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Transcript of Managerial Economics and Organizational Architecture, Chapter 4 Demand The willingness and ability...
![Page 1: Managerial Economics and Organizational Architecture, Chapter 4 Demand The willingness and ability to buy.](https://reader036.fdocuments.us/reader036/viewer/2022062422/56649eea5503460f94bfb984/html5/thumbnails/1.jpg)
Managerial Economics and Organizational Architecture, Chapter 4
Demand
The willingness and ability to buy
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Managerial Economics and Organizational Architecture, Chapter 4
Demandlearning objectives
Students should be able toDescribe and apply demand function and demand curveDistinguish between change in quantity demanded and change in demandCalculate and interpret demand elasticity
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Managerial Economics and Organizational Architecture, Chapter 4
Demand Function
A mathematical representation of the relationship between the quantity demanded and all factors influencing demand:
Q = f(X1, X2,… Xn)
where Q is quantity demanded and the Xis are the factors influencing demand
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Managerial Economics and Organizational Architecture, Chapter 4
Demand for PTC Tickets
Q = 117 - 6.6P + 1.66Ps - 3.3Pr + 0.00661I
where P is PTC ticket price, Ps is price of symphony tickets, Pr is price of nearby restaurant meals, and I is average per capita income.
(Interpret each term of the above equation.)
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Managerial Economics and Organizational Architecture, Chapter 4
Variable values
Suppose the variables have the following values:
P = $30
Ps = $50
Pr = $40I = $50,000
How many tickets will PTC sell?
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Managerial Economics and Organizational Architecture, Chapter 4
The demand curve
Substituting variable values (except for P) into the equation and simplifying:
P = 60 - 0.15Q
which is the equation for the demand curve.
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Managerial Economics and Organizational Architecture, Chapter 4
Graphing the demand curve
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Managerial Economics and Organizational Architecture, Chapter 4
Demand elasticity
The elasticity of demand is given by
⎟⎠
⎞⎜⎝
⎛ΔΔ
−=P
Q
%
%η
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Managerial Economics and Organizational Architecture, Chapter 4
Calculating elasticityarc price elasticity
Information requirements:
Quantity demanded before and after the price change Q1
Q2
Price before and after the price change P1
P2
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Managerial Economics and Organizational Architecture, Chapter 4
Calculating elasticityarc price elasticity
⎥⎥⎥⎥
⎦
⎤
⎢⎢⎢⎢
⎣
⎡
+Δ+Δ
−=
⎥⎥⎥⎥⎥⎥
⎦
⎤
⎢⎢⎢⎢⎢⎢
⎣
⎡
+Δ
+Δ
−=
)(
)(
2)(
2)(
21
21
21
21
PPPQQQ
PPP
QQQ
η
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Managerial Economics and Organizational Architecture, Chapter 4
Arc price elasticityexample
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Managerial Economics and Organizational Architecture, Chapter 4
Calculating elasticitypoint price elasticity
Information requirements
Demand curve equation:Q=a-bP, b=ΔQ/ΔP
Current price and quantity P Q
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Managerial Economics and Organizational Architecture, Chapter 4
Calculating elasticitypoint price elasticity
⎟⎟⎠
⎞⎜⎜⎝
⎛×−=⎟⎟
⎠
⎞⎜⎜⎝
⎛×
ΔΔ
−=
⎟⎟⎟
⎠
⎞
⎜⎜⎜
⎝
⎛
Δ
Δ
−=⎟⎠
⎞⎜⎝
⎛ΔΔ
−=
Q
Pb
Q
P
P
Q
PPQ
Q
P
Q
%
%η
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Managerial Economics and Organizational Architecture, Chapter 4
Point price elasticityexample
If the demand equation is Q=20-4P, P=14, and Q=27, then elasticity is
07.2)27/14)(4( −=−=η
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Managerial Economics and Organizational Architecture, Chapter 4
Range of price elasticities
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Managerial Economics and Organizational Architecture, Chapter 4
Determinants of price elasticity
Availability of substitutes– few substitutes for milk– lots of substitutes for milk at the supermarket
Size of good in consumer budget– consider salt versus a Lexus
Time period for consumer adjustment– given enough time, how do we adjust to higher
fuel prices?
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Managerial Economics and Organizational Architecture, Chapter 4
Price changes and total revenue
PTC’s total revenue is TR=PQ The inverse demand curve is P=60-.15Q Substituting, TR=(60-.15Q)Q=60Q-.15Q2 From this we can derive marginal revenue
(MR=ΔTR/ΔQ=60-.30Q)
(Well, OK, we did use a little calculus for that last step. Trust us.)
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Managerial Economics and Organizational Architecture, Chapter 4
Elasticity, prices, and total revenue
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Managerial Economics and Organizational Architecture, Chapter 4
Demand, total revenue, & marginal revenue
linear demand curve
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Managerial Economics and Organizational Architecture, Chapter 4
Other demand influences
Complements versus substitutes– Cross price elasticity of demand
21
21
yy
y
xx
x
xy
PP
PQQQ
+Δ+
Δ
=η
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Managerial Economics and Organizational Architecture, Chapter 4
Other demand influences
Income– Normal goods– Inferior goods
Income elasticity
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Managerial Economics and Organizational Architecture, Chapter 4
Product life cycle
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Managerial Economics and Organizational Architecture, Chapter 4
Estimating demandthe identification problem