Managerial Economics in a Global Economy 5 th

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Managerial Economics in a Global Economy, 5 th Edition by Dominick Salvatore Chapter 3

Managerial Economics in a Global Economy, 5 th Edition by Dominick Salvatore Chapter 3 Demand Theory Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Law of Demand • There is an inverse relationship between the price of a

Law of Demand • There is an inverse relationship between the price of a good and the quantity of the good demanded per time period. • Substitution Effect • Income Effect Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Individual Consumer’s Demand Qd. X = f(PX, I, PY, T) Qd. X = quantity

Individual Consumer’s Demand Qd. X = f(PX, I, PY, T) Qd. X = quantity demanded of commodity X by an individual per time period PX = price per unit of commodity X I = consumer’s income PY = price of related (substitute or complementary) commodity T = tastes of the consumer Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Qd. X = f(PX, I, PY, T) Qd. X/ PX < 0 Qd. X/

Qd. X = f(PX, I, PY, T) Qd. X/ PX < 0 Qd. X/ I > 0 if a good is normal Qd. X/ I < 0 if a good is inferior Qd. X/ PY > 0 if X and Y are substitutes Qd. X/ PY < 0 if X and Y are complements Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Market Demand Curve • Horizontal summation of demand curves of individual consumers • Bandwagon

Market Demand Curve • Horizontal summation of demand curves of individual consumers • Bandwagon Effect • Snob Effect Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Horizontal Summation: From Individual to Market Demand Prepared by Robert F. Brooker, Ph. D.

Horizontal Summation: From Individual to Market Demand Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Market Demand Function QDX = f(PX, N, I, PY, T) QDX = quantity demanded

Market Demand Function QDX = f(PX, N, I, PY, T) QDX = quantity demanded of commodity X PX = price per unit of commodity X N = number of consumers on the market I = consumer income PY = price of related (substitute or complementary) commodity T = consumer tastes Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Demand Faced by a Firm • Market Structure – Monopoly – Oligopoly – Monopolistic

Demand Faced by a Firm • Market Structure – Monopoly – Oligopoly – Monopolistic Competition – Perfect Competition • Type of Good – Durable Goods – Nondurable Goods – Producers’ Goods - Derived Demand Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Linear Demand Function Q X = a 0 + a 1 P X +

Linear Demand Function Q X = a 0 + a 1 P X + a 2 N + a 3 I + a 4 P Y + a 5 T PX Intercept: a 0 + a 2 N + a 3 I + a 4 P Y + a 5 T Slope: QX/ PX = a 1 QX Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Price Elasticity of Demand Point Definition Linear Function Prepared by Robert F. Brooker, Ph.

Price Elasticity of Demand Point Definition Linear Function Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Price Elasticity of Demand Arc Definition Prepared by Robert F. Brooker, Ph. D. Copyright

Price Elasticity of Demand Arc Definition Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Marginal Revenue and Price Elasticity of Demand Prepared by Robert F. Brooker, Ph. D.

Marginal Revenue and Price Elasticity of Demand Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Marginal Revenue and Price Elasticity of Demand PX MRX Prepared by Robert F. Brooker,

Marginal Revenue and Price Elasticity of Demand PX MRX Prepared by Robert F. Brooker, Ph. D. QX Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Marginal Revenue, Total Revenue, and Price Elasticity TR MR>0 MR=0 Prepared by Robert F.

Marginal Revenue, Total Revenue, and Price Elasticity TR MR>0 MR=0 Prepared by Robert F. Brooker, Ph. D. MR<0 QX Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Determinants of Price Elasticity of Demand for a commodity will be more elastic if:

Determinants of Price Elasticity of Demand for a commodity will be more elastic if: • It has many close substitutes • It is narrowly defined • More time is available to adjust to a price change Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Determinants of Price Elasticity of Demand for a commodity will be less elastic if:

Determinants of Price Elasticity of Demand for a commodity will be less elastic if: • It has few substitutes • It is broadly defined • Less time is available to adjust to a price change Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Income Elasticity of Demand Point Definition Linear Function Prepared by Robert F. Brooker, Ph.

Income Elasticity of Demand Point Definition Linear Function Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Income Elasticity of Demand Arc Definition Normal Good Prepared by Robert F. Brooker, Ph.

Income Elasticity of Demand Arc Definition Normal Good Prepared by Robert F. Brooker, Ph. D. Inferior Good Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Cross-Price Elasticity of Demand Point Definition Linear Function Prepared by Robert F. Brooker, Ph.

Cross-Price Elasticity of Demand Point Definition Linear Function Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Cross-Price Elasticity of Demand Arc Definition Substitutes Prepared by Robert F. Brooker, Ph. D.

Cross-Price Elasticity of Demand Arc Definition Substitutes Prepared by Robert F. Brooker, Ph. D. Complements Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide

Other Factors Related to Demand Theory • International Convergence of Tastes – Globalization of

Other Factors Related to Demand Theory • International Convergence of Tastes – Globalization of Markets – Influence of International Preferences on Market Demand • Growth of Electronic Commerce – Cost of Sales – Supply Chains and Logistics – Customer Relationship Management Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide