Managerial Economics in a Global Economy
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Transcript Managerial Economics in a Global Economy
Managerial Economics in a
Global Economy, 5th Edition
by
Dominick Salvatore
Chapter 3
Demand Theory
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 1
Law of Demand
• There is an inverse relationship
between the price of a good and the
quantity of the good demanded per time
period.
• Substitution Effect
• Income Effect
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 2
Individual Consumer’s Demand
QdX = f(PX, I, PY, T)
QdX = quantity demanded of commodity X
by an individual per time period
PX = price per unit of commodity X
I = consumer’s income
PY = price of related (substitute or
complementary) commodity
T = tastes of the consumer
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 3
QdX = f(PX, I, PY, T)
QdX/PX < 0
QdX/I > 0 if a good is normal
QdX/I < 0 if a good is inferior
QdX/PY > 0 if X and Y are substitutes
QdX/PY < 0 if X and Y are complements
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 4
Market Demand Curve
• Horizontal summation of demand
curves of individual consumers
• Bandwagon Effect
• Snob Effect
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 5
Horizontal Summation: From
Individual to Market Demand
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 6
Market Demand Function
QDX = f(PX, N, I, PY, T)
QDX = quantity demanded of commodity X
PX = price per unit of commodity X
N = number of consumers on the market
I = consumer income
PY = price of related (substitute or
complementary) commodity
T = consumer tastes
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 7
Demand Faced by a Firm
• Market Structure
– Monopoly
– Oligopoly
– Monopolistic Competition
– Perfect Competition
• Type of Good
– Durable Goods
– Nondurable Goods
– Producers’ Goods - Derived Demand
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 8
Linear Demand Function
QX = a0 + a1PX + a2N + a3I + a4PY + a5T
PX
Intercept:
a0 + a2N + a3I + a4PY + a5T
Slope:
QX/PX = a1
QX
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 9
Price Elasticity of Demand
Point Definition
Q / Q Q P
EP
P / P P Q
Linear Function
P
EP a1
Q
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 10
Price Elasticity of Demand
Arc Definition
Prepared by Robert F. Brooker, Ph.D.
Q2 Q1 P2 P1
EP
P2 P1 Q2 Q1
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 11
Marginal Revenue and Price
Elasticity of Demand
1
MR P 1
EP
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 12
Marginal Revenue and Price
Elasticity of Demand
PX
EP 1
EP 1
EP 1
QX
MRX
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 13
Marginal Revenue, Total
Revenue, and Price Elasticity
TR MR>0
EP 1
EP 1 MR=0
Prepared by Robert F. Brooker, Ph.D.
MR<0
EP 1
QX
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 14
Determinants of Price
Elasticity of Demand
Demand for a commodity will be more
elastic if:
• It has many close substitutes
• It is narrowly defined
• More time is available to adjust to a
price change
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 15
Determinants of Price
Elasticity of Demand
Demand for a commodity will be less
elastic if:
• It has few substitutes
• It is broadly defined
• Less time is available to adjust to a
price change
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 16
Income Elasticity of Demand
Point Definition
Q / Q Q I
EI
I / I
I Q
Linear Function
I
EI a3
Q
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 17
Income Elasticity of Demand
Arc Definition
Q2 Q1 I 2 I1
EI
I 2 I1 Q2 Q1
Normal Good
Inferior Good
EI 0
EI 0
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 18
Cross-Price Elasticity of Demand
Point Definition
Linear Function
Prepared by Robert F. Brooker, Ph.D.
EXY
QX / QX QX PY
PY / PY
PY QX
E XY
PY
a4
QX
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 19
Cross-Price Elasticity of Demand
Arc Definition
Substitutes
EXY 0
Prepared by Robert F. Brooker, Ph.D.
EXY
QX 2 QX 1 PY 2 PY 1
PY 2 PY 1 QX 2 QX 1
Complements
EXY 0
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 20
Other Factors Related to
Demand Theory
• International Convergence of Tastes
– Globalization of Markets
– Influence of International Preferences on
Market Demand
• Growth of Electronic Commerce
– Cost of Sales
– Supply Chains and Logistics
– Customer Relationship Management
Prepared by Robert F. Brooker, Ph.D.
Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.
Slide 21