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a
$15
Price per apple
b
12
c
9
d
6
e
3
D
0
8 14 20 26 32
Millions of apple per week
12/3/2017 Vidya Suresh 4
Market Demand is the Sum of Individual
Demands
Market Demand Curve: The horizontal summation of all the individual demand
curves.
(Q2 Q1 ) P1
P
( P2 P1 ) Q1
(Q2 Q1 ) ( P2 P1 )
EP
( P2 P1 ) (Q2 Q1 )
December 3, 2017 Vidya Suresh 14
Degrees of Price Elasticity
Elastic Demand situation in which a price
change leads to a more than proportionate
change in quantity demanded. Consumers are
extremely responsive to price changes.
Demand is elastic if the absolute value of the
price elasticity of demand is greater than one
P 1
Example:
P 3.2
P 3.2
December 3, 2017 Vidya Suresh 15
Degrees of Price Elasticity
Unit Elastic Demand situation in which price and
quantity changes exactly offset each other.
Response is equal to change in price
Demand is unit elastic if the absolute value of the
price elasticity of demand is equal to one
Example:
P 1 P 1
P 1
December 3, 2017 Vidya Suresh 16
Degrees of Price Elasticity
Inelastic Demand situation in which a price
change leads to a less than proportionate change
in quantity demanded. Consumers are extremely
unresponsive to price changes.
Demand is inelastic if the absolute value of the
price elasticity of demand is less than one
P 1
Example:
P 0.5
P 0.5
December 3, 2017 Vidya Suresh 17
December 3, 2017 Vidya Suresh 18
Methods of measuring elasticity of demand
Point elasticity of demand
E= (2 3) / 3
.33 / .5 .67
(30 20) / 20
(12 6) / 6
1 / .5 2
(120 80) / 80
Quantity Qx
Income
HIGH INCOME ELASTICITY OF DEMAND
when income increases, the quantity
increases in large proportion
EY>1
Eg:Branded items
Quantity Qx
Quantity Qx
Quantity Qx
December 3, 2017 Vidya Suresh 28
Cross elasticity of demand
Quantity Qx
Price Py
Utility
Satisfaction derived from consumption
Subjective
Assumption
Tastes are given
Tastes are
relatively stable
Total utility
Total satisfaction
Marginal utility
Change in total
utility from
one-unit change
in consumption
0 1 2 3 4 5 10
Pizzas per week
December 3, 2017 Vidya Suresh 35
Indifference Curves and Utility Maximization
Indifference map
Graphical representation of consumers tastes
Each I: different utility levels
The further indifference curve from origin
The higher the utility
More of both goods
10
Indifference curves farther
from origin depict higher levels
of utility.
5
I4 A line intersects each higher
I3 indifference curve, reflecting
I2
I1 more of both goods.
0 5 10
Pizzas per week
December 3, 2017 Vidya Suresh 38
Indifference Curves Do Not Intersect
Definition
Factors
Purposes of Forecasting
Short term
Long- term
Should forecast be general or specific
Problems and methods
Classification of goods
- consumer
- durable
- consumer goods and services
Macro
Industrial
Firm-level
Accuracy
- It is generally measured in terms of the past forecasts on
the present sales and by the number of times it is correct.
Plausibility
- The techniques used and the assumptions made should
be intelligible to the management. It is essential for a
correct interpretation of the results.
Simplicity
- It should be simple, reasonable and consistent with the
existing knowledge. A simple method is always more
comprehensive than the complicated one.
Collective opinion
Controlled experiments
Nave models
December 3, 2017
Judgmental approach49
Vidya Suresh
Survey or buyers method
Direct method of estimating sales in the near future
Asking customers what the buyers are planning to buy
Known as opinion survey
The burden of forecasting goes to buyer
Method is best when bulk of sales is made.
Customers may misjudge or mislead or may be uncertain
about quantity
Not useful in case of house old customers
Does not measure and expose the variables under
managements control
Survey methods
- experts opinion
- consumer survey
- complete enumeration
- sample survey
- end- use
- Delphi method
- market experimentation
- stimulated market method
- actual market method
Statistical method
- trend analysis
- heading indicator analysis
- regression method
- simultaneous equation