1. PRICE AND QUANTITY DETERMINATION
Dr MONIKA JAIN

2. the firm’s objectives in determining price and quantity
To Maximise market Share
Business objectives
To Maximise returns on sales
Cost plus margin
Minimum return on capital

3. Firm’s Objective in determining Price and Quantity
Objectives:
Increasing Market share
By Reducing Price
(Cost plus Margin)
If it’s a Monopolist Firm

4. MAXIMISING RETURNS ON THE SALE
Alternative A
Alternative B
Alternative C
Sales 95 70 50
Direct Cost 63 42 28
Sales less Direct Cost 32 22
Allocated Cost 19 14 10
Net Income 13 12
Returns on sales
13.7%
20.0%
24%

5. Alternative C?
Clear No
Alternative C has higher return on Sale not because it results in a larger income but because it has lower sales
Returns on sale= Net Income X 100
Total Sales
=12 X 100 50
= 24%

6. Alternative B
Alternative B has highest returns in absolute term. Net Income is highest under this alternative
but Net Income is calculated after deducting allocated Cost (which in this case is 20% of the total sales and includes General and administrative expenses)
Net Income is calculated after subtracting allocated Cost , Taxes, Depreciation etc)

7. Alternative A –The alternative that maximizes the present value of net cash flow
Net cash flow is the actual cash flow from the alternatives and it excludes the Allocated costs
We assume that the Taxes are Zero.No depreciation cost. So Net cash flow is the difference between the Sales and Direct expenses .
So , the correct Alternative is A as it gives the highest Net cash flow of $32 Million.
In the Long run it’s the stream of cash flow to the Investors

8. CONTEMPORARY ECONOMICS
07/14/11
07/14/11
Market
A market is a group of buyers and sellers of a particular good or service.
Buyers determine demand...
Sellers determine supply...
LESSON 4.1
LESSON 4.1 5 4 5 5 5 8 5 5 5

9. Demand limitations Consumer Surplus
The difference between the Consumer’s willingness to buy and What it actually pays.
What determines the consumer’s Willingness to buy?

10. CONTEMPORARY ECONOMICS
07/14/11
Demand
Demand indicates how much of a product consumers are both willing and able to buy at each possible price during a given period, other things remaining constant.
LESSON 4.1

11. CONTEMPORARY ECONOMICS
07/14/11
07/14/11
The Concept of Demand. . . P
Quantity Demanded refers to the amount (quantity) of a good that buyers are willing to purchase at various prices for a given period. Q
LESSON 4.1
LESSON 4.1 10 10 10 8 10 11 10 10 10

12. CONTEMPORARY ECONOMICS
07/14/11
Demand Curve for Pizza 8 14 20 26 32
Quantity demanded
$15 12 9 6 3
Price a b c d e D
LESSON 4.1

13. Determinants of Demand
What factors determine how much of a particular product you will buy? 15 10 15 15 15 15 15 15

14. Determinants of Household Demand
CONTEMPORARY ECONOMICS
07/14/11
Determinants of Household Demand
The price of the product in question.
The income available to the household.
The prices of related products available to the household.
The household’s tastes and preferences.
The household’s expectations about future income, wealth, and prices.
The number and composition of consumers
LESSON 4.1

15. CONTEMPORARY ECONOMICS
07/14/11
Elasticity of Demand
LESSON 4.1

16. Elasticity . . .
… allows us to analyze supply and demand with greater precision.
… is a measure of how much buyers and sellers respond to changes in market conditions

17. THE ELASTICITY OF DEMAND
Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price.

18. Computing the Elasticity of Demand
CONTEMPORARY ECONOMICS
07/14/11
Computing the Elasticity of Demand
Elasticity of demand measures the percentage change in quantity demanded divided by percentage change in price.
Elasticity of demand =
Percentage change in quantity demanded
Percentage change in price
LESSON 4.1

19. Percentage method or proportionate method
Price elasticity of demand
Proportionate change in demand for x =
Proportionate change in Price for x
_____ OR qx px
_____ / Qx Px
Here,
qx = change in the quantity of x demanded
Qx = original quantity of x demanded
px = change in the price of x
Px = original price of x

20. Computing the Price Elasticity of Demand
Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as:

21. Computing Elasticity of Demand
CONTEMPORARY ECONOMICS
07/14/11
Computing Elasticity of Demand
Degrees of elasticity
ep=  it is Infinity
ep=0 it is zero elasticity
ep =1 it is unit-elastic
ep<1 it is relatively inelastic
ep>1 it is relatively elastic demand
LESSON 4.1

22. Relatively elastic demand
When the proportionate change in demand is more than the proportionate changes in price, it is known as relatively elastic demand. P R I C E
Relatively elastic demand curve D D x
demand

23. Relatively Elastic demand
CONTEMPORARY ECONOMICS
Relatively Elastic demand
CONTEMPORARY ECONOMICS
07/14/11
07/14/11
e>1
P(£) b 5 10 a 4 20 D
Q (millions of units per period of time)
LESSON 4.1
LESSON 4.1 23

24. Relatively inelastic demand
When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand D
Relatively inelastic demand curve P R I C E D X O
demand

25. Relatively Inelastic demand
CONTEMPORARY ECONOMICS
CONTEMPORARY ECONOMICS
07/14/11
07/14/11
e <1 c 8 15
P(£) a 4 20 D
Q (millions of units per period of time)
LESSON 4.1
LESSON 4.1 25

26. Relatively inelastic demand
When the proportionate change in demand is less than the proportionate changes in price, it is known as relatively inelastic demand D
Relatively inelastic demand curve P R I C E D X O
demand

27. perfectly inelastic demand (PD = 0)
CONTEMPORARY ECONOMICS
CONTEMPORARY ECONOMICS
07/14/11
07/14/11 P D P2 b P1 a O Q1 Q
LESSON 4.1
LESSON 4.1 27

28. Perfectly elastic demand
When the demand for a product changes –increases or decreases even when there is no change in price, it is known as perfect elastic demand.
Perfectly elastic demand curve P R I C E D D x

29. Perfectly elastic demand (PD = )
CONTEMPORARY ECONOMICS
CONTEMPORARY ECONOMICS
07/14/11
07/14/11 P a b P1 D Q2 O Q1 Q
LESSON 4.1
LESSON 4.1 29

30. Elasticity of demand equal to utility
When the proportionate change in demand is equal to proportionate changes in price, it is known as unitary elastic demand y D P R I C E
Elasticity of demand equal to utility curve D x
demand

31. Practical Importance of the Concept of Price Elasticity Of Demand
The concept is helpful in taking Business Decisions
Importance of the concept in formatting Tax Policy of the government
For determining the rewards of the Factors of Production
To determine the Terms of Trades Between the Two Countries
For Nationalization of Certain Industries

32. The Value of the Next Best Choice
A special kind of Trade-Off is an
OPPORTUNITY COST =
The Value of the Next Best Choice
(Ex: Sleeping is the opportunity cost of studying for a test)

33. Q: What is the opportunity cost of buying pizza?
Opportunity Costs
This is really IMPORTANT – when you choose to do ONE thing, its value (how much it is worth) is measured by the value of the NEXT BEST CHOICE.
This can be in time, energy, or even MONEY
Then I can’t afford the movies…
If I buy a pizza…
Q: What is the opportunity cost of buying pizza?

34. Total Revenue, Total Cost, and Profit
The amount a firm receives for the sale of its output.
Total Cost
The market value of the inputs a firm uses in production.

35. Total Revenue, Total Cost, and Profit
Profit is the firm’s total revenue minus its total cost.
Profit = Total revenue - Total cost

36. Typical Demand Curve

37. Total Revenue / Contribution Per Unit
Total Revenue – This is the amount of money a business receives from selling its products. It is calculated by multiplying the number of units sold by the the unit price
Contribution Per Unit – This is the difference between the selling price per unit and the variable cost per unit
For example:
Selling Price Per Unit £20
Variable Cost Per Unit £10
Contribution Per Unit £10
Contribution is used to pay the fixed costs and generate a profit

38. DETERMINING OPTIMAL PRICE AND QUANTITY
DEMAND VC
UNIT CONTRIBUTION
TOTAL CONTRIBUTION 20
600 30
500 10
5000 40
400
8000 50
300
9000 60
200 70
100 80

39. Revenue Curve

40. Pay off Matrix Firm B’s Price $5 $6 Firm A’s Price $2400,$1200
$4000,$0
$1000,$2400
$3000,$1600