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2. Quantitative Demand Analysis

3. The Elasticity Concept Elasticity: a measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable.

4. Own Price Elasticity Of Demand Own price elasticity: a measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good E Qx, Px = (%  Qx) / (%  Px)

5. Own Price Elasticity Of Demand (continued) Qx = f (Px, Py, M, H). E Qx, Px = (dQx / dPx) (Px / Qx) Elastic demand: Absolute (E Qx,Px ) > 1 Inelastic demand: Absolute (E Qx,Px ) < 1 Unitary elastic demand: Absolute (E Qx,Px ) = 1

6. Elasticity And Total Revenue Figure 3-1 Page 77.

7. Factors Affecting The Own Price Elasticity: - Available substitutes, --the more substitutes available for the good, the more elastic the demand for it. --when there few close substitutes for a good, demand tends to be relatively inelastic.

8. Example: MarketOwn price elasticity Transportation-0.6 Motor vehicles-1.4 Motorcycles and bicycles-2.3 Food-0.7 Cereal-1.5 Clothing-0.9 Women’s clothing-1.2

9. Factors Affecting The Own Price Elasticity (continued): - Time, -- demand trends to be more inelastic in the short term than in in the long term. -- the more time consumers have to react to a price change, the more elastic the demand for the good.

10. Example: MarketShort term own price elasticity Long term own price elasticity Transportation-0.6-1.9 Food-0.7-2.3 Alcohol and tobacco -0.3-0.9 Recreation-1.1-3.5 Clothing-0.9-2.9

11. Factors Affecting The Own Price Elasticity (continued): - Expenditure share, -- goods that comprise a relatively small share consumer’s budgets tend to be more inelastic, than goods for which consumers spend a sizeable portion of their incomes.

12. Marginal Revenue And The Own Price Elasticity Of Demand Figure 3-3 Page 83. MR = P {(1 + E)/E} MR: marginal revenue P: price E: demand elasticity

13. Cross Price Elasticity: A measure of the responsiveness of the demand for a good to changes in the price of related good; The percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good.

14. Cross Price Elasticity (continued): E Qx, Py = (%  Qx) / (%  Py) Qx = f (Px, Py, M, H). E Qx, Py = (dQx / dPy) (Py / Qx)

15. Example: Cross price elasticity Transportation and recreation -0.05 Food and recreation0.15 Clothing and food-0.18

16. Income Elasticity: A measure of the responsiveness of the demand for a good to changes in consumer income; The percentage change in quantity demanded divided by the percentage change in income.

17. Income Elasticity (continued): E Qx, M = (%  Qx) / (%  M) Qx = f (Px, Py, M, H). E Qx, Py = (dQx / dM) (M / Qx)

18. Example: Income elasticity Transportation1.80 Food0.80 Ground beef, nonfed-1.94

19. Obtaining Elasticities From Demand Functions Qx = a0 + a1 Px + a2 Py + a3 M + a4 H Own price elasticity: E Qx, Px = a1 (Px / Qx) Cross price elasticity: E Qx, Py = a2 (Py / Qx) Income elasticity: E Qx, M = a3 (M / Qx)

20. Case: Qdx = 100 – 3 Px + 4 Py – 0.1 M + 2Ax the own price elasticity? the cross price elasticity? the income elasticity?