Managerial Economics | Managerial Economics | Managerial Economics

DEMAND
ANALYSIS AND
ESTIMATION
Lor Einna N. Santos
Table of
Contents
1.Concept of 2.Price Elasticity 3.Point and Arc
Elasticity Elasticity

4.Types of Price 5.Other

Elasticity of Demand Elasticities
 ELASTICITY OF DEMAND

The Elasticity Concept The concept of elasticity

simply involves the
percentage change in a
dependent variable, resulting
from a 1 percent change in
the value of an independent
variable.
PRICE
ELASTICITY
The price elasticity of demand
is the ratio of the percentage
change in quantity and the
percentage change in the
good’s price.
 Example:
At the current $240 fare, 100 coach seats ELAS
TICIT
are sold. If the airline cut its price to $235, Y
110 seats would be demanded. Therefore,
we find
 POINT ELASTICITY ARC ELASTICITY

-measures elasticity at the central point

-measures elasticity at a finite point of an arc between a pair of two points
of the demand curve. on the demand curve.

-there is a very small changes in X -there is a large-scale change in X

TYPES OF PRICE ELASTICITY OF DEMAND

Perfectly Elastic Demand

Elastic Demand
Perfectly Inelastic Demand
Inelastic Demand
Unitary Demand
 Perfectly Elastic
Demand
TYPES OF PRICE ELASTICITY OF DEMAND

In perfectly elastic demand, a

small rise in price results in fall
in demand to zero, while a
small fall in price causes
increase in demand to infinity.
 Elastic Demand
TYPES OF PRICE ELASTICITY OF DEMAND

An initial change in price

causes a larger percentage
change in quantity.
 Perfectly Inelastic
TYPES OF PRICE ELASTICITY OF DEMAND

Demand
A perfectly inelastic demand is
one when there is no change
produced in the demand of a
product with change in its
price.
 Inelastic Demand
TYPES OF PRICE ELASTICITY OF DEMAND

Inelastic demand is when the

percentage change produced
in demand is less than the
percentage change in the price
of a product.
 Unitary Demand
TYPES OF PRICE ELASTICITY OF DEMAND

When the proportionate

change in demand produces
the same change in the price of
the product.
 INCOME ELASTICITY OF
DEMAND
ELASTICITIES
Income elasticity of
demand measures
how a change in
buyers income will
OTHER

lead to a change in
the demand for a
good.
 INCOME ELASTICITY OF
ELASTICITIES DEMAND

We can interpret the income elasticity of demand as summarized in

the table below:
OTHER
Example:
INCO
The weekly demand for cheap garments went down from 4,000 pieces to ELAS ME
TICIT
2,500 pieces as the level of real income in the economy increased from $75 Y
per day to $125 per day. The reason is the shift in preference due to the
availability of extra money on the back of increased income level.

Therefore, the income elasticity of demand for cheap garments is -0.92,

it is an inferior good.
 CROSS-PRICE ELASTICITY OF
ELASTICITIES DEMAND

Cross-price elasticity
of demand measures
the how a change in the
price of one good will
affect the quantity
OTHER

demanded of another
good.
 CROSS-PRICE ELASTICITY OF
DEMAND
We can interpret the cross-price elasticity of demand as summarized
ELASTICITIES
in the table below:
OTHER
 Example: CROS
PRIC
S-
ELAS E
TICIT
Y
Suppose an increase in the price of Tea by 5% might lead to an
increase of the closed substitute, coffee (we assume the price
of coffee remains the same) by 15%. Then, calculate the cross-
price elasticity of tea and coffee.

Thus it can be concluded that for each one-unit

change of price of Tea, the demand for Coffee will
change by three units in the same direction.
Thank You!
Lor Einna N. Santos