Lesson 03 - Quantitative Demand Analysis.pptx

General Sir John Kotelawala Defence University, Sri Lanka Business Economics R. K. Kasunthika PHD (Reading), MBM (UoK), B.Sc (USJ), SLIM Bachelor of Science in Applied Data Science Communication, Batch 41 1  Quantita...

General Sir John Kotelawala Defence University, Sri Lanka Business Economics R. K. Kasunthika PHD (Reading), MBM (UoK), B.Sc (USJ), SLIM Bachelor of Science in Applied Data Science Communication, Batch 41 1  Quantitative Demand Analysis Lesson 03 Bachelor of Science in Applied Data Science Communication, Batch 41 2 The Elasticity Concept 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. Bachelor of Science in Applied Data Science Communication, Batch 41 3 Own Price Elasticity of Demand 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. Bachelor of Science in Applied Data Science Communication, Batch 41 4  Two aspects elasticity are important: Its Sign Whether it is greater or less than absolute value Elastic demand Demand is elastic if the absolute value of the own price elasticity is greater than 1. Inelastic demand Demand is inelastic if the absolute value of the own price elasticity is less than 1. Unitary elastic demand Demand is unitary elastic if the absolute value of the own price elasticity is equal to 1. Bachelor of Science in Applied Data Science Communication, Batch 41 5  Perfectly elastic demand Demand is perfectly elastic if the own price elasticity is infinite in absolute value. In this case the demand curve is horizontal. Perfectly inelastic demand Demand is perfectly inelastic if the own price elasticity is zero. In this case the demand curve is vertical. Bachelor of Science in Applied Data Science Communication, Batch 41 6 Total Revenue and Elasticity (Qx d = 80 − 2Px) Price of Quantity of Own Price Total Laptops Laptops Elasticity Revenue sols A 0 80 B 5 70 C 10 60 D 15 50 E 20 40 F 25 30 G 30 20 H 35 10 I 40 0 Bachelor of Science in Applied Data Science Communication, Batch 41 7 Factors Affecting the Own Price Elasticity Available substitutes Time Expenditure share Bachelor of Science in Applied Data Science Communication, Batch 41 8 Cross Price Elasticity A measure of the responsiveness of the demand for a good to changes in the price of a related good; the percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good. Bachelor of Science in Applied Data Science Communication, Batch 41 9 Demonstrate Problem You have just opened a new grocery store. You recently read an article in The Wall Street Journal reporting that the price of juice is expected to increase by 20 percent. How will this affect your store’s sales of coffee products? Bachelor of Science in Applied Data Science Communication, Batch 41 10 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. Bachelor of Science in Applied Data Science Communication, Batch 41 11 Demonstrate Problem Your firm’s research department has estimated the income elasticity of demand for organic potatoes to be 2.26. You have just read in The Wall Street Journal that due to a downturn in the economy, consumer incomes are expected to fall by 10 percent over the next three years. As a manager of an organic food retailer, how will this forecast affect your purchases of organic potatoes? Bachelor of Science in Applied Data Science Communication, Batch 41 12 Elasticities for Linear Demand Functions The elasticities are: Bachelor of Science in Applied Data Science Communication, Batch 41 13 Demonstrate Problem An analyst for a major apparel company estimates that the demand for its raincoats is given by ln Qx d = 10 − 1.2 ln Px + 3 ln R − 2 ln Ay where R denotes the daily amount of rainfall and Ay represents the level of advertising on good Y. What would be the impact on demand of a 10 percent increase in the daily amount of rainfall? What would be the impact of a 10 percent reduction in the amount of advertising directed toward good Y? Can you think of a good that might be good Y in this example? Bachelor of Science in Applied Data Science Communication, Batch 41 14 Demonstrate Problem The daily demand for Invigorated PED shoes is estimated to be Qx d = 100 − 3Px + 4Py −.01M + 2Ax where Ax represents the amount of advertising spent on shoes (X), Px is the price of good X, Py is the price of good Y, and M is average income. Suppose good X sells at $25 a pair, good Y sells at $35, the company utilizes 50 units of advertising, and average consumer income is $20,000. Calculate and interpret the own price, cross-price, and income elasticities of demand. 15 Bachelor of Science in Applied Data Science Communication, Batch 41 Demonstrate Problem An analyst for a major apparel company estimates that the demand for its raincoats is given by ln Qx d = 10 − 1.2 ln Px + 3 ln R − 2 ln Ay where R denotes the daily amount of rainfall and Ay represents the level of advertising on good Y. What would be the impact on demand of a 10 percent increase in the daily amount of rainfall? What would be the impact of a 10 percent reduction in the amount of advertising directed toward good Y? Can you think of a good that might be good Y in this example? Bachelor of Science in Applied Data Science Communication, Batch 41 16  Questions and Discussions Thank You… Bachelor of Science in Applied Data Science Communication, Batch 41 17