Lecture - Chapter 3 - Quantitative Demand Analysis 3-2...

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Quantitative Demand Analysis
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Overview I. The Elasticity Concept Own Price Elasticity Elasticity and Total Revenue Cross-Price Elasticity Income Elasticity II. Demand Functions Linear Log-Linear III. Regression Analysis 3-2
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The Elasticity Concept How responsive is variable “G” to a change in variable “S” If E G,S > 0, then S and G are directly related. If E G,S < 0, then S and G are inversely related. S G E S G % % , If E G,S = 0, then S and G are unrelated. 3-3
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Own Price Elasticity of Demand Negative according to the “law of demand.” Elastic: Inelastic: Unitary: X d X P Q P Q E X X % % , 1 , X X P Q E 1 , X X P Q E 1 , X X P Q E 3-4
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Perfectly Elastic & Inelastic Demand ) ( Elastic Perfectly ,  X X P Q E D Price Quantity D Price Quantity ) 0 , X X P Q E ( Inelastic Perfectly 3-5
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Own-Price Elasticity and Total Revenue Elastic Increase (a decrease) in price leads to a decrease (an increase) in total revenue. Inelastic Increase (a decrease) in price leads to an increase (a decrease) in total revenue. Unitary Total revenue is maximized at the point where demand is unitary elastic. 3-6
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Elasticity, Total Revenue and Linear Demand Q Q P TR 100 0 0 10 20 30 40 50 3-7
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Elasticity, Total Revenue and Linear Demand Q Q P TR 100 0 10 20 30 40 50 80 800 0 10 20 30 40 50 3-8
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Elasticity, Total Revenue and Linear Demand Q Q P TR 100 80 800 60 1200 0 10 20 30 40 50 0 10 20 30 40 50 3-9
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Elasticity, Total Revenue and Linear Demand Q Q P TR 100 80 800 60 1200 40 0 10 20 30 40 50 0 10 20 30 40 50 3-10
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Elasticity, Total Revenue and Linear Demand Q Q P TR 100 80 800 60 1200 40 20 0 10 20 30 40 50 0 10 20 30 40 50 3-11
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Elasticity, Total Revenue and Linear Demand Q Q P TR 100 80 800 60 1200 40 20 Elastic Elastic 0 10 20 30 40 50 0 10 20 30 40 50 3-12
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