1. Economic Analysis for Managers (ECO 501) Fall Semester, 2012
Khurrum S. Mughal

2. Theme of the Lecture Theory of Demand Consumer Demand
Market and Firm Demand
Point Price Elasticity of Demand
Arc Price Elasticity of Demand

3. Demand of a Commodity Demand for a commodity
Businesses start with demand
Depends on size of the market (Industry Demand for the commodity)
Related to Consumer Choice Theory
Consumer Demand Theory

4. Individual Demand
How are price and demand related for a good? (law of demand)
Normal Goods
Inferior Goods
Example: Suzuki Mehran
Effect of price of substitute and complementary goods
Effect of Change in Income and Tastes
Assuming everything else fixed…………….

5. Individual Demand When Price Changes: Substitution effect
A rise in Price of a product might cause consumers to substitute that product
Income effect
A rise in price causes decrease in real income of the consumer and hence decreases his/her demand

6. Market Demand Horizontal Summation of Individual Demand Curves
Negatively sloped, why?
Inverse relation between price and quantity
QD= F(Px, I, N, Py, T)
Bandwagon Effect and Snob Effect

7. Market Demand Change in demand Change in quantity Demanded
Determinants of Market Demand
Consumer Preferences
Income
Prices of Other Goods

8. Demand Faced by A Firm Only Firms in the market
Monopolist
Market demand is the firms demand
If many firms exist then firms demand is a share of the market demand

9. Demand Faced by A Firm Factors effecting Demand
Decisions made by competitors:
Advertising, Promotional Policies, PRICE CHANGES
Change in tastes or income of consumers effecting market demand
But how much its effects demand for a single firm’s product in the market?

10. Demand Faced by A Firm
Firms selling durable goods face more volatile & unstable demand
Like automobiles, washing machines, water geezers
Why?
Consumers can wait for Availability of credit, or growth in economy

11. Demand Faced by A Firm Demand function faced by a firm
qD= a0+a1px +a2i+a3n+a4py+ a5t……………
“a” is coefficient to be estimated with regression analysis

12. Total & Marginal Revenue
P ($) Q
TR=P.Q
MR=∆TR/∆Q 10 1 ? 9 2 18 8 3 24 7 4 28 6 5 30

13. Total & Marginal Revenue
P ($) Q
TR=P.Q
MR=∆TR/∆Q 10 1 - 9 2 18 8 3 24 6 7 4 28 5 30 -2 -4 -6 -8

14. Total & Marginal Revenue
1. Maximum Point
2. Where MR goes Negative
Revenue TR
Quantity
Price
Quantity MR

15. Price Elasticity of Demand
Measures responsiveness to changes in quantity demanded due to changes in price
Percentage change in quantity due to percentage change in price
Ep = %∆Q/% ∆ P
Different effects of reducing price
Types:
Point Price Elasticity of Demand
Arc Price Elasticity of Demand

16. Point Price Elasticity of Demand
Ep = Q2-Q1/Q1
P2-P1/P1
Different at different points
Given by coefficient “a” with Price in the regression equation

17. Arc Price Elasticity of Demand
Ep = Q2-Q1/ Q2+Q1
P2-P1/ P2+P1
Used since Point price elasticity differs in scenarios of price rise and fall
Calculated by average of change in quantity and price
In general: the price elasticity of demand for a firm is higher than the price elasticity of market demand

18. Price Elasticity, Total Revenue, & Marginal RevenueQ TR MR Ep 10 1 - 9 2 18 8
- 4.50 3 24 6
- 2.67 7 4 28
- 1.75 5 30
- 1.20
- 0.83 -2
- 0.57 -4
- 0.38 -6
- 0.22 -8
- 0.10

19. Total & Marginal RevenueTR
Quantity
Unit Elastic
Elastic Inelastic
Price
Demand
Quantity MR

20. Price Elasticity, Total Revenue, & Marginal Revenue
Effect of decrease in price on Total revenue:
Increases if demand is elastic
Decreases if Inelastic
Remains Unchanged if Unitary elastic

21. Factors Effecting Price Elasticity of Demand
Availability of Substitutes
Example: Sugar vs Sweetners
Proportion of Income Spent
Example: Matchbox
Time Period: Larger for longer time periods
Example: Petrol vs CNG