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http://managerialandeconomics.wordpress.com/. Quantitative Demand Analysis. The Elasticity Concept. Elasticity:

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  1. http://managerialandeconomics.wordpress.com/

  2. Quantitative Demand Analysis

  3. The Elasticity Concept • Elasticity: a measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable.

  4. Own Price Elasticity Of Demand • Own price elasticity: a measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good EQx, Px = (% DQx) / (% DPx)

  5. Own Price Elasticity Of Demand (continued) Qx = f (Px, Py, M, H). EQx, Px = (dQx / dPx) (Px / Qx) Elastic demand: Absolute (EQx,Px) > 1 Inelastic demand: Absolute (EQx,Px) < 1 Unitary elastic demand: Absolute (EQx,Px) = 1

  6. Elasticity And Total Revenue • Figure 3-1 Page 77.

  7. Factors Affecting The Own Price Elasticity: - Available substitutes, --the more substitutes available for the good, the more elastic the demand for it. --when there few close substitutes for a good, demand tends to be relatively inelastic.

  8. Example:

  9. Factors Affecting The Own Price Elasticity (continued): - Time, -- demand trends to be more inelastic in the short term than in in the long term. -- the more time consumers have to react to a price change, the more elastic the demand for the good.

  10. Example:

  11. Factors Affecting The Own Price Elasticity (continued): - Expenditure share, -- goods that comprise a relatively small share consumer’s budgets tend to be more inelastic, than goods for which consumers spend a sizeable portion of their incomes.

  12. Marginal Revenue And The Own Price Elasticity Of Demand • Figure 3-3 Page 83. MR = P {(1 + E)/E} MR: marginal revenue P: price E: demand elasticity

  13. Cross Price Elasticity: A measure of the responsiveness of the demand for a good to changes in the price of related good; The percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good.

  14. Cross Price Elasticity (continued): EQx, Py = (% DQx) / (% DPy) Qx = f (Px, Py, M, H). EQx, Py = (dQx / dPy) (Py / Qx)

  15. Example:

  16. Income Elasticity: A measure of the responsiveness of the demand for a good to changes in consumer income; The percentage change in quantity demanded divided by the percentage change in income.

  17. Income Elasticity (continued): EQx, M = (% DQx) / (% DM) Qx = f (Px, Py, M, H). EQx, Py = (dQx / dM) (M / Qx)

  18. Example:

  19. Obtaining Elasticities From Demand Functions Qx = a0 + a1 Px + a2 Py + a3 M + a4 H Own price elasticity: EQx, Px = a1 (Px / Qx) Cross price elasticity: EQx, Py = a2 (Py / Qx) Income elasticity: EQx, M = a3 (M / Qx)

  20. Case: • Qdx = 100 – 3 Px + 4 Py – 0.1 M + 2Ax the own price elasticity? the cross price elasticity? the income elasticity?

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