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Quantitative Demand Analysis
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.
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
EQx, Px = (% Qx) / (% Px)
Own Price Elasticity Of Demand (continued)Qx = f (Px, Py, M, H).EQx, Px = (dQx / dPx) (Px / Qx)
Elastic demand:Absolute (EQx,Px) > 1
Inelastic demand:Absolute (EQx,Px) < 1
Unitary elastic demand:Absolute (EQx,Px) = 1
Elasticity And Total Revenue
Figure 3-1 Page 77.
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.
Example:
Market Own 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
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.
Example:
Market Short 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
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.
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
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.
Cross Price Elasticity (continued):EQx, Py = (% Qx) / (% Py)
Qx = f (Px, Py, M, H).
EQx, Py = (dQx / dPy) (Py / Qx)
Example:
Cross price elasticity
Transportation and recreation
-0.05
Food and recreation 0.15
Clothing and food -0.18
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.
Income Elasticity (continued):EQx, M = (% Qx) / (% M)
Qx = f (Px, Py, M, H).
EQx, Py = (dQx / dM) (M / Qx)
Example:
Income elasticity
Transportation 1.80
Food 0.80
Ground beef, nonfed -1.94
Obtaining Elasticities From Demand Functions
Qx = a0 + a1 Px + a2 Py + a3 M + a4 H
Own price elasticity:EQx, Px = a1 (Px / Qx)
Cross price elasticity:EQx, Py = a2 (Py / Qx)
Income elasticity:EQx, M = a3 (M / Qx)
Case:
Qdx = 100 – 3 Px + 4 Py – 0.1 M + 2Ax
the own price elasticity?
the cross price elasticity?
the income elasticity?