01 0 0 02 0 0 03 0 0 04 0 0 05 0 0 06 0 0 07 0 0 08 0 0 09 0 0 0
1 0 0 0 0
YEAR
# of Passenger cars sold
In-tro-duc-tory
Pe-riod
GrowthPeriod
MaturePeriod
DecliningPeriod
Factory Sales of Passenger Cars in the U.S.
DEMAND
What Buyers are Willing and Able to Buy, during a given Time
Period, ceteris paribus.
KEY POINTS ABOUT DEMAND
“WILLINGNESS AND ABILITY” (not stridently wanting)
“BUYERS” (not sellers) “during a given time period” is a FLOW
(not a STOCK) “ceteris paribus”- all other things are
held constant except price and quantity. Whole set of P-Q combinations (not
QUANTITY DEMANDED)
GENERALIZED DEMAND FUNCTION
f = f( Price:
Taxes,Price of Complements
Price of SubstitutesTastes for good/service
Income,Buyer Expectations,Number of buyers)
Q
P
SUPPLY
What Buyers Sellers are Willing and Able to buy Sell, during a given Time
Period, ceteris paribus.
XXXXXXXX
KEY POINTS ABOUT SUPPLY
“WILLINGNESS AND ABILITY” (not stridently wanting)
“BUYERS” (not sellers) “during a given time period” is a FLOW
(not a STOCK) “ceteris paribus”- all other things are
held constant except price and quantity. Whole set of P-Q combinations (not
QUANTITY DEMANDED)
XXXXXXXXXXXXXXXXXXX Sellers (not buyers)
XXXXXXXXXXX SUPPLIED
GENERALIZED SUPPLY FUNCTION
f = f( Price:
Price of Resources
Technology,Seller Expectations,Number of Sellers)
HOW TO BE SHERLOCK HOLMES IN READING BETWEEN THE LINES
If You Know P and Q then you know whether demand or supply is involved as well as the direction of the shift.
If You Know the shift in demand or supply, then you know what is likely to happen to price and quantity
If You Know the determinant that has changed and price, then you know what is happening to quantity demanded.
If You Know the determinant that has changed and quantity demanded, then you know what is happening to price.
Lower Price Higher Price
LowerOutput
HigherOutput
Leftward (downward)
Shift of Demand
Rightward(upward)
Shift of Demand
Rightward(downward)
Shift ofSupply
Leftward(upward)Shift of Supply
Breakdown all shifts into their output and price vectors
MARKET BOUNDARIES
BUYER POINT OF VIEW: No potential seller exists outside of the market boundaries (within a reasonable price range)
SELLER POINT OF VIEW: No potential buyer exists outside of the market boundaries (within a reasonable price range)
BOTH POINTS OF VIEW MUST HOLD CROSS PRICE ELASTICITY measures
MARKET BOUNDARIES
X
X
X
XX
O
O
O
X represents buyers
O represents sellers
MARKET DEMAND FOR CARS
30
15
Price ($1000/car)
Price ($1000/car)
Price ($1000/car)
7 9 4 5 11 14U.S quantity (mill/yr) + Foreign Q (mill/yr) = Market Demand
MUSTANG DEMAND
DEMAND
150 550 (000’s Mustangs/year)
Price of Mustangs
95108000
TR= $1426 million
TR= $4400 Million
LOSS
GAIN
GAINS-LOSS=$2974 M.
MARGINAL REVENUE (MR)
MR DEMAND
150 550 (000’s Mustangs/year)
Price
95108000
GAINS-LOSSMR= CHANGE IN CARS
$2974 M./400,000 CARS=$7,435 PER CAR
LOSS
7435GAIN
REVENUE MAXIMIZATION
MR DEMAND
(000’s Mustangs/year)
Price
5037
1,334,000 MUSTANGS
(000’s Mustangs/year)
MR=0
Price ($/car)
5037
1,334,000 MUSTANGS
Q(000’s Mustangs/year)
Total Revenue ($/year)$6.5 billion
MAXIMUMREVENUE
MR>0
|elas|>1
|elas|=1
|elas|<1
MR<0
MUSTANG DEMAND
DEMAND
150(000’s Mustangs/year)
9510
Price of Mustangs
550
1966 DEMAND
1970 DEMAND
DEMAND ELASTICITY
ALWAYS THE PERCENTAGE CHANGE IN QUANTITY DIVIDED BY THE PERCENTAGE CHANGE IN A DETERMINANT OF DEMAND
NOT THE SAME AS MARGINAL REVENUE WHICH IS THE CHANGE IN REVENUE OVER THE CHANGE IN QUANTITY
PRICE ELASTICITY
E p=
PERCENTAGECHANGE IN QUANTITYPERCENTAGE CHANGE IN PRICE
Q1-Q2Q1+Q2P1-P2P1+P2
=
Note: This formula requires the knowledge of two different situations;The price (P1) and quantity demanded (Q1) in an initial situation andA price (P2) and quantity demanded (Q2) after a change has occurred
E p =Q1-Q2Q1+Q2P1-P2P1+P2
IN EXCEL:Suppose you have the EXCEL worksheet:
A B C D
1 Quantity
3 5
2 Price 10 6
3 E = -1
4
In C3, write the formula:=((B1-C1)/(B1+C1))/((B2-C2)/(B2+C2))
IT IS UNIT ELASTIC!
E p =Q1-Q2Q1+Q2P1-P2P1+P2
IN EXCEL:Suppose you have the EXCEL worksheet:
A B C D
1 Quantity
3 5 to 6
2 Price 10 6
3 E = -1.333
4In C3, write the formula:=((B1-C1)/(B1+C1))/((B2-C2)/(B2+C2))
XXXNOW IT IS ELASTIC!
E p =Q1-Q2Q1+Q2P1-P2P1+P2
IN EXCEL:Suppose you have the EXCEL worksheet:
A B C D
1 Quantity
3 5 to 4
2 Price 10 6
3 E = -.57143
4In C3, write the formula:=((B1-C1)/(B1+C1))/((B2-C2)/(B2+C2))
XXXNOW IT IS INELASTIC!
TOTAL REVENUE RULE
IF PRICE RISESTHEN:
IF PRICE FALLSTHEN:
ELASTIC(MR>0,|E|>1)
UNIT ELASTIC(MR=0,|E|=1)
INELASTIC(MR<0,|E|<1
IF ELASTI-CITY IS:
TR
TR stays same TR stays same
TR TR
TR
REVENUE MAXIMIZATION
MR DEMAND
150 550 (000’s Mustangs/year)
Price
951080007435
5037
1,334,000 MUSTANGS
LOSS
GAIN4000
BIG LOSS IN REVENUEIF PRICES BELOW REV-ENUE MAXIMIZING PRICE
CROSS-PRICE ELASTICITY
EX,Y=
PERCENTAGECHANGE IN QUANTITY (X)PERCENTAGE CHANGE IN PRICEOF ANOTHER GOOD (Y)
Qx-QxQx+QxPy-PyPy+Py
=
CROSS-PRICE ELASTICITY
Exy<0===> x and y are complements
Exy>0 ===> x and y are substitutes (or in same market)
Exy =0 ==> x and y are unrelated
MARKET BOUNDARIES
X
X
X
XX
O
O
O
X represents buyers
O represents sellers
U represents your firm
UN
N represents a new firm
Cross Price Elasticity w.r.t. New Firm?
MARKET BOUNDARIES
X
X
X
XX
O
O
O
X represents buyers
O represents sellers
U represents your firm
U
N represents a new firm
Cross Price Elasticity w.r.t. New Firm?
N
Positive , Negative, or Zero
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
75 85 95
Oil
Line 2
Auto Sales
Percentage Change
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
75 85 95
Oil
Line 2
Auto Sales
Percentage Change
INCOME ELASTICITY
EY=
PERCENTAGECHANGE IN QUANTITYPERCENTAGE CHANGE IN INCOME
Q1-Q2Q1+Q2Y1-Y2Y1+Y2
=
INCOME ELASTICITY
Ey<0===> An INFERIOR GOOD
Ey>0 ===> A NORMAL GOOD Ey >1 ==> A SUPERIOR GOOD 0<Ey<1=> A NECESSITY
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
75 85 95
Line 1GDPAuto Sales
Percentage Change
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
Oil
GDP
Auto Sales
Line 4
MR=0
Price ($/car)
Q(000’s Mustangs/year)
MR>0|elas|>1
|elas|=1 |elas|<1
MR<0
Price ($/car)
Q(000’s Mustangs/year)
LIINEAR DEMANDMAXIMUM REVENUE
MULTIPLICATIVE DEMANDCONSTANT REVENUE FLAT MARGINAL REVENUE CURVE
Q
MULTIPLICATIVE DEMAND
Price ($/car)
(000’s Mustangs/year)