1 / 28

Demand Analysis (Cont.)

Demand Analysis (Cont.). Managerial Economics. Your firm’s research department has estimated the income elasticity of demand for chicken to be -1.94.

urbain
Télécharger la présentation

Demand Analysis (Cont.)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Demand Analysis (Cont.) • Managerial Economics Lect. In managerial economics

  2. Your firm’s research department has estimated the income elasticity of demand for chicken to be -1.94. • You have just read in an economic newspaper that due to an upturn in the economy, consumer incomes are expected to rise by 10% over the next three years. • As a manager of a chicken processing plant, how will this forecast affect your purchase of chicken? Lect. In managerial economics

  3. Elasticities • When one of the determinants changes, demand will also change • The next issue is how much? • We analyse the magnitude of the change And hence we refer to ELASTICITIES Lect. In managerial economics

  4. ELASTICITY OF DEMAND • Price in 2007= Rs20: Demand (Sales)= 43 • Price in 2008= Rs10: Demand (Sales) =75 • When price change by Rs10, demand changes by 32 units. Can we say that for each Rs1, demand rises by (32/10) 3.2 units? Yes • However, to compare different goods, we take the percentage change Lect. In managerial economics

  5. Percentage change in demand =[(New-old)/old] X 100 = [(75-43)/43] = 75% • Hence, demand has increased by 75% • Percentage change in price =(10-20)/20= -50% • Hence, price has decreased by 50% Lect. In managerial economics

  6. Conclusion: • When price falls by 50%, demand rises by 75% It follows that when price changes by 1%, demand will rise by (75%/50%) = 1.5% 1.5 is called elasticity Lect. In managerial economics

  7. Formula for elasticity of demand: • % change of quantity demanded divided %change of price = 1.5 Lect. In managerial economics

  8. Elasticity of demand • Formula for elasticity of demand: Lect. In managerial economics

  9. Calculation • Elastic demand = >0 • Inelastic demand = <0 • Elasticity = Unitary = 1 Lect. In managerial economics

  10. Elasticity • Calculate: prices move from P1 to P2: • P1=10 Q1=100 • P2=20 Q2=50 • Elasticity= 50%/100% = 0.5% • When price changes by 1%, demand falls by 0.5% Lect. In managerial economics

  11. Arc elasticity Lect. In managerial economics

  12. Point elasticity • Requirements: understand slope of a demand curve • Slope = change in vertical/change in horizontal = 40/80=1/2 40 A 35 B 6 5 72 80 Lect. In managerial economics

  13. Calculate elasticity at A =2 X (35/5)=14% • Calculate elasticity at B = 2 X (6/72) = 0.16% • At A, demand is elastic • At B, demand is inelastic Lect. In managerial economics

  14. Calculating elasticity from demand function • Suppose • Q = 100 – 5P • Change in Q/Change in P =-5 • Elasticity = -5(P/Q) Lect. In managerial economics

  15. Elasticity and Total revenue • Suppose : • P1=10 Q1=100 TR= P1Q1=1000 • P2=20 Q2=75 TR = P2Q2 = 1400 • Elasticity= 25%/100% = 0.25% • When price rises by 1%, demand falls by 0.25% • Outcome: Total Revenue rises • Marginal revenue is positive Lect. In managerial economics

  16. Elasticity and Total revenue • Conclusion 1: when demand is elastic (>1), (when price rises, TR falls), can not raise the price • Conclusion 2: when demand is inelastic (<1), when price rises, TR rises always raise prices Lect. In managerial economics

  17. Elasticity and Total revenue • P1= 10 Q1= 100 TR = 1000 • P2=15 Q2=40 TR = 600 • Elasticity = 60%/50%=1.2% • When price rises by 1%, quantity demanded falls by more than 1% (1.2%): • Total revenue: Falls • Marginal revenue: negative Lect. In managerial economics

  18. Relationship between marginal revenue, and price elasticity Lect. In managerial economics

  19. Determinants of Price elasticity • Availability of substitutes • Elasticity is high when there are substitutes • Nature of commodity • Luxury, durable = elastic; necessity, non-durable = inelastic; • Weightage in the total consumption • When proportion is large = elastic; when prop. is low = inelastic • Time factor in adjustment of consumption • The longer the time to adjust, the higher the price elasticity • Range of commodity use • Multi-purpose goods = high elasticity • Proportion of Market supplies • The proportion of consumers who are satisfied: if less than 50%, demand will be elastic Lect. In managerial economics

  20. Cross price elasticity • Substitutes and complements • Income elasticity • Normal, necessities , inferior • Advertising elasticity • Elasticity of price expectations Lect. In managerial economics

  21. Advertising elasticity =0: sales do not respond to advertisement >0 but <1: less than proportionate increase in advertising =1 proportionate increase in advertising >0 more than proportionate increase in advertising Lect. In managerial economics

  22. Advertising elasticity • Determinants • The level of sales • Advertisement by other firms • Cumulative of past advertisement Lect. In managerial economics

  23. Elasticity of Price expectation Lect. In managerial economics

  24. Application Qc = 50 – 1.5Pc + 0.5Y + 2.0 Ps + 0.8A Qc = number of PCs demanded Pc = Price of PC Y = buyers income Ps = substitutes brand A = advertising Starting points: Pc = 40, Y= 60, Ps = 30, A = 25 Lect. In managerial economics

  25. Elasticities • Price Elasticity - Ep = -0.6 • Income Elasticity - Ey = 0.3 • Cross Elasticity - Es = 0.6 • Advertising Elasticity - Ea = 0.2 Lect. In managerial economics

  26. Your firm’s research department has estimated the income elasticity of demand for non-fed ground beef to be -1.94. You have just read in an economic newspaper that due to an upturn in the economy, consumer incomes are expected to rise by 10% over the next three years. As a manager of a meat-processing plant, how will this forecast affect your purchase of non-fed cattle? Lect. In managerial economics

  27. Elasticity and Demand functions (reconsider) • Elasticity of demand for linear demand function: • Own price elasticity = • Cross price elasticity = • Income elasticity = e Lect. In managerial economics

  28. Elasticity and Demand functions (reconsider) • Elasticity of demand for non-linear demand: • Own price elasticity = c • Cross-price elasticity = d • Income elasticity = e Lect. In managerial economics

More Related