplifying: P = Q which is the equation for the demand curve.

Managerial Economics and Organizational Architecture, Chapter 4 Graphing the demand curve

Managerial Economics and Organizational Architecture, Chapter 4 Demand elasticity The elasticity of demand is given by

Managerial Economics and Organizational Architecture, Chapter 4 Calculating elasticity arc price elasticity Information requirements: Quantity demanded before and after the price change Q1Q1 Q2Q2 Price before and after the price change P1P1 P2P2

Managerial Economics and Organizational Architecture, Chapter 4 Calculating elasticity arc price elasticity

Managerial Economics and Organizational Architecture, Chapter 4 Arc price elasticity example

Managerial Economics and Organizational Architecture, Chapter 4 Calculating elasticity point price elasticity Information requirements Demand curve equation: Q=a-bP, b=  Q/  P Current price and quantity PP QQ

Managerial Economics and Organizational Architecture, Chapter 4 Calculating elasticity point price elasticity

Managerial Economics and Organizational Architecture, Chapter 4 Point price elasticity example If the demand equation is Q=20-4P, P=14, and Q=27, then elasticity is

Managerial Economics and Organizational Architecture, Chapter 4 Range of price elasticities

Managerial Economics and Organizational Architecture, Chapter 4 Determinants of price elasticity Availability of substitutes –few substitutes for milk –lots of 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?

Managerial Economics and Organizational Architecture, Chapter 4 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-.15Q 2   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.)

Managerial Economics and Organizational Architecture, Chapter 4 Elasticity, prices, and total revenue

Managerial Economics and Organizational Architecture, Chapter 4 Demand, total revenue, & marginal revenue linear demand curve

Managerial Economics and Organizational Architecture, Chapter 4 Other demand influences Complements versus substitutes –Cross price elasticity of demand

Managerial Economics and Organizational Architecture, Chapter 4 Other demand influences Income –Normal goods –Inferior goods Income elasticity

Managerial Economics and Organizational Architecture, Chapter 4 Product life cycle

Managerial Economics and Organizational Architecture, Chapter 4 Estimating demand the identification problem