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Demand

Demand. IMBA NCCU Managerial Economics Lecturer: Jack Wu. Managerial Economics. Managerial economics: Science of directing scarce resources to manage more effectively resources – financial, human, physical management of customers, suppliers, competitors, internal organization

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Demand

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  1. Demand IMBA NCCU Managerial Economics Lecturer: Jack Wu

  2. Managerial Economics Managerial economics: Science of directing scarce resources to manage more effectively • resources – financial, human, physical • management of customers, suppliers, competitors, internal organization • organizations – business, nonprofit, household Managerial economics is based on Microeconomics. Managerial economics applies to new economy.

  3. NEW ECONOMY: INTERNET • Differences between “New” and “Old” economy: role of network effects in demand **network effects – benefit/cost depends on total number of other users

  4. Organization • Vertical boundaries – closer to or further from end user • Samsung Electronics – vertical boundaries longer than • Intel – specializes in semiconductors (upstream) • Motorola – specializes in mobile phones (downstream)

  5. Organization • Horizontal boundaries – scale and scope of activities • Samsung Electronics – horizontal boundaries broader than • LG.Philips LCD – specializes in LCD • Motorola – specializes in mobile phones

  6. MANAGERIAL ECONOMICS CASE: RISING GASOLINE PRICES • Between September 2004 and September 2005, the monthly average retail price of gasoline jumped from $1.85 per gallon to $3.08 per gallon. Sales of full-size SUVs dropped 16.8% over the same time period (with a particularly sharp 42.5% drop for full-size GM SUVs).

  7. MANAGERIAL ECONOMICS QUESTIONS • How important are gasoline prices to the sales of SUVs and other types of automobiles? • How should the auto manufacturers respond to the increasing price of gasoline? • Are manufacturer incentives (i.e. price reductions) an effective response? • What are the combined effects of incentives and increasing gas prices?

  8. MANAGERIAL ECONOMICS TOOL: DEMAND • We apply demand to show how the rising price of gasoline has caused decreases in large SUV sales, and how manufacturer incentives can offset these reductions.

  9. Individual Demand Curve Definition: graph of quantity that buyer will purchase at every possible price • Construction -- “Other things equal, how many would you buy at a price of ….?’’ • vertical axis -- price • horizontal axis -- quantity

  10. Individual Demand Schedule • Price Quantity ($ per movie) (movies per month) 10.00 0 7.50 1 5.00 2 2.50 4 0.00 7

  11. INDIVIDUAL DEMAND CURVE 10 7.50 Price ($ per movie) individual demand curve 5 2.50 0 1 2 4 7 Quantity (Movies a month)

  12. Individual Demand Schedule II • Price Quantity ($ per movie) (movies per month) 20.00 0 19.00 1 18.00 2 …. … 0.00 20

  13. Another Type of Individual demand Curve

  14. Two Views • for every possible price, it shows the quantity demanded • for each unit of item, it shows the maximum price that the buyer is willing to pay

  15. Demand Curve: Slope • diminishing marginal benefit -- each additional unit of consumption/usage provides less benefit than the preceeding unit  demand curve slopes downward

  16. Hoover, 1992 A negative price case: Hoover’s special promotion -- two free air tickets (worth more than £400) for purchase of appliance over £100. • promotion attracted over 100,000 customers • Hoover incurred £48 million loss

  17. Demand and Income Changes in income • normal product – demand increases with income • inferior product – demand falls with income

  18. Demand and Other Factors • prices of related products • substitutes • complements • advertising

  19. Recorded Music

  20. Recorded Music • Why the average Canadian bought more of both CDs and cassettes? • Why the ratio of CD to cassette purchases was relatively higher in Canada?

  21. Market demand Market demand = horizontal summation of individual demands

  22. Buyer Surplus • individual buyer surplus: difference between consumer’s benefit and price she must pay for the item • market buyer surplus: sum of individual buyer surpluses.

  23. INDIVIDUAL BUYER SURPLUS 10 individual buyer surplus at $2.50 price d a 7.50 Price ($ per movie) individual demand (marginal benefit) curve 5 b e c c f 2.50 h g j 0 1 2 4 7 Quantity (Movies a month)

  24. Buyer surplus: Individual

  25. Gains from price cut • lower price on the quantity that he/she would have purchased at the original price (inframarginal units) • he/she can buy more (marginal units) • Case: Student discount price for movie

  26. Package Deal • charge buyer just a little less than her/his total benefit • leave buyer with almost zero surplus

  27. fixed payment Two-part pricing • fixed payment • usage charge usage charge

  28. Buyer surplus:Two-part pricing

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