Lecture 5 - Market Equlibrium and Concept of Elasticity of Demand and Its Application

Managerial Economics
PGDM : 2015 17
Term 1 (June September, 2015)
(Lecture 05)
Market Equilibrium
P
Equilibrium:
P has reached the level
where quantity supplied
equals quantity
demanded
Q
2
Equilibrium Price: The price that equates quantity

supplied with quantity demanded (Max WTP = Min WTA)
P
QD
QS
$0 24
1 21
2 18
10
3 15
15
4 12
20
5 9
25
6 6
30
3
Equilibrium quantity: The quantity supplied and quantity

demanded at the equilibrium price
P
QD
QS
$0 24
1 21
2 18
10
3 15
15
4 12
20
5 9
25
6 6
30
4
Surplus (excess supply):When quantity supplied is

greater than quantity demanded
P
Surplus
Example:
If P = $5,
then
QD = 9 lattes
and
QS = 25 lattes
resulting in a
surplus of 16 lattes
Q
5

P
Surplus
Facing a surplus,
sellers try to increase sales
by cutting price.
This causes
QD to rise and QS to fall
which reduces the
surplus.
Q
6

P
Surplus
Facing a surplus,
sellers try to increase sales
by cutting price.
This causes
QD to rise and QS to fall.
Prices continue to fall until
market reaches
equilibrium.
Q
7
Shortage (excess demand): when quantity demanded is

greater than quantity supplied
P
Shortage
Example:
If P = $1,
then
QD = 21 lattes
and
QS = 5 lattes
resulting in a
shortage of 16 lattes
Q
8

P
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise,
which reduces the
shortage.
Shortage
Q
9

P
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise.
Prices continue to rise
until market reaches
equilibrium.
Shortage
Q
10
EXAMPLES
11
Demand Curve
Draw a demand curve for music downloads. What
happens to it in each of the following scenarios?
Why?
A. The price of iPods falls
B. The price of music
downloads falls
C. The price of CDs falls
12
A. Price of iPods falls

Music
Music downloads
downloads
and
and iPods
iPods are
are
complements.
complements.
A
A fall
fall in
in price
price of
of
iPods
iPods shifts
shifts the
the
demand
demand curve
curve for
for
music
music downloads
downloads
to
to the
the right.
right.
Price of
music
downloads
P1
D1
Q1
Q2
D2
Quantity of
music downloads
13
B. Price of music downloads falls

Price of
music
downloads
The
The D
D curve
curve
does
does not
not shift.
shift.
Move
Move down
down along
along curve
curve
to
to aa point
point with
with lower
lower P,
P,
higher
higher Q.
Q.
P1
P2
D1
Q1
Q2
Quantity of
music downloads
14
C. Price of CDs falls

CDs
CDs and
and
music
music downloads
downloads are
are
substitutes.
substitutes.
A
A fall
fall in
in price
price of
of CDs
CDs
shifts
shifts demand
demand for
for
music
music downloads
downloads
to
to the
the left.
left.
Price of
music
downloads
P1
D2
Q2
Q1
D1
Quantity of
music downloads
15
Supply Curve
Draw a supply curve for tax
return preparation software.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of
the software.
B. A technological advance
allows the software to be
produced at lower cost.
C. Professional tax return preparers raise the price of the
services they provide.
16
A. Fall in price of tax return software

Price of
tax return
software
S1
P1
P2
Q2 Q1
SS curve
curve does
does
not
not shift.
shift.
Move
Move down
down
along
along the
the curve
curve
to
to aa lower
lower PP
and
and lower
lower Q.
Q.
Quantity of tax
return software
17
B. Fall in cost of producing the software

Price of
tax return
software
S1
P1
Q1
Q2
S2
SS curve
curve shifts
shifts
to
to the
the right:
right:
at
at each
each price,
price,
Q
Q increases.
increases.
Quantity of tax
return software
18
C. Professional preparers raise their price

Price of
tax return
software
S1
This
This shifts
shifts the
the
demand
demand curve
curve for
for
tax
tax preparation
preparation
software,
software, not
not the
the
supply
supply curve.
curve.
Quantity of tax
return software
19
Three Steps to Analyze Changes in Equilibrium

To
Todetermine
determine the
the effects
effects of
ofany
any event,
event,
1.1. Decide
Decidewhether
whetherevent
eventshifts
shiftsSScurve,
curve,
DDcurve,
curve,or
orboth.
both.
2.2. Decide
Decidein
inwhich
whichdirection
directioncurve
curveshifts.
shifts.
3.3. Use
Usesupply-demand
supply-demanddiagram
diagramto
tosee
see
how
howthe
theshift
shiftchanges
changeseqm
eqmPPand
andQ.
Q.
Example 1: The Market for Diesel Cars

P
price of
diesel cars
S1
P1
D1
Q
Q1
quantity of
diesel cars
Example 1:A Shift in Demand

P
Event to be analyzed:
Increase in price of Petrol.

STEP 1:
S1
P2
D curve shifts
because
price of gas
P1
STEP 2:
affects demand for
D shifts right
hybrids.
because
high gas price
STEP
3:
S
curvehybrids
does not
shift,
makes
more
The shiftprice
causes
an increase
because
of
gas
attractive relative to does
in price
and
quantity
of diesel
not
affect
cost
of
other cars.
cars.
producing
hybrids.
D1
Q1 Q2
D2
Q
Example 1:A Shift in Demand

Notice:
When P rises,
producers supply
a larger quantity
of diesel cars, even
though the S curve
has not shifted.
Always be careful
to distinguish b/w
a shift in a curve
and a movement
along the curve.
P
S1
P2
P1
D1
Q1 Q2
D2
Q
Example 2:A Shift in Supply

Event: New technology
reduces cost of producing
diesel cars.
P
S1
S2
STEP 1:
S curve shifts
because
event affects
P1
STEP 2:
cost of production.
P2
S shifts right
D
curve event
does not
shift,
because
reduces
STEP 3: production
because
cost,
The shift causes
price
technology
is
not
of
makes productionone
more
to fall
and quantity
to
the
factors
that
affect
profitable at any given
rise.
demand.
price.
D1
Q1 Q2
Example3: A Shift in Both Supply and Demand

Events:
price of fuel rises AND
new technology reduces
production costs
STEP 1:
Both curves shift.

STEP 2:
P
S1
S2
P2
P1
Both shift to the right.

STEP 3:
D1
Q rises, but effect

on P is ambiguous:
If demand increases more than
supply, P rises.
Q1
25
Q2
D2
Q
Example3: A Shift in Both Supply and Demand

EVENTS:
price of fuel rises AND
new technology reduces
production costs
STEP 3, cont.
But if supply
increases more
than demand,
P falls.
P
S1
S2
P1
P2
D1
Q1
Q2
D2
Q
Shifts in Supply and Demand

Use the three-step method to analyze the effects of each event on the
equilibrium price and quantity of music downloads.
Event A:
A fall in the price of CDs
Event B:
Sellers of music downloads negotiate a reduction in

the royalties they must pay for each song they sell.
Event C:
Events A and B both occur.
A. Fall in price of CDs

STEPS
P
1. D curve shifts
2. D shifts left
3. P and Q both fall.
The market for

music downloads
S1
P1
P2
D2
Q2 Q1
D1
B. Fall in cost of royalties

STEPS
1. S curve shifts
(Royalties are part of
2. S shifts right
sellers costs)
P1
3. P falls,
P2
Q rises.
The market for

music downloads
S1
S2
D1
Q1 Q2
C. Fall in price of CDs and fall in cost of

royalties
Results
Results
PP unambiguously
unambiguously falls.
falls.
Effect
Effect on
on Q
Q isis ambiguous:
ambiguous:
The
The fall
fall in
in demand
demand reduces
reduces Q;
Q;
The
The increase
increase in
in supply
supply increases
increases Q.
Q.
A Funny Exercise
Explain the story told by this image with the help of Demand
Supply Tools..
31
Market Equilibrium: Algebraic Approach

Quantity Demanded Q d is function of priceP d
Q d f P d a .(1)
bP d
An inverse demand function or price function is

P d f 1 Q d a bQ d.(1.1)
a
1
where, a and b
b
b
Quantity Supplied Q s is function of P s
Q s f P s c dP s ....(2)
An inverse supply function is
P s f 1 Q s c dQ s ..(2.1)
c
1
where, c and d
d
d
32
Market Equilibrium: Algebraic Approach

e
When the market is in equilibrium, P d P s P e , where, P is the

Equilibrium Price
a bQ c dQ
e
where, Q is the Equilibrium Quantity
a c
Q
bd
e
ac
and , P a b
Since, Price cannot be negative a c

Alternatively, you can obtain the equilibrium price and quantity just by
equating equations (1) and (2)
33
Example
Demand is given by QD = 620 10P and supply is given by QS =
100 + 3P. What is the price and quantity when the market is in
equilibrium?
Answer:
In equilibrium,
QD = QS,
620 10P = 100 + 3P
So, the equilibrium Price is 40
And the equilibrium quantity is 220.
34
A note on Equilibrium Price
The objective of Demand supply analysis is to find a price at which the

market is clear. We know it is the equilibrium price.
Other than Market clearing explanation of equilibrium price what else
can you say about this price?
In the simplest manner, equilibrium price can be defined as the market
value of a product or service and at this value the willingness to accept
(WTA) of the sellers matches with willingness to pay (WTP) of the
buyers.
Now the question is why does equilibrium price differ across different
markets?
It was thought by the economists, that intrinsic use value of a commodity
is the reason for this difference .
However, the concepts of production cost and scarcity value better
explain this difference. It should be noted that scarcity is also responsible
for increasing the production cost. The following examples help you to
understand this concept:
35
A note on Equilibrium Price (contd.)
Diamond and Water Paradox
Real Diamond and Cubic Zicronium Diamond

(artificial)
Hand Written Bible and Printed Bible
Whale Oil Lubricant and Lubricant made from

Jojoba Beans
36
Suggested Readings
Shuttlecock Production in Uluberia, West Bengal (
http://articles.economictimes.indiatimes.com/2012-12-28/news/3603653
2_1_shuttlecocks-duck-feathers-badminton-players
)
Discovery of Jojoba Beans caused a collapse of Whale Oil Lubricant
Price (Article sent through email)
(http://en.wikipedia.org/wiki/Jojoba)
(http://en.wikipedia.org/wiki/Jojoba)
Depreciation of Rupee and Impact on Product Market (The article

sent through e-mail)
Atkins Diet and Demand for Egg (The article sent through e-mail)
37
Elasticity
Basic idea:
Elasticity measures how much one variable responds to
changes in another variable.
One type of elasticity measures how much demand for your
websites will fall if you raise your price.
Definition:
Elasticity is a numerical measure of the responsiveness of Qd
or Qs to one of its determinants.
38
Price Elasticity of Demand

Price elasticity
of demand
Percentage change in Qd
Percentage change in P
Price elasticity of demand measures how

much Qd responds to a change in P.
Loosely speaking, it measures the price-sensitivity of

buyers demand.
39

Price elasticity
of demand
P
Example:
Price elasticity
of demand
equals
15%
10%
P rises
by 10%
P2
P1
D
= 1.5
Q2
Q1
Q falls
by 15%
40

Price elasticity
of demand
Along
AlongaaDDcurve,
curve,PPand
andQQmove
move
in
inopposite
oppositedirections,
directions,which
which
would
wouldmake
makeprice
priceelasticity
elasticity
negative.
negative.
We
Wewill
willdrop
dropthe
theminus
minussign
sign
and
andreport
reportall
allprice
priceelasticities
elasticities
as
as
positive
positivenumbers.
numbers.
P
P2
P1
D
Q2
Q1
41
Calculating Percentage Changes

Standard method
of computing the
percentage (%) change:
Demand for
your websites
end value start value

start value
P
$250
Going from A to B,
the % change in P equals
$200
D
8
12
x 100%
($250$200)/$200 = 25%
42
Demand for
your websites
P
$250
B
A
$200
12
Problem:
The standard method gives
different answers depending on
where you start.
From A to B,
P rises 25%, Q falls 33%,
elasticity = 33/25 = 1.33
From B to A,
D
P falls 20%, Q rises 50%,
Q
elasticity = 50/20 = 2.50
43

So, we instead use the midpoint method:
end value start value

x 100%
midpoint
The midpoint is the number halfway between the

start & end values, the average of those values.
It doesnt matter which value you use as the start

and which as the end you get the same answer
either way!
44

Using the midpoint method, the % change
in P equals
$250 $200
x 100% = 22.2%
$225
The % change in Q equals

12 8
x 100% = 40.0%
10
The price elasticity of demand equals

40/22.2 = 1.8
45
What determines price elasticity?

To learn the determinants of price elasticity, we look at a series of
examples.
Each compares two common goods.
In each example:
Suppose the prices of both goods rise by 20%.
The good for which Qd falls the most (in percent) has the
highest price elasticity of demand.
Which good is it? Why?
What lesson does the example teach us about the determinants
of the price elasticity of demand?
46
The Determinants of Price Elasticity

The
The price
price elasticity
elasticity of
of demand
demand depends
depends on:
on:
the
the extent
extent to
to which
which close
close substitutes
substitutes are
are available
available
whether
whether the
the good
good isis aa necessity
necessity or
or aa luxury
luxury
how
how broadly
broadly or
or narrowly
narrowly the
the good
good isis defined
defined
the
the time
time horizon
horizon elasticity
elasticity isis higher
higher in
in the
the long
long
run
run than
than the
the short
short run
run
47
EXAMPLE 1: Insulin vs. Caribbean Cruises

The prices of both of these goods rise by 20%.
For which good does Qd drop the most? Why?
To millions of diabetics, insulin is a necessity.

A rise in its price would cause little or no decrease
in demand.
A cruise is a luxury. If the price rises,
some people will forego it.
Lesson: Price elasticity is higher for luxuries than for
necessities.
EXAMPLE 2: Breakfast cereal vs. Sunscreen
The prices of both of these goods rise by 20%. For which

good does Qd drop the most? Why?
Breakfast cereal has close substitutes (e.g., pancakes, Eggo
waffles, leftover pizza), so buyers can easily switch if the
price rises.
Sunscreen has no close substitutes, so consumers would
probably not buy much less if its price rises.
Lesson: Price elasticity is higher when close substitutes are
available.
EXAMPLE 3: Blue Jeans vs. Clothing

The prices of both goods rise by 20%. For which good does Qd
drop the most? Why?
For a narrowly defined good such as blue jeans, there are
many substitutes (black jeans, khakis, Grey Jeans).
There are fewer substitutes available for broadly defined
goods. Actually, there is no substitutes for clothing.
Lesson: Price elasticity is higher for narrowly defined goods
than broadly defined ones.
EXAMPLE 4: Car Fuel in the Short Run vs. Car Fuel

in the Long Run
The price of petrol rises 20%. Does Qd drop more in the short
run or the long run? Why?
Theres not much people can do in the short run, other than
ride the bus or carpool.
In the long run, people can buy smaller cars or live closer to
where they work.
Lesson: Price elasticity is higher in the long run than the
short run.
The Variety of Demand Curves

The price elasticity of demand is closely related to the
slope of the demand curve.
Rule of thumb:
The flatter the curve, the bigger the elasticity.
The steeper the curve, the smaller the elasticity.
Five different classifications of D curves.
52
Perfectly inelastic demand (one extreme case)

Price elasticity
=
of demand
% change in Q
% change in P
P
D curve:
vertical
10%
=0
P1
Consumers
price sensitivity:
none
Elasticity:
0
0%
P2
P falls
by 10%
Q1
Q changes
by 0%
53
Inelastic demand
Price elasticity
=
of demand
% change in Q
% change in P
10%
<1
D curve:
relatively steep
P1
Consumers
price sensitivity:
relatively low
Elasticity:
<1
< 10%
P2
P falls
by 10%
Q1 Q2
Q rises less
than 10%
54
Unit elastic demand

Price elasticity
=
of demand
% change in Q
% change in P
10%
=1
D curve:
intermediate slope
P1
Consumers
price sensitivity:
intermediate
Elasticity:
1
10%
P2
P falls
by 10%
Q1
Q2
Q rises by 10%
55
Elastic demand
Price elasticity
=
of demand
% change in Q
% change in P
10%
>1
D curve:
relatively flat
P1
Consumers
price sensitivity:
relatively high
Elasticity:
>1
> 10%
P2
P falls
by 10%
Q1
Q2
Q rises more
than 10%
56
Perfectly elastic demand (the other extreme)

Price elasticity
=
of demand
Very Large
= infinity
=
% change in P Very Low(almost 0%)
% change in Q
D curve:
horizontal
Consumers
price sensitivity:
extreme
Elasticity:
infinity
P2 = P1
P changes
by 0%
Q1
Q2
Q changes
by any %
57
Problem
Use the following
information to
calculate the
price elasticity
of demand
for hotel rooms:
if P = $70, Qd = 5000
if P = $90, Qd = 3000
58
Answers
Use midpoint method to calculate
% change in Qd
(5000 3000)/4000 = 50%
% change in P
($90 $70)/$80 = 25%
The price elasticity of demand equals
50%
= 2.0
25%
59
A scenario
You
You design
design websites
websites for
for local
local businesses.
businesses.
You
You charge
charge $200
$200 per
per website,
website, and
and currently
currently sell
sell 12
12 websites
websites per
per
month.
month.
Your
Your costs
costs are
are rising
rising (including
(including the
the opportunity
opportunity cost
cost of
of your
your
time),
time), so
so you
you consider
consider raising
raising the
the price
price to
to $250.
$250.
The
The law
law of
of demand
demand says
says that
that you
you wont
wont sell
sell as
as many
many websites
websites ifif
you
you raise
raise your
your price.
price.
How
How many
many fewer
fewer websites?
websites? How
How much
much will
will your
your revenue
revenue fall,
fall,
or
or might
might itit increase?
increase?
60
Price Elasticity and Total Revenue

Continuing our scenario, if you raise your price
from $200 to $250, would your revenue rise or fall?
Revenue = P x Q
A price increase has two effects on revenue:
Higher P means more revenue on each unit
you sell.
But you sell fewer units (lower Q),
due to Law of Demand.
Which of these two effects is bigger?
It depends on the price elasticity of demand.
61

Price elasticity
of demand
Percentage change in Q
Revenue = P x Q
If demand is elastic, then

price elast. of demand > 1
% change in Q > % change in P
The fall in revenue from lower Q is greater

than the increase in revenue from higher P,
so revenue falls.
62

Elastic demand
(elasticity = 1.8)
If P = $200,
Q = 12 and revenue
= $2400.
If P = $250,
Q = 8 and
revenue = $2000.
$250
Demand for
your websites
increased revenue
due to higher P
$200
lost
revenue
due to
lower Q
When D is elastic,
a price increase
causes revenue to fall.
63
12

Price elasticity
of demand
Percentage change in Q
Revenue = P x Q
If demand is inelastic, then

price elast. of demand < 1
% change in Q < % change in P
The fall in revenue from lower Q is smaller
than the increase in revenue from higher P,
so revenue rises.
In our example, suppose that Q only falls to 10 (instead
of 8) when you raise your price to $250.
64

Now, demand is
inelastic:
elasticity = 0.82
If P = $200,
Q = 12 and revenue
= $2400.
If P = $250,
Q = 10 and
revenue = $2500.
$250
increased revenue due to

higher P
$200
lost
reven
ue
due
to
lower
Q
When D is inelastic,
a price increase
causes revenue to rise.
10
12
D
Q
Demand for your websites

65
Elasticity, Revenue, Profit: Summary
66
Problem
A. Pharmacies raise the price of insulin by 10%. Does total
Revenue on insulin rise or fall?
B. As a result of a fare war, the price of a luxury cruise falls
20%. Does luxury cruise companies total revenue rise or
fall?
67
Answers
A. Pharmacies raise the price of insulin by 10%. Does
total revenue from insulin rise or fall?

Revenue = P x Q
Since demand is inelastic, Q will fall less
than 10%, so Revenue rises.
68
Answers
B. As a result of a fare war, the price of a luxury cruise
falls 20%.
Does luxury cruise companies total revenue
rise or fall?
Revenue = P x Q
The fall in P reduces revenue,
but Q increases, which increases revenue. Which
effect is bigger?
Since demand is elastic, Q will increase more than
20%, so revenue rises.
69
Problem
The manager of the Sell-Rite drug store accidentally
mismarked a shipment of 20-pound bags of charcoal at
$4.38 instead of the regular price of $5.18. At the end
of a week, the store's inventory of 200 bags of charcoal
was completely sold out. The store normally sells an
average of 150 bags per week. What is the store's price
elasticity of demand for charcoal? Give an economic
interpretation of the numerical value obtained.
70
Problem
Consider the following demand schedule for DVDs.
Points
Price (Rs.)
Quantity Demanded
B.
10
C.
20
D.
30
A.
a) Compute the Total Revenue and Price Elasticity of demand (between two successive points
like points A and B) on the demand curve to be drawn from this schedule and generate two
additional columns in the table above.
b) Graph the prices and quantity and indicate the region on the graph, where demand is elastic,
unitary elastic and inelastic.
c) Now comparing the two new columns you generated in part (a) verify whether your
calculation is consistent with the theoretical relationship you learnt between Total Revenue
and Elasticity. You can consider the possible points on the demand curve other than the points
given here to support your answer.
71
Other Types of Elasticity of Demand

Income elasticity of demand: measures the response of Qd to
a change in consumer income
Income elasticity of
demand
Percent change in Qd
Percent change in income
Recall : An increase in income causes an increase in demand

for a normal good.
Hence, for normal goods, income elasticity > 0.

For inferior goods, income elasticity < 0.
72

Cross-price elasticity of demand:
measures the response of demand for one good to changes in
the price of another good
Cross-price elast.
of demand
% change in Qd for good 1

% change in price of good 2
For substitutes, cross-price elasticity > 0

(e.g., an increase in price of mutton causes an increase in
demand for chicken)
For complements, cross-price elasticity < 0

(e.g., an increase in price of computers causes decrease in
demand for software)
73

Promotional/Advertising Elasticity of demand:
Advertising Elasticity
% change in Qd for good

% change in Advertising
Expenditure
74
Problem
Suppose Xerox outsources the manufacturing of an important component of its laser jet
printer to Canon. As a part of the arrangement, Xerox has to share some of important
features of the product with Canon. Canon takes advantage of it and launches cheaper
laser printer in the market. The Canon product is 90% identical to the Xerox laser printer
in terms of looks, features and after-sales services. In order to compete in the market, in
the short run, one obvious way out for Xerox is to make a new contract with another firm
which increases the cost of production of Xerox printer.
a) Assume that the Xerox Printer Market was in equilibrium before Canon launched
its product. Using a demand-supply graph, answer if there would be any change in
market equilibrium in the Xerox printer market.
b) Now suppose, a smart MBA with an engineering degree joins Xerox. After
working for six months at Xerox, he/she presents a new business model to Xerox
management which involves manufacturing of the important component (referred
earlier) by Xerox itself at lower cost than the cost of outsourcing. Will this new
business plan change the new equilibrium (if any) you got in part (a)?
75
Problem
A survey indicated that chocolate is Americans favorite ice cream
flavor. A severe drought in the Midwest causes dairy farmers to
reduce the number of milk-producing cattle in their herds by a
third. These dairy farmers supply cream that is used to
manufacture chocolate ice cream. At the same time a new report
by the American Medical Association reveals that chocolate does,
in fact, have significant health benefits.
Assume that the Chocolate Ice Cream market was in equilibrium.
Using the tool of demand and supply, analyze the impact of the
changing scenarios on equilibrium quantity demanded and
price of Chocolate Ice Cream. If you use graph, label it properly.
76
Problem
Amazon.com, the online bookseller, wants to increase its total revenue. One
strategy is to offer a 10% discount on every book it sells. Amazon.com knows that
its customers can be divided into two distinct groups according to their likely
responses to the discount. The accompanying table shows how the two groups
respond to the discount.
Calculate the price elasticities of demand for group A and group B.

Explain how the discount will affect total revenue from each group. If
Amazon.com wants to increase its total revenue, should discounts be offered to
group A or to group B, to neither group, or to both groups?
77
Problem
At an Asian Mobile Service provider, the demand for voice calls had an own
price elasticity of ( 0.085) and cross price elasticity with respect to the price
of SMS of ( 0.078). The demand for SMS had an own price elasticity of (
0.03) and cross price elasticity with repect to the price of voice calls of (
0.003).
(Source: Youngsoo Kim, Rahul Telang, William B. Vogt, and Ramayya
Krishnan, An Empirical analysis of mobile voice service and SMS: A
structural model Management Science, 2010)
For which service was the demand more price elastic? (2 Points)
How would you describe the relation between the demand for voice
calls and SMS?
Which is the relatively stronger complements/substitutes? (i) SMS for
voice calls, or (ii) voice calls for SMS?
Describe the impact on revenues from (i) voice and (ii) SMS if the
provider were to raise the price of voice calls by 5%.
78
Empirical Estimates of Price Elasticity of Demand
79
Empirical Estimates of Income Elasticity of Demand
80

Lecture 5 - Market Equlibrium and Concept of Elasticity of Demand and Its Application

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Lecture 5 - Market Equlibrium and Concept of Elasticity of Demand and Its Application

Hochgeladen von

Copyright:

Verfügbare Formate

Managerial Economics

Equilibrium Price: The price that equates quantity

Equilibrium quantity: The quantity supplied and quantity

Surplus (excess supply):When quantity supplied is

Surplus (excess supply):When quantity supplied is

Surplus (excess supply):When quantity supplied is

Shortage (excess demand): when quantity demanded is

Shortage (excess demand): when quantity demanded is

Shortage (excess demand): when quantity demanded is

A. Price of iPods falls

B. Price of music downloads falls

C. Price of CDs falls

A. Fall in price of tax return software

B. Fall in cost of producing the software

C. Professional preparers raise their price

Three Steps to Analyze Changes in Equilibrium

Example 1: The Market for Diesel Cars

Example 1:A Shift in Demand

Increase in price of Petrol.

Example 1:A Shift in Demand

Example 2:A Shift in Supply

Example3: A Shift in Both Supply and Demand

Both curves shift.

Both shift to the right.

Q rises, but effect

Example3: A Shift in Both Supply and Demand

Shifts in Supply and Demand

A fall in the price of CDs

Sellers of music downloads negotiate a reduction in

Events A and B both occur.

A. Fall in price of CDs

The market for

B. Fall in cost of royalties

The market for

C. Fall in price of CDs and fall in cost of

Market Equilibrium: Algebraic Approach

An inverse demand function or price function is

Quantity Supplied Q s is function of P s

An inverse supply function is

Market Equilibrium: Algebraic Approach

When the market is in equilibrium, P d P s P e , where, P is the

where, Q is the Equilibrium Quantity

Since, Price cannot be negative a c

A note on Equilibrium Price

The objective of Demand supply analysis is to find a price at which the

A note on Equilibrium Price (contd.)

Diamond and Water Paradox

Real Diamond and Cubic Zicronium Diamond

Hand Written Bible and Printed Bible

Whale Oil Lubricant and Lubricant made from

Depreciation of Rupee and Impact on Product Market (The article

Price Elasticity of Demand

Price elasticity of demand measures how

Loosely speaking, it measures the price-sensitivity of

Price Elasticity of Demand

Price Elasticity of Demand

Calculating Percentage Changes

end value start value

Calculating Percentage Changes

Calculating Percentage Changes

end value start value

The midpoint is the number halfway between the