MANAGERIAL

ECONOMICS
AND BUSSINESS
STRATEGY
PREPARED BY:
 CHAPTER THREE
QUANTITATIVE DEMAND
ANALYSIS

BOOK BY: Michael R. Baye

As explained in chapter two, the demand function
QD = F (PX, PS, PC, M, H)
doesn’t tell us or answer on the following questions:
1- How much will the changes of quantity demanded
of good X, when the price of good X changes by
1%?
2- How much will the changes of QD of good X as a
result of changes of the other goods (substitutes &
complements) prices ?
3- How much will the changes of QD of good X, when
the consumer income changes by 1.1% or 2%
…….etc?
To answer the previous questions, studying the three
types of demand elasticity is very essential.
TYPES OF DEMAND
ELASTICITY

Price Price Income

demand Cross demand
Elasticity Elasticity Elasticity

% ∆ QDX % ∆ QDX % ∆ QDX

% ∆ PX % ∆ PS, PC % ∆ income
Price Demand Elasticity:
measures the responsiveness of quantity demanded
to change in price, determining the value of price
elasticity of demand is very essential to the
manager.

He could know how

much the changes of
quantity sold and
revenues as a result
of the price cut.
In the normal goods, the sign of the price elasticity
of demand is negative, that reflects a negative
relationship between quantity demanded of good
X and the price of good X.
PRICE DEMAND ELASTICITY FORMULA:

EQ, PX = % ∆ QDX
% ∆ PX

% ∆ QDX = Changes of QD
Q DX

% ∆ PX = ∆ PX = Changes of the price of good X

PX Price of good X

EQ, PX = ∆ QDX ÷ ∆ PX = ∆ QDX * PX

Q DX PX ∆ PX QX
NOTE: There are two aspects of the price elasticity
of demand are important:

1- Its sign, it will be negative for all normal goods

and services, where it reflects a negative
relationship between quantity demanded of good
X and the price of good X or service.

2- The value of price elasticity of demand

regardless its sign (absolute value) may be as
follows:
 ELASTIC DEMAND
If EQ,PX > 1 , the demand will be elastic, it means the
% change of quantity demand of good X will be
greater than % changes of the price. Changes in the
price of PX BY 1% leads to changes of QD by more
than 1% (2% or more for example) in opposite
trend. Decreasing market price of good X by 1%
leads to increasing of quantity demanded by value of
elasticity as percentage.
If the value of EQ, PX equals (-3), it means the
increasing of market price of good X by 1% leads
to decreasing of Q from X by 3%.
 INELASTIC DEMAND
If EQ,PX < 1 , the demand will be inelastic demand, it
means decreasing market price of good X by 1%,
leads to increasing of the quantity demanded by less
than 1%.

** EQ, PX = - 0.5, the quantity demanded will

increase by 0.5% as a result of decreasing market
price by 1%.
 UNITARY ELASTIC DEMAND
If EQ,PX = 1 ,
the demand is called
unitary elastic, it
means increasing
market price by 1%
leads to decreasing
Of the quantity
Demanded by the
same percentage.
 ZERO ELASTIC DEMAND
If EQ,PX = 0 ,
perfectly inelastic demand,
it means any changes of
market price doesn’t
affect the quantity
demanded.
 PERFECTLY ELASTIC DEMAND
If EQ, PX = ∞ , demand will
be perfectly elastic, it
means any % changes of
PX leads to infinity %
changes of QDX, under
this type of elasticity,
the price will be
constant at any
level of QD.
What are the relationship between price
elasticity of demand and total revenues
(total expenditures)
EQ,PX PRICE QUANTITY TR
DECREASE
>-1 20 %
10 %
CONSTANT
=1 10 % 10 %
INCREASE
< -1 10 % 5%
INCREASE
=0 10 % 0%

=∞
DECREASE
10 % = ZERO TO ZERO
EQ,PX PRICE QUANTITY TR
INCREASE
>-1 20 %
10 %
CONSTANT
=1 10 % 10 %
DECREASE
< -1 10 % 5%
DECREASE
=0 10 % 0%

=∞ 10 % ∞% INCREASE
 PRICE CROSS ELASTICITY:
It measures the responsiveness of the quantity
demanded of good (X) to change in the price of
another good.

% ∆ QDX
% ∆ PS, PC

* if EQDX,PS > 0 ( X and S are substitutes products)

* if EQDX,PC> 0( X and C are complements products)
 INCOME DEMAND ELASTICITY
It measures the responsiveness of quantity
demanded of good (X) to change in income.

= % ∆ QDX
% ∆ income
It refers to the different quantities of commodities
and services which the consumers will buy at
different levels of income.
It reflect the relationship between income and
quantity demanded.