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Quantitative D emand Analysis

Alvaredo Chris t N. Aritonang Ndaru Pr ihatmoko

The Elasticity Con cept

Elastisitas :

Alat/ Tools untuk menguku r hubungan antara dua variabel.

Perbandingan perubahan p roporsional dari sebuah variabel dengan perubahan variabe l lainnya .

E

G , S

= %

Δ G

%Δ S

If E G S > 0, then S and G are directly related.

,

If E G,S < 0, then S and G are inversely related.

If E G, S = 0, then S and G are unrelated.

Own Price Elastic ity of Demand

U ku ra n pe rse ntase pe ru ba h a n kua nti tas ya n g diminta "disebabkan" ol eh persentase perubahan harga.

E

Q

X

, P

X

d

= %

Δ Q

X

%ΔP

X

Law of Demand Karena fungsi perminta a n adalah hubungan terbalik antara harga da n kuantitas, koefisien el asti s i tas h arga a kan s e l a l u negatif.

Own Price Elastic ity of Demand

Elastic Demand

Permintaan dikatakan “El a stis” apabila nilai absolut dari elastisitas permintaa n > 1

Inelastic Demand

Permi ntaan dikata kan “I n elasti s ” apa bil a nil a i a bsol ut dari elastisitas permintaa n < 1

Unitary Elastic D ema n d

Permintaan dikatakan “U nitary” apabila nilai absolut dari elastisitas permintaa n = 1

Perfectly Elastic & Inelastic Demand

Price

D Quantity Perfectly Elastic ( =−∞ ) E Q , P X X
D
Quantity
Perfectly Elastic (
=−∞
)
E Q
, P
X
X

Price

D Quantity Perfectly Inelastic ( = 0) E Q , P X X
D
Quantity
Perfectly Inelastic (
= 0)
E Q
, P
X
X

Own Price Elastici ty and Total Revenue

Elastic

Increase (a decrease) i n price leads to a decrease (an increase) in total re venue.

Inelastic

Increase ( a decrease) i n price leads to an increase (a decrease) in total re venue.

Unitar y

Total revenue is maxi m ized at the point where demand is unitary elas tic.

Elasticity, T o tal Revenue and Linea r Demand

P

100

TR
TR
Elasticit y, T o tal Revenue and Line a r Demand P 100 TR 0 1

0

10

20

30

40

50 Q

0

Q

Elasticity, T o tal Revenue and Linea r Demand

P TR 100 80 800 Q 0 10 20 30 40 50 Q 0 10
P
TR
100
80
800
Q 0
10
20
30
40
50 Q
0
10
20
30
40
50

Elasticity, T o tal Revenue and Linea r Demand

P TR 100 80 60 1200 800 Q 0 10 20 30 40 50 Q
P
TR
100
80
60
1200
800
Q 0
10
20
30
40
50 Q
0
10
20
30
40
50

Elasticity, T o tal Revenue and Linea r Demand

P TR 100 80 60 1200 40 800 Q 0 10 20 30 40 50
P
TR
100
80
60
1200
40
800
Q 0
10
20
30
40
50 Q
0
10
20
30
40
50

Elasticity, T o tal Revenue and Linea r Demand

P TR 100 80 60 1200 40 20 800 Q 0 10 20 30 40
P
TR
100
80
60
1200
40
20
800
Q
0
10
20
30
40
50 Q
0
10
20
30
40
50

Elasticity, T o tal Revenue and Linea r Demand

P TR 100 Elastic 80 60 1200 40 20 800 Q 0 10 20 30
P
TR
100
Elastic
80
60
1200
40
20
800
Q 0
10
20
30
40
50 Q
0
10
20
30
40
50

Elastic

Elasticity, T o tal Revenue and Linea r Demand

P TR 100 Elastic 80 60 1200 I nel asti c 40 20 800 Q
P
TR
100
Elastic
80
60
1200
I nel asti c
40
20
800
Q 0
10
20
30
40
50 Q
0
10
20
30
40
50

Elastic

Inelastic

Elasticity, T o tal Revenue and Linea r Demand

P TR 100 Unit elastic Elastic Unit elastic 80 60 1200 I nel asti c
P
TR
100
Unit elastic
Elastic
Unit elastic
80
60
1200
I nel asti c
40
20
800
Q 0
10
20
30
40
50 Q
0
10
20
30
40
50

Elastic

Inelastic

Demand, Marginal Revenue (MR) and

E last ic ity

P 100 Elastic Unit el astic 80 60 Inelastic 40 20 0 10 20 40
P
100
Elastic
Unit el astic
80
60
Inelastic
40
20
0
10
20
40
50
MR

For a linear inverse demand function, MR(Q) = a + 2bQ , where b < 0.

When

Q

MR > 0, demand is elastic;

MR = 0 , demand is unit elastic;

MR < 0, demand is inelastic.

Factors Af fecting the Own Pric e Elasticity

Available Substitutes

The more substitutes availa ble for the good, the more elastic the demand.

Time

Demand tends to be more inelastic in the short term than in the long term.

Time allows consumers to s eek out available substitutes.

Expenditure Share

Goods that comprise a sma ll share of consumer’s budgets tend to be more inelastic than g o ods for which consumers spend a large portion of their inco m es.

Elastisitas akan besar bila m ana :

terdapat banyak barang su bsitusi yang baik

harga relatif tinggi

ada banyak kemun g kinankemun g kinan p en gg unaan barang lain

Elastisitas umumnya akan kecil, bilamana :

b end a terseb ut di guna kan dengan kom bi nasi b end a l a i n

barang yang bersangkutan terdapat dalam jumlah banyak, dan dengan harga harga ya ng rendah.

Untuk b arang terseb ut t ida k terd apat b arangb arang substitusi yang baik, Dan b enda tersebut sangat dibutuhkan.

Cross Price Elast icity of Demand

E

Q

X

Y =

, P

% Δ Q

X

d

% Δ P

Y

I f E Q X ,P Y > 0, th en X an d Y are su bs titutes.

If E

Q X , P Y

< 0 then X and Y are com plements.

,

Predicting Re venue Changes from Tw o Products

Suppose that a firm sells to related goods. If the price of X chang es, then total revenue will change by:

Δ =

R

(

R

X

(

1+

E

Q

X

, P

X

)

+

R E

Y

Q P

Y

,

X

)

× %Δ

P

X

Income Elasticity

E Q M =

X ,

%Δ Q

X

d

%Δ M

If E Q X ,M > 0, then X is a norm a l good.

If E Q , M < 0, then X is a inferi o r good.

Uses of E lasticities

Pricing.

Managing cash flows.

Impact of changes in competitors’ prices.

Imp act of economic b ooms and recessions.

Impact of advertising campaigns.

And lots more!

Example 1: Prici n g and Cash Flows

Accordin g to an FTC Re p ort by Michael Ward , AT&T’s own price elast icity of demand for long distance services is 8. 64.

AT&T needs to boost r evenues in order to meet it’s marketing go als.

To accomplish this goa l, should AT&T raise or lower it’s p rice?

Answer: L ower p rice!

Since demand is elasti c, a reduction in price will increase quantity d emanded by a greater percentage than the p rice decline, resulting in more revenues for AT & T.

Example 2: Quan tif y in g the Change

If AT&T lowered price by 3 percent, what would happen to the v olume of long distance telephone calls routed through AT&T?

Answer: Ca lls Increase!

Calls would increase b y 25 . 92 percent!

E

Q

X

, P

X

=−8. =

64

% Δ Q

X

d

%Δ P

X

8.64

=

%

Δ Q

X

d

3% 8.6 4 = %Δ Q

)

2 5.92%

− ×−

%

3%

(

d

Δ Q =

X

X

d

Exam ple 3: Im pac t of a Change in a Competit or’s Price

According to an FTC Re port by Michael Ward, AT&T’s cross price elas ticity of demand for long distance services is 9.0 6 .

If competitors reduced their prices by 4 percent, what would happen to the demand for AT&T services?

Answer: AT&T’ s Demand Falls!

AT&T ’s d emand wou ld fa ll by 36. 24 percent!

E

Q

X

,

P

Y

9.06 =

4%

% Δ Q

×

X

= 9. 06 =

%Δ Q

X

d

% Δ P

Y

% Δ Q

X

d

4%

= Δ Q

d = − 36.24%

9.0 6

%

X

d

Inter p retin g De mand Functions

Mathematical rep rese ntations of demand curves.

Example:

Q

X d = 10 2 P

X

+ 3

P

Y

2

M

L aw o f demand h o ld s (co effi ci ent o f P X i s negati ve).

X and Y are substitutes (c oefficient of P Y is positive).

X i s an i nfer i or goo d (coe ffi c i ent o f M i s negati ve).

Linear Demand Func tions and Elasticities

General Linear Demand Function and Elasticities:

Q

d

X =α +α

0

X

P

X

+α +α

Y Y

P

M

M

+α

H

E Q

X

X =α

X

, P

P

X

Q

X

E

Q

X

, P

Y

P

Y

=α

Y Q

X

Own Price

Cross P rice

Elasticity

Elastici ty

E

Q

X

,

M

=α

M

Income

Elasticity

M

Q

X

H

Example of Li near Demand

Q d = 10 2P.

Own Price Elasticity: ( 2 )P/Q.

If P= 1, Q=8 (since 10 2 = 8) .

Own price elasticity at P =1, Q=8:

( 2)(1)/8= 0.25.

LogLinea r Demand

General LogLinear De mand Function:

ln

d

Q =+β β

X

0

X

ln

P +

X

β

ln

P +β

M

YY

Own Price Elas ticity :

Cross Price Ela sticit Income Elastic ity :

y :

ln

MH+β

H

ln

β

X

β

Y

β

M

Example of LogLinear Demand

ln(Q d ) = 10 2 ln(P) .

Own Price Elasticity: 2.

Graphical Represe ntation of Linear and LogLinea r Demand

P

D

D

Linear

Q

P

D

D

Log Linear

Q

Regressio n A na l ysi s

One use is for estimati ng demand functions .

Important terminology and concepts:

L east S quares Regression mo d e l : Y = a + bX + e.

Least Squares Regression line: Y a b X

Confidence Intervals.

t statistic.

Rsquare or Coefficient o f Determination.

F statistic.

ˆ

ˆ

ˆ

= +

An Ex ample

Use a spreadsheet to e stimate the following loglinear demand fun ction.

ln Q =β + β P + e

x

0

x

ln

x

Summar y Output

Regression Statistics

Multiple R R Square Adjusted R Square Standard Error Observations

0.41

0.17

0.15

0.68

41.00

ANOVA

df

SS

MS

F

Significance F

Regression

1.00

3.65

3.65

7.85

0.01

Residual

39.00

18.13

0.46

Total

40.00

21.78

Coefficients Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Intercept

7.58

1.43

5.29

0.000005

4.68

10.48

ln(P)

-0.84

0.30

-2.80

0.007868

-1.44

-0.23

Interpreting the Re gression Output

The estimated loglinea r demand function is:

ln(Q x ) = 7.58 0.84 ln(P x ).

Own p rice elasticit y: 0.84 (inelastic ).

How good is our estima te?

t statistics of 5.29 and 2.8 0 indicate that the estimated coefficients are statisticall y different from zero.

Rsquare of 0.17 indicates the ln(P X ) variable explains only 17 percent o f th e vari ati on i n l n (Q x ).

F statistic significant at th e 1 percent level.

C onc l us i on

Elasticities are tools you can use to quantify the i mpact of changes i n pr i ces, i ncome, and advertising on sales and revenues.

Gi ven m a rket or sur vey data , regressi on analys is can be used to estimate :

Demand functions.

Elasticities.

A host of other things, including cost functions.

Managers can quantify t he impact of changes in prices, income, advertis i ng, etc.

TERIMA KASIH