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Market Demand Curve
Definition:
- Illustrates the relationship between the total quantity and price per unit of a good all consumers are willing and able to purchase, holding other variables constant.
Law of Demand:
- The quantity of a good consumers are willing and able to purchase increases as the price falls and decreases as the price rises.
Changes in Quantity Demanded vs. Changes in Demand
Changes in Quantity Demanded:
- Changes due to price changes, represented by movement along the demand curve, holding other factors that impact demand constant.
Changes in Demand:
- Changes due to factors other than price, represented by a shift of the entire demand curve.
Demand Shifters
(5/2,2,2,1,1)
Income:
Normal Good:
- Demand increases as consumer income increases.
Inferior Good:
- Demand decreases as consumer income increases.
Prices of Related Goods:
Substitute Goods:
- Demand increases as the price of a substitute rises.
Complement Goods:
- Demand decreases as the price of a complement rises.
Advertising and Consumer Tastes:
Informative Advertising:
- Provides information about a product, increasing demand.
Persuasive Advertising:
- Alters consumer tastes, increasing demand.
Population:
- More consumers increase demand.
Consumer Expectations:
- Expectations of future prices or income can affect current demand.
Shift of demand curve
The Linear Demand Function
The demand function for good X is a mathematical representation describing how many units will be purchased at different prices for good X, different prices of a related good Y, different levels of income, and other factors that affect the demand for good X.
alpha x will always be a negative quantity
Understanding the Linear Demand Function (picture)
The Linear Demand Function in Action
Inverse Demand Function
Total expenditure (definition)
Total expenditure
The per-unit market price times the number of units consumed
Total consumer value
The sum of the maximum amount a consumer is willing to pay at different quantities
Consumer Surplus
What is the definition?
How to calculate?
Definition:
- The extra value that consumers derive from a good but do not pay for.
Calculation:
- The difference between what consumers are willing to pay and what they actually pay.
Market Supply Curve
Definition?
What is the law of supply?
Definition:
- Summarizes the relationship between the total quantity all producers are willing and able to produce at alternative prices, holding other factors constant.
Law of Supply:
- The quantity supplied of a good rises as the price rises
- and falls as the price falls
Market Equilibrium
Definition?
Characteristic?
Definition:
- The price and quantity at which the market demand and market supply are equal.
Characteristics:
- No shortage or surplus in the market; forces of demand and supply are balanced.
Changes in Quantity Supplied vs. Changes in Supply
Changes in Quantity Supplied:
- Changes due to price changes, represented by movement along the supply curve.
Change in Supply:
- Changes due to factors other than price, represented by a shift of the entire supply curve.
Supply Shifters (7)
Input Prices:
- Higher input prices decrease supply.
Technology:
- Improvements increase supply.
Government Regulation:
- Can either increase or decrease supply.
Number of Firms:
- More firms increase supply.
Substitutes in Production:
- Higher prices of substitutes decrease supply.
Taxes:
- Higher taxes decrease supply.
External Factors:
- Events like war, weather, and natural disasters can affect supply.
The Linear Supply Function
The Linear Supply Function in Action
Producer Surplus
Definition?
Importance?
Definition:
- The amount producers receive in excess of the amount necessary to induce them to produce the good.
Importance:
- Indicates the benefit producers get from selling at a market price higher than their minimum acceptable price.
Comparative Statics
Definition?
Useful because?
Definition:
- The study of the movement from one equilibrium to another.
Applications:
- Analyzing the effects of changes in demand, supply, or both on market equilibrium.
Introduction to Demand Analysis
What does an increase in the price of a good lead to in terms of quantity demanded?
- An increase in the price of a good leads to a decline in the quantity demanded for that good.
Elasticity Concept
What does elasticity measure?
.
Elasticity measures the responsiveness of a percentage change in one variable resulting from a percentage change in another variable
The elasticity between two variables, Q and P, is mathematically expressed as? (picture)
When a functional relationship exists, like Q = f(P), the elasticity is? (picture)
Measurement Aspects of Elasticity (2)
Pretty much direction of change and magnitude of change
Own Price Elasticity
What does it measure?
What is its equation?
What is the sign?
What are the different terms and what are they based off?
Measures the responsiveness of a percentage change in the quantity demanded of good X to a percentage change in its price.
Sign: negative by law of demand.
Unitary elastic point = highest revenue
Linear Demand, Elasticity, and Revenue
Total Revenue Test
When demand is elastic:
When demand is inelastic:
When demand is unitary elastic:
When demand is elastic:
- A price increase (decrease) leads to a decrease (increase) in total revenue.
When demand is inelastic:
- A price increase (decrease) leads to an increase (decrease) in total revenue.
When demand is unitary elastic:
- Total revenue is maximized.
Factors Affecting Own Price Elasticity
How does the availability of substitutes affect the own price elasticity of demand?
The more substitutes available for a good, the more elastic the demand for it.
Time/Duration of Purchase Horizon
How does the time consumers have to react to a price change affect demand elasticity?
The more time consumers have to react to a price change, the more elastic the demand for the good as they have more time to seek alternatives
Expenditure Share of Consumers’ Budgets
How does the expenditure share of a good in consumers’ budgets affect its price elasticity?
Essential goods are generally inelastic, while nonessential goods are generally elastic.
Demand and Marginal Revenue
The point at which there is unitary elasticity, marginal revenue is 0
Income Elasticity
What does income elasticity measure?
3 equations, 3 meanings?
It measures the responsiveness of a percent change in demand for a good due to a percent change in income.
Cross-Price Elasticity
What does it measure?
3 equations, 3 meanings?
Measures responsiveness of a percent change in demand for good X due to a percent change in the price of good Y.
0 = no effect on each other
Elasticities for Linear Demand Functions
Elasticities for Nonlinear Demand Functions
Equation
Managers frequently encounter situations where a product’s demand is a non-linear function of prices and money income
px has to be negative
Elasticities for Nonlinear Demand Functions
If we…
If we take the natural logarithm of this equation, we obtain an expression that is linear in the logarithms of the variables:
Regression Analysis
What can regression analysis be used to estimate? (3)
Regression analysis can be used to estimate:
- demand functions,
- elasticities,
- other important economic relationships.
What is consumer behavior?
Consumer behavior examines how individuals make decisions to allocate their resources (time, money, effort) among various goods and services.
What are consumer opportunities?
Consumer opportunities refer to the set of possible goods and services that consumers can afford to consume given their budget constraints.
What are consumer preferences?
Consumer preferences determine which set of goods and services will be consumed based on the satisfaction they provide to the consumer.
What are the properties of consumer preferences?
Completeness:
- Consumers can compare and rank all possible bundles of goods.
More is better:
- Consumers prefer more of a good to less.
Diminishing marginal rate of substitution:
- As a consumer obtains more of one good, they are willing to give up less of another good to get additional units of the first good.
Transitivity:
If a consumer prefers bundle A to B and B to C, then they prefer A to C.
What is the budget constraint?
The budget constraint is the restriction set by prices and income that limits the bundles of goods affordable to consumers.
What is consumer equilibrium?
Consumer equilibrium is the consumption bundle that is affordable and yields the greatest satisfaction to the consumer.
What happens to the budget constraint when income changes?
An increase in income shifts the budget constraint outward, allowing for more consumption, while a decrease in income shifts it inward.
How do price changes affect consumer equilibrium?
Price changes alter the budget constraint and can lead to a new consumer equilibrium depending on whether the goods are substitutes or complements.
What does regression analysis assume?
preceding analysis assumes the manager knows the demand for the firm’s product.
It can provide explicit estimates of demand elasticities and functional forms for demand functions.
How does one obtain information on the demand function? (3)
- Statistical technique called regression analysis using data on quantity, price, income and other important variables.
- Published studies.
- Hire consultant.
What is econometrics
- Econometrics is simply the statistical analysis of economic phenomena.
- The job of the econometrician (this lecture) is to find a smooth curve or line that does a “good” job of approximating the points.
Regression Line and Least Squares Regression
What does the econometrician believe?
What is the regression model?
The econometrician believes that, on average, there is a linear relation between Y and X, but there is also some random variation in the relationship.
Mathematically, the true (or population) regression model
𝑌=𝑎+𝑏𝑋+𝑒
𝑎 = unknown population intercept parameter.
𝑏 = unknown population slope parameter.
𝑒 = random error term with mean zero and standard deviation 𝜎.
For a demand function = Y = Quantity demanded
X = Own price
Regression Line and Least Squares Regression (picture)
How do you evaluate the statistical significance of estimated coefficients?
By using t-statistics and p-values. If the t-statistic is greater than 2 or the p-value is less than 0.05, the coefficient is considered statistically significant.
Means we can be 95% confident; P value and significance level are the sa
What is R-Square in regression analysis?
R-Square, or the coefficient of determination, measures the proportion of the variation in the dependent variable that is explained by the regression model. It ranges from 0 to 1.
What does the F-statistic indicate in regression analysis?
The F-statistic assesses whether the regression model has statistically significant explanatory power. If the significance F is less than 0.05, the model is considered significant.
What is multiple regression?
Multiple regression is a regression technique that involves more than one independent variable. It can be used to model nonlinear relationships and interactions between variables.
How do you interpret the regression results?
By examining the R-square, F-statistic, and the significance of individual coefficients. For example, a high R-square indicates a good fit, and significant coefficients suggest meaningful relationships between variables.
What does a negative coefficient for distance from campus indicate in a regression model for student property demand?
It indicates that as the distance from campus increases, the demand for student property units decreases.
What is the impact of price on demand according to the regression model?
A negative coefficient for price suggests that an increase in price leads to a decrease in the quantity demanded.
Picture nonlinear
Regression for Nonlinear Functions and Multiple Regression
