Quantitative Demand Analysis Flashcards
Introduction to Demand Analysis
What does an increase in the price of a good lead to in terms of quantity demanded?
- An increase in the price of a good leads to a decline in the quantity demanded for that good.
Elasticity Concept
What does elasticity measure?
.
Elasticity measures the responsiveness of a percentage change in one variable resulting from a percentage change in another variable
The Elasticity Formula
The elasticity between two variables, 𝑄 and 𝑃, is mathematically expressed as: (Formula)
When a functional relationship exists, like ______, the elasticity is:
Measurement Aspects of Elasticity
Important aspects of the elasticity: (2/2,2)
Sign of the relationship: (direction)
- Positive.
- Negative.
Absolute value of elasticity magnitude relative to unity: (see picture)
1% change in price = 2% change in quantity if it was 2
Own Price Elasticity
What does it do?
Formula?
(2)
Measures the responsiveness of a percentage change in the quantity demanded of good X to a percentage change in its price.
- Sign: negative by law of demand.
- Magnitude of absolute value relative to unity:
Linear Demand, Elasticity, and Revenue
Total Revenue Test
What happens to total revenue when demand is elastic and the price increases?
When demand is elastic, a price increase leads to a decrease in total revenue.
at unitary elasticity we get the highest revenue
Factors Affecting Own Price Elasticity (3/1,3,2)
- Availability of consumption substitutes:
- The more substitutes available for the good, the more elastic the demand for it.
- Time/Duration of purchase horizon:
- Demand tends to be more inelastic in the short term than in the long time.
- The more time consumers have to react to a price change, the more elastic the demand for the good.
- Time allows the consumers to seek out available substitutes.
- Expenditure share of consumers’ budgets :
- Essential goods are generally inelastic.
- Nonessential goods are generally elastic.
Demand and Marginal Revenue
Cross-Price Elasticity
What does it measure?
Formula
(3)
Measures responsiveness of a percent change in demand for good X due to a percent change in the price of good Y.
Income Elasticity
What does it measure?
Formula
(4)
Measures responsiveness of a percent change in demand for good X due to a percent change in the price of good Y.
Elasticities for Linear Demand Functions
From a linear demand function, we can easily compute various elasticities.
Given a linear demand function: (Formula)
(3)
Elasticities for Linear Demand Functions In Action
Elasticities for Nonlinear Demand Functions
Elasticities for Nonlinear Demand Functions In Action
How does one obtain information on the demand function?
(3)
- Published studies.
- Hire consultant.
- Statistical technique called regression analysis using data on quantity, price, income and other important variables.
