Chapter 4 Demand and Elasticity Concepts Basic Concepts Market Demand Price Elasticity of Demand Cross-price elasticity Income & population elasticity.

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Presentation transcript:

Chapter 4 Demand and Elasticity Concepts Basic Concepts Market Demand Price Elasticity of Demand Cross-price elasticity Income & population elasticity Empirical examples

Demand Concepts Inverse relationship between Q and P Demand Function: –theoretical meaning –Consumer benefit Other arguments: (Other prices; Income) Parameters: where do they come from ?

Demand Shifters Tastes and preferences Income Prices of other goods Own Price Effect –Income –Substitution (curvature)

Market Demand Horizontal aggregation Theory of market demand Aggregation problem –income effects Shifter: population –size –demographics

Price Elasticity of Demand Definition –dimensionless –Price response Calculation Interpretation –elastic, inelastic Relation to total revenue Price Flexibility

Determinants of Elasticity Availability of substitutes Level of market Budget share –Slutsky equation Adjustment time frame –short term –long term

Other Elasticities Cross price elasticity Income elasticity (Engel Curve) –low for agr products Population elasticity –forecasting future demand Empirical Examples