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Quantitative Demand Analysis

The Elasticity Concept n Elasticity: a measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable.

Own Price Elasticity Of Demand n Own price elasticity: a measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good EQx, Px = (% DQx) / (% DPx)

Own Price Elasticity Of Demand (continued) Qx = f (Px, Py, M, H). EQx, Px = (d. Qx / d. Px) (Px / Qx) Elastic demand: Absolute (EQx, Px) > 1 Inelastic demand: Absolute (EQx, Px) < 1 Unitary elastic demand: Absolute (EQx, Px) = 1

Elasticity And Total Revenue n Figure 3 -1 Page 77.

Factors Affecting The Own Price Elasticity: - Available substitutes, --the more substitutes available for the good, the more elastic the demand for it. --when there few close substitutes for a good, demand tends to be relatively inelastic.

Example: Market Own price elasticity Transportation -0. 6 Motor vehicles -1. 4 Motorcycles and bicycles Food -2. 3 Cereal -1. 5 Clothing -0. 9 Women’s clothing -1. 2 -0. 7

Factors Affecting The Own Price Elasticity (continued): - Time, -- demand trends to be more inelastic in the short term than in in the long term. -- the more time consumers have to react to a price change, the more elastic the demand for the good.

Example: Market Transportation Short term own price elasticity -0. 6 Long term own price elasticity -1. 9 Food -0. 7 -2. 3 Alcohol and tobacco Recreation -0. 3 -0. 9 -1. 1 -3. 5 Clothing -0. 9 -2. 9

Factors Affecting The Own Price Elasticity (continued): - Expenditure share, -- goods that comprise a relatively small share consumer’s budgets tend to be more inelastic, than goods for which consumers spend a sizeable portion of their incomes.

Marginal Revenue And The Own Price Elasticity Of Demand n Figure 3 -3 Page 83. MR = P {(1 + E)/E} MR: marginal revenue P: price E: demand elasticity

Cross Price Elasticity: A measure of the responsiveness of the demand for a good to changes in the price of related good; The percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good.

Cross Price Elasticity (continued): EQx, Py = (% DQx) / (% DPy) Qx = f (Px, Py, M, H). EQx, Py = (d. Qx / d. Py) (Py / Qx)

Example: Cross price elasticity Transportation and -0. 05 recreation Food and recreation 0. 15 Clothing and food -0. 18

Income Elasticity: A measure of the responsiveness of the demand for a good to changes in consumer income; The percentage change in quantity demanded divided by the percentage change in income.

Income Elasticity (continued): EQx, M = (% DQx) / (% DM) Qx = f (Px, Py, M, H). EQx, Py = (d. Qx / d. M) (M / Qx)

Example: Income elasticity Transportation 1. 80 Food 0. 80 Ground beef, nonfed -1. 94

Obtaining Elasticities From Demand Functions Qx = a 0 + a 1 Px + a 2 Py + a 3 M + a 4 H Own price elasticity: EQx, Px = a 1 (Px / Qx) Cross price elasticity: EQx, Py = a 2 (Py / Qx) Income elasticity: EQx, M = a 3 (M / Qx)

Case: n Qdx = 100 – 3 Px + 4 Py – 0. 1 M + 2 Ax the own price elasticity? the cross price elasticity? the income elasticity?