Download Demand

100
80
Where?
How? When?
What?
Why?
2015
60
East
West
North
40
20
0
1st Qtr
2nd Qtr 3rd Qtr 4th Qtr
Who?
Managerial Economics
Stefan Markowski
Demand analysis and demand
elasticities
The economics of competitive advantage
Detailed course schedule
Day no
Topic
Textbook ch.
1 (24 Nov;
3 hrs)
1. Introduction. Decision making process and its elements. The scope of
economic decision making. Application of marginal analysis
Chs. 1-2
2
3
3
3
2. Demand analysis and demand elasticities
Ch. 3
3. Buyer product valuation and choices. Consumer surplus. Buyer pricing
decisions
Ch. 4
4 (27 Nov;
2 hrs)
4. Production/transformation process. Production technologies and input-output
structure
Ch. 5
5 (28 Nov;
2 hrs)
5. Cost structure and cost drivers of producer pricing strategies. Production
scale and scope.
Chs. 5 and 7
6 (1 Dec; 3
hrs)
6. Structure-conduct-performance. Market structures: competition and
contestability. Pricing strategies of buyers and sellers
Ch. 8
7 (2 Dec; 3
hrs)
7. Market structures: monopoly/monopsony, monopolistic competition and
oligopoly. Pricing strategies and strategic behaviour
Chs. 9-10
8 (3 Dec; 3
hrs)
8. Input sourcing and investment. Pricing and market power
Chs. 6 and 11
9 (4 Dec; 2
hrs)
9. Decision making under conditions of uncertainty. Informational asymmetries
and risk management
Ch. 12
10 (5 Dec;
2 hrs)
10. Market research and market analysis. Auction and rings. Strategic
behaviour
Ch. 13
11 (8 Dec;
2 hrs )
12 (9 Dec;
2 hrs)
11. Public sector perspective
Ch. 14
13 (11
Dec; 2 hrs)
Examination
(25 Nov;
hrs)
(26 Nov;
hrs)
12. Revision
13. Examination
Topic 2: Demand analysis and
demand elasticities
Topic Contents
2.1
Managerial
perspective
2.2
2.3
2.4
Demand and
the demand
schedule
Elasticity of
demand and
revenue
implications
2.5
Expected demand
Demand
curve
2.6
Further reading
2.1 Managerial perspective
Identify
Develop
Provide
Marketplace Needs
Market Offer
Customer Satisfaction
MARKETING
Achieve
Organisational Goals
Coordinate
Production
Source
Inputs
2.2 Demand and the demand
schedule
• Demand - willingness and ability to buy a good or
a service
• Quantity demanded - the amount of a good that
buyers are willing and able to purchase at an
indicated price
• Demand schedule - a table that shows the
relationship between the price of a good and the
quantity demanded
• Law of demand - other things being equal
(ceteris paribus), the quantity demanded of a
good varies inversely with its own price
2.2 Demand and the demand
schedule
• Variables that may affect quantity demanded, Qa
– Own price (Pa)
– Prices of other goods/services (Po)
– Income (I)
– Tastes (T)
– Expectations (E)
– Number of buyers (n)
• Demand equation Qa = f (Pa, Po, I, T, ….)
• Example:
Qa = A - a Pa + b I
Qa = 20 - 0.5 Pa + 0.3 I
2.3 Demand curve
• Demand curve - a graph of the
relationship between the price of a good
and the quantity demanded (of that good)
Price ($)
1
3
6 9 12 15
Quantity
10 8 6 4 2
0
• Individual demand
• Market demand - as the sum of
individual demands
2.3 Demand curve
Price ($)
15
12
Movement along
9
6
3
1
0 2 4
Quantity
6
8 10 12 14 16
Movement along the demand curve (ceteris
paribus conditions)
2.3 Demand curve
P
Decrease
Increase
in demand
in demand
Q
• Shifts in the demand curve: increase in demand
or decrease in demand
2.3 Demand curve
Change in
a variable
Impact on the demand curve
Own Price
Movement along
Income
Shift
Other prices
Shift
Tastes
Shift
Expectations
Shift
No. of buyers
Shift
2.4 Elasticity of demand and
revenue implications
• Own price elasticity - the percentage change in
quantity demanded that results from one per
cent change in own price
Ea = %DQa/%Dpa
– point elasticity (if the price change is very
small)
– arc elasticity (if the price change is large)
• Point elasticity
Ea = dQa/Qa : dPa/Pa = dQa/dPa Pa/Qa
Arc elasticity
Ea = DQa/Qa : DPa/Pa = DQaPa/DPaQa
2.4 Elasticity of demand and
revenue implications
Demand is
If
– Elastic
Ea< -1
– Unitary elastic
Ea= -1
– Inelastic
-1< Ea < 0
2.4 Elasticity of demand and
revenue implications
• Cross price elasticity - the percentage change in
quantity demanded for a good, Qa, that results
from one per cent change in the price of another
good, Pb
Eab = %DQa/%DPb
• complements
Eab < 0
• substitutes
Eab > 0
• Two goods are:
– Substitutes - when an increase in the price of one good
increases the demand for the other good
– Complements - when an increase in the price of one
good decreases the demand for the other good
2.4 Elasticity of demand and
revenue implications
• Income elasticity - the percentage change in
quantity demanded for a good, Qa, that results
from one per cent change in the buyer’s income,
I
EI = %DQa/%DI
• A good is:
– normal - when, ceteris paribus, an increase in income
results in an increase in quantity demanded
0<EI (a necessity if 0 < EI <1)
– inferior - when, ceteris paribus, an increase in income
results in a decrease in quantity demanded
EI<0
2.4 Elasticity of demand and
revenue implications
• Total revenue
TR = PQ
• Average revenue
AR = TR/Q=P
• Marginal revenue
MR = dTR/dQ
Marginal revenue is the change in revenue
resulting from one unit change in quantity
demanded
2.4 Elasticity of demand and
revenue implications
Price Elasticity and Marginal Revenue
Price ($)
Elastic
Unitary
Elastic
Inelastic
0
MR
Quantity
2.5 Expected demand
• Uncertainty - ‘incomplete’ knowledge
• Non-quantifiable uncertainty - ordinal measures
(e.g., more likely than …..)
• Quantifiable uncertainty or Risk cardinal
measures (e.g., 10% chance of .….)
• Probability distributions
• Expected Value
N
E(V) =
S ViPi
i=1
where
Vi is the value of the ith outcome
Pi is the probability of the ith outcome
2.5 Expected demand
• Variance
VAR = S (Vi- V(P))2 Pi
i = 1, 2,
Standard Deviation
STD = VAR
• Coefficient of Variation
CV = STD/E(V)
Used as a measure of risk
N
2.5 Expected demand
Example: Bell-shaped distribution applied to
demand for an item repair services
2.5 Expected demand
• Preferences for risk bearing
– risk neutrality
– risk preference
– risk aversion
– certainty equivalence
– risk premium
• Consider two gifts with equal E(V) but different
coefficients of variation, CV. For example,
Gift A -
$100 cash
Gift B -
a lottery ticket offering a 50-50 chance of
winning $200 or nothing
2.5 Expected demand
• Risk-neutral person is indifferent between A and B
• Risk-averse person prefers A to B
• Risk-loving person prefers B to A
• Certainty equivalent is a certain activity with E(V) equal
to E(V) of some equivalent risky activity (e.g., A is the
certainty equivalent of B)
• Risk premium is the difference between the subjective
value of a risky activity and the value of its certainty
equivalent (e.g., V(B) - V(A))
2.6 Further reading
Baye (2010): chs. 3-4