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DEMAND ANALYSIS
•
Various perspectives
•
Consumer choices
•
Elasticity ratios
•
Defining the market
Prof. Patrick GOUGEON, ESCP-EAP
DEMAND ANALYSIS
Different perspectives
Consumer choices (utility theory)
Individual Demand
aggregation
Market Demand
Demand to the firm
Prof. Patrick GOUGEON, ESCP-EAP
Consumer choices
• n goods or services available on the market: i = 1,…..n
• Prices : p1,…..pi,……pn
•Quantity consumed of each:
x1, …..xi,…..xn
• Budget: R = Σ pi xi
• Objective
Maximise consumer satisfaction: Max U(x1, …..xi,…..xn)
under budget constraint: R = R°
• a change in pi (Dpi), other prices and budget remaining the same, result in
a change in the quantity purchased of good i (Dxi)
Individual Demand corresponds to the function that describes the relation between the
price and the quantity of a good purchased by an individual maximising his
satisfaction for a given level of income and other prices being held fix.
Prof. Patrick GOUGEON, ESCP-EAP
Demand Curves
Individual Demand
p
p
p
q
q
p
q
q
aggregation
Market Demand
p
q
Prof. Patrick GOUGEON, ESCP-EAP
Market Demand
p
The lower the price level considered, the higher the
number of consumers, and/or the higher the quantity
purchased by each
p0
p1
q
q0 q1
Except the « marginal consumer », most consumers will pay a price which is
lower than the maximum price they would accept.
This is the origin of the « consumer surplus »
Question
what do you suggest companies should do to capture this surplus ?
Prof. Patrick GOUGEON, ESCP-EAP
Elasticity ratios
Dq
q
Price elasticity: ep = Dp
p
Market demand
p
p0
p1
<0
Depends how easy it is to find a substitute
q
q0 q1
Income elasticity: eY=
Cross elasticity: ei/j =
Prof. Patrick GOUGEON, ESCP-EAP
Dq
q
DY
Y
Dqi
qi
Dpj
pj
> 1 ; superior goods
< 1 ; inferior goods
Its value has a strong influence on the
allocation of income growth within the
economy, and the volatility of an
activity
> 0 ; substitutes
Useful to define tha market scope
< 0 ; complements