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ECONOMICS
BADM 4300 – UNIT III
• DEMAND ANALYSIS:
– Functions &
– Elasticities
Definition of DEMAND:
Refers to the number of units of a particular good or
service that consumers are willing to buy under stated conditions of
time, place, price, and so forth.(Ceteris Paribus)
Thus demand is a function of a number of independent
variables or demand determinants; it can be expressed as an
algebraic equation or by a graph or table.
Price
8 20 6
4
6 30 2
4 40 0
2 50 Quantity
0 60
20 40 60
JULY 2008 BADM4300-Demand Analysis-Prof. Devaris
DEMAND LAW
• Inverse relationship between price (P) and
quantity demanded (Qd):
– When Price increases, quantity demanded decreases.
• P ↑⇔ Qd ↓
– When price decreases, quantity demanded increases.
• P ↓ ⇔ Qd ↑
• Advertising elasticity
– ε d = %∆ Qd / %∆ PE
• 3. Consumers Income
– Normal Goods: goods for which demand is
positively (directly) related to income, e.g., steak,
clothes, leisure time.
Income elasticity of demand ε d is positive
– Inferior Goods: goods for which demand is
negatively (inversely) related to income, e.g.,
potatoes, bread.
Income
JULY 2008
elasticity of demand ε d is negative
BADM4300-Demand Analysis-Prof. Devaris
DETERMINANTS OF
DEMAND
Continuation
• 4. Price of Closely Related Goods
– A) Substitutes. If products A and B are substitutes, a price increase in A will generate an
increase in the demand for B.Example, when the price of beef increases, the demand for
chicken increases.
• Cross elasticity of demand ε dx/y is positive.
• 5. Consumer Expectations
– Do consumers expect incomes and prices to increase or decrease in the near future?
PRICE-ELASTICITY
• 1)Luxury Goods - more elastic and
Necessity Goods – less elastic.
• 2) Expensive Goods –more elastic and
Cheap Goods – less elastic.
• 3) More Substitutes – more elastic and
Less Substitutes – less elastic.
• 4) Time Period: the longer the time period
– more elastic.
JULY 2008 BADM4300-Demand Analysis-Prof. Devaris
TYPES OF ELASTICITY
MEASUREMENTS
• Point-Elasticity Formula
– Q1 – Q0 P1 – P0 or ∆ Q/Q0
– Q0 P0 ∆ P/P0
• Arc-Elasticity Formula∆
Q1 – Q0 P1 – P0
– Q1 + Q0 P1 + P0
2 2
JULY 2008 BADM4300-Demand Analysis-Prof. Devaris
ELASTIC VS INELASTIC
• If ε = ∞, demand is perfectly elastic
• If ε > 1, demand is elastic
• If ε = 1, unitary elasticity
• If ε < 1, demand is inelastic
• If ε = 0, perfectly inelastic