1 / 55

Welcome to EC 209: Managerial Economics- Group A By: Dr. Jacqueline Khorassani

Welcome to EC 209: Managerial Economics- Group A By: Dr. Jacqueline Khorassani. Week Three. Class One. Monday, September 17 11:10-12:00 Fottrell (AM) The textbook is now available at the bookshop Don’t forget that the first aplia assignment is due before September 25

meris
Download Presentation

Welcome to EC 209: Managerial Economics- Group A By: Dr. Jacqueline Khorassani

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Welcome to EC 209: Managerial Economics- Group ABy:Dr. Jacqueline Khorassani Week Three

  2. Class One Monday, September 17 11:10-12:00Fottrell (AM) The textbook is now available at the bookshop Don’t forget that the first aplia assignment is due before September 25 It is the week 4 assignment Remember that if you don’t ask questions, I assume you know. I did not get any questions on this week’s study guide. So,I will briefly go over what you must know.

  3. What does the elasticity measure? • It measures how responsive (sensitive) is variable “G” to one percent change in variable “S” If EG,S > 0, then S and G are directly related. If EG,S < 0, then S and G are inversely related. If EG,S = 0, then S and G are unrelated.

  4. How can elasticity be shown (measured) using calculus? • Suppose G = f (S), then Where dG/dS is the partial derivative of G with respect to S

  5. What is the own price elasticity of demand? • Measures how sensitive the quantity demand is to one percent change in price.

  6. How is it measured? • Is it negative or positive? • Negative, according to the “law of demand.”

  7. Let’s practice If quantity demanded for sneakers falls by 12% when price increases 4%, we know that the absolute value of the own-price elasticity of sneakers is • A) 0.3. • B) 0.8. • C) 3.0. • D) 3.3. • Answer: C

  8. What is the difference between elastic, inelastic and unitary elastic demands? Elastic: Inelastic: Unitary elastic:

  9. How does elasticity change along a linear demand curve? • At any point on demand, the absolute value of elasticity = lower portion of demand /upper portion of demand At point A: What is the elasticity at point C? Infinity P C A What is the elasticity at point B? Zero B Q

  10. How does elasticity change along a linear demand curve? • The lower half of demand is inelastic • The upper half of demand is elastic • Mid point of demand is unitary elastic P Elastic C Unitary elastic // A Inelastic // B Q

  11. How is a perfectly elastic demand curve different from a perfectly inelastic demand curve? Price Price D D Quantity Quantity %ΔP = 0 %Δ Q = 0

  12. How does the own price elasticity of demand relate total revenue? P TR 100 30 40 50 Q Q 0 10 20 0

  13. Elasticity, Total Revenue and Linear Demand P TR 100 80 800 30 40 50 Q Q 0 10 20 10 30 40 50 0 20

  14. Elasticity, Total Revenue and Linear Demand P TR 100 80 1200 60 800 30 40 50 Q Q 0 10 20 30 40 50 0 10 20 In the elastic portion of demand, as you lower the price, TR goes up

  15. Elasticity, Total Revenue and Linear Demand P TR 100 80 1200 60 40 800 30 40 50 Q Q 0 10 20 30 40 50 0 10 20

  16. Elasticity, Total Revenue and Linear Demand P TR 100 80 1200 60 40 800 20 30 40 50 Q Q 0 10 20 30 40 50 0 10 20 In the inelastic portion of demand, as you lower the price, TR goes down.

  17. Elasticity, Total Revenue and Linear Demand P TR 100 Elastic 80 1200 60 40 800 20 30 40 50 Q Q 0 10 20 30 40 50 0 10 20 Elastic

  18. Elasticity, Total Revenue and Linear Demand P TR 100 Elastic 80 1200 60 Inelastic 40 800 20 30 40 50 Q Q 0 10 20 30 40 50 0 10 20 Elastic Inelastic

  19. Elasticity, Total Revenue and Linear Demand P TR 100 Unit elastic Elastic Unit elastic 80 1200 60 Inelastic 40 800 20 30 40 50 Q Q 0 10 20 30 40 50 0 10 20 In the meddle of demand, TR is at its max Elastic Inelastic

  20. Managerial Economics • Week Three, Class 2 • Tuesday, September 18 • 15:10-16:00 • Cairnes • Remember: If you don’t ask, I assume you know.

  21. About Aplia Assignments • 25% of grade • Fees = $20 • Need to be paid in 5 days or they kick you out of the program • I have no control over this • Course Key: R8WC-VRSZ-SCBQ • Assignment 1 is due before noon on September 25 • 5 grades question sets

  22. Let’s practice • Assume that the price elasticity of demand is -2 for a certain firm's product. If the firm raises price, the firm's managers can expect total revenue to: • a) Decrease • b) Increase • c) Remain constant • d) Either increase or remain constant depending upon the size of the price increase. • Answer: A

  23. How does the own-price elasticity related to marginal revenue? • What is marginal Revenue, MR? • Revenue resulting from selling one more unit of output • MR = ΔTR/ΔQ

  24. How does the own-price elasticity related to marginal revenue? • MR = P(1 + E)/E Suppose E < -1 which means |E| >1  (elastic), then MR is positive Suppose E = -1 which means |E|=1 then MR is zero Suppose E > -1  which means |E|<1 (inelastic), then MR is negative

  25. How does the own-price elasticity related to marginal revenue? • Between 0 to Q* demand is elastic and MR>0 • At Q* demand is unitary elastic and MR = 0 • Above Q* demand is inelastic and MR <0 Elastic MR >0 P Unitary elastic MR = 0 Inelastic MR <0 0 D Q Q* MR

  26. Which factors affect the own price ? • You need to study this one on your own. • PP 79-82 • Ask me questions

  27. Let’s practice • The demand for Adidas brand shoes is • A) more elastic than the demand for shoes in general. • B) less elastic than the demand for shoes in general. • C) equally elastic to the demand for shoes in general. • D) none of the above. • Answer: A

  28. Let’s practice • Lemonade, a good with many close substitutes, should have an own-price elasticity that is: • a) unitary. • b) relatively elastic. • c) relatively inelastic. • d) perfectly inelastic. • Answer: B

  29. What does the cross price elasticity of demand measure? It measures how sensitive the quantity demand for good X is to one percent change in the price of good Y If EQX,PY > 0, then X and Y are substitutes. If EQX,PY < 0, then X and Y are complements.

  30. Suppose that a firm sells two related good and the price ofone good changes; how can the cross price elasticity help us predict the changes in the total revenue? ΔR = change in total revenue, Rx = good X’s revenue, RY = good Y’s revenue

  31. What is the income elasticity? Measure the percentage change in quantity demand for good X as the income of consumer changes by one percent. If EQX,M> 0, then X is a normal good. If EQX,M < 0, then X is a inferior good.

  32. Uses of ElasticityExample 1: Pricing and Cash Flows (revenue) • According to an FTC Report by Michael Ward, AT&T’s own price elasticity of demand for long distance services is -8.64. • AT&T needs to boost revenues in order to meet it’s marketing goals. • To accomplish this goal, should AT&T raise or lower it’s price?

  33. Answer: Lower price! • Since demand is elastic, a reduction in price will increase quantity demanded by a greater percentage than the price decline, resulting in more revenues for AT&T.

  34. Example 2: Quantifying the Change • If AT&T lowered price by 3 percent, what would happen to the volume of long distance telephone calls routed through AT&T?

  35. Answer • Calls would increase by 25.92 percent!

  36. Example 3: Impact of a change in a competitor’s price • According to an FTC Report by Michael Ward, AT&T’s cross price elasticity of demand for long distance services is 9.06. • If competitors reduced their prices by 4 percent, what would happen to the demand for AT&T services?

  37. Answer • AT&T’s demand would fall by 36.24 percent!

  38. Interpreting Demand Functions • Mathematical representations of demand curves. • Example: • Where M is income

  39. What can you say about the relationship between good X and good Y? • X and Y are substitutes (coefficient of PY is positive). • Is X a normal or an inferior good? • X is an inferior good (coefficient of M is negative). • Holding price of Y and income constant, as price of X goes up by 1, quantity demanded for X goes ______ by ______. down 2

  40. Managerial Economics- Group A • Week Three- Class 3 • Thursday, September 20 • 15:10-16:00 • Tyndall • Aplia Assignment 1 • due before noon on Tuesday, September 25 • 25% of grade

  41. I received a question on how to calculate own elasticity when we have the demand function and only one price and one quantity • Remember • Suppose G = f (S), then Where dG/dS is the partial derivative of G with respect to S

  42. A General Linear Demand Functions Own Price Elasticity = (dQdx/dPx)*Px/Qx Income Elasticity= (dQdX/dM)*M/Qx Cross Price Elasticity= (dQdX/dPy)*Py/Qx

  43. Example: What is own elasticity if P = 1 • P = 5 – 1/2 Qd • What is this? • Inverse demand function • Need to change it to a demand function • ½ Qd = 5 – P • Qd = 10 - 2P. • Own-Price Elasticity = dQd/dP * P/Q = (-2)* P/Q • If P=1, then Q is • 8 (since 10 - 2 = 8). • Own price elasticity at P=1, Q=8: (-2)(1)/8= - 0.25.

  44. General Log-Linear Demand Function

  45. Example of Log-Linear Demand • ln(Qd) = 10 - 2 ln(P). • Own Price Elasticity: -2.

  46. P Q Graphical Representation of Linear and Log-Linear Demand P Elasticity varies along this demand curve Elasticity is constant along this demand curve D D Q Linear Log Linear

  47. Regression Analysis • Will not be covered at this time. • PP: 95 -109

  48. Let’s practice • Given a log-linear demand curve, we know that • A) demand is elastic at high prices. • B) demand is inelastic at low prices. • C) demand is unitary elastic at low prices. • D) the elasticity is constant at all prices. • Answer: D

  49. Chapter 4 • What are the properties of consumer preferences and what do they mean? • Completeness • More is Better • Diminishing Marginal Rate of Substitution? • Transitivity?

  50. Property 1: Completeness • Given the choice between 2 bundles of goods (A & B) • consumer must have an opinion, meaning that she should • prefers bundle A to bundle B: A  B; • or, prefers bundle B to bundle A: A  B; • or, be indifferent between the two: A  B.

More Related