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Demand
Managerial Economics, 2e
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©Oxford University Press,
Demand
Demand is---
Willingness
Ability to pay
Managerial Economics, 2e
ALL RIGHTS RESERVED
©Oxford University Press,
Demand
Demand is a function of:
- own price
- Prices of related commodities
- income
- tastes and preferences
- others
Managerial Economics, 2e
ALL RIGHTS RESERVED
©Oxford University Press,
Law of Demand
- Ceteris Paribus conditions
- “ all other factors remaining constant”
Managerial Economics, 2e
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©Oxford University Press,
Why negative slope?
- Substitution effect of a price change
Managerial Economics, 2e
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©Oxford University Press,
Exceptions
- negative income effect greater than substitution effect
Giffen good
Managerial Economics, 2e
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©Oxford University Press,
Shifts in Demand
When ceteris paribus assumption is relaxed
Managerial Economics, 2e
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©Oxford University Press,
Shifts in and movements along a
Demand Curve
Effect on demand of changes in its own price results in movement along
the demand curve.
Managerial Economics, 2e
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Market Demand
Horizontal summation of individual demand curves
Managerial Economics, 2e
ALL RIGHTS RESERVED
©Oxford University Press,
Elasticity
Price Elasticity: Proportionate change in quantity demanded due to a
proportionate change in price
- ∆Qx/ ∆Px * Px/Qx
- negative for normal goods
- negative sign is ignored while making comparisons among normal
goods
Managerial Economics, 2e
ALL RIGHTS RESERVED
©Oxford University Press,
Price Elasticity
Pe Greater than1 (ignoring – sign): Elastic
Pe Equal to 1 (ignoring – sign) : Unit Elastic
Pe Less than 1 ( ignoring – sign): Inelastic
Price Elasticity and Expenditure:
- Pe less than 1 a fall in price lower exp
- Pe equal to 1 a fall in price exp constant
- Pe greater than 1 a fall in price higher exp
Managerial Economics, 2e
ALL RIGHTS RESERVED
©Oxford University Press,
Price elasticity
Special cases:
Infinitely elastic
Zero elasticity
Managerial Economics, 2e
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©Oxford University Press,
Price elasticity
Along a linear demand curve:
P
Pe > 1
Pe < 1
Managerial Economics, 2e
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©Oxford University Press,
Total, Average, and Marginal
magnitudes
Q P TR MR Q P TR MR
(=AR)
0 10 0 - 6 4 24 -1
1 9 9 9 7 3 21 -3
2 8 16 7 8 2 16 -5
3 7 21 5 9 1 9 -7
4 6 24 3
5 5 25 1
Managerial Economics, 2e
ALL RIGHTS RESERVED
©Oxford University Press,
Derivation
Q=10 – P
P = 10 – Q
TR = P.Q = (10 - Q).Q = 10Q-Q2
MR= dTR/dQ = 10 – 2Q
Managerial Economics, 2e
ALL RIGHTS RESERVED
©Oxford University Press,
Price elasticity
Price elasticity and MR:
TR = P (Q) *Q
MR = dTR/dQ = P + Q dP/dQ
= P(1+ (Q/P * dP/dQ)
= P (1 + 1/Pe)
With Pe being –ve, it becomes
P ( 1- 1/Pe) (and Pe is without the –ve sign)
Managerial Economics, 2e
ALL RIGHTS RESERVED
©Oxford University Press,
Marginal Revenue and Price
Elasticity of Demand
1
MR P 1
EP
Marginal Revenue and Price
Elasticity of Demand
PX
EP 1
EP 1
EP 1
QX
MRX
Marginal Revenue, Total Revenue, and
Price Elasticity
TR MR>0 MR<0
EP 1 EP 1
QX
EP 1 MR=0
Price elasticity
Price elasticity and AR:
Since Ar =P,
We have MR = AR (1 – 1/Pe)
MR = AR – AR/ Pe
…….
……
Pe = AR / (AR – MR)
Managerial Economics, 2e
ALL RIGHTS RESERVED
©Oxford University Press,
Income Elasticity
Income Elasticity
∆Qx/∆I * I/Qx
Managerial Economics, 2e
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©Oxford University Press,
Cross Price Elasticity
Cross Price Elasticity:
∆Qx/∆Py * Py/Qx
Managerial Economics, 2e
ALL RIGHTS RESERVED
©Oxford University Press,