1. Demand analysis and demand
elasticities

2. Detailed course schedule
Day no
Topic
Textbook ch.
1 (24 Nov; 3 hrs)
1. Introduction. Decision making process and its elements. The scope of economic decision making. Application of marginal analysis
Chs. 1-2
2 (25 Nov; 3 hrs)
2. Demand analysis and demand elasticities
Ch. 3
3 (26 Nov; 3 hrs)
3. Buyer product valuation and choices. Consumer surplus. Buyer pricing decisions
Ch. 4
4 (27 Nov; 2 hrs)
4. Production/transformation process. Production technologies and input-output structure
Ch. 5
5 (28 Nov; 2 hrs)
5. Cost structure and cost drivers of producer pricing strategies. Production scale and scope.
Chs. 5 and 7
6 (1 Dec; 3 hrs)
6. Structure-conduct-performance. Market structures: competition and contestability. Pricing strategies of buyers and sellers
Ch. 8
7 (2 Dec; 3 hrs)
7. Market structures: monopoly/monopsony, monopolistic competition and oligopoly. Pricing strategies and strategic behaviour
Chs. 9-10
8 (3 Dec; 3 hrs)
8. Input sourcing and investment. Pricing and market power
Chs. 6 and 11
9 (4 Dec; 2 hrs)
9. Decision making under conditions of uncertainty. Informational asymmetries and risk management
Ch. 12
10 (5 Dec; 2 hrs)
10. Market research and market analysis. Auction and rings. Strategic behaviour
Ch. 13
11 (8 Dec; 2 hrs )
11. Public sector perspective
Ch. 14
12 (9 Dec; 2 hrs)
12. Revision
13. Examination
13 (11 Dec; 2 hrs)
Examination

3. Topic 2: Demand analysis and demand elasticities Topic Contents
2.1 Managerial perspective 2.2 Demand and the demand schedule 2.3 Demand curve
2.4 Elasticity of demand and revenue implications
2.5 Expected demand
2.6 Further reading

4. 2.1 Managerial perspective

5. 2.2 Demand and the demand schedule
Demand - willingness and ability to buy a good or a service
Quantity demanded - the amount of a good that buyers are willing and able to purchase at an indicated price
Demand schedule - a table that shows the relationship between the price of a good and the quantity demanded
Law of demand - other things being equal (ceteris paribus), the quantity demanded of a good varies inversely with its own price

6. 2.2 Demand and the demand schedule
Variables that may affect quantity demanded, Qa
Own price (Pa)
Prices of other goods/services (Po)
Income (I)
Tastes (T)
Expectations (E)
Number of buyers (n)
Demand equation Qa = f (Pa, Po, I, T, ….)
Example:
Qa = A - a Pa + b I
Qa = Pa I

7. 2.3 Demand curve
Demand curve - a graph of the relationship between the price of a good and the quantity demanded (of that good)
Price ($)
Quantity
Individual demand
Market demand - as the sum of individual demands

8. 2.3 Demand curve
Price ($) 15
12 Movement along 9 6 3
1 Quantity
Movement along the demand curve (ceteris paribus conditions)

9. 2.3 Demand curve P
Decrease Increase
in demand in demand Q
Shifts in the demand curve: increase in demand or decrease in demand

10. 2.3 Demand curve Change in Impact on the demand curve a variable
Own Price Movement along
Income Shift
Other prices Shift
Tastes Shift
Expectations Shift
No. of buyers Shift

11. 2.4 Elasticity of demand and revenue implications
Own price elasticity - the percentage change in quantity demanded that results from one per cent change in own price
Ea = %DQa/%Dpa
point elasticity (if the price change is very small)
arc elasticity (if the price change is large)
Point elasticity
Ea = dQa/Qa : dPa/Pa = dQa/dPa Pa/Qa
Arc elasticity
Ea = DQa/Qa : DPa/Pa = DQaPa/DPaQa

12. 2.4 Elasticity of demand and revenue implications
Demand is If
Elastic Ea< -1
Unitary elastic Ea= -1
Inelastic < Ea < 0

13. 2.4 Elasticity of demand and revenue implications
Cross price elasticity - the percentage change in quantity demanded for a good, Qa, that results from one per cent change in the price of another good, Pb
Eab = %DQa/%DPb
complements Eab < 0
substitutes Eab > 0
Two goods are:
Substitutes - when an increase in the price of one good increases the demand for the other good
Complements - when an increase in the price of one good decreases the demand for the other good

14. 2.4 Elasticity of demand and revenue implications
Income elasticity - the percentage change in quantity demanded for a good, Qa, that results from one per cent change in the buyer’s income, I
EI = %DQa/%DI
A good is:
normal - when, ceteris paribus, an increase in income results in an increase in quantity demanded
0<EI (a necessity if 0 < EI <1)
inferior - when, ceteris paribus, an increase in income results in a decrease in quantity demanded
EI<0

15. 2.4 Elasticity of demand and revenue implications
Total revenue TR = PQ
Average revenue AR = TR/Q=P
Marginal revenue MR = dTR/dQ
Marginal revenue is the change in revenue resulting from one unit change in quantity demanded

16. 2.4 Elasticity of demand and revenue implications
Price Elasticity and Marginal Revenue
Price ($)
Elastic Unitary
Elastic
Inelastic
MR Quantity

17. 2.5 Expected demand Uncertainty - ‘incomplete’ knowledge
Non-quantifiable uncertainty - ordinal measures (e.g., more likely than …..)
Quantifiable uncertainty or Risk cardinal measures (e.g., 10% chance of .….)
Probability distributions
Expected Value N
E(V) = S ViPi
i=1
where Vi is the value of the ith outcome
Pi is the probability of the ith outcome

18. 2.5 Expected demand Variance Coefficient of Variation STD = VAR
VAR = S (Vi- V(P))2 Pi i = 1, 2, N
Standard Deviation
STD = VAR
Coefficient of Variation
CV = STD/E(V)
Used as a measure of risk

19. 2.5 Expected demand
Example: Bell-shaped distribution applied to demand for an item repair services

20. 2.5 Expected demand Preferences for risk bearing
risk neutrality
risk preference
risk aversion
certainty equivalence
risk premium
Consider two gifts with equal E(V) but different coefficients of variation, CV. For example,
Gift A - $100 cash
Gift B - a lottery ticket offering a chance of winning $200 or nothing

21. 2.5 Expected demand Risk-neutral person is indifferent between A and B
Risk-averse person prefers A to B
Risk-loving person prefers B to A
Certainty equivalent is a certain activity with E(V) equal to E(V) of some equivalent risky activity (e.g., A is the certainty equivalent of B)
Risk premium is the difference between the subjective value of a risky activity and the value of its certainty equivalent (e.g., V(B) - V(A))

22. 2.6 Further reading
Baye (2010): chs. 3-4