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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

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