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In this topic, we will focus on linear demand function. A basic linear demand function is in the form of Qx = a b1Px + b2Py + b3Y

From this demand function, we can see that quantity demanded for good x depends on factors like price of good x (P x), price of good y (P y) and income (Y), where a, b1, b2 and b3 are constant values. For many purposes, it is useful to focus on the relationship between quantity demanded and the price of good or service while holding other variables constant. Hence, the demand function can be written as Qx = a b1Px

This demand function can be rewritten so that P becomes the subject or in other words, the conventional way of writing the demand curve function: Qx b1Px Px Example: = = = Qx a a b1Px Qx (1Qx / b1) 2Px Qx 1/2Qx 0.5Qx

(a/ b1) = 20 20 20/2 10

II.

2Px = Px = Px = The Market Demand

If you are given individual demand functions and you want to develop the market demand function, you need to add those individual demand functions. Give three individual demand : Q1 = a1 b1P1 Q2 = a2 b2P2 Q3 = a3 b3P3 To get market demand, we must make the following assumption: Let Pm = P1 = P2 = P3 where Qm = Q1 + Q2 + Q3 Example: The followings are individual demand functions for books for three individuals. Q1 = 25 2.50P1 Q2 = 35 0.25P2

1

25P3 ) (25 . MR Example: TR MR c) = = 8. AR Example: TR AR = = 8.5 TR/Q Q = dTR/dQ dTR/dQ Average Revenue.5Q2 Price. Ed = dQ dP x P Q 2 .5Q 0.1.5Q IV.5Q2 = = 8. TR = Example: P TR TR = = = 8. so we let Pm = P1 = P2 = P3 where Qm Qm Qm Qm III. = = = = Q1 + Q2 + Q3 (25 .25Pm ) 80 4Pm Total.1. Marginal and Average Revenue a) Total Revenue.50P1) + (35 .5 0. Q (Total Revenue function must be in the form of Q) b) Marginal Revenue.5Q2 8.25P3 The market demand function. P x Quantity.Q3 = 20 - 1.0.2.5 P 8.50Pm) + (35 . Elasticity a) Price elasticity of demand It measures the responsiveness of demand when price changes.5Q Q 0.25Pm) + (20 .5Q TR/Q = 0. assuming that there are only three individuals in the market.2.0.5Q x 0.25P2 ) + (20 .

Elasticity Elastic Demand Elastic Demand Unitary Elastic Demand Inelastic Demand Inelastic Demand Change In TR TR ↑ TR ↓ TR(no TR ↓ TR ↑ (Note: Further explanation on the relationship between Ed and TR . 2. 3. P↑ 1.Ed Ed change) to Ed Ed Ed Example : > < = = = 1 1 1 0 ∞ elastic (sensitive to price change) inelastic (not very sensitive to price unitary elastic (proportionately sensitive price change) perfectly inelastic (not sensitive to price change) perfectly elastic (very sensitive to price change) Given Q = 60 – 4P + 10Y and initial values P = 2. page 104 – 105. please refer to study manual.1 . Ey Ey = < dQ dY 0 x Y Q the good is an inferior good 3 .5 and Y = 5 Ed = Q P Find Q P Q P and Q= Q= Q= x P Q and Q : = –4 60 – 4P + 10Y 60 – 4(2. P↓ 5. since 0 < Ed Elasticity Vs Total Revenue Change in Price P↓ P↑ P ↑ or ↓ change) 4.5_ 100 < 1 Demand is inelastic Ey Ey = (– 4 ) x = 0.5) + 10(5) 100 2.) b) Income Elasticity It measures the responsiveness of demand to changes in income.

Ey 0 < Example : > Ey 1 ≤0 the good is a luxury good the good is a necessity good Given Q = 60 – 4P + 10Y and initial values P = 2.5 and Y = 5 Ey Find = Q x Y Y Q Q and Q : Y Q = 10 Y Q = 60 – 4P + 10Y Q = 60 – 4(2.5) + 5(3) + 10(2) 4 . Py = 3 and Y = 2 EC = Qx x Py0 Py Qx0 Find Qx and Q : Py Qx = 5 Py and Q = 20 – 4P + 5Py + 10Y Q = 20 – 4(2. since 0 < Ey ≤ 0 it is a necessity good Cross Elasticity It measures the responsiveness of demand to changes in price of other goods.5) + 10(5) Q = 100 5_ 100 and Ey Ey c) = (10) x = 0.5. Ec = dQx dPy 0 0 0 x Py Qx the two products x and y are substitutes the two products x and y are complements there is no relationship between two products. Ec Ec Ec the Example : > < = Given Qx = 20 – 4Px + 5Py + 10Y and initial values Px = 2.5 .

P = RM6. a) b) c) d) e) Derive the total revenue function. Its demand function has been estimated as follows: Qb Qb A Ps Pb a) b) = -28.85 and A = 210.80Pb = the demand for Golden Bake pies. At what price and quantity will marginal revenue be zero? At what price and quantity will total revenue be maximized? If price. Derive the marginal revenue function.20Ps – 38.Q = 45 EC = (5 ) x 3_ 45 > 0 . given that Ps = 0. 5 . calculate the price elasticity of demand for the product.33 . is The demand equation faced by DuMont Electronics for its personal computers given by P = 10.60 + 0. Derive the total revenue function. since Ec substitutes Exercise: 1. Golden Bake is involved with the production of pies.24A + 45.000 – 4Q.000. 2. = Advertising expenditure = the price of competitor’s pie per unit = the price of Golden-Bake’s pie per unit Derive the conventional demand curve function in the form of Q = a – bP. products x and y are Ey = 0.

a) Compute the point price elasticity of demand at P = RM30. Demand for softback managerial economics text is given by Q = 20.c) d) Calculate the sales-revenue maximizing price for Golden Bake. The book is initially priced at RM30. should the price be increased or decreased? Explain. 6 .000 – 300P. b) If the objective is to increase total revenue. What is the maximum total revenue it can earn? (APR 2002/ECO555/510/465/550) 3.

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