General economics
Lecture 1
Revenue management test: 80% revenue management – 20% economics
Economics: supply and demand curves, elasticities, different market structures
Demand
The relationship between demand and price
o The income effects
o The substitution effects
Demand curve shows: what is the quantity demanded on every level of price.
o Assumptions
o The axes
o The more horizontal, the better the demand
What determines the slope of the demand curve?
Price elasticity of demand – how price sensitive are my customers?
Other determinants of demand
o Tastes (technology, trends, fashion)
o Number and price of substitute goods
o Number and price of complementary goods
o Income
o Distribution of income
o Expectations
Any change in these determinants will cause a shift of the demand curve
Possible causes of a rise in demand:
- Tastes shift towards the product
- Rise in income
- Expectation of a rise in price
- Rise in price of substitute goods
- Fall in price of complementary goods
A shift to the demand to the right product became more popular
Supply
Determinants of supply
o Costs of production
o Profitability of alternative products
o Profitability of goods in joint supply
o Nature and other random shocks
o Aims of producers
o Expectations of producers
Movement along and shifts in the supply curve
, Government intervention
Minimum price to protect producers
Minimum price will be above equilibrium (evenwicht) or free market price
Example: agriculture products, labour
Minimum price will lead to supply surplus.
Maximum price will lead to a demand surplus
Equilibrium is a situation in which economic forces such as supply, and demand are balances.
Price elasticity of demand
Determinant of price elasticity of demand
o Number and closeness of substitute goods
o Proportion of income spent on the good
o The time period
Income elasticity
Change in demand of a product as a result of a change in income
Formula: relative change in quantity demanded divided by relative change of income
Normal products: demanded quantity increases slightly when income goes up. 0 < IE < 1
Whole wheat, organic food
Necessary products: demanded quantity does not change when income goes up or down. IE
=0
Haircuts, tobacco, electricity
Luxury products: demanded quantity increases when income goes up. IE > 1
Automobiles, wine, jewellery.
Inferior products: demanded quantity decreases when income goes up. IE < 0
Products that we are less interested in when our income goes up.
Supermarket name products
Cross elasticity
The relative change in demanded quantity for a product as a result of a price change of
another product.
- Formula: relative change of a demanded quantity / by relative price change of
another products
- Products can be divides in substitute, complementary goods or indifferent products.
Positive figures mean products are substitutes especially high values. CE > 0 – more clearly a
substitute when CE > 1
Negative outcome means products are complementary products. CE < 0 more clearly when
CE <-1
Lecture 1
Revenue management test: 80% revenue management – 20% economics
Economics: supply and demand curves, elasticities, different market structures
Demand
The relationship between demand and price
o The income effects
o The substitution effects
Demand curve shows: what is the quantity demanded on every level of price.
o Assumptions
o The axes
o The more horizontal, the better the demand
What determines the slope of the demand curve?
Price elasticity of demand – how price sensitive are my customers?
Other determinants of demand
o Tastes (technology, trends, fashion)
o Number and price of substitute goods
o Number and price of complementary goods
o Income
o Distribution of income
o Expectations
Any change in these determinants will cause a shift of the demand curve
Possible causes of a rise in demand:
- Tastes shift towards the product
- Rise in income
- Expectation of a rise in price
- Rise in price of substitute goods
- Fall in price of complementary goods
A shift to the demand to the right product became more popular
Supply
Determinants of supply
o Costs of production
o Profitability of alternative products
o Profitability of goods in joint supply
o Nature and other random shocks
o Aims of producers
o Expectations of producers
Movement along and shifts in the supply curve
, Government intervention
Minimum price to protect producers
Minimum price will be above equilibrium (evenwicht) or free market price
Example: agriculture products, labour
Minimum price will lead to supply surplus.
Maximum price will lead to a demand surplus
Equilibrium is a situation in which economic forces such as supply, and demand are balances.
Price elasticity of demand
Determinant of price elasticity of demand
o Number and closeness of substitute goods
o Proportion of income spent on the good
o The time period
Income elasticity
Change in demand of a product as a result of a change in income
Formula: relative change in quantity demanded divided by relative change of income
Normal products: demanded quantity increases slightly when income goes up. 0 < IE < 1
Whole wheat, organic food
Necessary products: demanded quantity does not change when income goes up or down. IE
=0
Haircuts, tobacco, electricity
Luxury products: demanded quantity increases when income goes up. IE > 1
Automobiles, wine, jewellery.
Inferior products: demanded quantity decreases when income goes up. IE < 0
Products that we are less interested in when our income goes up.
Supermarket name products
Cross elasticity
The relative change in demanded quantity for a product as a result of a price change of
another product.
- Formula: relative change of a demanded quantity / by relative price change of
another products
- Products can be divides in substitute, complementary goods or indifferent products.
Positive figures mean products are substitutes especially high values. CE > 0 – more clearly a
substitute when CE > 1
Negative outcome means products are complementary products. CE < 0 more clearly when
CE <-1
