DEMAND THEORY

Presented by Group 9
INDUKANA
SHRADDHA
BHUMIKA
Network Externalities - Bandwagon Effect

 Network Externalities are a special kind of

externalities in which individual’s utility for
a good depends on other people who
consume the commodity
 In fact, a person’s demand may be
affected by the number of other people
who have purchased the good.

Chap-3 Slide 2
Network Externalities - Bandwagon Effect

 Network externalities can be positive

or negative.
 A positive network externality exists if
the quantity of a good demanded by
a consumer increases in response to
an increase in purchases by other
consumers.

Chap-3 Slide 3
Network Externalities - Bandwagon Effect

 The Bandwagon Effect

 This is the desire to be in style, demand
for some goods of an individual
depends on other’s demand for them. In
these cases, an interdependency exist
between the demands.
 This is the major objective of marketing
and advertising campaigns (e.g. toys,
clothing).

Chap-3 Slide 4
Positive Network
Externality: Bandwagon Effect
When consumers believe more
Price D20 D40 D60 D80 D100 people have purchased the
($ per
unit)
product, the demand curve shifts
further to the the right .

Quantity
20 40 60 80 100 (thousands per month)

Chap-3 Slide 5
Positive Network
Externality: Bandwagon Effect

Price D20 D40 D60 D80 D100 The market demand

($ per curve is found by joining
unit)
the points on the individual
demand curves. It is relatively
more elastic.

Demand

Quantity
20 40 60 80 100 (thousands per month)

Chap-3 Slide 6
Positive Network
Externality: Bandwagon Effect

Price D20 D40 D60 D80 D100 Suppose the price falls
($ per from $30 to $20. If there
unit)
were no bandwagon effect,
quantity demanded would
$30 only increase to 48,000

$20 Demand

Pure Price
Effect

Quantity
20 40 48 60 80 100 (thousands per month)

Chap-3 Slide 7
Positive Network
Externality: Bandwagon Effect

Price D20 D40 D60 D80 D100 But as more people buy
($ per the good, it becomes
unit)
stylish to own it and
the quantity demanded
$30 increases further.

$20

Demand

Pure Price Bandwagon

Effect
Effect
Quantity
20 40 48 60 80 100 (thousands per month)

Chap-3 Slide 8
 Negative Network
Externality: Snob Effect

Chap-3 Slide 9
Chap-3 Slide 10
Chap-3 Slide 11
CROSS PRICE ELASTICITY OF
DEMAND
The cross elasticity of demand is an economic
concept that measures the responsiveness in the
quantity demanded of one good when the price for
another good changes.

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The cross elasticity of demand for substitute goods is always positive
because the demand for one good increases when the price for the
substitute good increases. For example, if the price of coffee increases,
the quantity demanded for tea (a substitute beverage) increases as
consumers switch to a less expensive yet substitutable alternative.

Alternatively, the cross elasticity of demand for complementary goods is

negative. As the price for one item increases, an item closely
associated with that item and necessary for its consumption decreases
because the demand for the main good has also dropped For example,
if the price of coffee increases, the quantity demanded for coffee stir
sticks drops as consumers are drinking less coffee and need to
purchase fewer sticks.

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Application of Cross Price Elasticity

Companies utilize cross-elasticity of demand to establish prices to sell

their goods. Products with no substitutes have the ability to be sold at
higher prices because there is no cross-elasticity of demand to
consider. However, incremental price changes to goods with
substitutes are analyzed to determine the appropriate level of demand
desired and the associated price of the good.

Additionally, complementary goods are strategically priced based on

cross-elasticity of demand. For example, printers may be sold at a
loss with the understanding that the demand for future complementary
goods, such as printer ink, should increase.

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