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## Demand: Know your market

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### Demand: Know your market Interdependent demands: Poiuyts & Qwerts Poiuyts and Qwerts are substitutes (qwerts are left-handed poiuyts) If you sell more qwerts, you ... – PowerPoint PPT presentation

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Title: Demand: Know your market

1
• Demand Know your market
• Interdependent demands Poiuyts Qwerts
• Poiuyts and Qwerts are substitutes (qwerts are
left-handed poiuyts)
• If you sell more qwerts, youll sell fewer
poiuyts
• xp 9000 100 Pp xq/3 (or Pp90 - xp/100 -
xq/300)
• If you sell more poiuyts, youll sell fewer
qwerts
• xq 1200 100Pq 2 xp/3 or (Pq120-
xq/100-xp/150 )
• Suppose that total cost is given by
• TC 1000 10 xp 20 xq
• Optimal outputs of poiuyts and qwerts are where
M?p0 given xq and M?q0 given xp
• Your text calls price as a function of
quantities the inverse demand function.

2
• Poiuyts and Qwerts
• When we optimize using Solver,
• xp 2000 Pp 56.67 xq 4000 Pq 66.67
• Notice, if we increase xp by 1 at this point, Pp
declines by 1/100 and Pq declines by 1/150.
Thus,
• MRp 56.67(1) - .01(2000) -.0067(4000)
• 56.67 20.00 26.67 56.67 46.67
• 10.00
• Since MCp 10.00, M?p 0 at the optimal
solution.

3
Demand
• When we speak of demand for a product, we think
of a uniform product, a commodity.
• When we dealt with demand for GM light trucks, we
didnt distinguish between Buick vans and Chevy
pick-ups we certainly didnt distinguish between
blue pick-ups and red pick-ups. We thought of a
generic product, light trucks.
• Even products we normally think of as
commodities are subtly differentiated Saudi
oil has less(?) sulfur content than North Sea oil
and accordingly sells for a different price.
• We can get important insights into how the light
truck market responds to rebates and how the oil
market responds to business cycles without
concerning ourselves with detailed product
differentiation.

4
Demand Analysis The Product and its Market
• How you define the product and its market depends
on the questions you want to ask.
• If all you care about is sales of red Chevy
pick-ups to women in Las Vegas in October
• red Chevy pick-ups is your product
• women in Las Vegas in October is your market
• Even then, youre abstracting from red Chevy
pick-ups with different accessories and Las Vegas
women of different marital status.
• When youre the analyst,
• you get to define the product.
• you get to define the geography, the
demographics, and the time period of your
analysis.

5
Demand The Industry, The Firm
• Competitive Industry Firm
With
• Industry Firm
Market Power

• Firm is Price Taker
Firm is Price Maker
• Decides
Quantity Decides Price-Quantity
• To
Produce Combination
• P
P P

6
Price Elasticity of Demand Once More
• Price elasticity of demand ?
• Percent change in quantity dx/x

• Percent change in price dp/p
• Linear Demand Constant ?
• x small?? high x large ? ? low x k P-a or
xPa k
• P
P

7
Price Elasticity of Demand Industry and
Firm Short Run and Long Run
• Price elasticity of demand increases the more
substitutes there are for a product
• The products of the all the other firms in an
industry are good substitutes for a particular
firms product
• Demand for the firms product is more elastic
than demand for the industrys product as a whole
• Demand for a competitive firms product is
infinite
• Price elasticity of demand increases the more
time buyers have to adjust to price changes
• Elasticity is greater in the long-run than in the
short-run
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