MANAGERIAL ECONOMICS 11th Edition By Mark Hirschey

Demand Analysis Chapter 5

Chapter 5 OVERVIEW Measuring Market Demand Demand Sensitivity Analysis: Elasticity Price Elasticity of Demand Price Elasticity and Marginal Revenue Price Elasticity and Optimal Pricing Policy Cross-price Elasticity of Demand Income Elasticity

Chapter 5 KEY CONCEPTS market demand curve elasticity endogenous variables exogenous variables point elasticity arc elasticity price elasticity of demand elastic demand unitary elasticity inelastic demand optimal price formula substitutes complements cross‑price elasticity income elasticity normal goods inferior goods. counter-cyclical noncyclical normal goods cyclical normal goods

Measuring Market Demand Graphing the Market Demand Curve Market demand is total demand. Evaluating Market Demand Demand differs among market segments. Add segment demand to get market demand.

Demand Sensitivity Analysis: Elasticity Elasticity Concept Elasticity measures sensitivity. Point and Arc Elasticity Point elasticity reflects sensitivity of Y to small changes in X, εX = ∂Y/Y ÷ ∂X/X. Arc elasticity reflects sensitivity of Y to big changes in X, EX = (Y2–Y1)/(Y2+Y1) ÷ (X2-X1)/(X2+X1). Advertising Elasticity Example

Price Elasticity of Demand Price Elasticity Formula Point price elasticity, εP = ∂Q/Q ÷ ∂P/P. In all cases, εP < 0 . Price Elasticity and Total Revenue Price cut increases revenue if │εP│> 1. Revenue constant if │εP│= 1. Price cut decreases revenue if │εP│< 1. Uses of Price Elasticity Information

Price Elasticity and Marginal Revenue How Elasticity Varies along a Demand Curve As price rises, so does │εP│. As price falls, so does│εP│. Price Elasticity and Price Changes MR > 0 if │εP│> 1. MR = 0 if │εP│= 1. MR < 0 if │εP│< 1.

Price Elasticity and Optimal Pricing Policy Optimal Price Formula MR and εP are directly related. MR = P/[1+(1/ εP)]. Optimal P* = MC/[1+(1/ εP)]. Optimal Pricing Policy Example Determinants of Price Elasticity Essential goods have low│εP│. Nonessential goods have high│εP│.

Cross-price Elasticity of Demand Substitutes and Complements Cross-price elasticity shows demand sensitivity to changes in other prices. εPX = ∂QY/QY ÷ ∂PX/PX. Substitutes have εPX > 0. Complements have εPX > 0. Independent goods have εPX > 0. Cross-price Elasticity Example

Income Elasticity Normal Versus Inferior Goods Types of Normal Goods Income elasticity shows demand sensitivity to changes in income. εI = ∂Q/Q ÷ ∂I/I. Normal goods have εI > 0. Inferior goods have εI < 0. Types of Normal Goods Noncyclical goods have 0 < εI < 1. Cyclical goods have εI > 1.