1、3.1 2005 Prentice Hall,Inc.Economics for Managersby Paul FarnhamChapter 3:Demand Elasticities3.2 2005 Prentice Hall,Inc.Demand ElasticityDemand elasticity shows the percentage change in quantity demanded of a product relative to the percentage change in both variablesThe coefficient represents the r
2、atio of the two percentage changes 3.3 2005 Prentice Hall,Inc.Price Elasticityof Demand EquationThe percentage change in the quantity demanded of a given good relative to a percentage change in its priceeP=%Qx%Pxwhere=the absolute change eP=price elasticity of demandQx=quantity demanded of good X Px
3、=the price of good X 3.4 2005 Prentice Hall,Inc.Price Elasticity ABQuantityPriceP1P20Q1Q2DemandMeasured as a movement along a demand curveFigure 3.1QP3.5 2005 Prentice Hall,Inc.Price Elasticity and Decision MakingTells managers what will happen if product prices changeHelps firms to develop pricing
4、strategiesHelps to develop pricing strategies in the public sector3.6 2005 Prentice Hall,Inc.ElasticityElastic demand:change in quantity demanded is greater than the change in priceInelastic demand:change in quantity demanded is less than the change in priceUnitary elasticity:change in quantity dema
5、nd is equal to change in price3.7 2005 Prentice Hall,Inc.Elasticity andTotal RevenueIf demand is elastic,higher prices result in lower total revenue.Lower prices result in higher total revenueChanges in price and the resulting total revenue are inversely proportionate(see Figure 3.2 on next slide)3.
6、8 2005 Prentice Hall,Inc.Elastic Demand and Total RevenueABXYCQuantityPrice(P1)10(P2)902(Q1)Demand3(Q2)1212If prices decrease,revenue increases.If prices increase,revenue decreases.Figure 3.2Area X=Q1CBQ2Area Y=P1ACP23.9 2005 Prentice Hall,Inc.Inelastic DemandWhen units are sold at a lower price,the
7、 quantity demanded has not increased proportionatelyTotal revenue decreasesChanges in price and the resulting total revenue move in the same direction(See Figure 3.3 on next slide)3.10 2005 Prentice Hall,Inc.Inelastic Demand and Total Revenue Figure 3.3ABXYCQuantityPrice(P1)4(P2)308(Q1)Demand9(Q2)12
8、12If prices decrease,revenue decrease.If prices increase,revenue increases.Area X=Q1CBQ2Area Y=P1ACP23.11 2005 Prentice Hall,Inc.Managers can estimate price elasticity by asking customers:1.What do you currently pay for my product?2.At what price would you stop buying my product altogether?Managers
9、should ask themselves:1.How much will revenue increase as a result of higher sales?2.How much will revenue decrease as a result of lower prices for each unit?Managerial Rule of Thumb:Estimating Price Elasticity3.12 2005 Prentice Hall,Inc.Determinants of Price Elasticity of Demand1.Number of substitu
10、te goods2.Percent of a consumers income that is spent on the product3.Time period under consideration4.Nature of the good(durable or non-durable)3.13 2005 Prentice Hall,Inc.Calculating Price ElasticitiesArc price elasticity:base quantity(or price)is the average value of the starting and ending point
11、sPoint price elasticity:measurement of the price elasticity of demand calculated at a point on the curve using infinitesimal changes in prices and quantities3.14 2005 Prentice Hall,Inc.Equation for Point Price Elasticity of DemandP=the price chargeda=the vertical intercept of the plotted demand curv
12、e(the P=axis)(P-a)ep =Pwhere3.15 2005 Prentice Hall,Inc.Numerical ExamplesDemand functionShows relationship between quantity demanded and priceQ=12 P or P=12 QTotal revenue functionShows total revenue received by producer as a function of the level of outputTR=(P)(Q)=(12 Q)(Q)=12Q Q23.16 2005 Prenti
13、ce Hall,Inc.Numerical ExamplesAverage revenue function:shows how average revenue is related to level of outputAR=TR/Q=(P)(Q)/Q=PMarginal revenue function:shows the additional revenue a producer receives by selling an additional unit of output at different levelsMR=(TR)/(Q)=(TR2 TR1)/(Q2 Q1)MR=dTR/dQ
14、=12 2Q3.17 2005 Prentice Hall,Inc.Demand and Marginal RevenueFirms are always constrained by demand curveTop half of the demand curve in Figure 3.4 indicates when managers lower price,total revenue increasesBottom half indicates a price decrease causes total revenue to fall3.18 2005 Prentice Hall,In
15、c.Demand and Marginal Revenue|eP|1Demand,marginal revenue,and total revenue functions are relatedFigure 3.4|eP|=1|eP|1Marginal RevenueQuantity6061212Demand3.19 2005 Prentice Hall,Inc.The Total Revenue Function01836126Total RevenueTotal RevenueFigure 3.53.20 2005 Prentice Hall,Inc.Extreme Demand Curv
16、esVertical demand curveRepresents perfectly inelastic demandExample might be insulin for diabeticsHorizontal demand curveRepresents perfectly elastic demandExample would be a bushel of wheat from an agricultural producer3.21 2005 Prentice Hall,Inc.Extreme Demand Curves0P1QuantityPriceHorizontal dema
17、nd curveDemand0Q1QuantityPriceVertical demand curveDemand3.22 2005 Prentice Hall,Inc.Elasticities of DemandIncome elasticity of demand:percentage change in quantity demanded of a given good relative to percentage change in consumer incomeNecessities elasticity between 0 and 1 Luxuries elasticity gre
18、ater than 13.23 2005 Prentice Hall,Inc.Calculating income elasticity of demand is based on two questions for a consumer:1.What fraction of your total budget do you spend on Product X?2.If you earned a bonus of$1000,what part of that bonus would you spend on Product X?Managerial Rule of Thumb:Calcula
19、ting Income Elasticity3.24 2005 Prentice Hall,Inc.Elasticities of DemandCross-price elasticity of demand:measures how demand for Good X varies with changes in the price of Good YSubstitute goods have positive cross elasticityComplementary goods have negative cross elasticityDefines relevant market i
20、n which different products compete3.25 2005 Prentice Hall,Inc.Which demand elasticity should be used in making appropriate decisions:the one for the entire product or the one for the individual producer?(The answer depends upon how other firms react to price changes)Managerial Rule of Thumb:Price El
21、asticity Decision Making3.26 2005 Prentice Hall,Inc.Marketing Literature Regarding Elasticity IssuesAdvertising elasticity of demand:the percentage change in quantity demanded of a good relative to the percentage change in advertising dollars spent on that goodMarketing studiesTellis,1988Sethuraman
22、and Tellis,1991Hoch,et al,19953.27 2005 Prentice Hall,Inc.Summary of Key TermsAverage revenue and average revenue functionCross-price elasticity of demandDemand elasticity Luxury and necessityMarginal revenue and marginal revenue function3.28 2005 Prentice Hall,Inc.Summary of Key TermsPerfectly elastic demandPerfectly inelastic demandPoint price elasticity of demandPrice elasticity of demandTotal revenue and total revenue functionUnitary elasticity3.29 2005 Prentice Hall,Inc.Do you have any questions?
