CHAPTER 3: DEMAND AND PRICING

Demand function: an equation that relates the quantity demanded of a good or service to its determinant factors, such
as price, income, advertising, etc.

Demand curve: a graph that shows the relationship between the quantity demanded and the price of a good or service,
holding other factors constant.

Elasticity of demand: a measure of the responsiveness of quantity demanded to changes in one of its determinant
factors. It is calculated as the ratio of percentage change in quantity demanded to percentage change in the factor.

Price elasticity: the elasticity of demand with respect to changes in the price of the good or service1. It is usually
negative, except for Giffen goods. Goods are price elastic if the absolute value of price elasticity is greater than one, and
price inelastic if it is between zero and one.

Income elasticity: the elasticity of demand with respect to changes in income2. It is positive for normal goods and
negative for inferior goods. Goods are cyclic if income elasticity is greater than one, noncyclic if it is between zero and
one, and countercyclic if it is negative3.

Cross-price elasticity: the elasticity of demand with respect to changes in the price of another good or service1. It is
positive for substitute goods and negative for complementary goods4.

Advertising elasticity: the elasticity of demand with respect to changes in advertising expenditure. It is usually positive,
meaning that more advertising leads to more demand.

Price discrimination: a practice of charging different prices to different customers or groups of customers for the same or
similar goods or services5. There are three types of price discrimination: first-degree, second-degree, and third-degree7.

First-degree price discrimination: charging each customer the highest price they are willing to pay8. This is difficult to
implement and may be illegal or unethical.

Second-degree price discrimination: charging different prices based on the quantity purchased or the timing of
purchase. Examples are volume discounts, two-part pricing, and sliding prices.

Third-degree price discrimination: charging different prices to different groups of customers based on their
characteristics or preferences6. Examples are student discounts, senior discounts, and geographic pricing.

Demand function: Q = 25,800 − 800 P + 4 A + 200 CP + 0.4 DIPC1

Demand curve: Q = 40,000 − 800 P2

Price as a function of quantity: P = 50 − 0.00125 Q

Price elasticity: Price elasticity = (percentage change in Q) / (percentage change in P)

Income elasticity: Income elasticity = (percentage change in Q) / (percentage change in DIPC)

Cross-price elasticity: Cross-price elasticity = (percentage change in Q) / (percentage change in CP)

Advertising elasticity: Advertising elasticity = (percentage change in Q) / (percentage change in A)

1. Marketing decisions are based on economic reasoning and concepts. This chapter explains consumer behavior
and demand from an economic perspective.
2. A consumer is someone who makes consumption decisions for herself or her household.
3. The theory of the consumer assumes that consumers can compare and rank any two patterns of consumption3.
They also adjust their consumption when prices change, resulting in substitution and income effects.
4. The theory of the consumer may not fully match reality, but it is still useful for modeling consumer behavior.
Some alternative theories are bounded rationality, satisficing, and social learning.
5. A demand function is an equation that relates the quantity demanded of a good or service to its determinant
factors.

Q = 25,800 − 800 P + 4 A + 200 CP + 0.4 DIPC

Q = 25,800 − 800(30) + 4(5000) + 200(25) + 0.4(33,000) = 40,000 subscribers

6. A demand curve is a graph that shows the relationship between the quantity demanded and the price of a good
or service, holding other factors constant. It can be derived from a demand function by fixing the values of other
factors.

Demand curve: Q = 40,000 − 800 P2

7. The demand curve can shift when one of the other factors changes.
8. Demand functions and demand curves help business managers understand their customers and forecast their
demand levels.
9. Businesses can adjust their market strategy elements, such as pricing, promotion, and location, to influence
their future demand. However, they cannot control some external factors, such as the economy, the
competition, and the demographics. They can use forecasts or scenarios to anticipate the impact of these factors
on their demand.
10. An elasticity of demand is a measure of the responsiveness of quantity demanded to changes in one of its
determinant factors. It is calculated as the ratio of percentage change in quantity demanded to percentage
change in the factor.

Price elasticity = (percentage change in Q) / (percentage change in P)

11. The elasticity of demand with respect to changes in the price of the good or service is called the price elasticity.
Goods are price elastic if the absolute value of price elasticity is greater than one, and price inelastic if it is
between zero and one.
12. The elasticity of demand with respect to changes in income is called the income elasticity. Goods are cyclic if
income elasticity is greater than one, noncyclic if it is between zero and one, and countercyclic if it is negative.

Income elasticity = (percentage change in Q) / (percentage change in DIPC)

13. The elasticity of demand with respect to changes in the price of another good or service is called the cross-price
elasticity. It is positive for substitute goods and negative for complementary goods.

Cross-price elasticity = (percentage change in Q) / (percentage change in CP)

14. Elasticities can be calculated for any factor that can be expressed quantitatively, such as advertising expenditure.

Advertising elasticity = (percentage change in Q) / (percentage change in A)

15. Long-run elasticities tend to be higher than short-run elasticities because consumers have more time to adjust
their consumption patterns.
16. Price discrimination is a practice of charging different prices to different customers or groups of customers for
the same or similar goods or services. There are three types of price discrimination: first-degree, second-degree,
and third-degree16.
17. First-degree price discrimination is charging each customer the highest price they are willing to pay. This is
difficult to implement and may be illegal or unethical. Examples are negotiation, auction, and sliding prices.
18. Second-degree price discrimination is charging different prices based on the quantity purchased or the timing of
purchase. Examples are volume discounts, two-part pricing, and sliding prices.
19. Third-degree price discrimination is charging different prices to different groups of customers based on their
characteristics or preferences. Examples are student discounts, senior discounts, and geographic pricing.
CHAPTER 2: KEY MEASURES AND RELATIONSHIPS
1. The chapter covers key measures and relationships of a business operation, such as revenue, cost, profit, and
breakeven point.
2. Revenue is the total monetary value of the goods or services sold by a business.
Cost is the collective expenses incurred to generate revenue.
Profit is the difference between revenue and cost.
3. Accounting costs are measured according to accounting standards and principles, which are important for
financial reporting and taxation purposes.
4. Economic costs are relevant for decision making and include opportunity costs and sunk costs.
5. The students need to consider the relationship between the volume or quantity of ice cream bars sold and the
resulting revenue, cost, and profit. These relationships are called functions and can be expressed in tables,
graphs, or equations.
6. The revenue function is the product of price per unit and number of units sold.
Revenue function: R = PQ
7. The cost function has a fixed cost component and a variable cost component.
Cost function: C = FC + (VC)Q
8. The profit function is the difference between revenue and cost.
Profit function: π = R – C
9. The quantity level that separates the loss zone from the profit zone is called the breakeven point. There are
several ways to find it algebraically or graphically.