The document discusses quantitative demand analysis and elasticity. It defines price elasticity of demand as the responsiveness of quantity demanded to changes in price. Demand can be elastic, inelastic, or unitary elastic depending on whether the percentage change in quantity is greater than, less than, or equal to the percentage change in price. The three main factors that influence elasticity are availability of substitutes, time horizon of purchase, and expenditure share of the product. Regression analysis can be used to estimate demand functions and calculate various elasticities from market data.

1. CHAPTER 3
Quantitative Demand Analysis

2. Learning Objectives
What will you learn in this module?
 What is price elasticity of demand?
 What is the difference between inelastic and elastic
demand for goods?
 Why firms want to know the price elasticity of demand for
their products?
 What are the THREE (3) important factors that influences
the elasticity of demand for a product?

3. Consumer Demand
• In the previous module, we can see that the demand
for a firm's product, depends on
• its price,
• the prices of substitutes or complements,
• consumer incomes and
• other variables.

4. Consumer Demand
In this module, we will go through the important elements:
• Demand for a firm’s product depends on various factors,
managers must understand the directions of the changes in
prices and income on consumer demand to make a good
decision.
• Important to understand what is elasticity, it explains the
magnitude of changes in price and quantity of a good.
• Demand Function: different factors influence consumer
demand, the Regression analysis is used to estimate the
parameters (factors) of demand functions.

5. THE ELASTICITY

6. The Elasticity
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What is Elasticity?
• the responsiveness or sensitivity of one variable to
changes in other variable.
• The elasticity between two variables, quantity ( and , can
be expressed mathematically as:
• When a functional relationship exists, like , the elasticity
is:

7. How to measuring Elasticity
• Two Important aspects of elasticity:
1. Sign determines the relationship: either positive or
negative.
2. Value: absolute value is greater than 1 or less than 1.
The absolute Magnitude of elasticity:
• 𝐸 𝑄,𝑃 > 1 Q is highly responsive to changes in 𝑃.
• 𝐸 𝑄,𝑃 < 1 Q is slightly responsive to changes in P.
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8. Price Elasticity
• What is own price elasticity of demand?
 Measures the responsiveness of a percentage change
in the quantity demanded of good X to a percentage
change in the price of X.
𝐸 𝑄 𝑋
𝑑
,𝑃 𝑋
=
%Δ𝑄 𝑋
𝑑
%Δ𝑃𝑋
 Sign: negative by law of demand.
 Magnitude of absolute value relative to unity:
• 𝐸 𝑄 𝑋
𝑑
,𝑃 𝑋
> 1: price elasticity of demand is Elastic.
• 𝐸 𝑄 𝑋
𝑑
,𝑃 𝑋
< 1: price elasticity of demand is Inelastic.
• 𝐸 𝑄 𝑋
𝑑
,𝑃 𝑋
= 1: price elasticity is Unitary elastic.
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9. A VIDEO ABOUT
For more Video on Demand Elasticity
https://www.youtube.com/watch?v=HHcblIxiAAk
For more video on Price Elasticity
https://www.youtube.com/watch?v=VhKI8cOaYL
I

10. Linear Demand
Quantity
Price
Demand
$40
0
$20
$10
20 30
$5
40
$15
$30
$25
$35
10 50 60 70 80
Linear Inverse Demand: 𝑃 = 40 − 0.5𝑄
Demand: 𝑄 = 80 − 2𝑄
• Revenue = $30 × 20 = $600
• Elasticity: −2 ×
$30
20
= −3
• Conclusion: Demand is elastic.
• Revenue = $10 × 60 = $600
• Elasticity: −2 ×
$10
60
= −0.333
• Conclusion: Demand is
inelastic.
Elasticity varies along
a linear (inverse)
demand curve

11. Elasticity and Total Revenue
• Total revenue is maximized when demand is unitary
elastic
• Elastic demand: A price increase (decrease) leads to a
decrease (increase) in total revenue.
• Inelastic demand: A price increase (decrease) leads to
an increase (decrease) in total revenue.
• Perfectly elastic: infinite elasticity of demand
• Perfectly inelastic: demand elasticity is zero
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𝐸 𝑄 𝑋
𝑑
,𝑃 𝑋
= 0
𝐸 𝑄 𝑋
𝑑
,𝑃 𝑋
= −∞

12. Factors Affecting their Own Price
Elasticity
• Three factors can influence the own price
elasticity of demand:
1. Availability of consumption substitutes: one key
determinant of elasticity of demand of the good is
the number of its close substitute goods
2. Time/Duration of purchase horizon: demand is
more elastic in the short term than in the long term.
3. Expenditure share of consumers’ budgets: small
share of consumer’s budget is more inelastic than
consumers spend large proportion of their income.
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13. A VIDEO ABOUT
For more video on Factors Affecting their Own Price
Elasticity
https://www.youtube.com/watch?v=mKSBYx3VPPA

14. Elasticity and Marginal Revenue
• The marginal revenue can be derived from a market
demand curve.
 Marginal revenue measures the additional revenue due to a
change in output.
• This link relates marginal revenue to the own price
elasticity of demand:
• When then, . demand is elastic
• When then, . demand is unitary elastic
• When then, . demand is inelastic
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15. The figure showsthe MarginalRevenueassociatedwith eachprice-outputpairon the demandcurve.
Noticethat for a lineardemand curve, the marginalrevenuescheduleliesexactlyhalfwaybetween the
demandcurve and the verticalaxis.Furthermore, marginalrevenueis lessthan the pricefor each unit
sold.
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Quantity0
𝑃
MR
3
Price
6
Demand
1
6
Unitary
Marginal Revenue (MR)

16. Cross-Price Elasticity
• Cross-price elasticity
Measures responsiveness of a percent change in demand for good
X due to a percent change in the price of good Y.
𝐸 𝑄 𝑋
𝑑
,𝑃 𝑌
=
%Δ𝑄 𝑋
𝑑
%Δ𝑃𝑌
• If 𝐸 𝑄 𝑋
𝑑
,𝑃 𝑌
> 0, then 𝑋 and 𝑌 are substitutes.
• If 𝐸 𝑄 𝑋
𝑑
,𝑃 𝑌
< 0, then 𝑋 and 𝑌 are complements.
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17. Cross-Price Elasticity
• Suppose the cross-price elasticity of demand between
clothing and food is -0.18. If the price of food is projected
to increase by 10 percent, how much will demand for
clothing change?
−0.18 =
%∆𝑄 𝐶𝑙𝑜𝑡ℎ𝑖𝑛𝑔
𝑑
10
⇒ %∆𝑄 𝐶𝑙𝑜𝑡ℎ𝑖𝑛𝑔
𝑑
= −1.8
• That is, demand for clothing is expected to decline by 1.8 percent
when the price of food increases 10 percent.
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18. Cross-Price Elasticity
• Cross-price elasticity is important for firms selling multiple
products.
• Price changes for one product that affect changes in demand for
other products.
• Assessing the overall change in revenue from a price
change for one good when a firm sells two different goods
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19. Income Elasticity
• What is Income elasticity
 Measures responsiveness of a percent change in demand for good
X due to a percent change in income (M).
𝐸 𝑄 𝑋
𝑑
,𝑀 =
%Δ𝑄 𝑋
𝑑
%Δ𝑀
• If 𝐸 𝑄 𝑋
𝑑
,𝑀 > 0, then 𝑋 is a normal good.
• If 𝐸 𝑄 𝑋
𝑑
,𝑀 < 0, then 𝑋 is an inferior good.
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20. A VIDEO ABOUT
For more information on Cross-Price and
Income Elasticity
https://www.youtube.com/watch?v=QLMJDo9dc
k0

21. Elasticities for Linear Demand
Functions
• From a linear demand function, we can compute various
elasticities of demand.
• Given a linear demand function:
𝑄 𝑋
𝑑
= 𝛼0 + 𝛼 𝑋 𝑃𝑋 + 𝛼 𝑌 𝑃𝑌 + 𝛼 𝑀 𝑀 + 𝛼 𝐻 𝑃 𝐻
 Own price elasticity: 𝛼 𝑋
𝑃 𝑋
𝑄 𝑋
𝑑.
 Cross price elasticity: 𝛼 𝑌
𝑃 𝑌
𝑄 𝑋
𝑑.
 Income elasticity: 𝛼 𝑀
𝑀
𝑄 𝑋
𝑑.
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22. Regression Analysis
• How does manager obtain information on the demand
function?
• Published studies.
• Hire consultant.
• To estimate the demand function using Statistical technique called
regression analysis
• using data on quantity, price, income and other important variables.
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23. Conclusion
• Elasticities are tools used to quantify the impact of
changes in prices, income, and advertising on sales and
revenues.
• Given market or survey data, regression analysis can be
used to estimate:
• Demand functions.
• Elasticities.
• Other things, including cost functions.
• Managers can quantify the impact of changes in prices,
income, advertising, etc.
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24. SHORT QUIZ
On Key Terms and Concepts
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25. Review the following key concepts and terms
Elasticity
Own price elasticity of demand
Cross price elasticity of demand
Arc elasticity of demand
Inelastic demand
Income elasticity
Perfectly Inelastic demand
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