1. Faculty: Prof. Sunitha Raju
Business Economics
Sessions 2 & 3 : Demand Analysis - II
Faculty:
Prof. Sunitha Raju
Session Date:

2. Learning Objectives
to understand demand – revenue relationships at the firm level
to use elasticities as tools for managerial decision
to relate demand factors to pricing decisions

3. Relationship Between Price, and Total Revenue
Price of Product X (Px)
Quantity of Product X (Qx)
Total Revenue
(PxQx) 5 70
350 10 60
600 15 50
750 20 40
800 25 30 35
As P ↑, TR ↑ and then ↓

4. Relationship Between Price, and Total Revenue and Marginal Revenue
Price of Product X (Px)
Quantity of Product X (Qx)
Total Revenue
(PxQx)
Marginal Revenue (TRx) 5 70
350 10 60
600 25 15 50
750 20 40
800 30 -5
-15 35
-25
-35
TR ↑ when MR is Positive

5. Problem Solving The demand curve faced by a firm is P = 10,000 – 4Q
(i) What is the MR equation
(ii) At what price & quantity MR be zero
(iii) At what price & quantity will TR be maximized
(iv) If price is increased from $6000 to $7000, what will be the effect on TR?

6. Price Elasticity of Demand (єp)
1. Definition
2. Measurement
Point єp
Arc єp
Px Qx

7. Relationship Between Єp , Price and Revenue
The Case of
Implies
Following a P
Following a P
1. Elastic Demand
 єp > 1
% Q > % P
Revenue
Revenue 
2. Unitarv Demand
 єp = 1
% Q = % P
Revenue Unchanged
3. Inelastic Demand
 єp  < 1
% Q < % P
Revenue 

8. Price Elasticity of Demand (єp).
1. Definition
Measurement
(i) Point єp
KRMY-TV is contemplating a T-shirt advertising
promotion. Monthly sales data from T-shirt shops
marketing the “Eye Watch KRMY-TV” design
Indicate that
Q = 1,500 – 200P
Calculate the point price elasticity of demand at a
price of $5.

9. Relationship Between Price, and Total Revenue and Marginal Revenue
Price of Product X (Px)
Quantity of Product X (Qx)
Total Revenue
(PxQx)
Marginal Revenue TRx Q єp 5 70
350 10 60
600 25
-0.14 15 50
750
-0.33 20 40
800
-0.60 30 -5
-1.00
-15
-1.66 35
-25
-3.00
-35

10. Selected Own Price Elasticities
Market
Own Price Elasticity
Transportation
-0.6
Motor Vehicles
-1.4
Motorcycles and bicycles
-2.3
Food
-0.7
Cereal
-1.5
Clothing
-0.9
Women’s Clothing
-1.2

11. Selected Short-and Long-Term Own Price Elasticities
Market
Short-Term Own Price Elasticity
Long-Term Own Price Elasticity
Transport
-0.6
-1.9
Food
-0.7
-2.3
Alcohol and Tobacco
-0.3
-0.9
Recreation
-1.1
-3.5
Clothing
-2.9
long run єp higher compared to short run єp

12. Income Elasticities () and Product Class
Income Elasticity
Product Class
Increased Income
(I)
Decreased Income
(I)
1.  >  > 1 (+)
LUXURIES
Qx es by greater percentage
Qx  es by greater percentage
2. 1 >  > 0 (+)
NECESSITIES
Qx es by lesser percentage
Qx es by lesser percentage
3. 0 >  > -  (-)
INFERIOR GOODS
Qx  es
Qx es

13. Income Elasticity of Demand, Selected Commodities, United States
Commodity
Income elasticity of demand
Alcohol
1.54
Housing, owner-occupied
1.49
Furniture
1.48
Dental Services
1.42
Restaurant meals
1.40
Shoes
1.10
Medical insurance
0.92
Gasoline and oil
0.48
Butter
0.42
Coffee
Margarine
-0.20
Flour
-0.36
Source: Houthakker and Taylor, Consumer Demand in the United States.

14. Cross Price Elasticity of Demand ( )
Cross Elasticity
Product Relationship
Increase in Py
Decrease in Py
1.  >  > 0 (+)
SUBSTITUTES
Qx RISES
Qx FALLS
2.   0
UNRELATED
Qx UNCHANGED
3. 0 >  > -  (-)
COMPLEMENTS
Qx RISES

15. Cross Elasticity of Demand
Elasticity of Demand Selected Pairs of Commodities, Cross United States
Good X
Good Y
Cross Elasticity of Demand
Electricity
Natural gas
+0.20
California Orange
Florida Oranges
+0.14
Butter
Margarine
+0.67
Pork
Beef
Source: R. Halvarsen, “Energy Substitution in U.S. Manufacturing,