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Demand: Know your market


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

  • 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
  • xp 9000 100 Pp xq/3 (or Pp90 - xp/100 -
  • If you sell more poiuyts, youll sell fewer
  • 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.

  • 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.
  • 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

  • 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

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

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

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

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

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
  • 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