9781118041581

The demand equation can be used to test the effect of changes in any of

the explanatory variables. From Equation 3.2, we see that

1. For each point increase in the income index, 3 additional seats will be
   sold.


2. For each $10 increase in the airline’s fare, 20 fewer seats will be sold.


3. For each $10 increase in the competitor’s fare, 10 additional seats will
   be sold.

Each of these results assumes the effect in question is the onlychange that occurs;

that is, all other factors are held constant. In fact, the total changein demand

caused by simultaneous changes in the explanatory variables can be expressed as

[3.3]

where means “change in.” Thus, if income increases by 5 index points while

both airline prices are cut by $15, we find Q 3(5) 1(15) 2(15) 

30 seats. Your airline would expect to sell 30 additional seats on each flight.

¢Q 3 ¢Y 1 ¢P 2 ¢P,

80 Chapter 3 Demand Analysis and Optimal Pricing

CHECK

STATION 1

Use Equation 3.3 to compute the change in sales, Q, that will result from Y8,

P12, and P20.

The Demand Curve and Shifting Demand

Suppose that, in the immediate future, regional income is expected to remain

at 105 and the competitor’s fare will stay at $240. However, your airline’s fare

is not set in stone, and you naturally are interested in testing the effect of dif-

ferent possible coach prices. Substituting the values of Y and Pinto Equation

3.2’s demand function, we find that

[3.4]

Like the basic demand equation facing the microchip producer in Chapter 2,

Equation 3.4 relates the quantity of the good or service sold to its price. Here,

however, it is important to remember that, in the background, all other factors

affecting demand are held constant (at the values Y 105 and P240). Of

course, it is a simple matter to graph this demand equation as a demand curve.

(Do this yourself as practice.) As usual, the demand curve is downward sloping.^5

 580 2P

Q 25 3(105)1(240)2P,

(^5) We can graph the demand curve(by putting quantity and price on the respective axes), but we
cannot graph the demand function(because this involves four variables and we do not have four
axes). Thus, graphing a particular demand curve requires holding all other factors constant.
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