Micro Economics Chapter 3 Demand Theory

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Presentation transcript:

Micro Economics Chapter 3 Demand Theory PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

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 PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Individual Consumer’s Demand QdX = 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 PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

QdX/I > 0 if a good is normal 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 PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Market Demand Curve Horizontal summation of demand curves of individual consumers Bandwagon Effect Snob Effect PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Horizontal Summation: From Individual to Market Demand PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Market Demand Function QDX = 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 PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Demand Faced by a Firm Market Structure Type of Good Monopoly Oligopoly Monopolistic Competition Perfect Competition Type of Good Durable Goods Nondurable Goods Producers’ Goods - Derived Demand PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Linear Demand Function QX = a0 + a1PX + a2N + a3I + a4PY + a5T PX Intercept: a0 + a2N + a3I + a4PY + a5T Slope: QX/PX = a1 QX PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Price Elasticity of Demand Point Definition Linear Function PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Price Elasticity of Demand Arc Definition PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Marginal Revenue and Price Elasticity of Demand PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Marginal Revenue and Price Elasticity of Demand PX QX MRX PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Marginal Revenue, Total Revenue, and Price Elasticity TR MR>0 MR<0 QX MR=0 PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Determinants of Price Elasticity of Demand 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 PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Determinants of Price Elasticity of Demand 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 PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Income Elasticity of Demand Point Definition Linear Function PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Income Elasticity of Demand Arc Definition Normal Good Inferior Good PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Cross-Price Elasticity of Demand Point Definition Linear Function PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Cross-Price Elasticity of Demand Arc Definition Substitutes Complements PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

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 PowerPoint Slides by Robert F. Brooker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.