econ 503 chp3
ECON 503: Chapter 3
Quantitative Demand Analysis
Dr. Fida Karam
Gulf University for Science and Technology
Department of Economics and Finance
Office N1-115 email: karam.f@gust.edu.kw
Dr. Fida Karam
(GUST)
Quantitative Demand Analysis
1 / 19
Introduction
The shapes of demand and supply curves influence how much shifts in demand or supply affect market equilibrium.
• Shape is best summarized by elasticity.
• Elasticity indicates how responsive one variable is to a change in another variable: Elasticity of A with respect to B = % A/% B
Common Elasticities
Price elasticity of demand.
Income elasticity of demand.
Cross-price elasticity of demand.
Advertising elasticity.
Price elasticity of supply.
Dr. Fida Karam
(GUST)
Quantitative Demand Analysis
2 / 19
Price Elasticity of Demand
Definition
The price elasticity of demand measures the sensitivity of the quantity demanded to price. The price elasticity of demand (denoted by D ) is the percentage change in quantity demanded (Q) brought about by a 1 percent change in price (P ), holding the other determinants of demand constant.
D
=
percentage change in quantity percentage change in price
If Q is the change in quantity and P is the change in price, then
Q
percentage change in quantity = Q × 100% and percentage change in price = PP × 100%. Hence,
D
Dr. Fida Karam
(GUST)
=
Q P
×
P
Q
Quantitative Demand Analysis
3 / 19
Price Elasticity of Demand
Interpretation
if
D
= 0, we say that the we have a perfectly inelastic demand
if −1 < if if
D
D
D
< 0;, we say that we have an inelastic demand
= −1, we say that the we have a unitary elastic demand
= −∞, we say that the we have a perfectly elastic demand
if −∞ <
D
< −1 we say that the we have an elastic demand
Example
Suppose the price is initially $5.00, and the corresponding quantity demanded is 1,000 units. Also suppose, that when the price rises
Quantitative Demand Analysis
Dr. Fida Karam
Gulf University for Science and Technology
Department of Economics and Finance
Office N1-115 email: karam.f@gust.edu.kw
Dr. Fida Karam
(GUST)
Quantitative Demand Analysis
1 / 19
Introduction
The shapes of demand and supply curves influence how much shifts in demand or supply affect market equilibrium.
• Shape is best summarized by elasticity.
• Elasticity indicates how responsive one variable is to a change in another variable: Elasticity of A with respect to B = % A/% B
Common Elasticities
Price elasticity of demand.
Income elasticity of demand.
Cross-price elasticity of demand.
Advertising elasticity.
Price elasticity of supply.
Dr. Fida Karam
(GUST)
Quantitative Demand Analysis
2 / 19
Price Elasticity of Demand
Definition
The price elasticity of demand measures the sensitivity of the quantity demanded to price. The price elasticity of demand (denoted by D ) is the percentage change in quantity demanded (Q) brought about by a 1 percent change in price (P ), holding the other determinants of demand constant.
D
=
percentage change in quantity percentage change in price
If Q is the change in quantity and P is the change in price, then
Q
percentage change in quantity = Q × 100% and percentage change in price = PP × 100%. Hence,
D
Dr. Fida Karam
(GUST)
=
Q P
×
P
Q
Quantitative Demand Analysis
3 / 19
Price Elasticity of Demand
Interpretation
if
D
= 0, we say that the we have a perfectly inelastic demand
if −1 < if if
D
D
D
< 0;, we say that we have an inelastic demand
= −1, we say that the we have a unitary elastic demand
= −∞, we say that the we have a perfectly elastic demand
if −∞ <
D
< −1 we say that the we have an elastic demand
Example
Suppose the price is initially $5.00, and the corresponding quantity demanded is 1,000 units. Also suppose, that when the price rises