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

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.