Asst. Prof. Dr.

Akin Seber / (IJAEST) INTERNATIONAL JOURNAL OF ADVANCED ENGINEERING SCIENCES AND TECHNOLOGIES
Vol No. 4, Issue No. 2, 001 - 003

An Analytical Exercise or
A New Approach to Demand?
Asst. Prof. Dr. Akin Seber
Department of Financial Economics and
Faculty of Commercial Sciences
Yeditepe University, Istanbul, Turkey
aseber@yeditepe.edu.tr

Abstract — In this paper, we introduce ―anew change in total
revenue‖ and ― a new demand function‖ and price elasticity of
demand as measured by ―a new elasticity measure‖.
Furthermore, we propose ―a new pricing strategy‖ and ―anew
firm objective‖ in congruence with the newly defined variables.
As a result, we show that the normal theories of ―b usiness
Production quantity is chosen at the point where marginal
revenue - MR is equal to marginal cost - MC, and price is
determined from the demand curve once the production
quantity is chosen.

strategy‖ may no longer hold for this ―new firm‖, and the firm’s
production process may have implications for ―sustainable
production‖ in general.
Keywords – Demand; total revenue; price elasticity of demand;
firm objectives; business strategy; sustainable production
I. INTRODUCTION
ES
As it is well known from the “Principles of
Microeconomics” courses, the price elasticity of demand
changes along a straight line demand curve. At the mid-
point of the demand curve, the price elasticity of demand is
unit elastic; above the midpoint it is greater than 1 (elastic)
and reaches infinity where the demand curve touches the price
- P axis (y-intercept); below the midpoint it is less than 1
(inelastic) and reaches 0 where it touches the quantity axis (x-
intercept). In other words, starting from the point where the
linear demand curve touches the P-axis, to the midpoint of the
A
demand curve and to the point it touches the Q-axis, the price
elasticity of demand decreases from infinity to 1 and then
finally to 0.
Furthermore, if you plot the Total Revenue - TR, which
simply is price times quantity - P x Q, against quantity - Q, it
has an increasing concave section, a point where it stops
IJ
T
In this paper, we want to analyze the effects of introducing
a special kind of “Change in Total Revenue – TR” function
which looks at the price change from the perspective of the
consumer as well as the producer. Furthermore, we propose a
different elasticity measure, which considers “Absolute
Change” rather than “Relative Change” in the variables P and
Q of the demand function. The argument about the elasticity
measure is in agreement with our recent papers [4], [5]. We
structure a “New Demand Function” that would be in
congruence with the new “Change in Total Revenue”
definition and objective of the firm, and examine the elasticity
properties of this demand function. Finally, with the new
definitions of the variables, we analyze the validity of usual
Business Strategies and make suggestions about the
Sustainability characteristics of the Production Process in
general.
This ―N ew Approach to Demand‖ analysis may be
considered important if everyone considers Environmental
Damages like ―Global Warming‖ as a problem that needs
serious prevention measures. If this is the case, there might
be a need for a Structural Change in the production
process and this study may be considered as an attempt in
this regard. The documentary of History Channel about
Global Warming – Global Warning [1], or even only just the

recent Earthquake – Tsunami – Nuclear Power Plant

increasing and reaches a maximum, and it has a decreasing
Explosion that devastated Japan may indicate the importance
concave section until it touches the Q-axis. The increasing and
of a search for new ways of “Environmental Damage
the decreasing sections are mirror images of each other around
Prevention – EDP” for the future of the world. Otherwise, the
the maximum point of the TR curve. Considering the
analysis may only be considered as ―A n Analytical
relationship of the demand curve with TR curve, we observe
Exercise on Demand‖.
that as you move down along the demand curve starting from
the P-axis, down to the midpoint and finally to the Q-axis, TR Since the analysis presented in the paper is based on new
increases from 0 to reach maximum and starts decreasing and definitions about some economic variables open to different
finally falls again down to 0. In other words, along the TR interpretations by the readers, we will not compare it with any
curve, the price elasticity of demand is infinity at the start and previous study, but only utilize two economic references, one
decreases to 1 at the maximum point and reaches 0 where it a principles of economics book [2], and the other an
touches the Q axis. The increasing portion of the TR curve is intermediate level book on the applications of microeconomics
price elastic, the maximum point unit price elastic, and the principles [3], to see the suitability of the well known
decreasing portion price inelastic. theorems on this new approach.
Normally, firms in monopolistic and monopolistically
competitive environments produce in the elastic portion but
below the maximum point of TR, because the criteria is to
“Maximize Profits – MP”, which also considers cost curves.

ISSN: 2230-7818 @ 2011 http://www.ijaest.iserp.org. All rights Reserved. Page 1

 Asst. Prof. Dr. Akin Seber / (IJAEST) INTERNATIONAL JOURNAL OF ADVANCED ENGINEERING SCIENCES AND TECHNOLOGIES
II. METHOD
A. New Definition of Change in Total Revenue:
Let’s assume for the time being that “Total Revenue – TR”
function of the firm, which only considers monetary returns,
rather than “Total Benefit – TB”, which considers non-
monetary benefits as well, still holds as is in traditional
economic analysis. The first step in the analysis will be to
make a new definition of “Change in Total Revenue – ∆TR”
function for the firm. In this definition, we consider the effect
of changes in “Price – P” and “Quantity – Q” from the
perspective both of the “Consumer and Producer” rather than
just the “Producer”. Therefore, when P increases and Q
decreases for example, it will have a positive and a
corresponding negative effect on producer and consumer,
respectively. When we consider the Whole in the definition of
TR, rather than Parts as in the case of only the producer, the
changes in P and Q would not affect the TR function as was
the case of maximum Total Revenue with Unit Elastic
Demand with original definitions. The following equations
summarize these arguments
(1)
( )( ) (2)
Here, the producer thinks the benefit and cost of the price
B. New Objective Function of the Firm :
ES
change not only for himself, but also for the consumer.
Therefore, the total change in TR would be 0.
Unlike in the case of traditional theory of firms, the new
firm doesn’t try to ―Maximize Profits - MP‖, but ― Serve
the Public - SP‖. The philosophy of “Giving what you
Receive” – GWR” is important here. In other words, the firm
doesn’t only want to maximize its profits – Parts, but the
benefit of the Whole. The words of Turkish poet Yunus Emre
may also be convenient to mention here: “Treat others as you
treat yourself; that is the meaning of all 4 books, if any”.
A
Therefore, it chooses profits π = 0 as a Strategic Policy itself,
and is not forced by Competition existing in the market as in
the case of Perfect Competition or Monopolistic Competition
in traditional economic analysis.
The following equations summarize the objective function
of the firm, where TC, TFC and TVC stand for Total Cost,
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Total Fixed Costs, and Total Variable Costs as usual,
respectively (we assume linear total cost function for
simplicity):
(3)
(4)
As a consequence of the new pricing strategy of the firm,
the demand function will change as well.
C. Price – Setting Firm and New Demand Function:
The new firm would no longer be a price-taker - P-T like
in perfect competition, but a price-setter - P-S like in
monopoly. Since the costs are defined as economic costs,
including normal profits as well as other opportunity costs,
zero economic profit would actually mean the firm is making
―F air Profits‖ and not ―No Profits‖.
ISSN: 2230-7818 @ 2011 http://www.ijaest.iserp.org. All rights Reserved.
Vol No. 4, Issue No. 2, 001 - 003
The new firm will set its price, which also equals its
Average Revenue – AR, letting it be equal to Average Total
Cost – ATC, price set just to cover total costs. This condition
also imposes the idea that it’s essentially the same whether the
firm produces a lot, a little, or nothing at all. The following
equation summarizes “the New Demand Function” of the firm:
(5)
In order to have a better grasp of the situation, we can look
at Figure 1, where we assume that a > b. If all the firms accept
the same objective function of SP policy, there will be only
one type of demand function in all the markets as shown in
Figure 1.
Revenue, Cost
T
P = AR = ATC = D = S
TR = TC = a + b Q
a
b MR = MC = b
0 Q
Figure 1. Revenue and cost functions of the firm with new objective
function.
Furthermore, even though the new firm doesn’t want to
maximize profits, the profit maximizing condition of MR =
MC still holds for all quantities Q. Actually the Supply curve
– S is equal to the Demand – D curve, and there is no separate
S curve as in the traditional economic analysis. Therefore, the
market is in equilibrium, not only at a single point of P and
Q, but for all Q along the new D and thus the S curve.
Furthermore, we also have to define a new “Market
Efficiency – ME Condition” different than the traditional
analysis, which assumes that ME is achieved at Competitive
Market Equilibrium, where the sum of Consumer Surplus –
CS and Producer Surplus – PS is maximized. On the other
hand the “Surplus” concept is based on the idea of “Benefiting
more than what you Pay” or “Pricing more than what it
Costs”, that is maximizing Parts principle, and is to be avoided
according to the SP policy of the new firm. Therefore, the new
definition of ME would be CS = 0, PS = 0, CS + PS = 0 where
no one is actually “gaining more than what it costs” in pursuit
of his/her goals. Putting it differently, according to the new
definitions, ― ME would occur at a point of equilibrium,
such that, Total Surplus – TS = CS + PS is Minimized and
not Maximized‖. In this regard, the New Firm would create a
Market Structure that satisfies ME.
D. New Price Elasticity of Demand Measure :
In parallel with our arguments about “The Relative versus
Absolute Performance Measures” [1], [2], we can define a
“New Elasticity Measure”. In the new definition, each change
in P and Q is equally important regardless of the initial level
of P and Q. This is illustrated in equations (6) and (7), where
EPD stands for price elasticity of demand.
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 Asst. Prof. Dr. Akin Seber / (IJAEST) INTERNATIONAL JOURNAL OF ADVANCED ENGINEERING SCIENCES AND TECHNOLOGIES
( )
( )
(6)
( )
(7)
( )
The new elasticity measure is changed considering the P-S
strategy of the firm in such a way that it is no longer P that
determines the quantity demanded Q, but the level of Q that
determines P. The new firm wants (note the term wants
rather than forced by the competition) to make normal
profits with its economic profit function π = 0, when setting P
for a given Q. Therefore, the new elasticity measure will be
just the slope of the demand curve. The dependent and
independent variables in the “New Demand Function” are
reversed. For the new firm, Q is the independent variable and
P the dependent variable, which graphically is normal since P
is already in the y-axis, and Q in the x-axis.
The “New Price Elasticity of Demand” for the “New
Demand Function” can therefore be given by the following
equation:
( ) (8)
III. APPLICATION
ES
A. The Comparison with Traditional Firm Strategies:
In this section, we want to analyze if business strategies in
a normal framework of market structures would also be valid
for the SP firm. For example, the Consumer Search
paradigm, where the consumer searches for the lowest price
with a cut-off value for search costs will no longer be valid,
because the firm has already set the price at lowest level
possible, equal to its ATC.
Another example might be the strategies of other firms to
A
keep the firm out of the market like limit pricing, predatory
pricing or raising rival’s costs. Limit Pricing, where the other
firm produces just enough to leave the firm with zero profits is
irrelevant, because the firm has already willingly accepted the
zero profit rule as a firm strategy. Predatory Pricing, where
the opponents decrease the price so that the firm will have to
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leave the market, is again irrelevant because of the knowledge
by the public that the firm is there to serve them rather than
to make profits will be enough to keep the firm in the market.
The other strategy of Rising Rival’s Costs will actually
backfire and will be destructive for the other firm who rather
distortedly sees “The public-serving firm as an opponent”.
Actually, the normal business strategies that are applicable
in traditional competitive market conditions will no longer be
applicable with the change from ―C ompetition Philosophy –
Comp.‖ of the traditional firm to ―C ooperation Philosophy –
Coop.‖ of the new firm.
Furthermore, the new demand curve doesn’t shift to the
left or right with other determinants of demand (like
changes in population, tastes and preferences or price of
substitutes and complements), as is usual in the case of
traditional economic analysis. What happens is, after the
change in any of the variables determining demand, the new
ISSN: 2230-7818 @ 2011 http://www.ijaest.iserp.org. All rights Reserved.
Vol No. 4, Issue No. 2, 001 - 003
quantity is being determined in the market, and the price set
equal to ATC.
B. Further Implications for Total Production:
So far the analysis only covered Private Costs, which were
termed TC that are actually Internal Costs – IC of production.
However, as we know, there are other costs including
Environmental Costs, Noise and Time Costs that are
considered as External Costs – EC with negative effects on
living and health conditions for all the living. Actually, as is
already described in Macroeconomics courses the IC are
actually revenues for others in the society, as the Expenditure
approach and the Income approach are to yield the same Gross
National Product – GNP value. What matters for production
then is only EC, and the best strategy of production
looking from the perspective of the Whole, that is not only
present generation of all people, animals and plants, but
also of future generations, may be to minimize EC. The
total cost of the production of the firm is given by the
following equation:
T
(9)
According to this cost function, only those goods that are
necessary for the society may be produced, the determining
factor for production being the ―M inimization of External
Costs - MEC‖. At the extreme point of prevention measure, it
may be only those goods that are ―
World”.
Basic Needs and Not
Wants – BNNW‖ to be produced for “the Future of the
IV. CONCLUSION
The new objective function for the firm to SP rather than
PM may actually have the potential to solve the Global
Warming problem of the world. The new firm with its new
objective and strategies, however, may have the potential to
achieve this only if the “Necessary Structural Adjustments –
NSA” are considered ―Wo rthy‖ enough, with a possible need
of support for those who lose jobs, as is usual in every
“Structural Unemployment”. However, if proper “Support of
the Governments and Public- SGP” for the NSA can be
achieved, these difficulties may well be overcome and the
result may be: ―C hange can be Made – CCM‖, only if the
conduct is ―Ev eryone Willing to Pay the Price – EWPP‖ as
a society and organizes as a ― Team‖ and accepts ―S erving
Public - SP‖ as the performance measure as is the case for
the new firm, and make that ― Mental Change – MC‖ from
―Maximizing Individual Benefits Paradigm - MIB‖ to
―Maximizing the Benefit of All Paradigm - MBA‖ and of
―Giving what you Receive‖ for future generations rather
than only ―Receiving‖.
REFERENCES
[1] “Global Warming – Global Warning”, History Channel Documentory.
[2] M. Parkin, M. Powel, K. Matthews, Economics, Pearson, 2005.
[3] Michael R. Baye, Managerial Economics and Business Strategy,
McGraw-Hill, 2009
[4] A. Seber, Ahmet H. Kaya, “Performance measures in education and
productive efficiency”, International Journal of Advanced Engineering
Sciences and Technologies, March 2011, vol.4 no.1, p. 22-25.
[5] A. Seber, “Chicken - egg problem in education and organization
theory”, International Journal of Advanced Engineering Sciences and
Technologies, April 2011, vol.4 no.2.
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