NATIONAL AND KAPODISTRIAN UNIVERSITY OF ATHENS
Faculty of Economics
Department of Business Economics and Finance
Center of Financial Studies
Laboratory for Investment Applications
Internal Audit Program
Course: Managerial Economics and Financial
Management – Chapter 4
Instructor: Panayotis Alexakis
In cooperation with:
Under the aegis of:
Managerial Economics and
Financial Management
Chapter 4: Market Demand Analysis for
Decision Making
Contents of presentation:
Demand function and elasticity
 Company demand function and
structure
 Product differentiation mechanisms
 Determinants of the market structure

market
Introduction


Product demand forms the fundamental link
between the company and its customers. A
company whose products depict high demand
is considered to be successful and growing.
On the contrary, a company whose products
have low demand faces difficulties and
problems.
Based on the company definition, it follows
that a company can exist and operate only if
the production costs can be compensated
with revenues from the product sales. The
ability for sales depends on the characteristics
of product demand.
3
Introduction
The realization of demand for products and
services by their users is founded on two
conditions:
1. The specific product has a value for its use, that is
it renders a benefit to the user. This holds true for
both intermediary and final products as one could
refer to innumerable examples.
2. For the realization of this demand the potential
product users must possess the financial means to
acquire the goods. These means can be either
related to incomes, liquidation of investment
assets or social grants. The combination of these
two conditions is required for effective demand
to be established.

4
Introduction
Example:
 A company producing home appliances, analyses
the potential market size for its products, say, for
the cases of Italy and Indonesia, and is not
complacent by the fact that the second has a
population more than three times higher than the
former (and therefore many more users), but also
takes into account that per capita income in Italy is
more than ten times higher than that of Indonesia.
 It may arrive to the conclusion that Italy presents a
larger sales potential despite its smaller population.
So, in this hypothetical case, the Italian market
seems to fulfill the two conditions more
satisfactorily than Indonesia, for the realization of
effective product demand.
5
Demand function and elasticity
The demand function presents the factors
which affect the quantity demanded for a
product. Its general presentation is as
follows:
Q=Q(X1,X2,X3…) (1)
Where, Q is the quantity demanded and
X1,X2,X3…. are the factors which affect this
quantity. The number of demand determinants
depends on the characteristics of the product
and those of the market.

6
Demand function and elasticity
The three factors which are usually incorporated in
the simple presentation of the demand function
refer to the price of the product (P), the prices of
other products (Pa1, Pa2, Pa3….) where 1,2,3 refer to
other products, and the consumers’ income (Y),
which is usually estimated as per capita income.
 By restricting, for the moment, the determinant
factors to these three categories, then the demand
function can become more specific as follows:

Q  Q[ P, ( Pa1, Pa 2, Pa 3 ....), Y ]( 2)
7
Demand function and elasticity
The direction of change stemming from the
effect of each determinant, as well as the size
it exerts on the quantity sold, can be
measured by the partial derivative of Q with
respect to this independent variable.
 Therefore, on the demand function (2),
derivative (dQ / dP) measures the effect of a
change on the product price on the sold
quantity,
 (dQ / dPa1) measures the effect of the change
of the price of another product to the sold
quantity of the product under examination,
and so on.

8
Demand function and elasticity
However, while the derivative measures the effect
of each factor on the sold quantity, the
comparison of the size of these effects can only
take place by transforming this measurement on a
percentage basis. The percentage measurement of
the effect of each factor in the sold quantity is
called elasticity.
 Its general definition with respect to a factor X is:

dQ X
 
x
(3)
dX Q
9
Demand function and elasticity

So, the elasticity of demand for a product with respect to
its price (or price elasticity of demand for a product) is:
dQ P

x (4)
dP Q

 P measures
the percentage change in Q that
accompanies the change of P by a percentage unit. Given
that that this derivative follows the inequality:
dQ
 0,
dP

then
 P has also a negative sign, since both quality Q and
price P refer to positive sizes.
10
Demand function and elasticity
Three, significant technical points
should be mentioned:
a) In the general case of the demand
function, the elasticity differs from one
point to the other. This practically means
that in high price levels their change
affects the sold quantity differently, as
compared to the changes in low price
levels.
11
Demand function and elasticity
b)
At the point of the demand curve which
is related to revenue maximization with
respect to the product price, the price
elasticity of demand equals -1. This is
derived from the fact that the
maximization of revenues (QxP) is
achieved (with respect to P) at the point
where:
dQ
QP
dP
 0(5)
12
Demand function and elasticity
From (5), it can be derived that:
dQ P
x   P  1
dP Q
c) The highest and lowest prices that P scores,
are those of (   ) and (0). In the first case,
demand is fully elastic, while in the second
it is fully inelastic. In the first case, it means
that an infinite quantity of the product can
be sold at the given price, while in the
second, the quantity sold is given,
irrespective of the price level.

13
Demand function and elasticity

The following diagram presents various demand
functions (with a change only in the price and at
the sold quantity of the product).
14
Demand function and elasticity
Function B is fully inelastic while function D
is fully elastic. Function A is inelastic at high
price levels and elastic at low price levels.
Function C is linear, although elasticity is
changing along the line.
 The elasticity of the product demand with
respect to the price of another product is:

 Pa
dQ
Pa

x
dPa Q
15
Demand function and elasticity
  Pa
can be either positive or negative. In
general, if  Pa  0 , it means that the other
product is considered as a substitute of the
product under examination, given that a
rise of the price of the other product leads
to an increase to the quantity sold of the
first product. If, now  Pa  0 , then the other
product is considered as a complementary
of Q as a rise at the price of the other
product leads to the reduction of the
quantity sold of the first product.
16
Demand function and elasticity
Alternative
 A product is considered as a substitute of another
if both are competing in the consumers’
preferences. For example, pork and beef meat are
substitutes. If the price of pork rises without a
change in the price of beef, then the sales of beef
will rise.
 A product is complementary to another, it both are
combined to the consumers’ preferences. For
example, cameras and film are complementary. If
the price of cameras falls without changing the film
price then the quantity sold of both cameras and
films will rise.
17
Demand function and elasticity
Price elasticity of demand

The price elasticity of demand with respect
to other products forms a significant
instrument for the analysis of business
decisions, for two main reasons:
1. It determines the potential limits of a
company in order to autonomously
change the price of its product. For
example, a company can appear as a
monopoly in the production of product.
The classic behavior of monopoly refers
to the increase of price up to the point of
profit maximization.
18
Demand function and elasticity
However, if there are potential substitutes to
the product, this limits the company’s ability
to raise the price, as a price increase could
divert demand towards the substitute
products. So it is not right, for example, to
consider that a unique coffee company forms
a monopoly if the elasticity of substitution of
coffee to tea is very high.
19
Demand function and elasticity
2.

The second reason refers to the case of companies
which present a multiplicity of products. The pricing
of different products produced by the same
company should take into account the relation of
substitutability and complementarity of these
products, so that it does not undermine the
demand of these products.
The elasticity of demand with respect to the
consumers’ income, the income elasticity of demand,
is, respectively, defined as:
Y
dQ Y

x (8)
dY Q
20
Demand function and elasticity
 It should be kept in mind that  Y can take either
a positive or a negative value with respect to the
products.
 Those with negative income elasticity of demand
are considered inferior products whose demand
is being reduced along with the rise in income.
Certain food products (potatoes, beans etc) form
a typical example, as consumers tend to
substitute them with other food products as their
income rises. For most products, income elasticity
of demand is positive.
21
Demand function and elasticity


However, even within this category, it is
useful to distinguish between high income
demand elasticity goods  Y  1 and low income
demand elasticity goods. The former’s share in
consumers’ expenditure rises along the rise in
per capita income, while it is reduced for
those products of low income demand
elasticity.
Also, when important cyclical variations take
place in the economy, high income demand
elasticity products depict an intensive cyclical
behaviour, which is not the case for the other
category of goods
22
Demand function and elasticity

The income demand elasticity of a product
is also important for business decision
making, as it is related to the choice of
location for the sales network of a product.
Given that various regions of a country are
characterized by different income levels,
the income elasticity of demand of a
product forms a criterion for the choice of
geographical regions in which the
promotion of a product could be more
successful.
23
Company demand function and
market structure
The demand function, presented in the previous
section, refers to a specific product. However, this
is not necessarily the demand function faced by a
company, as the same (or similar) product can be
produced by many companies.
 For this reason, a distinction should be drawn
between the sectoral demand, which is a
function of demand for a product on a category
of products, such as textile products, and the
company demand for a product, which
depends on the way sectoral demand is shared
between the sector’s companies. From the side of
a specific company, the sharing of total sectoral
demand between this company and its
competitor companies, is a very important issue. 24

Company demand function and
market structure


In microeconomic theory, the way sectoral
demand is shared depends on the structure
of the market. There exist three types of
market structure, namely, perfect competition,
imperfect or monopolistic competition, and the
oligopolistic structure. The theoretical case of the
monopoly is excluded from the analysis as the
sector coincides with the company and
therefore no demand sharing between
companies exists.
In brief,
25
Company demand function and
market structure


Perfect competition is the type of market
structure characterized by a large number of
firms which produce the same product. The
size of the production of each company is so
small in relation to total sectoral production,
so that a company can not by itself affect the
price of the product, through its decisions.
Therefore, in this market type every company
considers the product’s price as given and
independent from the size of the company
production. In this case, the company demand
function is considered as perfectly elastic with
respect to the product price.
26
Company demand function and
market structure
Company demand in perfect competition
27
Company demand function and
market structure

Price Po that prevails in the market remains
steady for all sizes of product quantity produced
by the company. If the company aims for a higher
price than P, say P1, then it will not be able to
achieve any sale at all, as all its customers will be
diverted towards the company’s competitors,
which offer the same product, at a lower price. If
on the other side, the company is in a position to
offer a lower price, say P2, without incurring a
loss, then two developments could follow:
28
Company demand function and
market structure
The one is that the company’s competitors will
follow suit as they otherwise risk to lose
customers and therefore a new competitive
equilibrium price will be formed, at P2.
 The other is that the company’s competitors will
not follow, as they incur a higher cost, and
therefore the company will emerge as a holder of
monopoly power. In this case, though, the sector
will lose the perfect competition character and
the market structure will be modified towards
monopolistic or oligopolistic competition.

29
Company demand function and
market structure
 In
reality, perfect competition is very
rarely met as a clear market type. It is
more a theoretical standard with
interesting characteristics and less a
phenomenon with a broad empirical
content. From the evolutionary view of
the economic structures, the perfect
competition type is unstable as it
contains the elements of its reversal.
30
Company demand function and
market structure

This happens as even firms operating inside a
hypothetical environment of perfect competition,
are not complacent with their passive adjustment
at the prevailing market price. They endeavor to
discover an element that would make them
supersede their competitors, either a lower
production cost or a particular product
characteristic that attracts the customer
preferences. The companies which succeed in that,
achieve, at the same time, to overthrow the perfect
competition conditions. For this reason, the two
market types examined below, in contrast to
perfect
competition, form
categories
of
phenomena with a broad empirical content.
31
Company demand function and
market structure

Monopolistic competition forms a type
of market structure which resembles
perfect competition, as it is observed in
sectors with a significant number of firms. It
differs though from it as the products
produced by the sector’s companies are not
exactly identical, but they differ to each
other on certain characteristics. In other
words, the companies’ products, under
monopolistic competition, are not perfect
substitutes to each other.
32
Company demand function and
market structure

However, they constitute an imperfect
substitute to each other, in the sense that
the demand elasticity of the quantity sold of
one product to the price of the other
product is positive (  Pa  0 ). The result of
these characteristics is that the company
which operates under the regime of
monopolistic competition, has the ability to
monitor both the quantity and the price of
the product up to a certain degree and
within certain limits.
33
Company demand function and
market structure
Furthermore, the company, due to the large number of
firms, can take decisions with a certain autonomy
without counting on the direct reaction of its
competitors.
Company demand in monopolistic competition

34
Company demand function and
market structure
The two demand functions presented form examples of
differing degrees of company product differentiation
with respect to the products of other companies of the
sector.
 So, curve B is almost the horizontal demand
presentation of perfect market competition. The slope
of curve B implies that the company’s product is
differentiated only to a small degree from the product
of the other companies of the sector, so that they are
considered as close substitutes to this product. For this
reason a small variation of the price, say from level Pb,
leads to a large variation of the sold quantity. This
variation is explained by the fact that the upward or
downward price change respectively repels or attracts
many users of the B’s product towards or from close
substitute products of other companies.

35
Company demand function and
market structure

On the contrary curve A implies a higher
product differentiation compared to the
products of the competitor companies, so that
a price variation, say around PA level, to lead to
smaller changes of the sold quantity, compared
to the case of B. Bigger differentiation means,
as expected, smaller elasticity of substitution
of product A to the products of other
companies of the sector.
36



Company demand function and
market structure
The comparison of the two cases presented in the diagram
leads to the conclusion that the company facing demand
function A supersedes the company that faces demand
function B, in two ways.
First, it has a higher ability to determine its product’s price,
or to raise this price, due to the smaller leakage of the
company’s customers towards other companies of the sector.
Second, it has a smaller sensitivity to price reductions from
competitive companies. Both of these advantages provide the
A company greater flexibility on the choice of the pricequantity pair, which determines the level of its revenues. Also,
they are based on the bigger product differentiation on the
part of A, which finally means that this company has
customers who have a special preference to company A’s
37
products.
Company demand function and
market structure

From these findings the conclusion is that
the achievement of product differentiation
and the keeping of customers loyal to the
company’s products form a fundamental
element in the economic strategy of a
company.
38
Company demand function and
market structure
Oligopoly or oligopolistic competition is the type of
market structure characterized by two elements:
 Firstly, all companies of the oligopolistic sector produce
differentiated products and face, like the companies of
monopolistic competition, negatively sloped demand curves.
 Secondly, since, in the oligopoly, there is only a small
number of producing companies, the competitive
environment of each of these companies is composed of
known and specific competitors. For this reason, each
company when taking a decision has to always take into
account the reaction of its competitors. This second
characteristic differentiates the oligopolistic market
structure to that of monopolistic competition.

39
Company demand function and
market structure

This differentiation between the two market
structures has actually to do with the difference in
the size of the companies and the ability of each
one to draw information with respect to the
behaviour and the choices of its competitors.
With respect to company size
 In a sector where tens or hundreds of companies
are operating, and therefore the market share of
each one is small, the effect of the activities of
one company on the others are so dispersed so
that they are not directly felt and do not cause
any reaction by them.
40
Company demand function and
market structure
Example:
 In a sector with 1,000 companies, each having equal
market share, that is 0.1% of total sector demand, if
total sales reach 100,000 units, each company sells
100 units. Suppose now, that a company manages to
present its product in an attractive way and increase
its sales by 66 units, that is by 66%, by taking
customers from the rest of the companies. For the
company itself this rise in activity is very big, indeed.
 However, the remaining 999 enterprises realise a
very small reduction of their activity each loosing, as
an average, 0.066 units, or by 0.0007%. This
reduction is so small that no defensive reactions are
initiated by the other companies.
41
Company demand function and
market structure
Suppose, now, that the sector is instead
composed of 10 companies and therefore the
66% rise in market share, that is 6,600 units,
leads to a 7.3% reduction to the activity of the
other 9 companies. This is a significant
development and leads the other 9 companies
to react to the initiative of the first company, in
ways that can make them recover their lost
market share.
 It is evident that the first case of the sector
with 1,000 units refers to monopolistic
competition, while the second case reflects
oligopoly.

42
Company demand function and
market structure
With respect to the importance of
information, it should be noted that drawing
information by each company with respect to
the policy followed by its competitors,
presupposes the incurring of expenditure.
 When the number of the competitors is large
the information expenditure is unbearable. At
the same time the information benefits are
small, given that, as the example demonstrated,
the negative effects are widely dispersed.
However, when the number of the companies
is small, information costs are less expensive
and the expected benefits are much bigger.

43
Company demand function and
market structure


In the oligopoly market structure, each
company aims at being informed on the
business movements of the others, as benefits
greatly supersede search costs. They entail the
company’s ability to timely react to the
initiatives of the others.
For example, if a company decides to reduce
prices, its oligopolistic competitors are
immediately informed and they have the time
to follow. The first company, now, which aims
at price reductions, takes into account the
reaction of its competitors and formulates its
decisions, accordingly.
44
Company demand function and
market structure

A presentation of this cycle of reactions is
presented below.
Demand function of an oligopolistic firm
45
Company demand function and
market structure
Suppose that an oligopolistic firm faces demand function
A, producing quantity Q, and prices each unit with P1.
The A demand function is formed under the condition
that the other sector’s companies keep a similar level in
their prices.
 If company wishes to increase its sales by reducing the
price to P2, the quantity occurring in demand function A
is Q2. This increase, however, implies that the other
oligopolistic companies keep their prices unchanged. If,
on the contrary, the other companies follow the price
reduction, the company’s demand curve will shift to B
and the quantity sold will finally be Q3. This process of
action – reaction, means that the company, by taking
into account the other companies’ reaction, considers C
as the effective demand function, which incorporates
the reaction of its competitors.

46
Company demand function and
market structure
The effective operation of the market is the
one that excludes or restricts greatly the
drawing of monopoly profits from the
market. However, since perfect competition
does not prevail everywhere, while there is
no guarantee that all companies will behave
as perfectly competitive enterprises, many
countries adopt measures and policies for
competition.
 These can be related to ex ante regulations
or ex post control of company behaviour.

47
Company demand function and
market structure
The ex ante regulations include price or profit limits, or
even obligatory rules of behaviour such as the wiping
out of rules or restrictions which act as obstacles for
the free access of companies to a market, or free entry
of new companies in a business sector.
 The ex post controls of companies behaviour usually
include the search on whether two or more companies
coordinate with respect to price determination, market
share distribution, whether a company exploits its
leading position and achieves supra normal profits or
prevents its potential competitors from entering the
market. An important issue which concerns the
competition policy is the analysis of merger or
acquisition cases in identical or similar sectors which
could end up undermining the conditions of a market.

48
Product differentiation mechanisms
The previous analysis emphasised more, in the case
of the oligopolistic market structure, on the
competition that emerges on product prices and
quantities.
 However, as under monopolistic competition,
companies achieve a degree of protection from the
competition of similar enterprises, aiming at the
differentiation of their products, the oligopolistic
enterprises aim also at hedging their market
through differentiation of their products.
 Furthermore, since product differentiation is met in
both types of market structure, it can be asserted
that this phenomenon forms a general
characteristic of the strategic goals of an
enterprise

49
Product differentiation mechanisms
It should be noted that the oligopolistic
firms have a greater incentive for the
differentiation of their products.
 Why?
 Because the company that functions under the
monopolistic competition draws a degree of
protection for its customers from its small
size and the high information cost of the
competitive
firms,
while
oligopolistic
enterprise faces well informed competitors
who aim at building a degree of protection of
their customers through the differentiation of
their products.

50
Product differentiation mechanisms
The mechanisms, through which product
differentiation is achieved, are many. A first
approach distinguishes three categories,
namely,
geographical access,
provision of after sale services
and
the changes in the physical
characteristics as well as the appearance of
the product.

51
Product differentiation mechanisms

The geographical access presents an advantage when
the user of the product is subject to a transportation
cost or appreciates the fact that he can acquire a product
at the place of his residence. This is particularly important
for common use products, where the user does not need
to spend time for market research before he selects a
product. In this sense a kiosk or a bakery have a constant
number of customers and they serve their customers for
the products they supply them. Even if a similar shop
operating in a different geographical area offers better
prices or services, the customers prefer the shops that
are more easily accessible to them. For the same reason
shops like neighborhood groceries keep operating even if
their prices are higher compared to supermarket stores. 52
Product differentiation mechanisms


However, the geographical access is not only valid
for small firms but also for big ones which plan and
organise their sales network. The location of an
automobile representation office, an electric
appliances group, a bank branch, form a very serious
decision which weights the cost of the firm with the
benefit of approaching additional steady clientele, in
a geographic area.
The issue of company location and formation of
sales networks is set for big companies, both at
national and international level. The dominant
companies on a world scale, keep their advantages,
due to the sales network that they possess. Sales
networks can be either a branch of a company or
that of a trading company.
53
Product differentiation mechanisms
The provision of services accompanying a sale
or after sales services forms the second category of
differentiation mechanisms and a significant source
of advantage, stabilization and further increase of
the company’s customers.
 For example, the good treatment of customers
inside a store, the quick service, the execution of
orders in short time, the payment facilities, the
product quality guarantees offered, an effective
distribution network and service provision, such as
maintenance and repairs, all contribute to the
strengthening of customer preferences towards the
company’s products against other companies.

54
Product differentiation mechanisms
In a way this method forms an implicit reduction in
the product price. As the competition in the form
of price cuts can lead to a price war with uncertain
outcomes for all companies, in many cases,
companies tacitly agree to product price stability
while competition among them is taking place
through the accompanying services.
 The provision of financial facilities with reduced
interest rates for the purpose of high value
consumer goods, forms an indirect tool of product
price reductions.
 Furthermore, the provision of free maintenance
and repair services for a certain period following a
product sale, forms also an indirect tool for
product price reductions.

55
Product differentiation mechanisms
The change of the physical characteristics and the
appearance of the products forms the most complex
mechanism of product differentiation. Furthermore,
it is the one most frequently used in oligopolistic markets.
These changes usually enter under the term “product
quality”, which, however, contains various elements.
 As examples, one could refer to changes in the useful
substances of a food product, the absence of certain
harmful substances, the life span of an apparatus or a car,
the improved technique for a product, the way of
packaging, the attractive picture of a fruit store, these
could lead consumer preferences to a company’s products,
without always implying the derivation of more real
benefits for the customers. In the car industry or in
clothing – textiles, the “line” forms a basic element of
product differentiation based mainly on appearance and
not on technical or natural characteristics.

56
Product differentiation mechanisms
The process of changing the natural characteristics
of products, as well as the logical consequence of
this process which is the development of new
products, become the subject of a planned activity
on
companies
through
research
and
development (R&D) programs.
 These programs are dedicated to the creation of
new or significantly differentiated products, which
cannot be easily imitated by the competitors and
are frequently protected by intellectual property
and patent rights. Under this method monopoly
cases are being created which favour demand,
consumer preferences and, in last analysis, the
profitability of the company’s products.

57
Product differentiation mechanisms


For this reason, the competition between
enterprises (especially, again, at the regime of
oligopolistic structure), frequently takes the
form of competitive investment in R&D
programs. As it is natural, the R&D programs
are more intensive and more costly for the so
called “peak sectors” in which high
expectations are identified for product
creations.
For example, today, the expenditure on
programs of this type is very big in
telecommunications,
information
and
biotechnology sectors.
58
Product differentiation mechanisms
On the side of the company strategy and
economic analysis, the R&D expenses form
investment expenses. Therefore, their
evaluation should follow the standards of
investment appraisal.
 The benefits steaming from R&D refer to
the production of knowledge and
technology, whose utilization brings profits
to the company and monopolistic
advantages which are based on product
differentiation.

59
Product differentiation mechanisms



Inside the mechanisms which lead to product
differentiation, advertising
should
be
included. Both under monopolistic and
oligopolistic
competition,
advertising
expenditures form a usual and easily spotted
phenomenon.
The question is on the exact operation of
advertising on the process of product
differentiation.
The answer on this issue is provided by more
than one ways:
60
Product differentiation mechanisms


According to the neoclassical approach,
advertising forms an information mechanism
for customers with respect to a product’s
characteristics, which assumes that product
differentiation exists already and that the
advertisements, simply inform customers on
this differentiation.
A critical view on that is reported, for
example, by Galbraith (1967) and by Baran –
Sweezy (1968), that advertising forms a
mechanism of psychological influence which
creates to customers the perception for new
needs.
61
Product differentiation mechanisms
This dimension considers advertising itself
as the creator of differentiation, through
the use of slogans and pictures, which
accustom consumers to the use of a
specific product brand, and finally to prefer
these products instead of those of another
company.
 Differentiation is therefore based on a type
of psychological addiction which does not
correspond to real but to rather symbolic
qualitative differences among the products.

62
Product differentiation mechanisms
Irrespective of the particular explanation given to advertising on a
product differentiation mechanism, all views converge to the fact
that advertising leads to a shift of the company demand function.
Example:
Shift in demand due to advertising activity

63
Product differentiation mechanisms
AB presents the demand function of the company
without advertisement expenses. CD is the demand
function following the realization of advertising
expenditure of, say, Z euros. Given the price P1, the
result of the undertaking of advertising expenditure
refers to the increase of the quantity of sales from Q1 to
Q2.
 This parallel shift of the demand function from AB to CD
means that the price demand elasticity of the product is
being reduced for each price level of the product. It is
known that:

P
dQ P

x
dP Q
64
Product differentiation mechanisms

It is observed that under the parallel shift,
dQ
the value of the derivative ( dP ) remains
steady, as the slope of CD equals that of
AB. Therefore, at price P1, the following is
valid:
dQ P1
 P ( AB) 
x
dP Q1
dQ P1
 P (CD) 
x
dP Q2
65
Product differentiation mechanisms

Given that Q2 is bigger than Q1, then,
 P ( AB)  ε P (CD)

The same conclusion is derived for any
other price level under the same algebraic
approach. As it is shown, the reduction of
the elasticity price, strengthens the
monopoly power of the company in the
pricing of its products.
66
Product differentiation mechanisms
However, the undertaking of advertisement
expenditure does not imply a continuous
ability to increase product demand. The
effectiveness of advertising is usually falling and this
is due to two reasons:
 Firstly, the increase in the use of the product by
each consumer leads to a declining marginal utility,
as it is accepted in microeconomic theory.
 Secondly, the acquisition of new customers away
from the products of other companies tends to
become more and more difficult when the
competitive enterprises aim at creating and hold
their customers through their own advertising
campaign.

67
Product differentiation mechanisms

The elasticity of demand with respect to the
advertising expenditure M is as follows.
M

dQ M

x
dM Q
For a company operating under monopolistic
competition or oligopoly, the optimisation of this
operation requires the combined choice of the
product price level and of advertising
expenditure.
68
Determinants of the market
structure


The types of market structure analysed above, are
determined by two categories of factors. One such
category refers to the relation between the
production cost and the market size. This relation
restricts, in certain cases, the number of companies
included in a sector.
For example, when economies of scale are observed
in the production of a product, where the production
cost is much smaller when 100,000 units rather than
50,000 units are produced, it is very profitable that if
the total sector sales amount to 200,000 units, the
sector to end up to 2 companies and not up to 4 or
10.
69
Determinants of the market
structure


By generalising this principle, if minimum
production scale represents a big size in
relation to the sales of the sector, the latter is
to have an oligopolistic structure. Even if the
sector initially starts with many enterprises,
the cost factor is to act in a way that either
through mergers or company liquidations, the
sector will end up as an oligopoly.
A historic classical example of this process is
offered by the growth of the automobile
industry in USA and Europe.
70
Determinants of the market
structure
A second and even more significant category of factors
are related to the strategies of the companies which
already operate within a sector against others which
aim their entry to the sector. In general, it is easily
realised that the number of companies operating in a
sector remains steady or changes depending on the
entry of new companies or on the exit of already
operating companies. The entry of new firms in a sector
depends on the investment opportunities occurring in
this sector as well as on the strategy of the already
operating companies.
 The latter tend to create various obstacles to the entry
of new companies, so that they discourage the
emergence of new competitors.
 Three categories of obstacles are known more than
others.

71
Determinants of the market
structure
1.


Legal obstacles.
This category includes intellectual
property rights, which safeguard the
exclusive right of use of a technology for
a certain time period, by a company only.
Also, this category includes exclusive
contracts with major customers, a
phenomenon especially prevailing in the
case of public procurements, for example.
72
Determinants of the market
structure
Technological obstacles.
 This category includes the low cost
production technique by a company in such
a level which cannot be copied by other
firms. The attainment of low cost can be due
either to exclusive knowledge of technology
or to exclusive possession of special
production factors.
 For example, the oligopolistic structure of
the oil refining sector was, initially, based on
the possession of oil wells with a very low
extraction cost.
2.
73
Determinants of the market
structure
3.


Strategic – economic obstacles.
This category of obstacles includes the pricing
policy of the companies, as well as all strategic
product differentiation, analysed above. With
respect to the pricing policy, the companies
operating in a sector can discourage new entries
by initiating “price wars” which exhaust newly
coming companies.
By proceeding to strategic product differentiation
companies operating in a sector stabilize and
hedge their customers and make it harder for
potential entrants to actually penetrate and enter
the sector.
74
Determinants of the market
structure

The exit of companies from a sector is usually
the result of a crisis. In case that the crisis in
one company, only, is possibly due to bad
management, failures, accidents or loss of
certain advantages, this company is forced to
exit the sector, as its expected revenues are
not sufficient to cover its operational costs. In
case the crisis affects the whole sector, the
exit usually takes place though the closing of
the weaker companies. In certain cases,
though, this result can be avoided through the
coordination in production reduction by all
the companies of the sector.
75
Determinants of the market
structure
The recognition of cases such as the entry of new
companies or sector crises leads to stock
management strategies on the part of the operating
companies. The possession of economic stocks (e.g.
liquid assets), is sufficient to increase the
robustness of the companies, either against the
expansionary moves of quasi competitors or
against the difficulties of a sectoral crisis.
 In general, the uncertainty in relation to sectoral
variations leads to “security policies” taking the
form of possession of sufficient stocks of financial
resources, products, production factors and / or
more complex types such as commodity futures
contracts.

76
Questions
Comment on the price elasticity of demand for the
following products, as relatively high or relatively low:
 Beverages
 Coca Cola
 Diet Pepsi
 Convertible sport car
 Jean trousers
2. Explain how the demand function of product X can
be derived, when knowing that Px = 4.5 euros, Qx =
20 and p = - 1.5 times.
3. Explain, why the demand for luxury products, such as
jewellery and expensive coats, is more sensitive
compared to meat and vegetables, in periods of
income changes.
1.
77
Questions
4.
5.
6.
7.
8.
According to your opinion, is there a market
structure that finally tends to be established in
practice, in total or on a sectoral basis?
Discuss the basic mechanisms, through which
product differentiation is achieved.
Present the forms of product differentiation which
tend to prevail in today’s market economy.
In the oligopolistic market structure, R&D
expenditure as well as advertising expenditure are
bigger as compared to other forms of market
structure. Is this proposition true?
Can a monopolistic firm benefit from the
advertisement of its products and why?
78
Exercises
1.
Company FGH has the following demand
profile
products.
Price
(euro)for one of its
Quantity
Demanded
5.00
970
4.95
1000
4.90
1026
4.85
1049
4.80
1071
4.75
1085
4.70
1095
4.65
1105
4.60
1114
79
Exercises
a)
b)
c)
Present the company’s demand function,
the marginal revenue function, and the
total revenue function.
Calculate the price elasticity of demand
for each change in price.
Determine the space in which, demand is
i) elastic, ii) inelastic and iii) equal to unity.
80
Exercises
2.










The demand function of product X has been estimated
as follows:
Qx = 5.030 – 3,806.2Px + 1,458.5 Py + 0.2566 Mx –
0.0323 My + 0.18Y
where:
Qx = demand for product X
Px = price of product X
Py = price of competitive product Y
Mx = advertising expenditure for product X
My = advertising expenditure for product Y
Y = average disposable consumer income
The current prices for the independent variables are (in
euros):
Px = 8, Py = 6, Mx = 168,000, My = 182,000,Y = 12,875
81
Exercises
Calculate the εPx, if the price changes to
10.
 Calculate the εMx, if Mx increases by
25,200 euros.

82
Exercises
A Mercedes car importer, in Marseilles, was
prepared, in September 2010, to receive new
models, type 2011. In order to clear the stock of
cars of older types, he offered, in August 2010, a
discount of 1,750 euros per car from the regular
price of 52,500 euros. As a result, sales were
increased from the average monthly level of 50 cars
to 75 cars.
 Calculate the εP, on the basis of the regular price.
 Which discount should the importer undertake in
September 2010 in order to sell the remaining
stock of 90 cars of 2010 type model?
3.
83
Exercises
A store selling student brief cases followed a
discount policy last August by reducing the
regular price of 24 euros by 1.5 euros. As a result,
weekly sales of brief cases were increased from
20 to 25 units, and the sale of writing pads from
140 to 160 units.
a) Calculate the elasticity of demand for brief cases
and writing pads with respect to the price of the
brief case, on the basis of 24 euros.
b) If each brief case costs 15 euros and sales costs
are 2 euros per unit, which is the price which
maximizes the profits of the store? Calculate the
sales and the profits from brief cases at this price.
4.
84
Exercises
This year’s increase of per capita income in
Brazil by 4%, leads to a rise in the sales of
industrial equipment of company CMX by
20%. The president of CMX maintains that
for next year, where a fall in income is
foreseen by 6%, the company should increase
its advertising expenditure by 15% in order
to keep the sales level unchanged.
a) Calculate the income elasticity of demand
b) Which assumption does the president
undertake for the elasticity of the advertising
expenditure?
5.
85
Exercises
6.

The demand function for commodity A is
provided as:
1.1
0.5
3.8
2.5
1.9
QA  10PA xPB xM A xM B xY , where:
QA = quantity of sales product A
 PA = price of product A
 PB = price of product B
 MA = advertising expenditure of product A
 MB = advertising expenditure of product B
 Y = disposable per capita income

86
Exercises
a)
b)
c)
d)
Calculate the elasticity for each of the
determinants.
B is complementary or substitute to A?
On the basis of the answer in (b), how do
you explain that MA and MB have a
positive impact on QA?
In case of a reduction in Y by 5%, which is
the offsetting change of PA or MA in order
for QA to remain unchanged? (Suppose
that all other sizes remain constant).
87
Exercises
Company AKUI produces stereo equipment in USA.
The price function for the product is P = 200 –
0.00003Q.The total cost function is:
 TC = 7,812,500 + 100Q + 0.00002Q2 and is valid for
each factory. For the present, AKUI produces in one
factory only but it studies the use of multiple product
units.
a) When producing in one factory only, which is the
profit maximizing quantity? Which is the price and the
total cost at this quantity?
b) Which is the quantity that minimizes product unit
cost?
c) Utilizing multiple and identical production units, which
is the quantity and price combination that maximizes
profit?
d) Based on the previous calculation, what comments can
88
be derived with respect to scale economies?
7.
Exercises
8.
An industrial sector includes a large
enterprise and many small ones. The
permanent behavior of the sector is for the
large firm to set the price while small firms
proceed to sales in this price. The sectoral
demand function is Q= 23,000 – 30P. The
total cost of the large firms is TCL =
3,000,000 + 25QL, where QL is the quantity
sold by the large enterprise. The total cost of
the small firms is TCS = 200 PS + 0.05 QS2,
where QS is the quantity sold by all small
firms.
89
Exercises
a)
b)
c)
d)
Which is the supply curve of the small
firms?
Which is the demand function for the large
firm?
Which pair of quantity and price maximizes
profits for the large firm?
Which quantity is to be produced by the
small firms?
90
Exercises
9.
a)
b)
Company A produces electric appliances and
wishes to sell a new type of laundry machine to the
market, in 2 months, the Q42. In order to wipe out
the stocks of previous type Q41, coming to 18,000
pieces, the company decided to reduce the price of
Q41 from 150 euros to 120 euros. If the company
knows that the εP for Q41 is -2.5, then:
Calculate the additional sales of Q41 in January in
relation to the usual monthly sales of 5.000 units
that the company achieves.
Will the company have to follow a discount policy
in February in order to wipe out the stock, and if
yes, which is the quantity and the level of the price
per Q41 unit that have to be determined?
91
Solutions to Exercises
Exercise 1
a.
Demand function

93
Exercise 1



Demand function:
P = a+ b Q
Diagram, on X axis presents Quantity and on Y axis
presents Price.


Total Revenues:
TR: P x Q


Total Revenues function :
Calculation of Revenues for each Price-Quantity
pair.

Total Revenues: Σ TR= 40,550.85
94
Exercise 1
PRICE
5
4.95
4.90
4.85
4.80
4.75
4.70
4.65
4.60
INCOME
4,850
4,950
5,027.4
5,087.65
5,140.8
5,153.75
5,146.5
5,138.25
5,124.4
95
Exercise 1






Observation 1: As quantity rises, revenues rise,
too.
Observation 2: As price decreases, revenues
rise.
Observation 3: At the quantity level of 1,085
units, and price level of € 4.75, revenues are
maximised.
Observation
4:
Marginal
Revenues
Decreasing (decreasing returns)
Marginal revenue function: 54.95, then
MR = [Δ (TR)] / [Δ(Q)] = 100/30 = 3.33 €/unit
96
Exercise 1

The same calculations take place for the price
changes that follow.

MR becomes positive when elasticity is above
unity  TR increase with rises in Q.

MR= 0 at the price-quantity pair (4.75 , 1,085)
where TR = (5,153.75) are maximised.

MR becomes negative when elasticity is below
unity  TR decrease along with rises in Q.
97
Exercise 1
Marginal Revenues
Price (euro
per lb)
5
Quantity
demanded
(lbs/wk)
970
Total revenue Marginal
(euro)
revenue
(euro/unit)
4,850
4.95
1000
4,950
3.333333333
4.90
1026
5,027.4
2.976923077
4.85
1049
5,087.65
2.619565217
4.80
1071
5,140.8
2.415909091
4.75
1085
5,153.75
0.925
4.70
1095
5,146.5
-0.725
4.65
1105
5,138.25
-0.825
4.60
1114
5,124.4
1.528888889
98
Exercise 1
Total Revenue and Marginal Revenue
Functions
99
Exercise 1
b)
 Elasticity:


ε = (% change of Q) / (% change of P) or [ΔQ/Q]/[ΔP/P] or
[ΔQ/ΔP] x [P/Q]

ΔP/ΔQ = b the slope of the demand curve in the linear
demand function P = a + b Q
For 5  4.95:
 ε = [ΔQ/ΔP] x [P/Q] = [(1,000-970) / (-0.05)] X (5/970)
 ε = - 3.093

For 4.95  4.90:
 ε = [(1,026 – 1,000) / (-0.05)] x (4.95 / 1,000) = -2.574

100
Exercise 1












For 4.90  4.85:
ε = [(1,049 – 1,026) / (-0.05)] x (4.90/1,026) = -2.1968
For 4.85  4.80:
ε = [(1,071 – 1,049) / (-0.05)] x (4.85 / 1,049) = -2.0343
For 4.80  4.75:
ε = [(1,085-1,071) / (-0.05)] x (4.80 / 1,071) = -1.255
For 4.75  4.70:
ε = [(1,095 – 1,085) / (-0.05)] x (4.75 / 1,085) = -0.8755
For 4.70  4.65:
ε = [(1,105 – 1,095) / (-0.05)] x (4.70/1,095) = -0.8584
For 4.65  4.60:
ε = [(1,114-1,105) / (-0.05)] x (4.65/1,105) = -0.7575
101
Exercise 1
Demand Elasticity with respect to price
Price (euro per lb) Quantity
demanded
(lbs/wk)
5
970
4.95
1000
4.90
1026
4.85
1049
4.80
1071
4.75
1085
4.70
1095
4.65
1105
4.60
1114
Price elasticity
of demand
-3.092783505
-2.574
-2.196881092
-2.034318398
-1.254901961
-0.875576037
-0.858447489
-0.757466063
102
Exercise 1
c)
 Elastic (|ε| > 1): for the first 5 pairs of prices (price above 4.75)

Decline in P  Increase in TR
 Inelastic (0 < |ε| < 1): for the following price changes (below
4.75)

 from 4.75 to 4.70
  from 4.70 to 4.65
  from 4.65 to 4.60


Decline in P  Decrease in TR

Finally, elasticity of unity (|ε|=1) does not appear anywhere
(change P  constant TR).
103
Exercise 2
Observations
 The values of the coefficients of the independent
variables of the demand function are the partial
derivative of demand with respect to each variable.

dQx / dPx = -3,806.2

dQx / dPy = 1,458

dQx / dMx = 0.2566

dQx / dMy = -0.0323

dQx / dY = 0.18
104
Exercise 2








The signs of the coefficients depict the direction of the
effect of each variable on Qx.
Qx = 5.030 – 3,806.2 Px + 1,458.5 My + 0.2566Δx –
0.0323My + 0.18y (1)
For Px=8 (1) becomes :
Qx = 5.030 – 3,806.2*8 + 1,458.5*6 + 0.2566*168,000 –
0.0323*182,000 + 0.18*12,875 = 5.030 – 30,449.6 + 8,751
+ 43,108.8 – 5,878.6 + 2,317.5
Qx = 22,879.1
For Px=10 (1) becomes :
Qx= 5.030 – 3,806.2*10 + 1,458*6+ 0.2566*168,000 –
0.0323*182,000 + 0.18*12,875 = 5.030 – 38,062.2 + 8,751
+ 43,108.8 – 5,878.6 + 2,317.5
Qx = 15,266.5
105
Exercise 2
ε = [ΔQ/ΔP]*[P/Q] = [(15,266.7 –
22,879.1)/(10-8)]*[8/22,879.1]=(7,522.4/2)*[8/22,879.1] = -1.33
 or (-3,806.2)*[8/22,879.1] = -1.33
Explain: As price rises by 1%, the quantity
is reduced by 1.33%.

106
Exercise 2
That is, the advertising expenditure now is equal to:
 Mx = 168,000 + 25,200 = 193,200

For Mx = 168,000, then (1):
 Qx = 5.030 – 30,449.6 + 8,751 + 43,108.8 –
5,878.6 + 2,317.5
 Qx = 22,879.1




For Mx = 193,200 (1) becomes:
Qx = 5.030 – 30,449.6 + 8,751 + 49,575.12 –
5,878.6 + 2,317.5
Qx = 29,345.42
107
Exercise 2
Therefore:
 εMx = [ΔQ/ΔΜx] * [Mx/Q] = [(29,345.4222,879.1)]/[(193,200168,000)]*[193,200/29,345.42] = 1.68
Explain: When advertising expenditure of X
rises by 1%, quantity rises by 1.68%.
108
Exercise 2






Other Comments
Income Elasticity (εy) = [dQx/dY]*[Y/Qx] = [0.18]*[12,875/22,879.1] =
0< 0.101<1
Good X: Necessary – necessities (e.g. , food, clothes)
εy < 0 inferior goods (e.g. legumes )
εy > 1 luxury goods (luxuries)
εy < 1 regular goods
Cross-Elasticity of Demand
 (εPy) = [dQx/dPy]*[Py/Qx] = [1,458.5]*[6/22,879.1] = 0.382 > 0
 The goods X and Y are substitutes (e.g. coffee-tea)
 Reduction in Py Reduction in Qx (shift of the demand curve of x, to
the left)



Complementary goods (complements): εPY < 0
e.g. Coffee and Cream
Reduction in Py  Rise in Qx (shift to the demand curve of x, to the
right)
109
Exercise 2
Cross elasticity with respect to advertising
 (eMΥ)
= [dQx/dΜy] * [Μy/Qx] =
[-0.0323]*[182,000/22,879.1] = -0.2569 < 0

Expectation: Negative elasticity for substitute
and positive for complementary goods.

e.g. Rise in advertising for a movie 
Reduction in ticket sales of other movies 
Rise of sales of other goods inside the cinema
building.
110
Exercise 3


a)
εP = [ΔQ/ΔP] * [P/Q]
1,750]*[52,500/50] = -1.5
=
[(75-50)/-
Meaning: When price rises by 1%, quantity
decreases by 15% (law of demand).

b) -15 = [ΔQ/ΔP]*[P/Q] =
50)/ΔP]*[52,500/50]  ΔP = € -2,800
[(90-
Meaning <<-<< : Discount
111
Exercise 4
a)
 εBC = [ΔQ/ΔP] * [P/Q] = [(25-20)/1.5]*[24-20] = -4
Meaning: When price of briefcases rises by
1%, sales of brief cases decrease by 4%.

 EWP
= [(160-140) / -1.5] * [24/140] = -2.29
Meaning: When price of briefcases rises by
1%, sales of writing pads decrease by
2.29%.
112
Exercise 4

b)
The profit function is as follows: K = Q (P-17)
 Each briefcase costs €15  production cost + € 2 / sales
cost per brief case.
 Calculate the derivative of profit with respect to quantity:
 ∂K / ∂Q => P* ∂Q/∂P + Q – 17* ∂Q/∂P = 0 
 Q (P/Q) * ∂Q/∂P + 1-17* ∂Q/∂P* 1/Q = 0


-4 + 1 + (17*4)/P = 0 

-3 + 68/P = 0  3P = 68 

P* = € 22.6
113
Exercise 4


Quantity at this price:
εBC = [ΔQ/ΔP] * [P/Q] = -4  [ΔQ/1,4]*[24/20]= -4  ΔQ = 4.66
where, ΔP = 24-22.6 = 1.4

So Q* = 20 + 4.66  Q* = 24.66 briefcases

Profit at price €22.6 and at quantity of 24.66
units:
K = P* Q – 17Q  K = € 138,096

114
Exercise 5

a)
For income elasticity:
 εy = (%change of Q) / (% change of Υ) ή
[ΔQ/Q] / [ΔΥ/Υ]
 or [ΔQ/Q] [Υ/ΔΥ] ή [ΔQ/ΔΥ] x [Υ/Q]

 εy = [ΔQ/Q]
/ [ΔΥ/Υ] = 0.2 / 0.04 =5
115
Exercise 5

b)
For the elasticity of advertising expenditure (εΜ):
 The Chairman wishes to increase advertising expenditure in
order for the sales to remain at last year’s levels.
 Reduction of income by 6% (ΔΥ/Υ=-0.06)  Reduction in
sales by factor 5*6%=30% (εy = 5 = [ΔQ/Q] / [ΔY/Y])
 Therefore sales from Q they become Q’ = ((1-0.3) Q’=0.7Q
without advertising
 In order to restore the previous level, an increase is needed
by
 [(Q-Q’/Q’]% = 0.3Q/0.7Q  [ΔQ/Q] = 42.86%



If this increase takes place with additional advertising
expenditure (ΔΜ/Μ) 15%, then
εΜ = ΔQ/Q / ΔΜ/Μ = 42.86% / 15% = 2.86
116
Exercise 6


a)
This function is of Cobb-Douglas form, therefore it
can be directly concluded that:
[∂Q / ∂Pa] * [Pa/Q] = -1.1
[∂Q / ∂Pb] * [Pb/Q] = 0.5
[∂Q / ∂Ma] * [Μa/Q] = 3.8
[∂Q / ∂Mb] * [Μb/Q] = 2.5
[∂Q / ∂Y] * [Y/Q] = 1.9
b)
 [∂Q/Pb] *[Pb/Q] = 0.5  A and B are substitutes
(positive elasticity). An increase of the price of B
leads to increase of demand of A, and the reverse.

117
Exercise 6










c) Positive elasticity with respect to Ma and Mb. The
advertisement of B benefits also its substitute.
d)
∂Y/Y = -0.05
∂Q/Q has to be estimated
So: [∂Q/∂Y] * [Y/Q] = 1.9  ∂Q/Q = -1.9 * 0.05 =
-0.095 or -9.5%
For the elasticity of Pa:
εPa = -1,1  [ΔQ / ΔPa] * [ Pa / Q] = -1.1 
[Pa / ΔPa] * [ΔQ / Q] = -1.1 
[ΔPa/Pa] * [1/-0.095]=1/-1.1
[ΔPa / Pa] = (-0.095) / -1.1 = 8.63
118
Exercise 6
For the elasticity of the advertising
expenditure for A:
 εMΔ = 3.8  [ΔQ / ΔΜ] * [Μ / Q] = 3.8 
 [M / ΔΜ] * [ΔQ / Q] = 3.8 
 [Μ / ΔΜ] * [1 / (0.095)] = 1/3.8 
 [ΔΜ / Μ] = (-0.095) / 3.8 = -2.5

Summarizing:
 In order to [ΔQ / Q] = + 0.095 (i.e. for Q to
remain unchanged),
 then, either [ΔPa / Pa] = + 0.0863
 or [ΔΜ / Μ] = -0.025
119
Exercise 7
P = 200 – 0.00003Q
 TC = 7,812,500 + 100Q + 0.00002Q2

a) K = P * Q – TC = (200 – 0.00003Q)*Q
– (7,812,500 + 100Q + 0.00002Q2). 
 K = 100Q – 0.00005Q2
 - 7,812,500

120
Exercise 7

Calculating the derivative with respect to quantity
Q:

∂K / ∂Q = 100 – 0.00001Q = 0  Q*=1,000,000
units

For the price and the TC at this quantity:

P = 200 – 0.00003Q = 200 – 0.00003*1,000,000
= 170

TC = 7,812,500 + 100Q + 0.00002Q2 =
127,812,500
121
Exercise 7
b)
 AC = TC / Q = (7,812,500 / Q) + 100 + 0.00002Q
 ∂AC/∂Q = 0  Q* = 625,000 units, the quantity
that minimizes cost per unit of output


c) According marginal analysis  MC = MR
MC = ∂TC / ∂Q = 100 + 0.00004*Q (=625,000) =
125
 TR = (200 – 0.00003Q)*Q και ∂TR/∂Q = MC 
200 – 0.00006Q=125  Q*=1,250,000 units
 P = 200-0.00003*1,250,000 = 162.5

122
Exercise 7

What can be observed? By doubling the
production units, Q* is also doubled. If the
production units were 3, then Q is,
respectively, 3Q*.

The economies of scale are depleted at
625,000

With two identical units, we shall necessarily
have equal production in these two, while
optimization requires that production takes
place at the point of the minimum average
cost.
123
Exercise 8
TCL = 3,000,000 + 25QL
 TCs = 200Qs + 0.05Q2s

Profits of small enterprises = Ks = P*Qs –
Cost = P*Qs – 200QS – 0.05Qs2
 Then we take the derivative with respect
to Qs
 [∂Ks/∂Qs] = P -200 – 0.1 Qs = 0  Qs =
10P -2,000

124
Exercise 8
b) QL = Q – Qs = 23,000 – 30P – 10P + 2,000
QL = 25,000 – 40P
c) KL = P*QL - TCL = P* QL – 3,000,000 – 25 QL
= P (25,000 – 40P) – 3,000,000 -25 (25,00040P)

∂KL / ∂P = … = 0  25,000 – 80P + 1,000
= 0
P*=325
 QL= 25,000-40*325  QL = 12,000 units

125
Exercise 8
d)
 Qs = 10P-2,000 = 10*325-2,000  Qs=1,250
units


Sectoral demand: Q=23,000-30(325) =
13,250 units and since QL=12,000 units ,
the QL= 1,250 units.
126
Exercise 9
a) ερ = [ΔQ/ΔP] * [P/Q] = -2.5
Then:
 -2.5 = [ΔQ / 30] * [150 / 5,000]  …  ΔQ =
2,500 units




Total sales of company A, in January, are = 5,000 +
2,500 = 7,500 units
For February, 18,000-7,500 = 10,500 laundries of
type Q41 are left.
Obviously, it will have to follow such a policy. The
issue however, in which price. What is asked, in
other words, is ΔP.
127
Exercise 9
= -2.5  [ΔQ/ΔP] * [P/Q] =
2.5 [(10,500-5,000)/ΔP] =[150/5,000] = 2.5  …  ΔP = -66
 ερ

Therefore, price, from € 150, becomes
(150-66=) €84, under which the company
will sell the additional 10,500 pieces in
February.
128