SKC Education

1. CHAPTER 3
Quantitative Demand Analysis

2. Learning Objectives
What will you learn in this module?
 What is price elasticity of demand?
 What is the difference between inelastic and elastic
demand for goods?
 Why firms want to know the price elasticity of demand for
their products?
 What are the THREE (3) important factors that influences
the elasticity of demand for a product?

3. Consumer Demand
• In the previous module, we can see that the demand
for a firm's product, depends on
• its price,
• the prices of substitutes or complements,
• consumer incomes and
• other variables.

4. Consumer Demand
In this module, we will go through the important elements:
• Demand for a firm’s product depends on various factors,
managers must understand the directions of the changes in prices
and income on consumer demand to make a good decision.
• Important to understand what is elasticity, it explains the
magnitude of changes in price and quantity of a good.
• Demand Function: different factors influence consumer demand,
the Regression analysis is used to estimate the parameters
(factors) of demand functions.

5. THE ELASTICITY

6. The Elasticity
3-6

7. negative.
1.
• Two Important aspects of elasticity:
1. Sign determines the relationship: either positive or
2.Value: absolute value is greater than 1 or less than
The absolute Magnitude of elasticity:
•
•
is highly responsive to changes in .
is slightly responsive to changes in .
How to measureElasticity
•
3-7

8. Price Elasticity
3-8

9. The Elasticity
3-9
• For more Video on Demand Elasticity
• https://www.youtube.com/watch?v=HHcblIxiAAk
• For more video on Price Elasticity
• https://www.youtube.com/watch?v=VhKI8cOaYLI

10. Linear Demand
Quantity
Demand
30
$10
$5
Price
$40
$35
$30
$25
$20
$15
0 10 20 40 50 60 70 80
•
•
•
Revenue = $
Elasticity:
Conclusion: Demand is elastic.
•
•
•
Revenue = $
Elasticity:
Conclusion: Deman is
inelastic.
Elasticity varies along
a linear (inverse)
demand curve

11. Elasticity and TotalRevenue
• Total revenue is maximized when demand is unitary
elastic
• Elastic demand: A price increase (decrease) leads to a
decrease (increase) in total revenue.
• Inelastic demand: A price increase (decrease) leads to
an increase (decrease) in total revenue.
• Perfectly elastic: infinite elasticity of demand
• Perfectly inelastic: demand elasticity is zero
3-

12. Factors Affecting Their OwnPrice
Elasticity
3-
• Three factors can influence the own price elasticity of
demand:
1. Availability of consumption substitutes: one key
determinant of elasticity of demand of the good is the number
of its close substitute goods
2. Time/Duration of purchase horizon: demand is more
elastic in the short term than in the long term.
3. Expenditure share of consumers’ budgets: small share of
consumer’s budget is more inelastic than consumers spend
large proportion of their income.
For more video on Factors Affecting their Own Price Elasticity
https://www.youtube.com/watch?v=mKSBYx3VPPA

13. Elasticity and MarginalRevenue
• The marginal revenue can be derived from a market
demand curve.
Marginal revenue measures the additional revenue due to a
change in output.
• This link relates marginal revenue to the own price
elasticity of demand:
• When then, . demand is elastic
• When then, . demand is unitary elastic
• When then, . demand is inelastic
•
3-

14. The figureshowsthe MarginalRevenueassociatedwitheachprice-outputpairon the demand curve.
Noticethatfora lineardemandcurve,themarginalrevenuescheduleliesexactlyhalfwaybetweenthe
demandcurveand theverticalaxis.Furthermore,marginalrevenueis lessthanthepriceforeachunit
sold.
0
MR
3
Price
Demand
1
6
Unitary
6 Quantity
Marginal Revenue (MR)
3-

15. Cross-Price Elasticity
• Cross-price elasticity
Measures responsiveness of a percent change in demand for good
X due to a percent change in the price of good Y.
• If , then and are substitutes.
• If , then and are complements.
•
3-

16. Cross-Price Elasticity•
3-

17. Cross-Price Elasticity
3-
• Cross-price elasticity is important for firms selling multiple
products.
• Price changes for one product that affect changes in demand for
other products.
• Assessing the overall change in revenue from a price
change for one good when a firm sells two different goods

18. Income Elasticity
3-
For more information on Cross-Price and Income Elasticity
https://www.youtube.com/watch?v=QLMJDo9dck0

19. E• lasticities for LinearDemand
Functions
3-

20. Regression Analysis
3-
• How does manager obtain information on the demand
function?
• Published studies.
• Hire consultant.
• To estimate the demand function using Statistical technique called
regression analysis
• using data on quantity, price, income and other important variables.

21. Conclusion
3-
• Elasticities are tools used to quantify the impact of
changes in prices, income, and advertising on sales and
revenues.
• Given market or survey data, regression analysis can be
used to estimate:
• Demand functions.
• Elasticities.
• Other things, including cost functions.
• Managers can quantify the impact of changes in prices,
income, advertising, etc.

22. RECAP
On Key Terms and Concepts
2-22

23. Review the following key concepts and terms
 Elasticity
 Own price elasticity of demand
 Cross price elasticity of demand
 Arc elasticity of demand
 Inelastic demand
 Income elasticity
 Perfectly Inelastic demand
2-23