Quantitative Demand Analysis Managerial Economics Kyle J. Anderson Kelley School of Business Indiana University

What we can learn: What factors affect sales of my product? How sensitive are my sales to these factors? How will a price change impact revenue? Kelley School of Business

The demand function Linear demand Qx=a + b1Px + b2Py + b3Pz + b4M Log linear demand lnQx=a + b1lnPx + b2lnPy + b3lnPz + b4lnM Kelley School of Business

Q = 513 – 3.68P Kelley School of Business

Multiple Regression Q = 300 – 3.60P + 2.08Py + 23.19W Q = 531 – 3.60P   Coefficients Standard Error t Stat P-value Intercept 300.02 37.20 8.06 0.00 Our Price -3.60 0.27 -13.15 Comp. Price 2.08 0.26 8.12 Weekend 23.19 3.28 7.08 Q = 300 – 3.60P + 2.08Py + 23.19W Q = 531 – 3.60P Simplified Demand for Weekend when Py = 100 Kelley School of Business

Elasticity Measurement of how one variable responds to a change in another. Own price elasticity Cross price elasticity Income elasticity Advertising elasticity Other – Win Elasticity Percentage change in one variable due to a percentage change in another.

Own Price Elasticity -∞ Own price elasticity is always negative. Elastic demand – absolute value greater than 1. Inelastic demand – abs. value less than 1. Unitary elasticity – E= -1. Inelastic Elastic -1 -∞ Unitary Own Price Elasticity Spectrum

Perfectly Elastic Demand Price D Quantity Exists for some sellers The demand facing a seller may be perfectly elastic. Kelley School of Business

Perfectly Inelastic Demand Price D Nothing has perfectly inelastic demand. Quantity Kelley School of Business

Factors Affecting Own Price Elasticity Available Substitutes The more close substitutes available for the good, the more elastic the demand. Similar products  More elastic demand Brand loyal  less elastic Kelley School of Business

Factors Affecting Own Price Elasticity Available Substitutes The more close substitutes available for the good, the more elastic the demand. Beer: Miller Lite Many substitutes: Elastic demand No substitute – inelastic demand Kelley School of Business

Factors Affecting Own Price Elasticity Time Demand tends to be more inelastic in the short term than in the long term. Time allows consumers to seek out available substitutes. Short-term e = -.53 Long-term e = -.81 Kelley School of Business

Factors Affecting Own Price Elasticity Expenditure Share Larger share  more elastic demand Small purchase – less elastic Large purchase – more elastic Kelley School of Business

Own Price Elasticity and Linear Demand Elasticity is different at different prices. Higher prices – demand is more elastic. Price Elastic Unitary Elastic Inelastic D Quantity Kelley School of Business

Calculating elasticity Linear demand: Q= b0 – b1P Loglinear demand: lnQ = b0 + b1lnP E = b1 Kelley School of Business

Conclusion Defined Elasticity Determinants of Elasticity Calculate Elasticity Next: Elasticity and Revenue Kelley School of Business