Chapter 3: Quantitive demand analysis
Income elasticity
a measure of the responsiveness of the demand for a good to changes in consumer income; the percentage change in quantity demanded divided by the percentage change in income
If demand is perfectly elastic, then the demand curve is
horizontal
Log-linear demand
if the logarithm of demand is a linear function of the logarithms of prices, income, and other variables
Perfectly elastic demand
if the own price elasticity is infinite in absolute value.
Perfectly inelastic demand
if the own price elasticity is zero.
Does demand tend to be more inelastic in the short term or the long term?
in the short term
If demand is elastic, a ______ in price will lead to a ______ in total revenue.
increase, decrease or decrease, increase
If demand is inelastic, a ______ in price will lead to a _____ in total revenue.
increase, increase or decrease, decrease
When there are few close substitutes for a good, demand tends to be relatively _____. This is because consumers can't readily switch to a close substitute when the price increases.
inelastic
Marginal revenue (MR)
is the change in total revenue due to a change in output
Total revenue test
is the relationship among the changes in price, elasticity, and total revenue
How is the log-linear demand curve shaped?
it is a convex curve
P-values of .05 or lower are considered
low enough for researcher to be confident that the estimate coefficient is statistically significant
Cross-advertising elasticity between goods X and Y would
measure the percentage change in the consumption of X that results from a 1 percent change in advertising directed toward 1
P-values
moe precise measure of statistical significance
Demand for food (a broad commodity) is ________ than the demand for beef (a specific commodity).
more inelastic
If demand is elastic, a price increase leads to consumers to
substitute toward another product, then reducing the quantity demanded for the good.
Own adversing elasticity of demand for good X is
the ratio of the percentage change in the consumption of X to the percentage change in advertising spent on X
T-statistic
the ratio of the value of a parameter estimate to the standard error of the parameter estimate
Econometrics
the statistical analysis of economic phenomena
If demand is perfectly inelastic, then the demand curve is
vertical
When is R-squared considered a better fit?
when closer to 1
When t-stat for a parameter estimate is large in absolute value, then
you can be confident that thee true parameter is not zero
Elasticity
a measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable
Standard error
a measure of how much each estimated coefficient would vary in regressions based on the same underlying true demand relation, but with different observations
Cross-price elasticity
a measure of the responsiveness of the demand for a good to changes in the price of a related good; the percentage change in the quantity demanded for one good divided by the percentage change in the price of a related good
Own price elasticity
a measure of the responsiveness of the quantity demanded of a good to change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good
By the law of demand, there is an inverse relation between price and quantity demanded; thus, the own price elasticity of demand is what kind of number?
a negative number
When the absolute value of the own price elasticity is less than 1,
an increase in price increase total revenue
When the absolute value of the own price elasticity is greater than 1,
an increase in price leads to a reductio in total revenue
Multiple regressions
are regression of dependent variable on multiple explanatory variables
When is total revenue is maximized?
at the point where demand is unitary elastic (E = -1) and MR = 0
What are 3 factors that affect the magnitude of the own price elasticity of a good?
available substitutes, time, and expenditure share
If there are more substitutes available for the good, the more _____ the demand for it is.
elastic
F-stat with significance values of 5 percent or less are
generally considered significant
An increase in the price of good Y leads to a decrease in demand for good X means
goods X and Y are complements
An increase in the price of good Y leads to an increase in demand for good X means
goods X and Y are substitutes
If demand is inelastic, a price increase causes consumers to
not able to readily switch to a close substitute .
Absolute value of the own price elasticity gets larger as
price increases
F-stat
provides a measure of the total variation explained by the regression relative to the total unexplained variation
How to maximize profits a firm should produce?
set marginal revenue to equal marginal cost (MR=MC)
R square (coefficient of determination)
tells the fraction of the total variation in the dependent variable that is explained by the regression
When demand is perfectly elastic, a manager who raises prices even slightly will find:
that none of the good is purchased due to competing versions of the product being sold at cheaper price
If the absolute value of a t-stat is greater than or equal to 2, then
the corresponding parameter estimate is statistically different from zero (manager is 95 percent confident)
If the absolute value of the own price elasticity is greater than 1, then
the demand is elastic
If the absolute value of the own price elasticity is less than 1, then
the demand is inelastic
If the absolute value of the own price elasticity is equal to 1, then
the demand is unitary elastic
P-value of .05 is said that
the estimated coefficient is statistically significant at the 5 percent level.
When is f-stat considered a better fit?
the greater it is
Least squares regression
the line that minimizes the sum of squared deviations between the line and the actual data points
The lower the significance value of the F-stat,
the more confident you can be of the overall fit of the regression equation.
