Class notes Revenue Management

Demand
 The relationship between demand and price
- The income effect
- The substitution effect

The demand curve (downwards slope)
- Assumptions
- The axes (price and quantity)
- Illustrates how much would be demanded at each price
Data can be gathered by asking or by experimenting by actual changing the price

What determines the slope of the demand curve?
What makes it more horizontal or vertical?
 THE PRICE ELASTICITY OF DEMAND – how price sensitive are my customers?

Other determinants of demand:
 Tastes (technology, trends, fashion)
 Number and price of substitute goods
 Number and price of complementary goods
 Income
 Distribution of income
 Expectations (of the price)

Movement along and shifts in the demand curve

Possible causes of a rise in demand
 Tastes shift towards this product
 Rise in price of substitute products
 Fall in price of complementary goods
 Rise in income and product is normal or luxury
 Fall in income and product is inferior
 Expectations of a rise in price

Supply
 Relationship between supply and price
o As price rises, firms supply more
 It is worth incurring the extra unit costs
 They switch from less profitable goods
 In the long run, new firms will be encouraged to enter the market
 The supply curve (upwards slope)
o Assumptions
o The axes (price and supplied quantity)
o Illustrates how much would be supplied at each price

Other determinants of supply:
 Costs of production
 Profitability of alternative products
 Profitability of goods in joint supply
 Nature and other random shocks
 Aims of producers
 Expectation of producers

, Movements along and shifts in the supply curve

Possible causes of a rise in supply at any price level
 Fall in costs of production
 Reduced profitability of alternative products that could be supplied
 Increased profitability of goods in joint supply
 Benign shocks
 Expectations of a fall in price

The determination of price
 Equilibrium price and output
o Response to shortages and surpluses
o Significance of ‘’equilibrium’’
 Demand and supply curves lead to an equilibrium price

The free-market economy
 Advantages
o Transmits information between buyers and sellers
o No need for costly bureaucracy
o Incentives to be efficient
o COMPETITIVE markets respond to consumer wishes
 Problems
o Competitions may be limited
o Inequality
o Environment and social goals may be ignored

 The mixed economy
o Types of intervention
 Use of taxes, subsidies and benefits
 Legislation and regulation
 Direct provision by the government

Government intervention:
 Minimum price to protect producers
 Minimum price will be above equilibrium or free market price
 Examples: agricultural products, labour
 Minimum price will lead to supply surplus

 Maximum price to protect consumers
 Maximum price will be below equilibrium or free market price
 Examples: bread, medicines, rent, interest
 Maximum price will lead to demand surplus

Price Elasticity of Demand
 Determinants of price elasticity of demand
o Number and closeness of substitute goods
o Proportion of income spend on the goods
o The time period