Managerial Economics in a Global Economy 5 th
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 1
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 2
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 3
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 4
Market Demand Curve • Horizontal summation of demand curves of individual consumers Prepared by Robert F. Brooker, Ph. D. Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 5
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 6
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 7
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 8
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 9
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 10
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 11
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 12
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 13
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 14
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 15
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 16
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 17
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 18
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 19
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 20
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 21
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