Managerial Economics) · (เศรษฐศาตร์เพื่อการจัดการ Managerial Economics)
Managerial economics -demand theory
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Transcript of Managerial economics -demand theory
Demand Theory andIts Implications In
Managerial Economics
Group Members
Omer ShahzadMB-12-08
Anam ArifMB-12-03
What is Demand ?
Demand is the basis of all productive activities. Demand theory is an economic theory that concerns the relationship between the demand for goods and their prices; it forms the core of microeconomics. The generation of demand can be pictorically shown as below,
NEED WANT DEMAND
Desire to buy
Willingness to pay
Ability to pay
Want Demand
Concept of Effective Demand
Individual Consumer’s DemandQdX = f(PX, I, PY, T)
QdX = Quantity demanded of commodity X by an individual per time period
PX = Price per unit of commodity X
I = Consumer’s income
PY = Price of related (substitute or complementary) commodity
T = Tastes of the consumer
Consumer Demand Theory
Consumer Demand Theory
GoodsNormal GoodsGoods for which demand increases when income increases, and falls when income decreases but price remains constant.
Inferior GoodsA good that decreases in demand when consumer income rises.
SubstitutesA product or service that satisfies the need of a consumer that another product or service fulfills.
Individual Demand Curve
Price of a Commodity (PX)
Quantity Demanded (QdX)
$2 1
$1 3
$0.50 4.5
Law of Demand
The law of demand states that the quantity demanded and the price of a commodity are inversely related, other things remaining constant. If the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of good demanded by the consumer will be negatively correlated to the change in the price of the good.
Law of Demand
There is an inverse relationship between the price of a good and the quantity of the good demanded per time period.
Substitution Effect Income Effect
Law of Demand
Income Effect
When price of a commodity falls then the individual can purchase more units of that commodity, thus quantity demanded for that commodity increases.
Substitution Effect
When price of a commodity falls, the quantity demanded for that product increases because the individual substitutes in consumption the product with its substitutes.
Horizontal summation of demand curves of individual consumers
Market Demand Curve
Individual to Market Demand
Market Demand FunctionQDX = f(PX, N, I, PY, T)
QDX = Quantity demanded of commodity X
PX = Price per unit of commodity X
N = Number of consumers on the market
I = Consumer income
PY = Price of related (substitute or complementary) commodity
T = Consumer tastes
Individual to Market Demand
Individual to Market Demand
Bandwagon EffectPeople tend to purchase a commodity which others are using or in order to follow the fashion.
Snob EffectSituation where the demand for a product by a high income segment varies inversely with its demand by the lower income segment.
Market Structure Monopoly
Perfect Competition
Oligopoly
Monopolistic Competition
Demand Faced by a Firm
Demand Faced by a Firm
Monopoly
Firm is sole producer of commodity
No substitutes
Total control on price
A rare case bound with government regulations
Examples are local telephone, electricity, public transport.
Perfect Competition
Large number of firms
Identical products
No control on price
A rare case
Examples are farmers selling wheat or rice or sugar-cane
Demand Faced by a Firm
Oligopoly
Firms producing homogeneous or standardized products like cement
Firms producing heterogeneous or differentiated products like soft drinks
Examples are firms in production sector of the economy
Monopolistic Competition
Involves elements of monopoly and perfect competition
Firm has somehow control over price
Examples are firms in service sector like gasoline stations or barber shops
Type of Good Durable Goods
Nondurable Goods
Producers’ Goods - Derived Demand
Demand Faced by a Firm
Demand Faced by a Firm
Durable Goods
Goods that provide services not only during the year when they are purchased but also in following years
Firm faces a more volatile or unstable demand
Examples are automobiles, electric appliances
Non-Durable Goods
Goods that cannot be stored and can be used within a year
Firm faces a stable demand
Examples are food, cosmetics and cleaning products
Demand Faced by a Firm
Non-Durable Goods
Goods that cannot be stored and can be used within a year
Firm faces a stable demand
Examples are food, cosmetics and cleaning products
Producer’s Goods
Goods, such as raw materials and tools, used to make consumer goods
The demand for such goods is derived demand because it depends upon the demand for goods and services it sells
Firm’s demand for producers goods is also more volatile and unstable
QX = a0 + a1PX + a2N + a3I + a4PY + a5T + …….
Linear Demand Function
QX = Quantity demanded of commodity X faced by the firm
PX = Price of commodity X
I = Consumer’s income
PY = Price of related (substitute or complementary) commodity
T = Tastes of the consumer
a = Co-efficient estimated by the regression analysis
An Insight into a new era of Demand Theory
Price Elasticity of Demand
A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is:
𝑃𝑟𝑖𝑐𝑒𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑=%𝑎𝑔𝑒 h𝑐 𝑎𝑛𝑔𝑒𝑖𝑛𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑%𝑎𝑔𝑒 h𝑐 𝑎𝑛𝑔𝑒𝑖𝑛𝑝𝑟𝑖𝑐𝑒
Price Elasticity of Demand
Price Elasticity of Demand
Point Price Elasticity of Demand
Arc Price Elasticity of Demand
Price Elasticity of Demand
/
/P
Q Q Q PE
P P P Q
Linear Function
Point Definition
1P
PE a
Q
Price Elasticity of Demand
Arc Definition2 1 2 1
2 1 2 1P
Q Q P PE
P P Q Q
Marginal Revenue and Price Elasticity of Demand
11
P
MR PE
Marginal Revenue, Total Revenue, and Price Elasticity
TR
QX
1PE MR<0MR>0
1PE
1PE MR=0
PX
QX
MRX
1PE
1PE
1PE
Marginal Revenue, Total Revenue, and Price Elasticity
Determinants of Price Elasticity of Demand
Demand for a commodity will be more elastic if:
It has many close substitutes
It is narrowly defined
More time is available to adjust to a price change
Demand for a commodity will be less elastic if:
It has few substitutes
It is broadly defined
Less time is available to adjust to a price change
Determinants of Price Elasticity of Demand