Demand Analysis
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View Demand Analysis as PDF for free.
More details
- Words: 1,157
- Pages: 41
Managerial Economics
Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decisionmaking process within the firm or organization.”
Salvatore - “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”
Positive Economics:Derives useful theories with testable propositions about WHAT IS. Normative Economics:Provides the basis for value judgements on economic outcomes.WHAT SHOULD BE
Scope of Managerial Economics
Utility analysis Demand and supply analysis Production and cost analysis Market analysis Pricing Investment decisions Game theory
Basic problems of an economy
What to produce( Choice) How to produce ( Technology) Whom to produce ( Distribution)
Fundamental Concepts Managerial Economics
Marginal Principle Opportunity cost principle Incremental Principle Discount Principle Time Perspective
Demand Analysis Demand – Desire + ability to pay + willingness to pay
Demand is relative term – Price Time Place
Determinants of demand
Price Income Taste, preference and fashion Prices of related goods Government policy Custom and tradition Advertisement
Law of demand
If other things remain constant, when price increases demand contracts and when price decreases demand expands. Price and demand are inversely proportionate. D = a - bP
Why demand curve slopes downwards
Law of diminishing marginal utility Income effect Substitution effect Multiplicity of uses
Market Demand Curve
Shows the amount of a good that will be purchased at alternative prices. Law of Demand
The demand curve is downward sloping.
Price
D Quantity
Exception to the law of demand
Giffen Goods Prestigious goods Buyers illusions Necessary goods Brand loyalty
Elasticity
Elasticity is a measure of responsiveness of one variable to another variable. Can involve any two variables. An elastic relationship is responsive. An inelastic relationship is unresponsive.
Types of Elasticity of demand
Price Elasticity of demand Income elasticity of demand Cross Elasticity of demand Promotional Elasticity of demand
Price elasticity: Εp=%∆Q/% ∆P
Causality: denominator numerator! An elastic response is one where numerator is greater than denominator. i.e., %∆ Q>%∆ P so Ep >1
Imagine extreme example.
An inelastic response is one where numerator is smaller than denominator. i.e., %∆ Q<%∆ P so Ep <1
Again, imagine extreme example.
Look at the Extremes
Perfectly Elastic D Ep =infinite
P
P
Perfectly Inelastic D D
Ep =0
D
Q
Q
Relatively Elastic vs. Inelastic Demand Curves P
D’ is relatively more elastic than D P1 P2 D Q1 Q2
Q2’
D’ Q
Point Elasticity Formula
Point elasticity Point elasticity is responsiveness at a point along the demand function
Ep =∆ Q/Q1 ∆ P/P1 simplifying: Ep =(∆ Q/∆ P)* P1 /Q1
Price (Rs.)
P1 D
Q1
Q
Point Elasticity Formula
Point elasticity Point elasticity is responsiveness at a point along the demand function
Ep =∆ Q/Q1 ∆ P/P1 simplifying: Ep =(∆ Q/∆ P)* P1 /Q1
Price (Rs.)
P1 D
Q1
Q
Example: Q=56-0.002*P
Point elasticity
Ep =(∆ Q/∆ P)* P1 /Q1
Suppose P=17000 Q=56-0.002*17000 Q=56-34=22 Plug into equation gives: Ep =( -0.002)* 17000 /22 Ep =-34/22=-1.54
Price (Rs)
17k D 22
Q
Arc Elasticity Briefly, arc elasticity is simply an average elasticity along a range of the demand curve.
Arc Elasticity Formula
Arc elasticity: Price ($) Responsiveness along a range of D. function
Ep =∆ Q/((Q1+ Q2)/2) ∆ P/((P1+ P2)/2)
P2 P1
Avg. responsiveness D
simplifying: Ep=(∆ Q/∆ P)*((P1+P2)/(Q1+Q2))
Q2 Q1
Q
Example Q=56-0.002*P
Arc elasticity
Ep =(∆ Q/∆ P)*((P1+P2)/(Q1+Q2)) Look at P range 16k 17k Q=56-0.002*17000 Q=56-34=22 Plug into equation gives:
Price ($)
17k 16k
Ep =( -0.002)*(33000/46) Ep
=-66/46=-1.43
D 22 24
Q
Factors influence Price elasticity of demand
Nature of commodity Availability of substitute Multiplicity of uses Habit Proportion of income spent Price range
Managerial Applications of Price elasticity of demand
Pricing Decision Fiscal policy Labour market International trade
Income Elasticity of Demand
Recall demand function is: Q=f(P,I,Prelated,Tastes,Buyers,Expectations...)
Change in I causes shift in demand. Size of shift depends on income elasticity. EI =%∆Q/%∆I Focus again on point formula. Value of EI determines type of good.
Values for Income Elasticity (Ε Ι )
Sign indicates normal or inferior EI >0 implies normal good. EI<0 implies inferior good. Normal goods may be necessity or luxury.
If EI>1 then this is luxury (responsive to income). If 0<EI<1 then this is necessity (unresponsive to income).
Cross Price Elasticity (EXY) QX=f(PX ,I,PY,Tastes, Buyers,Expectations...)
Change in PY causes shift in demand for X.
Size of shift depends on cross-price elasticity. EXY=%∆ QX /%∆ PY
Sign indicates relationship between two goods EXY>0 implies goods are substitutes. EXY<0 implies goods are complements.
OBJECTIVES OF SHORT TERM DEMAND FORECASTING
Production planning Evolving sales policy Fixing sales targets Determining price policy Inventory control Determining short-term financial planning
OBJECTIVES OF LONG-TERM DEMAND FORECASTING
BUSINESS PLANNING
MANPOWER PLANNING
LONG-TERM FINANCIAL PLANNING
METHODS OF DEMAND FORECASTING
Survey methods:
Consumer interviews Opinion poll Experts opinion End-use method
Statistical methods:
Trend Analysis Regression Analysis
Market Supply Curve
The supply curve shows the amount of a good that will be produced at alternative prices. Law of Supply
The supply curve is upward sloping Price
S0
Quantity
Supply Shifters
Input prices Technology or government regulations Number of firms Substitutes in production Taxes Producer expectations
The Supply Function
An equation representing the supply curve: QxS = f(Px , PR ,W, H,)
QxS = quantity supplied of good X.
Px = price of good X.
PR = price of a related good
W = price of inputs (e.g., wages) H = other variable affecting supply
Change in Quantity Supplied Price
A to B: Increase in quantity supplied S0 B
20 A 10
5
10
Quantity
Change in Supply S0 to S1: Increase in supply
Price
S0 S1 8 6 5
7
Quantity
Producer Surplus
The amount producers receive in excess of the amount necessary to induce them to produce the good. Price
S0 P* Producer Surplus
Q*
Quantity
Market Equilibrium
Balancing supply and demand Q S= x
Qxd
Steady-state
Equilibrium Price and quantity Price
S
7
D 8
Quantity
If price is too low... Price S
7 6 5 D
Shortage 12 - 6 = 6 6
12
Quantity
If price is too high… Surplus 14 - 6 = 8
Price
S
9 8 7
D 6
8
14
Quantity
Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decisionmaking process within the firm or organization.”
Salvatore - “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”
Positive Economics:Derives useful theories with testable propositions about WHAT IS. Normative Economics:Provides the basis for value judgements on economic outcomes.WHAT SHOULD BE
Scope of Managerial Economics
Utility analysis Demand and supply analysis Production and cost analysis Market analysis Pricing Investment decisions Game theory
Basic problems of an economy
What to produce( Choice) How to produce ( Technology) Whom to produce ( Distribution)
Fundamental Concepts Managerial Economics
Marginal Principle Opportunity cost principle Incremental Principle Discount Principle Time Perspective
Demand Analysis Demand – Desire + ability to pay + willingness to pay
Demand is relative term – Price Time Place
Determinants of demand
Price Income Taste, preference and fashion Prices of related goods Government policy Custom and tradition Advertisement
Law of demand
If other things remain constant, when price increases demand contracts and when price decreases demand expands. Price and demand are inversely proportionate. D = a - bP
Why demand curve slopes downwards
Law of diminishing marginal utility Income effect Substitution effect Multiplicity of uses
Market Demand Curve
Shows the amount of a good that will be purchased at alternative prices. Law of Demand
The demand curve is downward sloping.
Price
D Quantity
Exception to the law of demand
Giffen Goods Prestigious goods Buyers illusions Necessary goods Brand loyalty
Elasticity
Elasticity is a measure of responsiveness of one variable to another variable. Can involve any two variables. An elastic relationship is responsive. An inelastic relationship is unresponsive.
Types of Elasticity of demand
Price Elasticity of demand Income elasticity of demand Cross Elasticity of demand Promotional Elasticity of demand
Price elasticity: Εp=%∆Q/% ∆P
Causality: denominator numerator! An elastic response is one where numerator is greater than denominator. i.e., %∆ Q>%∆ P so Ep >1
Imagine extreme example.
An inelastic response is one where numerator is smaller than denominator. i.e., %∆ Q<%∆ P so Ep <1
Again, imagine extreme example.
Look at the Extremes
Perfectly Elastic D Ep =infinite
P
P
Perfectly Inelastic D D
Ep =0
D
Q
Q
Relatively Elastic vs. Inelastic Demand Curves P
D’ is relatively more elastic than D P1 P2 D Q1 Q2
Q2’
D’ Q
Point Elasticity Formula
Point elasticity Point elasticity is responsiveness at a point along the demand function
Ep =∆ Q/Q1 ∆ P/P1 simplifying: Ep =(∆ Q/∆ P)* P1 /Q1
Price (Rs.)
P1 D
Q1
Q
Point Elasticity Formula
Point elasticity Point elasticity is responsiveness at a point along the demand function
Ep =∆ Q/Q1 ∆ P/P1 simplifying: Ep =(∆ Q/∆ P)* P1 /Q1
Price (Rs.)
P1 D
Q1
Q
Example: Q=56-0.002*P
Point elasticity
Ep =(∆ Q/∆ P)* P1 /Q1
Suppose P=17000 Q=56-0.002*17000 Q=56-34=22 Plug into equation gives: Ep =( -0.002)* 17000 /22 Ep =-34/22=-1.54
Price (Rs)
17k D 22
Q
Arc Elasticity Briefly, arc elasticity is simply an average elasticity along a range of the demand curve.
Arc Elasticity Formula
Arc elasticity: Price ($) Responsiveness along a range of D. function
Ep =∆ Q/((Q1+ Q2)/2) ∆ P/((P1+ P2)/2)
P2 P1
Avg. responsiveness D
simplifying: Ep=(∆ Q/∆ P)*((P1+P2)/(Q1+Q2))
Q2 Q1
Q
Example Q=56-0.002*P
Arc elasticity
Ep =(∆ Q/∆ P)*((P1+P2)/(Q1+Q2)) Look at P range 16k 17k Q=56-0.002*17000 Q=56-34=22 Plug into equation gives:
Price ($)
17k 16k
Ep =( -0.002)*(33000/46) Ep
=-66/46=-1.43
D 22 24
Q
Factors influence Price elasticity of demand
Nature of commodity Availability of substitute Multiplicity of uses Habit Proportion of income spent Price range
Managerial Applications of Price elasticity of demand
Pricing Decision Fiscal policy Labour market International trade
Income Elasticity of Demand
Recall demand function is: Q=f(P,I,Prelated,Tastes,Buyers,Expectations...)
Change in I causes shift in demand. Size of shift depends on income elasticity. EI =%∆Q/%∆I Focus again on point formula. Value of EI determines type of good.
Values for Income Elasticity (Ε Ι )
Sign indicates normal or inferior EI >0 implies normal good. EI<0 implies inferior good. Normal goods may be necessity or luxury.
If EI>1 then this is luxury (responsive to income). If 0<EI<1 then this is necessity (unresponsive to income).
Cross Price Elasticity (EXY) QX=f(PX ,I,PY,Tastes, Buyers,Expectations...)
Change in PY causes shift in demand for X.
Size of shift depends on cross-price elasticity. EXY=%∆ QX /%∆ PY
Sign indicates relationship between two goods EXY>0 implies goods are substitutes. EXY<0 implies goods are complements.
OBJECTIVES OF SHORT TERM DEMAND FORECASTING
Production planning Evolving sales policy Fixing sales targets Determining price policy Inventory control Determining short-term financial planning
OBJECTIVES OF LONG-TERM DEMAND FORECASTING
BUSINESS PLANNING
MANPOWER PLANNING
LONG-TERM FINANCIAL PLANNING
METHODS OF DEMAND FORECASTING
Survey methods:
Consumer interviews Opinion poll Experts opinion End-use method
Statistical methods:
Trend Analysis Regression Analysis
Market Supply Curve
The supply curve shows the amount of a good that will be produced at alternative prices. Law of Supply
The supply curve is upward sloping Price
S0
Quantity
Supply Shifters
Input prices Technology or government regulations Number of firms Substitutes in production Taxes Producer expectations
The Supply Function
An equation representing the supply curve: QxS = f(Px , PR ,W, H,)
QxS = quantity supplied of good X.
Px = price of good X.
PR = price of a related good
W = price of inputs (e.g., wages) H = other variable affecting supply
Change in Quantity Supplied Price
A to B: Increase in quantity supplied S0 B
20 A 10
5
10
Quantity
Change in Supply S0 to S1: Increase in supply
Price
S0 S1 8 6 5
7
Quantity
Producer Surplus
The amount producers receive in excess of the amount necessary to induce them to produce the good. Price
S0 P* Producer Surplus
Q*
Quantity
Market Equilibrium
Balancing supply and demand Q S= x
Qxd
Steady-state
Equilibrium Price and quantity Price
S
7
D 8
Quantity
If price is too low... Price S
7 6 5 D
Shortage 12 - 6 = 6 6
12
Quantity
If price is too high… Surplus 14 - 6 = 8
Price
S
9 8 7
D 6
8
14
Quantity
Related Documents
Demand Analysis
June 2020 5
Demand Analysis
June 2020 4
Demand Analysis
June 2020 7
Demand Analysis
May 2020 23
Demand Analysis Am Mended)
June 2020 4
Session7-8 Demand Analysis
June 2020 3More Documents from "Saurabh Suman"
Attitude
May 2020 32
Se2 (1).docx
November 2019 28
Objectives Of Firms
May 2020 28
4 - Kinds Of Companies
May 2020 27