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Lecture Notes 7 Quantitative Demand Analysis by Dr. Khizra Safdar Khan

The document provides lecture notes on quantitative demand analysis including linear demand functions, the elasticity concept, own price elasticity of demand, and how elasticity relates to total revenue. Key topics covered include the midpoint method for calculating percentage changes and elasticities, conditions for elastic, inelastic, and unitary elastic demand, and using elasticity to determine if a price cut will increase total revenue.

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Sidra Jamshaid Ch
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56 views4 pages

Lecture Notes 7 Quantitative Demand Analysis by Dr. Khizra Safdar Khan

The document provides lecture notes on quantitative demand analysis including linear demand functions, the elasticity concept, own price elasticity of demand, and how elasticity relates to total revenue. Key topics covered include the midpoint method for calculating percentage changes and elasticities, conditions for elastic, inelastic, and unitary elastic demand, and using elasticity to determine if a price cut will increase total revenue.

Uploaded by

Sidra Jamshaid Ch
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lecture notes by Dr.

Khizra Safdar Khan (Managerial Economics: ECO-601/401)

LECTURE NOTES 7
QUANTITATIVE DEMAND ANALYSIS

By
DR. KHIZRA SAFDAR KHAN

Linear Demand Functions

Demand for a firm’s product depends on its price (Px), the prices of substitutes or
complements (Py), consumer incomes (M), and other variables (H) such as advertising, the
size of the population, or consumer expectations: sound managerial decisions, the successful
manager is also adept at providing “detailed” quantitative answers to questions like these:

• How much do we have to cut our price to achieve 3.2 percent sales growth?
• If we cut prices by 6.5 percent, how many more units will we sell?

The Elasticity Concept

An elasticity measures the responsiveness of one variable to changes in another variable. For
example, the elasticity of your grade with respect to studying, denoted EG, S, is the
percentage change in your grade (%∆G) that will result from a given percentage change in
the time you spend studying (%∆S). In other words,

Two aspects of an elasticity are important:


(1) whether it is positive or negative and
(2) whether it is greater than 1 or less than 1 in absolute value.
The sign of the elasticity determines the relationship between G and S. If the elasticity is
positive, an increase in S leads to an increase in G. If the elasticity is negative, an increase in
S leads to a decrease in G.
The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities
• The midpoint formula is preferable when calculating the price elasticity of demand
because it gives the same answer regardless of the direction of the change.
Lecture notes by Dr. Khizra Safdar Khan (Managerial Economics: ECO-601/401)

(Q 2  Q 1) / [(Q 2  Q 1) / 2 ]
P ric e e la s tic ity o f d e m a n d =
(P 2  P 1 ) / [(P 2  P 1 ) / 2 ]
Own Price Elasticity of Demand

the own price elasticity of demand, which measures the responsiveness of quantity demanded
to a change in price. Negative according to the “law of demand.”

demand is said to be elastic if the absolute value of the own price elasticity is greater than 1:

demand is said to be inelastic if the absolute value of the own price elasticity is less than 1:

Finally, demand is said to be unitary elastic if the absolute value of the own price elasticity is
equal to 1:

Own-Price Elasticity and Total Revenue

If demand is elastic, an increase (decrease) in price will lead to a decrease (increase) in total
revenue. If demand is inelastic, an increase (decrease) in price will lead to an increase
(decrease) in total revenue. Finally, total revenue is maximized at the point where demand is
unitary elastic.
Lecture notes by Dr. Khizra Safdar Khan (Managerial Economics: ECO-601/401)


 Elastic

o Increase (a decrease) in price leads to a decrease (an increase) in total revenue.

 Inelastic

o Increase (a decrease) in price leads to an increase (a decrease) in total revenue.

 Unitary

o Total revenue is maximized at the point where demand is unitary elastic.

 suppose the research department of a computer company estimates that the own price
elasticity of demand for a particular desktop computer is -1.7. If the company cuts
prices by 5 percent, will computer sales increase enough to increase overall revenues?
We can answer this question by setting -1.7 = EQx, Px and -5 =%∆Px in the formula
for the own price elasticity of demand:
Lecture notes by Dr. Khizra Safdar Khan (Managerial Economics: ECO-601/401)

 Solving this equation gives %∆Qx=8.5


 In extreme cases the demand for a good may be perfectly elastic or perfectly inelastic.
Demand is perfectly elastic if the own price elasticity of demand is infinite in absolute
value. Demand is perfectly inelastic if the own price elasticity of demand is zero.

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