Title: Players%20Theater%20Company
1Players Theater Company
- Should the theater cut prices?
- The theater has 500 seats about 200 are filled
in a typical performance - The PTC has been charging 30/seat
2Demand Function
- Q f(X1, X2,, Xn)
- Example
- Q 117 6.6P 1.66Ps 3.3 Pr .0066I
3Demand Curve
Ticket Pricein Dollars
Income 50,000 Price of Symphony tickets
50 Price of meal at nearby restaurant 40
60
30
Demand
Quantity of PTC Tickets
200
400
4Demand Curve
Ticket Pricein Dollars
Income 50,000 ? 51,000 Price of Symphony
tickets 50 Price of meal at nearby restaurant
40
61
60
30
Quantity of PTC Tickets
200
400
406.6
5Elasticity of Demand
- Definition
- ? -( change in Q) / ( change in P)
- Calculating
6Arc Elasticity
Ticket Pricein Dollars
60
40
30
Quantity of PTC Tickets
200
133
400
7Estimates of Price Elasticities
- Sugar 0.31
- Potatoes 0.31
- Tires 1.20
- Electricity 1.20
- Haddock 2.20
- Movies 3.70
8Total Revenue, Marginal Revenue
- Total Revenue P x Q
- Marginal Revenue the change in total revenue
associated with selling one more unit of the
product
9Ticket Price,Marginal Revenue In Dollars
? gt 1
? 1
30
Demand
Q
Total Revenuein Dollars
MR
Total Revenue
Q
10Other Factors Influencing Demand
- Prices of related products
- Complements vs. Substitutes
- Defining a Market
- Cross Price Elasticity of Demand
11Estimates of Cross Elasticities
- Electricity and Natural Gas 0.20
- Beef and Pork 0.20
- Natural Gas and fuel oil 0.44
- Margarine and Butter 0.81
12Other Factors Influencing Demand
- Income
- Normal vs. Inferior goods
- Income Elasticity of demand
13Estimates of Income Elasticities
- Flour -.36
- Natural Gas 0.44
- Margarine -0.20
- Milk 0.07
- Dentist Services 1.41
- Restaurant Consumption 1.48
14Advanced Issues
- Network Effects
- Product Attributes
- Product Life Cycles
IndustryQuantityof output
Intro
Decline
Growth
Maturity
Time
15Demand Estimation
- Interviews
- Price Experimentation
- Statistical Analysis
- Omitted Variables Bias
- Multicollinearity
- Identification Problem
16The Identification Problem
- Suppose that this is a history of recent price
and quantity changes in our industry
Year Price Quantity
2004 25 4.5 million
2005 29 5.25 million
2006 22 7 million
17The Identification Problem
Price in dollars
2005
29
2004
25
2006
22
Industry output In millions
4.5
5.25
7
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