DEMAND ANALYSIS

1
Factory Sales of Passenger Cars in the U.S.
of Passenger cars sold
In- tro- duc- tory Pe- riod
Mature Period
Declining Period
Growth Period
YEAR
2
DEMAND

• What Buyers are Willing and Able to Buy, during a
  given Time Period, ceteris paribus.

3
KEY POINTS ABOUT DEMAND

• WILLINGNESS AND ABILITY (not stridently
  wanting)
• BUYERS (not sellers)
• during a given time period is a FLOW (not a
  STOCK)
• ceteris paribus- all other things are held
  constant except price and quantity.
• Whole set of P-Q combinations (not QUANTITY
  DEMANDED)

4
GENERALIZED DEMAND FUNCTION
P
f f( Price Taxes, Price of
Complements Price of Substitutes Tastes for
good/service Income, Buyer Expectations, Number
of buyers)
Q
5
SUPPLY

• What Buyers Sellers are Willing and Able to buy
  Sell, during a given Time Period, ceteris paribus.

XXXXX
XXX
6
KEY POINTS ABOUT SUPPLY

• WILLINGNESS AND ABILITY (not stridently
  wanting)
• BUYERS (not sellers)
• during a given time period is a FLOW (not a
  STOCK)
• ceteris paribus- all other things are held
  constant except price and quantity.
• Whole set of P-Q combinations (not QUANTITY
  DEMANDED)

XXXXXXXXXXXXXXXXXXX Sellers (not buyers)
XXXXXXXXXXX SUPPLIED
7
GENERALIZED SUPPLY FUNCTION
f f( Price Price of Resources Technolo
gy, Seller Expectations, Number of Sellers)
8
HOW TO BE SHERLOCK HOLMES IN READING BETWEEN THE
LINES If You Know P and Q then you know
whether demand or supply is involved as well as
the direction of the shift. If You Know the
shift in demand or supply, then you know what is
likely to happen to price and quantity If You
Know the determinant that has changed and price,
then you know what is happening to quantity
demanded. If You Know the determinant that has
changed and quantity demanded, then you know
what is happening to price.
9
Lower Price Higher Price

Lower Output Higher Output
Leftward (downward)
Shift of Demand
Leftward (upward) Shift of Supply
Rightward (downward) Shift of Supply
Rightward (upward) Shift of Demand
Breakdown all shifts into their output and price
vectors
10
MARKET BOUNDARIES

• BUYER POINT OF VIEW No potential seller exists
  outside of the market boundaries (within a
  reasonable price range)
• SELLER POINT OF VIEW No potential buyer exists
  outside of the market boundaries (within a
  reasonable price range)
• BOTH POINTS OF VIEW MUST HOLD
• CROSS PRICE ELASTICITY measures

11
MARKET BOUNDARIES
X represents buyers
O represents sellers
X
X
O
O
X
X
X
O
12
MARKET DEMAND FOR CARS
Price (1000/car)
Price (1000/car)
Price (1000/car)
30
15
7 9 4 5
11 14
U.S quantity (mill/yr) Foreign Q (mill/yr)
Market Demand
13
MUSTANG DEMAND
GAINS-LOSS2974 M.
Price of Mustangs
TR 1426 million
9510
TR 4400 Million
GAIN
8000
LOSS
DEMAND
150
550
(000s Mustangs/year)
14
MARGINAL REVENUE (MR)
GAINS-LOSS
MR
Price
CHANGE IN CARS
2974 M./400,000 CARS
9510
7,435 PER CAR
8000
GAIN
7435
DEMAND
MR
LOSS
150
550
(000s Mustangs/year)
15
REVENUE MAXIMIZATION
Price
1,334,000 MUSTANGS
5037
DEMAND
MR
(000s Mustangs/year)
16
Price (/car)
1,334,000 MUSTANGS
elas1
elas1
MR0
5037
elasMR0
MRQ
(000s Mustangs/year)
MAXIMUM REVENUE
Total Revenue (/year)
6.5 billion
(000s Mustangs/year)
17
MUSTANG DEMAND
Price of Mustangs
1966 DEMAND
9510
1970 DEMAND
DEMAND
150
550
(000s Mustangs/year)
18
DEMAND ELASTICITY

• ALWAYS THE PERCENTAGE CHANGE IN QUANTITY DIVIDED
  BY THE PERCENTAGE CHANGE IN A DETERMINANT OF
  DEMAND
• NOT THE SAME AS MARGINAL REVENUE WHICH IS THE
  CHANGE IN REVENUE OVER THE CHANGE IN QUANTITY

19
PRICE ELASTICITY
Q1-Q2 Q1Q2 P1-P2 P1P2
PERCENTAGE CHANGE IN QUANTITY PERCENTAGE CHANGE
IN PRICE


E
p
Note This formula requires the knowledge of two
different situations The price (P1) and quantity
demanded (Q1) in an initial situation and A price
(P2) and quantity demanded (Q2) after a change
has occurred
20
IN EXCEL
Q1-Q2 Q1Q2 P1-P2 P1P2

E
Suppose you have the EXCEL worksheet
p
IT IS UNIT ELASTIC!
In C3, write the formula ((B1-C1)/(B1C1))/((B2-
C2)/(B2C2))
21
IN EXCEL
Q1-Q2 Q1Q2 P1-P2 P1P2

E
Suppose you have the EXCEL worksheet
p
NOW IT IS ELASTIC!
XXX
In C3, write the formula ((B1-C1)/(B1C1))/((B2-
C2)/(B2C2))
22
IN EXCEL
Q1-Q2 Q1Q2 P1-P2 P1P2

E
Suppose you have the EXCEL worksheet
p
NOW IT IS INELASTIC!
XXX
In C3, write the formula ((B1-C1)/(B1C1))/((B2-
C2)/(B2C2))
23
TOTAL REVENUE RULE
IF PRICE FALLS THEN
IF PRICE RISES THEN
IF ELASTI- CITY IS

ELASTIC (MR0,E1)
TR

TR
UNIT ELASTIC (MR0,E1)
TR stays same TR stays same
INELASTIC (MRTR
TR
24
REVENUE MAXIMIZATION
Price
1,334,000 MUSTANGS
9510
BIG LOSS IN REVENUE IF PRICES BELOW REV- ENUE
MAXIMIZING PRICE
8000
7435
5037
LOSS
4000
GAIN
DEMAND
MR
150
550
(000s Mustangs/year)
25
CROSS-PRICE ELASTICITY
Qx-Qx QxQx Py-Py PyPy
PERCENTAGE CHANGE IN QUANTITY (X) PERCENTAGE
CHANGE IN PRICE OF ANOTHER GOOD (Y)


E
X,Y
26
CROSS-PRICE ELASTICITY

• Exy x and y are complements
• Exy0 x and y are substitutes (or in same
  market)
• Exy 0 x and y are unrelated

27
MARKET BOUNDARIES
N represents a new firm
U represents your firm
X represents buyers
O represents sellers
X
X
O
O
X
U
X
N
X
O
Cross Price Elasticity w.r.t. New Firm?
28
MARKET BOUNDARIES
N represents a new firm
U represents your firm
X represents buyers
O represents sellers
X
X
O
N
O
X
U
X
X
O
Cross Price Elasticity w.r.t. New Firm?
Positive , Negative, or Zero
29
Percentage Change
30
Percentage Change
31
INCOME ELASTICITY
Q1-Q2 Q1Q2 Y1-Y2 Y1Y2
PERCENTAGE CHANGE IN QUANTITY PERCENTAGE CHANGE
IN INCOME


E
Y
32
INCOME ELASTICITY

• Ey An INFERIOR GOOD
• Ey0 A NORMAL GOOD Ey
  1 A SUPERIOR GOOD 0 A NECESSITY

33
Percentage Change
34
(No Transcript)
35
LIINEAR DEMAND
MAXIMUM REVENUE
Price (/car)
MULTIPLICATIVE DEMAND
CONSTANT REVENUE FLAT MARGINAL REVENUE
CURVE
Q
(000s Mustangs/year)
36
MULTIPLICATIVE DEMAND
Q