Presentation Transcript

1. Welcome to BA 445 Managerial Economics Getting acquaintedWhat is Managerial Economics? Managerial Economics blends intermediate microeconomics, game theory, and industrial organization to help managers make profitable decisions. It emphasizes the rationality and logic of decisions, and so differs from the psychological and sociological problems in Organizational Behavior (BA 366). Managerial Economics also emphasizes formulating and anticipating changes in decision problems, and so differs from solving fully-formed, fixed decision problems in Quantitative Analysis (BA 452). A.1 Demand and Supply
2. Welcome to BA 445 Managerial Economics Getting startedRead and bookmark the online course syllabus: http://faculty.pepperdine.edu/jburke2/ba445/index.htm It provides review questions for each lesson, and serves as a contract specifying our mutual obligations. (You may need Internet Explorer.) In particular, note: Linear Algebra (solve 2 equations for 2 variables), Calculus (take a derivative), and Introduction to Microeconomics are prerequisites, so review as needed. Before each class meeting, download and read the PowerPoint lesson, available under the “Schedule” link. A.1 Demand and Supply
3. Readings Readings For background or for an alternative description of the concepts in the following PowerPoint slides, I recommend Baye 6th edition or 7th edition, Chapter 2 A.1 Demand and Supply
4. Overview Overview A.1 Demand and Supply
5. Overview Part A OverviewDemand and Supply Analysis from Part A helps managers make profitable decisions when there are impersonal markets of large numbers of customers and workers and, sometimes, of firms. Game Theory in Parts B and C completes demand and supply analysis when personal decisions interact. A.1 Demand and Supply
6. Overview For example, when merchants try to attract tourist shoppers, there may be many potential destinations and vacationers competing in a market, with market price determined by aggregate supply and demand. But once Carlos sets up a stall selling Foakleys (Fake Oakleys) outside the Tijuana Wax Museum, he becomes tied to Aleisha and the few other tourists walking by his stall, and the merchant sets his prices separately from the worldwide competitive market for Foakleys by bargaining with those tourists. A.1 Demand and Supply
7. Overview Lesson OverviewEach of the lessons in the three parts of the course are broken into a few individual topics. Often, each topic contains one question and answer to help you prepare for your exam. Lesson A.1 (the first lesson in Part A) divides into 4 topics. A.1 Demand and Supply
8. Overview A.1 Demand and Supply
9. Demand Curves Demand Curves A.1 Demand and Supply
10. Overview Demand Curves show the amount a good that consumers are willing to buy at alternative prices when those prices cannot be changed by any single buyer. For example, oranges sold in a popular grocery have a demand curve since many buyers compete to buy. But a right-handed sequined glove worn by Michael Jackson has no demand curve since so few of his fans would want one that each potential buyer can negotiate price. Demand Curves A.1 Demand and Supply
11. The Demand Curve The demand curve is typically downward sloping. There are exceptions, like when poor people eat more beans when the price of beans increases from $0.10 per hundred calories to $0.20 per hundred calories because they can no longer afford to add any pork (selling for $1.00 per hundred calories) and so must add even more beans to avoid loosing weight. Demand Curves Quantity Price A.1 Demand and Supply
12. The Inverse Demand Cuve Alternative reading of demand, with price a function of quantity. Example: Demand Function for Good X: Qx= 10 – 2Px Inverse Demand Function for Good X: 2Px = 10 – Qx Px= 5 – 0.5Qx Demand Curves Quantity Price A.1 Demand and Supply
13. Demand Curves Demand shifters Since the demand curve only describes the relation of demand for a good to its own price, demand shifts when there is a change in any other factor that affects demand. Income An increase in consumer income increases demand for normal goods (like meat for the typical middle-class consumer) An increase in consumer income decreases demand for inferior goods (like beans) Prices of Related Goods An increase in the price of another good increases demand for a [gross] substitute good (like Windows computers and Apple computers) An increase in the price of another good decreases demand for a [gross] complement good (hardware and software) (I’ll explain the “gross” later.) A.1 Demand and Supply
14. Demand Curves AtoB: Increase inquantity demanded Price 10 6 4 7 Quantity Change in Quantity Demanded When computer demand changes with the price of computers A B D0 A.1 Demand and Supply
15. Demand Curves 6 D1 13 7 Change in Demand Curve When computer demand changes with decreased software price D0 to D1: Increase in Demandfor computers. Price D0 Quantity A.1 Demand and Supply
16. Demand Curves Consumer Surplus is the happiness left over after a consumer buys a good. Sellers measure consumer surplus then try to capture some or all of it by changing their marketing. For example, suppose Disney determined that typical customers value a day at Disneyland at $160. Suppose also that the admission price to Disneyland is currently $140, so there is currently $20 consumer surplus. Disney would then raise its admission price by $20 to capture all of the consumer surplus. A.1 Demand and Supply
17. Demand Curves Getting a good deal means large consumer surplus. You got a lot of bang for the buck! Total value greatly exceeds the total amount paid. Consumer surplus is large. A.1 Demand and Supply
18. Demand Curves Getting a fair deal means small consumer surplus. Disneyland is fun, but they drive a hard bargain! I almost decided not to go! They tried to squeeze the very last cent from me! Total amount paid is close to total value. Consumer surplus is low or zero. A.1 Demand and Supply
19. Demand Curves Getting a bad deal or making a mistake means negative consumer surplus. Economics is only appropriate when mistakes are rare. Little children (or stupid big children) can make frequent mistakes, so their parents make decisions for them. You can only have one candy. Don’t bounce the basketball off the house! A.1 Demand and Supply
20. Demand Curves Computing surplus from demand in discrete units (like numbers of refrigerators). Price Consumer Surplus: The value received but not paid for. For demand P = 10-2Q and price P = 2, consumer surplus = (8-2) + (6-2) + (4-2) = $12. 10 8 6 4 2 D 1 2 3 4 5 Quantity A.1 Demand and Supply
21. Demand Curves Value of 4 units = $24 Consumer Surplus = $24 - $8 = $16 Computing surplus from demand in continuous units (like pounds of meat). Price $ 10 8 6 4 Expenditure on 4 units = $2 x 4 = $8 2 D 1 2 3 4 5 Quantity A.1 Demand and Supply
22. Supply Curves Supply Curves A.1 Demand and Supply
23. Overview Market Supply Curves show the amount a good that suppliers are willing to supply at alternative prices when those prices cannot be changed by any single supplier. For example, mall prices are outside each seller’s control when enough sellers compete to sell. Supply Curves A.1 Demand and Supply
24. Market Supply Curves apply when producers are price takers, in perfect competition with other firms producing products that are identical or perfectly substitutable to consumers. Price makers (like Monopolists) choose their price, and do not have supply curves. Law of Supply: The supply curve is upward sloping. That “Law” has no exceptions. Supply Curves Quantity Price A.1 Demand and Supply
25. Supply Curves Supply shifters When supply is affected by factors other than its own price. Input prices (wages) direction? --- other examples? Prices of production substitutes or complements (like cars and trucks) direction? --- other examples? Technology (marginal cost) or government regulations direction? Number of firms Entry (like coffee houses) --- other examples? Exit (like airlines) --- other examples? A.1 Demand and Supply
26. Supply Curves Price S0 20 10 5 Quantity 10 Change in Quantity Supplied When computer supply depends on the price of computers AtoB: Increase in quantity supplied B A A.1 Demand and Supply
27. Supply Curves S1 Price S0 8 6 Quantity 5 7 Change in Supply When computer supply depends on wages. Direction? --- Other examples? S0to S1: Decreasein supply A.1 Demand and Supply
28. Supply Curves Producer Surplus When producers receive more than necessary to induce them to produce a good. Producer surplus is the source of profit when producers are in perfect competition with each other (when they have supply curves). A.1 Demand and Supply
29. Supply Curves The continuous case Price S0 P* Q* Quantity A.1 Demand and Supply
30. Competitive Markets Competitive Markets A.1 Demand and Supply
31. Competitive Markets Overview Competitive Markets require enough competing buyers and competing sellers so prices are outside of everyone’s control. At the other extreme, one buyer and one seller negotiate price. A.1 Demand and Supply
32. Competitive Markets Question: Suppose Aleisha is willing to pay up to $59 for a pair of shoes. Brad, to pay $44; Claudia, $34.01; Darren, $24; Edwina, $10. Suppose Andrew is willing to sell down to $8 for a pair of shoes. Betty, to sell $20; Carlos, $34; Donna, $48; Engelbert, $62. Compute the competitive-equilibrium price of shoes if all 10 people trade shoes and money on eBay? (Ignore postage costs.) Alternatively, suppose Aleisha and Carlos do not use eBay, but Aleisha walks by Carlos’s trading stall outside the Tijuana Wax Museum. Compute the gains if Aleisha and Carlos trade a pair of shoes for money. Compute the price of shoes if they divide the gains 50-50. A.1 Demand and Supply
33. Competitive Markets Answer: Competitive Markets have Many Independent Buyers ... Aleisha is willing to pay up to $59 for a pair of shoes. Brad, $44; Claudia, $34.01; Darren, $24; Edwina, $10. Aleisha Brad Claudia Darren Edwina A.1 Demand and Supply
34. Competitive Markets … and Many Independent Sellers Andrew is willing to sell down to $8 for a pair of shoes. Betty, $20; Carlos, $34; Donna, $48; Engelbert, $62. Aleisha Engelbert Brad Donna Claudia Carlos Darren Betty Edwina Andrew A.1 Demand and Supply
35. Competitive Markets Demand equals Supply determines Competitive Price At some price between $34 and $34.01, Aleisha, Brad and Claudia buy 1 pair each from Andrew, Betty and Carlos. Aleisha Engelbert Brad Donna Claudia Carlos Darren Betty Edwina Andrew A.1 Demand and Supply
36. Competitive Markets Bargaining Occurs with One Buyer and One Seller If Aleisha and Carlos meet separate from the competitive market, then the gains if they were to trade a pair of shoes is the difference between willingness to pay and willingness to sell. Aleisha is willing to pay up to $59 for a pair of shoes. Carlos is willing to sell down to $34 for a pair of shoes. The gain from trade is the difference, $25 = $59-$34. If Aleisha and Carlos divided the gains from trade 50-50, then each gets $12.50 gain, meaning Aleisha pays price $46.50 = $59.00-$12.50, and Carlos receives price $46.50 = $34.00+$12.50 A.1 Demand and Supply
37. Market Equilibrium Market Equilibrium A.1 Demand and Supply
38. Market Equilibrium Overview Competitive Market Equilibrium is the price that equates supply and demand. At any lower price, shortage raises the price; and at any higher price, surplus lowers the price. A.1 Demand and Supply
39. Market Equilibrium S D Market Equilibrium The Pricethat equates supply and demand Why predict that price? Price Quantity A.1 Demand and Supply
40. Market Equilibrium Market Equilibrium The Price (P) that equates supply and demand QxS= QxD No shortage or surplus It is a steady state (rest point) when shortage (D > S) drives prices up, and surplus (D < S) drives prices down. A.1 Demand and Supply
41. Graphing the equilibrium story: If price is too low, like the initial price of hybrid cars … Other examples? Market Equilibrium S 7 6 5 D Shortage 12 - 6 = 6 6 12 Price Quantity A.1 Demand and Supply
42. If price is too high, like airline prices just after 9/11 …Other examples? Market Equilibrium Surplus 14-6 = 8 S 7 8 9 D 6 14 9 Price Quantity A.1 Demand and Supply
43. Market Equilibrium Market Equilibrium does not occur when the government intervenes to change prices, like keeping child-costs low (through tax credits that subsidize the “consumption” of children). Managerial economics treats children like other commodities, with the family as the “consumer”. Managerial economics deals with families that make a rational choice about the number of children. They never make the mistake of having more children than they can afford. A.1 Demand and Supply
44. Market Equilibrium Since poverty levels in the U.S. depend on the number of children in a household, the U.S. assumes having children is not a rational choice. Otherwise, having more children makes you wealthy, not poor and needing government subsidies. Here are 2013 federal poverty levels used as guidelines for government-subsidized health programs. A.1 Demand and Supply
45. Summary Summary A.1 Demand and Supply
46. Summary The lesson uses demand and supply curves, and so all results are only for perfectly competitive markets. One purpose is to help managers in competitive markets predict changes in equilibrium, so they can plan their future. Another purpose is to exercise the use of demand curves, which are used even when markets are not competitive. A.1 Demand and Supply
47. BA 445 Managerial Economics End of Lesson A.1 A.1 Demand and Supply