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

2. What we can learn: What factors affect sales of my product?
How sensitive are my sales to these factors?
How will a price change impact revenue?
Kelley School of Business

3. The demand function Linear demand Qx=a + b1Px + b2Py + b3Pz + b4M
Log linear demand
lnQx=a + b1lnPx + b2lnPy + b3lnPz + b4lnM
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4. Q = 513 – 3.68P
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5. Multiple Regression Q = 300 – 3.60P + 2.08Py + 23.19W Q = 531 – 3.60P
Coefficients
Standard Error
t Stat
P-value
Intercept
300.02
37.20
8.06
0.00
Our Price
-3.60
0.27
-13.15
Comp. Price
2.08
0.26
8.12
Weekend
23.19
3.28
7.08
Q = 300 – 3.60P Py W
Q = 531 – 3.60P
Simplified Demand for Weekend when Py = 100
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6. Elasticity
Measurement of how one variable responds to a change in another.
Own price elasticity
Cross price elasticity
Income elasticity
Advertising elasticity
Other – Win Elasticity
Percentage change in one variable due to a percentage change in another.

7. Own Price Elasticity -∞ Own price elasticity is always negative.
Elastic demand – absolute value greater than 1.
Inelastic demand – abs. value less than 1.
Unitary elasticity – E= -1.
Inelastic
Elastic -1 -∞
Unitary
Own Price Elasticity Spectrum

8. Perfectly Elastic Demand
Price D
Quantity
Exists for some sellers
The demand facing a seller may be perfectly elastic.
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9. Perfectly Inelastic Demand
Price D
Nothing has perfectly inelastic demand.
Quantity
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10. Factors Affecting Own Price Elasticity
Available Substitutes
The more close substitutes available for the good, the more elastic the demand.
Similar products 
More elastic demand
Brand loyal  less elastic
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11. Factors Affecting Own Price Elasticity
Available Substitutes
The more close substitutes available for the good, the more elastic the demand.
Beer:
Miller Lite
Many substitutes: Elastic demand
No substitute – inelastic demand
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12. Factors Affecting Own Price Elasticity
Time
Demand tends to be more inelastic in the short term than in the long term.
Time allows consumers to seek out available substitutes.
Short-term e = -.53
Long-term e = -.81
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13. Factors Affecting Own Price Elasticity
Expenditure Share
Larger share  more elastic demand
Small purchase – less elastic
Large purchase – more elastic
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14. Own Price Elasticity and Linear Demand
Elasticity is different at different prices.
Higher prices – demand is more elastic.
Price
Elastic
Unitary Elastic
Inelastic D
Quantity
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15. Calculating elasticity
Linear demand: Q= b0 – b1P Loglinear demand: lnQ = b0 + b1lnP E = b1
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16. Conclusion Defined Elasticity Determinants of Elasticity
Calculate Elasticity
Next: Elasticity and Revenue
Kelley School of Business