MANAGERIAL ECONOMICS Sayed Abu Sufyan

Lecture No.: 03 Roll No.: ZR1801005

Date: 20.07.2018
Key notes of Lecture 03
1. Price elasticity of demand: Price elasticity of demand shows the relationship between price and
%∆𝑄
quantity demanded. |𝑒𝑝 | = %∆𝑃
2. Income elasticity of demand: Income elasticity of demand measures the relationship between a
%∆𝑄
change in quantity demanded for good X and a change in real income. |𝑒𝑦 | = %∆𝑌
a. Normal goods have a positive income elasticity of demand so as consumers' income rises
more is demanded at each price.
b. Normal necessities have an income elasticity of demand of between 0 and +1. Demand is
rising less than proportionately to income.
c. Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises
more than proportionate to a change in income.
d. Inferior goods have a negative income elasticity of demand meaning that demand falls as
income rises.
3. Cross elasticity of demand: Cross price elasticity measures the change of demand for good X
%∆𝑄𝑥
following a change in the price of a related good Y. |𝑒𝑥𝑦 | = %∆𝑃𝑦
 With substitute goods such as coke and Pepsi, an increase in the price of one good will lead
to an increase in demand for the rival product. The cross-price elasticity for two substitutes
will be positive. For example: |𝑒𝑥𝑦 | = 2
 With complimentary goods such as coffee and coffee mate, an increase in the price of one
good will lead to a decrease in demand for the complimentary product. The cross-price
elasticity for two complimentary products will be negative. |𝑒𝑥𝑦 | = −2
4. Advertisement elasticity of demand: Advertising elasticity of demand is a measure of a market's
%∆𝑄𝑥
sensitivity to increases or decreases in advertising saturation. |𝑒𝑎𝑑 | = . A positive
%∆𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑑.
advertising elasticity indicates that an increase in advertising leads to an increase in demand for
the advertised goods.

5. Relation between quantity demanded with other factors:

𝑄𝑑 = 𝐶 − 𝑚𝑃 + 𝑛𝑌 + 𝑙𝐴𝑑 + 𝑘𝑃 𝑠 − 𝑗𝑃𝑐
Here, 𝑄𝑑 is the quantity demanded; P is the price of the product, Y is income; 𝐴𝑑 is advertisement costs
of the product, 𝑃 𝑠 is the price of substitute products; and 𝑃𝑐 is the price of complimentary product.