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Demand Analysis

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Demand Elasticity Supply Equilibrium ... Determinants of Price Elasticity Substitutability Complementary goods Relative importance in budget Time Income Elasticity of ... – PowerPoint PPT presentation

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Title: Demand Analysis


1
Demand Analysis
  • Demand
  • Elasticity
  • Supply
  • Equilibrium

2
Behind the Demand Curve Theory of Consumer Choice
  • Balance preferences and spending power
  • Weigh willingness to buy against ability to buy
  • Match desire to buy and ability to buy

3
Utility Theory
  • Goal of maximizing utility s.t. an income
    constraint
  • U U(X, Y)
  • s.t. M pxX PyY
  • Consumers can rank preferences
  • Consumers have income to spend
  • There are goods to buy

4
Consumer Equilibrium
  • Maximize utility s.t. income constraint
  • Given limited budget and positive prices, reach
    highest level of utility
  • Income and substitution effects
  • Equilibrium implies MUx/MUy px/py

5
Consumer Choice Using Lagrangians
  • Deriving the decision rule with mathematics

6
Basis for Demand
  • Direct demand
  • Derived demand

7
The Demand Function
  • Determinants of demand
  • Qd Qd (PoT, C, I, Pn, R, E )

8
The Demand Curve
  • The amount of a good consumers are willing to buy
    at various prices
  • The maximum price consumers are willing to pay
    for a given amount of a good

9
The Concept of Elasticity
  • Defined
  • Formula
  • Point v. arc elasticity
  • The relationship between elasticity and slope

10
Nature of Elasticity
  • Perfectly elastic
  • Elastic
  • Unit elastic
  • Inelastic
  • Perfectly Inelastic

11
Issues in Elasticity
  • Elasticity-revenue relationship
  • Optimal pricing
  • Straight-line demand curves
  • MR P(1 1/e)

12
Determinants of Price Elasticity
  • Substitutability
  • Complementary goods
  • Relative importance in budget
  • Time

13
Income Elasticity of Demand
  • Superior goods
  • Normal goods
  • Inferior goods
  • Giffen goods

14
Cross Elasticity of Demand
  • Substitutes
  • Complements

15
Basis for Supply
  • Supply decisions based on cost of production

16
Market Supply
  • Determinants of supply
  • Qs Qs (PoPr, K, M)

17
The Supply Curve
  • The amount of a good suppliers are willing to
    provide at various prices
  • The minimum price suppliers are willing to accept
    to make a given amount of a good available

18
Market Equilibrium
  • Superimpose demand and supply
  • If Qs Qd, no tendency to change

19
Applications
  • Excise tax
  • Quotas and tariffs
  • Agricultural policy
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