MANAGERIAL ECONOMICS 11th Edition

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MANAGERIAL ECONOMICS 11th Edition

• By
• Mark Hirschey

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Demand Analysis

• Chapter 5

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Chapter 5OVERVIEW

• Measuring Market Demand
• Demand Sensitivity Analysis Elasticity
• Price Elasticity of Demand
• Price Elasticity and Marginal Revenue
• Price Elasticity and Optimal Pricing Policy
• Cross-price Elasticity of Demand
• Income Elasticity

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Chapter 5KEY CONCEPTS

• market demand curve
• elasticity
• endogenous variables
• exogenous variables
• point elasticity
• arc elasticity
• price elasticity of demand
• elastic demand
• unitary elasticity
• inelastic demand

• optimal price formula
• substitutes
• complements
• cross-price elasticity
• income elasticity
• normal goods
• inferior goods.
• counter-cyclical
• noncyclical normal goods
• cyclical normal goods

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Measuring Market Demand

• Graphing the Market Demand Curve
• Market demand is total demand.
• Evaluating Market Demand
• Demand differs among market segments.
• Add segment demand to get market demand.

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Demand Sensitivity Analysis Elasticity

• Elasticity Concept
• Elasticity measures sensitivity.
• Point and Arc Elasticity
• Point elasticity reflects sensitivity of Y to
  small changes in X, eX ?Y/Y ?X/X.
• Arc elasticity reflects sensitivity of Y to big
  changes in X, EX (Y2Y1)/(Y2Y1)
  (X2-X1)/(X2X1).
• Advertising Elasticity Example

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Price Elasticity of Demand

• Price Elasticity Formula
• Point price elasticity, eP ?Q/Q ?P/P.
• In all cases, eP lt 0 .
• Price Elasticity and Total Revenue
• Price cut increases revenue if ePgt 1.
• Revenue constant if eP 1.
• Price cut decreases revenue if ePlt 1.
• Uses of Price Elasticity Information

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Price Elasticity and Marginal Revenue

• How Elasticity Varies along a Demand Curve
• As price rises, so does eP.
• As price falls, so doeseP.
• Price Elasticity and Price Changes
• MR gt 0 if ePgt 1.
• MR 0 if eP 1.
• MR lt 0 if ePlt 1.

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Price Elasticity and Optimal Pricing Policy

• Optimal Price Formula
• MR and eP are directly related.
• MR P/1(1/ eP).
• Optimal P MC/1(1/ eP).
• Optimal Pricing Policy Example
• Determinants of Price Elasticity
• Essential goods have loweP.
• Nonessential goods have higheP.

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Cross-price Elasticity of Demand

• Substitutes and Complements
• Cross-price elasticity shows demand sensitivity
  to changes in other prices.
• ePX ?QY/QY ?PX/PX.
• Substitutes have ePX gt 0.
• Complements have ePX gt 0.
• Independent goods have ePX gt 0.
• Cross-price Elasticity Example

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Income Elasticity

• Normal Versus Inferior Goods
• Income elasticity shows demand sensitivity to
  changes in income.
• eI ?Q/Q ?I/I.
• Normal goods have eI gt 0.
• Inferior goods have eI lt 0.
• Types of Normal Goods
• Noncyclical goods have 0 lt eI lt 1.
• Cyclical goods have eI gt 1.