1 / 46

Welcome to PMBA0608: Economics/Statistics Foundation

Engage in active learning during the Fall 2006 session on Economics and Statistics. Enhance understanding by participating in class discussions. Optimize your learning by reviewing assigned book sections ahead of time. Embrace interactive teaching methods to grasp concepts effectively.

roselynj
Download Presentation

Welcome to PMBA0608: Economics/Statistics Foundation

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 toPMBA0608: Economics/Statistics Foundation Fall 2006 Session 8: October 18 Eastern campus

  2. I prefer not to post the slides before each class…..why? 1) I would like to encourage you to • Think in class • Respond in class • Interact in class • Learn in class 2) I don’t know how much I will cover in class. 3) Reading the assigned sections of the book ahead of time is a good substitute for having the slides a head of time. 4) Don’t write everything down in class as the slides will be posted after class. 5) Write down what is not in the slide. 6) I have the slides numbered now. So you cans just refer to them by their numbers in your notes

  3. Do you smoke? P (male & smoking) = 2/18=0.11 P (male\smoker) =2/5=0.40 P (smoker\male) =2/11=0.18

  4. The table shows proportion of adults (in each category) who find the ads believable. (B) 18% of college grads find the ads believable (82% don’t, NB) (We are not saying that 18% of believers are college grads.) Discuss Assignment 31. Application 3.17, Page 110 of Stat

  5. 1. Application 3.17, Page 110 of Stat P (B\CG) = 0.18 P (CG) = 0.24 P(NB\CG) =0.82 P(B\C) =0.25 P (C)= 0.36 P(NB\C) = 0.75 Adult population P (B\NC) =0.27 P (NC) = 0.4 P (NB\NC)=0.73 Note: 27 percent and 27 percent is not 54%. It is 54 per 200 or 27 percent.

  6. 1. Application 3.17, Page 110 of Stat (Part a) • We know that P(CG ) = 0.24 • We also know that P (NB\CG) = 0.82 • We want to know P (NB & CG) • Conditional Probability • P(NB\CG)= P (NB & CG)/P (CG) • 0.82 = P (NB & CG) /0.24 • P (NB & CG)= 0.24 * 0.82 = 0.1968 0r 19.68%

  7. 1. Application 3.17, Page 110 of Stat (Part b) • P (NB\C)=? • P (NB\C) = 1- P (B\C) =1 – 0.25 = 0.75 or 75%

  8. 1. Application 3.17, Page 110 of Stat (Part c) • P (HG U H) = 0.4= P (NC) • P (B\NC) =0.27 • P (NC & B) =? • P (B\NC) = P (NC &B) /P (NC) • 0.27 = P (NC & B) / 0.4 • P (NC & B) = 0.27 * 0.4 = 0.108 or 10.8%

  9. 2. Application 3.19, Page 110 of Stat (categories are mutually exclusive)

  10. 2. Application 3.19, Page 110 of Stat • P(A) = 0.15 • P (AB & NA) = 0.4 0.03 is joint probability. You want the conditional probability) • P (AB\A) =? • P (AB\A) = P (AB & A) / P (A) • P (AB\A) = 0.03/0.15= 0.2 or 20%

  11. 3. Application 3.27, Page 115 of Stat (D= detection, ND =no Detection) P(D\A)=0.99 P (A) = 0.5 P (ND\A) =0.01 P (D\B) =0.95 P (B)= 0.3 P(ND\B = 0.05) P (D\C)=0.8 P (C) =0.2 P (ND\C) =.2

  12. 3. Application 3.27, Page 115 of Stat (D= detection, ND =no Detection) a) P(A\D) =? • P (A\D) = P (A & D)/ P (D) • P (A & D) = 0.5 * 0.99= 0.495 • P(D) = P (A & D ) + P (B & D) + P ( C & D) • P (D) = 0.495 + 0.3 * 0.95 + 0.2* 0.8 • P (D) = 0.495 + 0.285 + 0.16=0.94 • P (A\D) = 0.495/0.94 =0.5266 b) P (C\D) =P (C & D) / P (D) • P (C\D) = 0.16/0.94 = 0.1702

  13. 4. Exercise 3.31, Page 123 of Stat • a is a probability distribution because • P (x) is between 0 and 1 • ∑p (x) =1 • b is not a probability distribution because conditions 1 and 2 are not met. • c is not a probability distribution because condition 2 is not met

  14. P (theft) = 0.01, Value = $50,000 Let D = premium G =insurance company’s gain 5. Application 3.33, Page 123 of Stat E (G) = 0.99D + 0.01 (D-50000) 1000 = 0.99D +0.01D - 500 1500 = D

  15. Assignment 4(due on or before October 25) • Questions 1, 2, 6, Page 110 of Econ. • Questions 11 & 13, Page 111 of Econ.

  16. Next Class • Saturday, October 28 in Athens • Study • Chapter 4 of Stat • Chapter 23 of Econ

  17. Chapter 5 of Econ Book • Price of gas goes up by 10% • Do we buy more or less? • How much less? • Price of restaurant meals goes up by 10% • Do we buy more or less? • How much less? • We are more sensitive to changes in the price of restaurant meals than to changes in the price of gasoline.

  18. Price Elasticity of Demand • Measure of the price sensitivity of buyers • Ed = • Percentage change in quantity demanded as a result of 1% change in price. $ P1=$1000 P2=$800 D Q1=200 Q2 = 300 Computers

  19. Price Elasticity of Demand • Midpoint Formula Ed = = Ed = -[.40/.22] = -1.82 For every 1% decrease in price quantity demanded increases by 1.82% $ $1000 $800 D Q1 =200 Q2=300 Computers

  20. Degree of Sensitivity • Elastic: |Ed| > 1 • Unit: |Ed| = 1 • Inelastic: |Ed| < 1 • In our example |E| > 1, so demand for computers is elastic

  21. Let’s practice • When the price of milk is $2 per gallon, consumers buy 500 gallons. When the price rises to $3 per gallon, consumers buy only 400 gallons. What is the elasticity of demand and how would you classify it? • Ed = • Ed = -.22/.40 = -0.55 • Inelastic, since |E| < 1

  22. Let’s practice • Question 3a Page 110 • Price elasticity of demand is 0.2 • If price increases from $1.80 to $2.20, what happens to quantity demanded? • Ed = • -0.2 = • -0.2 = %ΔQ/0.2 %ΔQ = -0.04 or quantity demanded drops by 4%

  23. Some Estimated Price Elasticities of Demand • GoodPrice elasticity • Inelastic demand Eggs 0.1 Beef 0.4 Stationery 0.5 Gasoline 0.5 • Elastic demand Housing 1.2 Restaurant meals 2.3 Airline travel 2.4 Foreign travel 4.1

  24. Determinants of Elasticity • Number of substitutes • The greater the # substitutes, the greater the elasticity • The narrower the definition of the market, the greater the elasticity • Ex: Ecars < Echevys < Ecamaros

  25. Determinants of Elasticity 2. Item’s share of consumer budget • The greater the share of budget, the greater the elasticity • Ex: Ehousing is ______ than Esalt 3. Time • The longer the time horizon, the greater the elasticity • Ex: Gasoline Demand: ELR is ____ than ESR

  26. Determinants of Elasticity 4. Necessities have a lower price elasticity of demand than luxuries • Ex: E diamonds > E gasoline

  27. Extreme Cases of Price Elasticity • D1 is Perfectly Inelastic Everywhere • Why? • Ed = • Ed = 0 • Examples? $ D1 P2 P1 Q

  28. Extreme Cases of Price Elasticity 2. D1 is Perfectly elastic Everywhere • Why? • Ed = • Ed = • Examples? $ D1 P1 ∞ Q

  29. General Rule • The flatter the demand curve the ______ the elasticity Which demand is more elastic at point A? P A 12 10 D2 D1 Q 40 25 50

  30. Total Revenue, TR TR = $200,000 • TR = P x Q • What does a decrease in P do to TR? • ↓P↓TR • ↑Q  ↑TR • %Δ TR = %Δ + %Δ P • If l%Δ Pl > l%Δ Ql • Then TR↓ • If l%Δ Pl < l%Δ Ql • Then TR↑ $ $1000 D 200 Computers

  31. Elasticity and Total Revenue • If demand is elastic • |Ed | = | | >1 • l%ΔQl > l%ΔPl • If P↓TR↑

  32. Elasticity and Total Revenue • If demand is unitary elastic • | Ed | = | | =1 • l%ΔQl = l%ΔPl • If P↓TR remains unchanged

  33. Elasticity and Total Revenue • If demand is inelastic • | Ed | = | | < 1 • l%ΔQl < l%ΔPl • If P↓TR↓

  34. Let’s practice • Question 9, page 111 • Should you increase or decrease the price of admissions to a museum to increase revenue? • Is demand for museum likely to be elastic or inelastic? • Elastic • Decrease price

  35. Think about the uses of knowing the price elasticity of demand in your line of work • Share your thoughts with us.

  36. Other Demand Elasticities • Cross-Price Elasticity • Exy = • Examples Substitutes: Exy > 0 Complements: Exy < 0

  37. Example of cross-price elasticities(1977, US) Note: all of these are examples of substitutes with cross price elasticity >0

  38. Other Demand Elasticities 2. Income Elasticity • EI = Normal Goods: EI > 0 Inferior Goods: EI < 0 • Examples

  39. Example of income elasticities(1970, US)

  40. Price Elasticity of Supply • Measure of the price sensitivity of sellers • Es = • Percentage change in quantity supplied as a result of 1% change in price. • What is elasticity of this supply? (midpoint formula) S $ P2=$800 P1=$600 Q1=200 Q2 = 300 Computers

  41. Application of elasticity • Who pays taxes? • If government imposes an excise tax of $1 per pack on cigarettes, who ends up paying the tax? • Is demand for cigarettes elastic or inelastic? • Inelastic

  42. Who is the tax collected from? • Supplier • What does this do to the supplier’s cost? • What does this do to supply curve? • Decreases (shifts leftward) • By how much? • $1 per pack

  43. Let’s show this graphically • Most of the tax (80% of it) is paid by demanders • If demand is inelastic, consumers end up paying most of the tax S2 P $1 S1 $2.80 $2 D 100 98 Cigarettes

  44. Now let’s suppose government collects a $1 excise tax from producers of vitamins • Is demand for vitamins more or less elastic than demand for cigarettes? • More elastic

  45. Let’s show this graphically • Only 40% of tax is paid by demanders S2 P $1 S1 $2.40 $2 D Vitamins 100 80

  46. All else equal • The higher the elasticity of demand, the higher the ______tax burden. • The higher the elasticity of supply, the higher the demanders’ tax burden (show this graphically)

More Related