Ch 3 - Demand Theory

# Ch 3 - Demand Theory - CHAPTER 3 DEMAND THEORY Market...

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CHAPTER 3 – DEMAND THEORY Market Analysis: - why do start-up companies overestimate their sales? Overestimate demand - why is a business interested in Demand Functions? - why do consumers prefer one product over another? - how can we estimate consumer preference or demand? Market Demand Schedule: - shows the total quantity of the good that would be purchased @ each price - determining: - mkt demand = ∑ individual demands - downward sloping (to the right) = inverse relationship: Q inc & P dec = horizontal summation of individual demand curves for all consumers - is valid for a particular period of time Market Demand Function: Q = -b 1 P + b 2 I – b 3 S + b 4 A Q = # of PCs demanded in a particular year P = avg price of PCs in that year Q is inversely related to the price I = per capita disposable income during that year Q is directly related to the level of consumers income S = avg price of supplemental goods (software) during the year Q is directly related to the price charged by its competitors for substitutable & similar goods, and inversely related to the prices of supplemental goods A = the amount spent on advertising by procedures of PC’s in that year Q is directly related to its advertising expenditures but inversely related to the advertising expenditures spent by its competitors Assume = the population in the relevant market is constant Subsitutes & Complements: - Substitutes = Direct Relationship: if P inc/dec, Qd inc/dec ex movie tickets & movie rentals - Complements = Inverse Relationship: if P inc/dec, Qd dec/inc

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Shift of Demand vs Movement Along Demand Curve: - change in demand (D) is not the same as a change in quantity demanded (Qd) - changes in the determinants of demand, other than price causes a change in demand or a shift of the entire demand curve, from D A to D B - a higher price causes lower Qd Change in Demand vs Change in Quantity Demanded: - demand shifts to the right = demand increases = causes Qd to be greater than it was prior to the shift,
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Ch 3 - Demand Theory - CHAPTER 3 DEMAND THEORY Market...

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