Managerial Economics & Business Strategy: Quantitative Demand Analysis
Managerial Economics & Business Strategy: Quantitative Demand Analysis
Managerial Economics & Business Strategy: Quantitative Demand Analysis
Strategy
Chapter 3
Quantitative Demand Analysis
3-2
%G
EG , S
%S
If EG,S > 0, then S and G are directly related.
If EG,S < 0, then S and G are inversely related.
d
%QX
EQX , PX
%PX
• Negative according to the “law of demand.”
Elastic: EQX , PX 1
Inelastic: EQX , PX 1
Unitary: EQX , PX 1
3-4
Perfectly Elastic &
Inelastic Demand
Price Price
D
Quantity Quantity
Own-Price Elasticity
and Total Revenue
• Elastic
– Increase (a decrease) in price leads to a decrease (an
increase) in total revenue. (Negative relation with price)
• Inelastic
– Increase (a decrease) in price leads to an increase (a
decrease) in total revenue. (positive relation with price)
• Unitary
– Total revenue is maximized at the point where demand
is unitary elastic.
3-6
P
TR
100
0 10 20 30 40 50 Q 0 Q
3-7
P
TR
100
80
800
0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
3-8
P
TR
100
80
60 1200
800
0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
3-9
P
TR
100
80
60 1200
40
800
0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
3-10
P
TR
100
80
60 1200
40
20 800
0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
3-11
P
TR
100
Elastic
80
60 1200
40
20 800
0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
Elastic
3-12
P
TR
100
Elastic
80
60 1200
Inelastic
40
20 800
0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
Elastic Inelastic
3-13
P TR
100
Elastic Unit elastic
80 Unit elastic
60 1200
Inelastic
40
20 800
0 10 20 30 40 50 Q 0 10 20 30 40 50 Q
Elastic Inelastic
Factors Affecting 3-14
d
%QX
EQX , PY
%PY
Income Elasticity
d
%QX
EQX , M
%M
Price Price
S
S
Perfectly Inelastic ( EQX , PX 0)
Quantity Quantity
Uses of Elasticities
• Pricing.
• Managing cash flows.
• Impact of changes in competitors’ prices.
• Impact of economic booms and recessions.
• Impact of advertising campaigns.
3-21
Answer
• Calls would increase by 25.92 percent!
d
% Q X
EQX , PX 8.64
%PX
d
%QX
8.64
3%
3% 8.64 %QX
d
d
%QX 25.92%
3-25
Answer
• AT&T’s demand would fall by 36.24 percent!
d
%QX
EQX , PY 9.06
%PY
d
%QX
9.06
4%
d
4% 9.06 %QX
d
%QX 36.24%
3-27
QX 0 X PX Y PY M M H H
d
PX PY M
EQ X , PX X EQX , PY Y EQX , M M
QX QX QX
Own Price Cross Price Income
Elasticity Elasticity Elasticity
3-29
Log-Linear Demand
ln Q X d 0 X ln PX Y ln PY M ln M H ln H
Regression Analysis
• One use is for estimating demand functions.
• Important terminology and concepts:
– Least Squares Regression model: Y = a + bX + e.
– t-statistic.
– R-square or Coefficient of Determination.
– F-statistic.
• Slope:
x x y y
ˆ1 i i
x x
2
i
• Intercept:
ˆ0 y ˆ1x
3-32
Conclusion
• Elasticities are tools you can use to quantify
the impact of changes in prices, income,
and advertising on sales and revenues.
• Given market or survey data, regression
analysis can be used to estimate:
– Demand functions.
– Elasticities.
• Managers can quantify the impact of
changes in prices, income, advertising, etc.