Managerial economics Business strategy Chapter 3 Quantitative Demand Analysis Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 3 Quantitative Demand Analysis
Oⅴ erven I Elasticities of demand Own Price Elasticity a Elasticity and Total revenue Cross-Price Elasticity Income elasticit IL Demand functions Linear Log-Linear III. Regression Analysis Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview I. Elasticities of Demand Own Price Elasticity Elasticity and Total Revenue Cross-Price Elasticity Income Elasticity II. Demand Functions Linear Log-Linear III. Regression Analysis
Elasticities of demand How responsive is variable"G to a change in variables 00△G GS 0O△S t s and g are directly related S and g are inversely related Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Elasticities of Demand • How responsive is variable “G” to a change in variable “S” + S and G are directly related - S and G are inversely related S G EG S = % %
Own Price Elasticity of Demand 0△Q Qx,Px%△Px Negative according to the law of demand ElastiC: E Inelastic:Egx, P <1 Unitary: EOP, =1 Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Own Price Elasticity of Demand • Negative according to the “law of demand” Elastic: Inelastic: Unitary: X d X Q P P Q E X X = % % , , 1 QX PX E , 1 QX PX E , =1 QX PX E
Perfectly elastic Inelastic demand Price Price D uantity Quantity Perfectly elastic Perfectly Inelastic Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Perfectly Elastic & Inelastic Demand Perfectly Elastic D Price Quantity Perfectly Inelastic D Price Quantity
Own-Price Elasticity and Total revenue astic Increase(a decrease) in price leads to a decrease(an increase)in total revenue Inelastic a Increase(a decrease)in price leads to an increase(a decrease) in total revenue Unitary Total revenue is maximized at the point where demand s unitary elastic Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Own-Price Elasticity and Total Revenue • Elastic Increase (a decrease) in price leads to a decrease (an increase) in total revenue. • Inelastic Increase (a decrease) in price leads to an increase (a decrease) in total revenue. • Unitary Total revenue is maximized at the point where demand is unitary elastic
Elasticitv. TR. and Linear Demand Price 10 Elastic 8 Inelastic D 2345 Quantity Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Elasticity, TR, and Linear Demand Price Quantity D 10 8 6 4 2 1 2 3 4 5 Elastic Inelastic
Factors Affecting Own Price Elasticity Available substitutes The more substitutes available for the good, the more elastic the demand Time Demand tends to be more inelastic in the short term than in the long term Time allows consumers to seek out available substitutes Expenditure Share Goods that comprise a small share of consumer 's budgets tend to be more inelastic than goods for which consumers spend a large portion of their incomes Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Factors Affecting Own Price Elasticity Available Substitutes • The more substitutes available for the good, the more elastic the demand. Time • Demand tends to be more inelastic in the short term than in the long term. • Time allows consumers to seek out available substitutes. Expenditure Share • Goods that comprise a small share of consumer’s budgets tend to be more inelastic than goods for which consumers spend a large portion of their incomes
Cross Price Elasticity of Demand %△Qx Ox 0△P Y Substitutes Complements Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Cross Price Elasticity of Demand + Substitutes - Complements Y d X Q P P Q E X Y = % %
Income Elasticity %△Qx Ox, M 00△M normal good Inferior good Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Income Elasticity + Normal Good - Inferior Good M Q E d X QX M = % %
