khurrum s. mughal 1 economic analysis for managers (eco 501)
TRANSCRIPT
Khurrum S. Mughal
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Economic Analysis for Managers (ECO 501)
Theory of Demand
◦ Point Income Elasticity of Demand
◦ Arc Income Elasticity of Demand
◦ Point Cross-Price Elasticity of Demand
◦ Arc Cross-Price Elasticity of Demand
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Theme of the Lecture
Theory of Demand
◦ Point Income Elasticity of Demand
◦ Arc Income Elasticity of Demand
◦ Point Cross-Price Elasticity of Demand
◦ Arc Cross-Price Elasticity of Demand
Theme of the Lecture
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QD= F (Px, I, N, Py, T)
Relationship between income and quantity
Effect of change in income on Demand
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Market Demand
Measures responsiveness to changes in quantity
demanded due to changes in income
◦ Percentage change in quantity due to percentage change
in income
Types:
◦ Point Income Elasticity of Demand
◦ Arc Income Elasticity of Demand
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Income Elasticity of Demand
Inferior Goods
◦ Cheap quality detergents - Negative
Necessities:
◦ Food, clothing, - positive but low
Luxuries:
◦ Health care, housing, & recreation - positive & greater than 1
Implications
◦ Different types of income measure
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Income Elasticity of Demand
Demand is not effected much in case of low
income elasticity
Used extensively in targeting customers
Engel’s Law
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Income Elasticity of Demand
Theory of Demand
◦ Point Income Elasticity of Demand
◦ Arc Income Elasticity of Demand
◦ Point Cross-Price Elasticity of Demand
◦ Arc Cross-Price Elasticity of Demand
Theme of the Lecture
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QD= F (Px, I, N, Py, T)
Relationship between substitutes/complements
and quantity demanded
Effect of change in price of substitute/complement on
Demand
Market Demand
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Measures responsiveness to changes in quantity
demanded due to changes in prices of
substitutes/complements
◦ Percentage change in quantity due to percentage change
in price of substitute/complement
Types:
◦ Point Cross-Price Elasticity of Demand
◦ Arc Cross-Price Elasticity of Demand
Cross-Price Elasticity of Demand
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If positive the goods are substitutes
If negative the goods are complements
If close to zero the goods are independent
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Cross-Price Elasticity of Demand
Price Elasticity of Demand
Income Elasticity of Demand
Cross-Price Elasticity of Demand
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Practical Applications of Elasticity of Demand
Regression equation for Novels by Feroz Sons Publishing:
Qx = 12,000 – 5000Px + 5I + 500Pc
a. Effect of Price Increase
b. Effect of Increases in Income
c. Effect of Changes in Prices by Competitors
Assuming Initial values as
◦ Px = Rs. 5
◦ I = Rs. 10,000
◦ Pc = Rs. 6
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Using Elasticities in Decision Making