Demand Analysis

1
Demand Analysis

• Demand
• Elasticity
• Supply
• Equilibrium

2
Behind the Demand Curve Theory of Consumer Choice

• Balance preferences and spending power
• Weigh willingness to buy against ability to buy
• Match desire to buy and ability to buy

3
Utility Theory

• Goal of maximizing utility s.t. an income
  constraint
• U U(X, Y)
• s.t. M pxX PyY
• Consumers can rank preferences
• Consumers have income to spend
• There are goods to buy

4
Consumer Equilibrium

• Maximize utility s.t. income constraint
• Given limited budget and positive prices, reach
  highest level of utility
• Income and substitution effects
• Equilibrium implies MUx/MUy px/py

5
Consumer Choice Using Lagrangians

• Deriving the decision rule with mathematics

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Basis for Demand

• Direct demand
• Derived demand

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The Demand Function

• Determinants of demand
• Qd Qd (PoT, C, I, Pn, R, E )

8
The Demand Curve

• The amount of a good consumers are willing to buy
  at various prices
• The maximum price consumers are willing to pay
  for a given amount of a good

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The Concept of Elasticity

• Defined
• Formula
• Point v. arc elasticity
• The relationship between elasticity and slope

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Nature of Elasticity

• Perfectly elastic
• Elastic
• Unit elastic
• Inelastic
• Perfectly Inelastic

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Issues in Elasticity

• Elasticity-revenue relationship
• Optimal pricing
• Straight-line demand curves
• MR P(1 1/e)

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Determinants of Price Elasticity

• Substitutability
• Complementary goods
• Relative importance in budget
• Time

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Income Elasticity of Demand

• Superior goods
• Normal goods
• Inferior goods
• Giffen goods

14
Cross Elasticity of Demand

• Substitutes
• Complements

15
Basis for Supply

• Supply decisions based on cost of production

16
Market Supply

• Determinants of supply
• Qs Qs (PoPr, K, M)

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The Supply Curve

• The amount of a good suppliers are willing to
  provide at various prices
• The minimum price suppliers are willing to accept
  to make a given amount of a good available

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Market Equilibrium

• Superimpose demand and supply
• If Qs Qd, no tendency to change

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Applications

• Excise tax
• Quotas and tariffs
• Agricultural policy