Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good...
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![Page 1: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/1.jpg)
Managerial Economics in a Global Economy, 5th Edition
byDominick Salvatore
Chapter 3Demand Theory
![Page 2: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/2.jpg)
Law of DemandThere is an inverse relationship between the
price of a good and the quantity of the good demanded per time period.
Substitution EffectIncome Effect
![Page 3: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/3.jpg)
Individual Consumer’s DemandQdX = f(PX, I, PY, T)
quantity demanded of commodity X by an individual per time period
price per unit of commodity X
consumer’s income
price of related (substitute or complementary) commodity
tastes of the consumer
QdX =
PX =
I =
PY =
T =
![Page 4: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/4.jpg)
QdX = f(PX, I, PY, T)
QdX/PX < 0
QdX/I > 0 if a good is normal
QdX/I < 0 if a good is inferior
QdX/PY > 0 if X and Y are substitutes
QdX/PY < 0 if X and Y are complements
![Page 5: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/5.jpg)
Market Demand CurveHorizontal summation of demand curves of
individual consumers
Bandwagon EffectSnob Effect
![Page 6: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/6.jpg)
Horizontal Summation: From Individual to Market Demand
![Page 7: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/7.jpg)
Market Demand FunctionQDX = f(PX, N, I, PY, T)
quantity demanded of commodity X
price per unit of commodity X
number of consumers on the market
consumer income
price of related (substitute or complementary) commodity
consumer tastes
QDX =
PX =
N =
I =
PY =
T =
![Page 8: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/8.jpg)
Demand Faced by a FirmMarket Structure
MonopolyOligopolyMonopolistic CompetitionPerfect Competition
Type of GoodDurable GoodsNondurable GoodsProducers’ Goods - Derived Demand
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Linear Demand FunctionQX = a0 + a1PX + a2N + a3I + a4PY + a5T
PX
QX
Intercept:a0 + a2N + a3I + a4PY + a5T
Slope:QX/PX = a1
![Page 10: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/10.jpg)
Price Elasticity of Demand
/
/P
Q Q Q PE
P P P Q
Linear Function
Point Definition
1P
PE a
Q
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Price Elasticity of Demand
Arc Definition 2 1 2 1
2 1 2 1P
Q Q P PE
P P Q Q
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Marginal Revenue and Price Elasticity of Demand
11
P
MR PE
![Page 13: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/13.jpg)
Marginal Revenue and Price Elasticity of Demand
PX
QX
MRX
1PE
1PE
1PE
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Marginal Revenue, Total Revenue, and Price Elasticity
TR
QX
1PE MR<0MR>0
1PE
1PE MR=0
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Determinants of Price Elasticity of Demand
Demand for a commodity will be more elastic if:
It has many close substitutesIt is narrowly definedMore time is available to adjust to a price
change
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Determinants of Price Elasticity of Demand
Demand for a commodity will be less elastic if:
It has few substitutesIt is broadly definedLess time is available to adjust to a price
change
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Income Elasticity of Demand
Linear Function
Point Definition /
/I
Q Q Q IE
I I I Q
3I
IE a
Q
![Page 18: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/18.jpg)
Income Elasticity of Demand
Arc Definition 2 1 2 1
2 1 2 1I
Q Q I IE
I I Q Q
Normal Good Inferior Good
0IE 0IE
![Page 19: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/19.jpg)
Cross-Price Elasticity of Demand
Linear Function
Point Definition /
/X X X Y
XYY Y Y X
Q Q Q PE
P P P Q
4Y
XYX
PE a
Q
![Page 20: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/20.jpg)
Cross-Price Elasticity of Demand
Arc Definition
Substitutes Complements
2 1 2 1
2 1 2 1
X X Y YXY
Y Y X X
Q Q P PE
P P Q Q
0XYE 0XYE
![Page 21: Chapter 3 Demand Theory. Law of Demand There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649e365503460f94b25314/html5/thumbnails/21.jpg)
Other Factors Related to Demand TheoryInternational Convergence of Tastes
Globalization of MarketsInfluence of International Preferences on
Market DemandGrowth of Electronic Commerce
Cost of SalesSupply Chains and LogisticsCustomer Relationship Management