Players%20Theater%20Company

1
Players Theater Company

• Should the theater cut prices?
• The theater has 500 seats about 200 are filled
  in a typical performance
• The PTC has been charging 30/seat

2
Demand Function

• Q f(X1, X2,, Xn)
• Example
• Q 117 6.6P 1.66Ps 3.3 Pr .0066I

3
Demand Curve
Ticket Pricein Dollars
Income 50,000 Price of Symphony tickets
50 Price of meal at nearby restaurant 40
60
30
Demand
Quantity of PTC Tickets
200
400
4
Demand Curve
Ticket Pricein Dollars
Income 50,000 ? 51,000 Price of Symphony
tickets 50 Price of meal at nearby restaurant
40
61
60
30
Quantity of PTC Tickets
200
400
406.6
5
Elasticity of Demand

• Definition
• ? -( change in Q) / ( change in P)
• Calculating

6
Arc Elasticity
Ticket Pricein Dollars
60
40
30
Quantity of PTC Tickets
200
133
400
7
Estimates of Price Elasticities

• Sugar 0.31
• Potatoes 0.31
• Tires 1.20
• Electricity 1.20
• Haddock 2.20
• Movies 3.70

8
Total Revenue, Marginal Revenue

• Total Revenue P x Q
• Marginal Revenue the change in total revenue
  associated with selling one more unit of the
  product

9
Ticket Price,Marginal Revenue In Dollars
? gt 1
? 1
30
Demand
Q
Total Revenuein Dollars
MR
Total Revenue
Q
10
Other Factors Influencing Demand

• Prices of related products
• Complements vs. Substitutes
• Defining a Market
• Cross Price Elasticity of Demand

11
Estimates of Cross Elasticities

• Electricity and Natural Gas 0.20
• Beef and Pork 0.20
• Natural Gas and fuel oil 0.44
• Margarine and Butter 0.81

12
Other Factors Influencing Demand

• Income
• Normal vs. Inferior goods
• Income Elasticity of demand

13
Estimates of Income Elasticities

• Flour -.36
• Natural Gas 0.44
• Margarine -0.20
• Milk 0.07
• Dentist Services 1.41
• Restaurant Consumption 1.48

14
Advanced Issues

• Network Effects
• Product Attributes
• Product Life Cycles

IndustryQuantityof output
Intro
Decline
Growth
Maturity
Time
15
Demand Estimation

• Interviews
• Price Experimentation
• Statistical Analysis
• Omitted Variables Bias
• Multicollinearity
• Identification Problem

16
The Identification Problem

• Suppose that this is a history of recent price
  and quantity changes in our industry

Year Price Quantity
2004 25 4.5 million
2005 29 5.25 million
2006 22 7 million
17
The Identification Problem
Price in dollars
2005
29
2004
25
2006
22
Industry output In millions
4.5
5.25
7
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