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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 Two. Class One. Monday, September 10 11:00-11:50 Fottrell (AM). Announcement.

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

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

  2. Class One Monday, September 10 11:00-11:50Fottrell (AM)

  3. Announcement • We are looking for 2 students from 2nd Commerce to come forward for the Staff/Student Liaison Committee; as well as two students from the B.Comm Intl and BSc in BIS classes.Contact: • Mairéad MacKenzie Administrative Assistant Commerce Faculty NUI, Galway Phone: 091 492612 Fax:     091 494546 E-mail: mairead.mackenzie@nuigalway.ie

  4. Good morning • How was your weekend? • I am fine • I am adjusting • This morning, I thought I saw a 6-7 year old boy driving!!!! • Oooops, the wrong side of the car!!!

  5. I did not receive any questions from you on Chapter One, so let’s practice • If the interest rate is 7% and cash flows are $4,000 at the end of year one and $6,000 at the end of year two, then the present value of these cash flows is • A) $8,979. • B) $11,149. • C) $309. • D) $9,346. • The answer is A

  6. Answer • PV = (4000/1.07) + (6000/(1.07)2)

  7. Let’s practice • If the interest rate is 4%, the present value of $1000 received at the end of 3 years is • A) $970. • B) $1,040. • C) $889. • D) $961. • The answer is C

  8. Answer • PV = 1000/(1.04)3

  9. Let’s practice • Maximizing the firm's current profits is the same as maximizing the lifetime value of the firm when the • A) growth rate in profits is larger than the interest rate. • B) growth rate in profits and the interest rate are equal. • C) interest rate is constant and is smaller than the growth rate in profits. • D) interest rate is larger than the growth rate in profits and both are constant. • The answer is D

  10. What is the demand curve for managerial textbook at NUI-Galway? It is a curve that shows the number of textbooks that will be purchased at alternative prices, holding other factors constant. Chapter 2: You have already seen these topics in other courses. You did not send me any questions . So we move fast. D

  11. Quantity What is the law of demand? • It states that, all else being constant, the demand curve is downward sloping. Price

  12. What factors other than price affect the demand for managerial textbook? • Number of students in managerial class • Income (budget) of students • Tuitions and fees at NUI (the price of complements) • What else? • If the above factors change the demand curve will shift.

  13. What is a demand function? • It is an equation representing the demand curve Qxd = f(Px ,PY , M, H,) • Qxd = quantity demand of good X (textbooks). • Px = price of good X (textbooks). • PY = price of a related good (tuitions). • M = income. • H = any other variable affecting demand.

  14. What is an inverse Demand Function • Price as a function of quantity demanded. • Example: • Demand Function • Qxd = 10 – 2Px • Inverse Demand Function: • 2Px = 10 – Qxd • Px = 5 – 0.5Qxd

  15. Price A to B: Increase in quantity demanded 10 6 4 7 Quantity What changes the quantity demanded? A Quantity demanded increased because price decreased. B D0

  16. Change in Demand Price 6 D1 D0 Quantity 7 13 D0 to D1: Increase in Demand Demand increased because tuitions went down.

  17. Let’s practice • Which of the following is most likely to shift the demand curve for electricity to the left? • A) Consumers becoming more energy conscious. • B) An increase in income. • C) A decrease in the price of electricity. • D) An increase in the price of natural gas, a substitute source of energy. • The answer is A

  18. What is the consumer surplus? • The value consumers get from a good but do not have to pay for. Or, • The difference between the highest price consumers will pay and the actual market price.

  19. I got a great deal! • That company offers a lot of bang for the buck! • Dell provides good value. • Total value greatly exceeds total amount paid. • Consumer surplus is large.

  20. I got a lousy deal! • That car dealer drives a hard bargain! • I almost decided not to buy it! • They tried to squeeze the very last cent from me! • Total amount paid is close to total value. • Consumer surplus is low.

  21. What is consumer surplus? Consumer Surplus= the value received but not paid for = (8-2) + (6-2) + (4-2) = $12. Price 10 8 6 4 Market price =2 D 1 2 3 4 5 Quantity

  22. Total Value of 4 units=area under the demand curve= $24 Consumer Surplus = $24 - $8 = $16 Consumer Surplus:The Continuous Case Price $ 10 8 6 4 Expenditure on 4 units = $2 x 4 = $8 Market price =2 D 1 2 3 4 5 Quantity

  23. Managerial Economics: Week Two, Class 2 • Week One- Class 2 • Tuesday, September 11 • Cairness • In class • Please turn off your phones. • Have paper, pencil, calculator, notes with you

  24. Teaching Assistant • Darragh Flannery • d.flannery@nuigalway.ie • Office: 234 , St. Anthony's • Office Hours beginning September 24 • Mondays • 10 AM till 1 PM and 3 PM till 6 PM

  25. The first set of Aplia assignments are up • You have till September 25 to complete the assignment • Do the practice questions first • There are 4 graded problems and 4 multiple choice question. • You can work on it a little at a time

  26. You will need to purchase the book as soon as possible. • Don’t have to buy from the bookshop • You will need a copy of a chapter in another book later • I have left a copy of the first 3 chapters of the book at the media center (printing services) in this building.

  27. Price S0 Quantity What is the Supply Curve for managerial textbook at NUI-Galway? • The supply curve shows the number of a textbooks that will be supplied at alternative prices.

  28. What is the law of supply? • All else being constant, the supply curve is upward sloping.

  29. What are some of the other determinants of supply besides price? • Price of paper • Technology • Tax on books • Tariff on imported ink • Price of accounting book (substitute in production) • What else?

  30. What is the Supply Function? • An equation representing the supply curve: QxS = f(Px ,PR, W, H,) • QxS = quantity supplied of books. • Px = price of book. • PR = price of accounting book • W = price of inputs (e.g., wages). • H = other variable affecting supply.

  31. What is an inverse Supply Function? • Price as a function of quantity supplied. • Example: • Supply Function • Qxs = 10 + 2Px • Inverse Supply Function: • 2Px = 10 + Qxs • Px = 5 + 0.5Qxs

  32. Price S0 20 10 5 Quantity 10 Change in Quantity Supplied A to B: Increase in quantity supplied B Quantity supplied will increase only if price increases A

  33. Price S0 S1 8 Quantity 5 7 Change in Supply S0 to S1: Increase in supply Supply will increase because of a change in a factor other than price of the good.

  34. Is the following statement true or false? • An additional tariff on imported wine from France will decrease the quantity of French wine supplied in Ireland. • False • An additional tariff on imported wine from France will decrease the supply of French wine in Ireland.

  35. Let’s practice • Graphically, a hurricane that destroys 30 percent of the orange trees in Florida will cause the supply curve for oranges to • A) shift rightward. • B) shift leftward. • C) become flatter. • D) become steeper. • The answer is B

  36. Let’s practice • Holding all else constant, as additional firms leave an industry • A) more output is available at each given price. • B) less output is available at each given price. • C) the same output is available at each given price. • D) Unable to tell. • Answer: B

  37. What is producer surplus? • The amount producers receive in excess of the amount necessary to induce them to produce the good. The points on the supply curve represent the price necessary to induce suppliers to supply = marginal cost Price Producer surplus = P – marginal cost S0 P* Q* Quantity

  38. What is market equilibrium? • Balancing supply and demand QxS = Qxd • Steady-state

  39. If price is too low… S 7 6 5 D Shortage 12 - 6 = 6 6 12 Price Quantity

  40. If price is too high… Surplus 14 - 6 = 8 S 7 8 9 D 6 14 8 Price Quantity

  41. Managerial Economics • Week Two, Class 3 • Thursday, September 13 • 15:10-16:00 • Tyndall

  42. Don’t forget to register for Aplia • Directions on my course contract at • www.mareitta.edu/~khorassj • Assignment 1 is due September 25

  43. Comparative Static Analysis • shows how the equilibrium price and quantity will change when a determinant of supply or demand changes.

  44. Event: The WSJ reports that the prices of PC components are expected to fall by 5-8 percent over the next six months. Scenario 1: You manage a small firm that manufactures PCs. How can managers use the comparative static analysis to make decisions?

  45. As a manager of a small PC maker, you will need to • Step 1: Look for the “Big Picture.” • Step 2: Organize an action plan (worry about details).

  46. Step 1: Consider the market for PCs • Price of components are expected to go down • Cost of production of PCs is expected to go • down • Supply of PCs is expected to go • up

  47. Big Picture: Impact of decline in component prices on PC market Price of PCs S S* P0 P* D Quantity of PC’s Q* Q0 Price of PCs is expected to go down and quantity of PCs is expected to go up

  48. Big Picture Analysis: PC Market • Equilibrium price of PCs will fall, and equilibrium quantity of computers sold will increase. • Use this to organize an action plan • contracts/suppliers? • inventories? • human resources? • marketing? • do I need quantitative estimates?

  49. How can managers use the comparative static analysis to make decisions? • Event: The WSJ reports that the prices of PC components are expected to fall by 5-8 percent over the next six months. • Scenario 2: You manage a small software company.

  50. Scenario 2: Software Maker • Step 1: Use analysis like that in Scenario 1 to deduce that lower component prices will lead to • a lower equilibrium price for computers. • a greater number of computers sold. • Step 2: How will these changes affect the “Big Picture” in the software market?

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