Economics Welcome To Session 3: Sm1.21 Managerial
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Managerial Economics - 3.1
SM1.21 Managerial Economics ■
Welcome to session 3
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.2
Course Timetable Week 1
Week 3
Week 4
Introduction Theory of the Firm
Week 2 Optimization Management Tools
Demand and Theory of the consumer
Demand Estimatioon and Forecasting
Week 5
Week 6
Week 7
Week 8
Production and Cost Analysis
Cost Theory and Estimation
Market Structure
Strategies and Pricing
Week 9
Week 10
Week 11
Week 12
The Role of The Government
Risk Analysis and Capital Budgeting
Tutorial and Reserve
Final Exam
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.3
SM1.21 Managerial Economics ■
Optimization Techniques and New Management Tools
Dr. H. Stoessel
S A V
Managerial Economics 1999
Methods of expressing Economic Relationships
Managerial Economics - 3.4
Equation ■ Tables ■ Graphs ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Optimization Analysis ■
Managerial Economics - 3.5
Examining the process by which a firm determines the output level at which it maximizes total profits
Dr. H. Stoessel
S A V
Managerial Economics 1999
Optimization Analysis
Managerial Economics - 3.6
Total revenue/cost approach ■ Marginal Analysis ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.7
New Management Tools
Benchmarking ■ Total Quality Management (TQM) ■ Reengineering ■ The Learning Organization ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.8
Course Timetable Week 1
Week 3
Week 4
Introduction Theory of the Firm
Week 2 Optimization Management Tools
Demand and Theory of the consumer
Demand Estimatioon and Forecasting
Week 5
Week 6
Week 7
Week 8
Production and Cost Analysis
Cost Theory and Estimation
Market Structure
Strategies and Pricing
Week 9
Week 10
Week 11
Week 12
The Role of The Government
Risk Analysis and Capital Budgeting
Tutorial and Reserve
Final Exam
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.9
SM1.21 Managerial Economics ■
Optimization Techniques and New Management Tools
Dr. H. Stoessel
S A V
Managerial Economics 1999
Methods of expressing Economic Relationships
Managerial Economics - 3.10
Equation ■ Tables ■ Graphs ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Optimization Analysis ■
Managerial Economics - 3.11
Examining the process by which a firm determines the output level at which it maximizes total profits
Dr. H. Stoessel
S A V
Managerial Economics 1999
Optimization Analysis
Managerial Economics - 3.12
Total revenue/cost approach ■ Marginal Analysis ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.13
New Management Tools
Benchmarking ■ Total Quality Management (TQM) ■ Reengineering ■ The Learning Organization ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.14
SM1.21 Managerial Economics ■
Welcome to session 3
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.15
Course Timetable
Week 4
Demand Analysis Managerial Tools
Week 3 Demand and Theory of the consumer
Week 5
Week 6
Week 7
Week 8
Production and Cost Analysis
Cost Theory and Estimation
Market Structure
Strategies and Pricing
Week 9
Week 10
Week 11
Week 12
The Role of the Governmaentg
Risk Analysis
Tutorial
Reserve Final Exam
Week 1
Week 2
Introduction Theory of the Firm
Capital Budgeting
Dr. H. Stoessel
S A V
Demand Estimatioon
Managerial Economics 1999
Objectives of Session 3
Managerial Economics - 3.16
To understand how consumer preferences determine demand for commodities, while business cost are the foundation of the supply of commodities ■ To see how supply and demand are brought into balance by the price mechanism ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Demand Theory ■
Managerial Economics - 3.17
You can make even a parrot into a learned economist; all it must learn are the two words “supply” and “demand”
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.18
Markets ■ ■ ■ ■ ■ ■
Capital Market Labor Market Vegetable Market Wedding Market Education Market Stock market
Dr. H. Stoessel
S A V
Managerial Economics 1999
The demand for a commodity
Managerial Economics - 3.19
The individual demand ■ The market demand ■ The demand faced by the firm ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Individual Demand
■
Managerial Economics - 3.20
Qdx = f(Px, I, Py, T)
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.21
Theory of the Consumer
To explain the principles of consumer behavior ■ To understand the concept of consumer surplus ■ “normal” and “inferior”goods ■ Income and substitution effect ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Choice and Utility ■
Managerial Economics - 3.22
People tend to choose those goods and services they value most highly
? Dr. H. Stoessel
S A V
Managerial Economics 1999
Marginal Utility ■
Managerial Economics - 3.23
The law of diminishing marginal utility states that as the amount of a good consumed increases, the marginal utility of that good tends to diminish
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.24
The utility of a hamburger
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.25
Total and marginal utility
The Marginal Utility is the additional utility gained by consuming one more unit of the same commodity ■ The total utility is the sum of the marginal utilities ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.26
Equilibrium ■ ■
Equal marginal utility per Dollar for Every Good A consumer with a fixed income and given market prices will get maximum satisfaction when the marginal utility of the last dollar spent on each good is exactly the same as the marginal utility of the last dollar spent on any other good Dr. H. Stoessel
S A V
Managerial Economics 1999
Why the demand curve slopes downward?
Managerial Economics - 3.27
Why the higher the price the less quantity demanded? ■ Because a higher price for a good reduces the consumer’s optimal consumption of commodities - he will buy less to increase marginal utility! ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Substitution effect ■
Managerial Economics - 3.28
When the price of a good rises, consumers will tend to substitute other goods for the more expensive good in order to achieve the desired satisfaction most cheaply
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.29
Market Demand
■
QDx = F(Px, I, N, Py, T, S)
Dr. H. Stoessel
S A V
Managerial Economics 1999
From Individual to Market Demand
Managerial Economics - 3.30
The market demand curve is the the sum of individuals demand at each price
Dung+Hung=Market 10 Dung Demand
8 Price
■
6
Hung Demand
4
Total demand
2 0 0 1 2 3 4 5 6 7 8 Qua ntity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.31
Behind the demand curve The good’s own price ■ The average income ■ Population ■ Prices of related goods ■ Tastes ■ Special Influences ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Shift of demand
Managerial Economics - 3.32
Demand curves shift, if and when the influence other than the price change ■ change in quantity demanded versus change in demand ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.33
Shift in demand M a rk e t E q u ilib riu m
■
6 5
Price
4
Demand shifts because people change their habits
3 2
E q u ilib riu m p o in t Dem and
1
S u p lly
0 0 2 4 6 8 1 01 21 41 61 82 0
S h ift d e m a n d
Q u a n tity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Three Hurdles
Managerial Economics - 3.34
■
“Other things equal”
■
Movement along curves vs. shifts
■
Equilibrium
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.35
Budget Line ■
Clothing 1 $
Budget line 7 6 5 4 3 2 1 0
Series1
0
2
4
6
Food 1.5 $
Dr. H. Stoessel
S A V
The budget line sums up all the possible combinations of the two goods that would just exhaust the consumer’s income
Managerial Economics 1999
Changes in Income and Price
Managerial Economics - 3.36
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.37
Price elasticity of demand
The price elasticity is the responsiveness of the quantity demanded of a good to changes in the good’s price ■ (The percentage change in quantity demanded divided by the percentage change in price) ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.38
Elastic demand ■
Halving the price has tripled quantity demanded
■
=elastic demand
Elastic demand
10 5
1
3 Dr. H. Stoessel
S A V
Managerial Economics 1999
Unit-Elastic Demand ■
Halving the price has doubled the quantity demanded
■
= Unit Elastic
10
5
1
Managerial Economics - 3.39
2 Dr. H. Stoessel
S A V
Managerial Economics 1999
Inelastic demand ■
Halving the price leads to a fifty percent increase in quantity demanded
■
= inelastic demand
1 0
5
1 0
Managerial Economics - 3.40
1 5 Dr. H. Stoessel
S A V
Managerial Economics 1999
Examples of elasticity Commodity Tomatoes Furniture Bus travel Cigarettes Margarine Flour Cars
Dr. H. Stoessel
Managerial Economics - 3.41
Price
Income
elasticity
elasticity
4.6 1 0.2 0.5
S A V
1.5 0.6 -0.2 -0.4 2.5
Managerial Economics 1999
Managerial Economics - 3.42
Income effect ■
The impact of a price change on consumers’ real incomes
Dr. H. Stoessel
S A V
Managerial Economics 1999
Income Elasticity ■
Managerial Economics - 3.43
The percentage change of quantity demanded divided by the percentage change of income
Dr. H. Stoessel
S A V
Managerial Economics 1999
Consumer Surplus ■
Managerial Economics - 3.44
Consumer surplus measures the extra utility consumers receive over what they pay for the commodity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Application of consumer surplus
Managerial Economics - 3.45
■
The Concept of Consumer surplus is extremely useful in making decisions about public goods, airports, roads, bridges, parks
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.46
The Indifference Curve ■ In d iffe r e n c e C u r v e 6 5 Clothing
4 3
S e rie s 1
2 1 0 0
1
2
3
4
5
Every point on the curve represents a different combination of two goods where the consumer is indifferent
Food
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.47
The Indifference Map The indifference maps shows various indifference curves
In d iffe r e n c e M a p 6 5
U1
4 Clothing
■
U2
3
U3
2
U4
1 0 0
1
2
3
4
5
6
Food
Dr. H. Stoessel
S A V
Managerial Economics 1999
7
8
Managerial Economics - 3.48
The Law of Substitution ■
The scarcer a good the greater is it’s relative substitution value: it’s marginal utility rises relative to the marginal utility of the good that has become plentiful
Dr. H. Stoessel
S A V
Managerial Economics 1999
Equilibrium
Managerial Economics - 3.49
Clothing 1 $
12 10 Series1
8
U2
6
U3 U4
4 2 0 0
2 Dr. H. Stoessel
4 6 Food 1.5 $
S A V
8 Managerial Economics 1999
Managerial Economics - 3.50
Constraints
The budget line ■ The income ■ Normal or inferior good? ■ Macroeconomic influences ■ The Bandwagon and the snob effects ■ Tastes ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
The Paradox of Value ■
Managerial Economics - 3.51
Why the water which is essential to life has little value and fur coats which are quite unnecessary have a high price?
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.52
Supply The supply curve relates quantity supplied to price
S u p p ly o f c o r n 6 5 4 Price
■
3
S u p p ly
2 1 0 0
10
20
Q u a n tity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.53
Behind the supply curve
Businesses supply commodities for profit (not for charity) ■ The key is the cost of production ■ Cost of production are affected by technological change and prices of inputs ■ Prices of related goods ■ The market organization ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.54
Changes of supply The good’s own price ■ Technology ■ Input prices ■ Prices of related goods ■ Market organization ■ Special influences ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Shifts of Supply
Managerial Economics - 3.55
Supply shifts when influences other than the commodity’s own price changes ■ Supply increases or decreases when the amount supplied increases or decreases at each market price ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.56
The market equilibrium The equilibrium point, where supply and demand curve meet, is the market clearing price
M a rk e t E q u ilib riu m 6 5 4 Price
■
E qu ilib riu m p o in t
3 2 1
Dem and
0
S u p lly 0 2 4 6 8 1 01 2 14 1 6 18 20 Q u a n tity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Supply shift and equilibrium A supply shift caused by bad weather e.g. will result in higher price and lower quantity supplied.
M a rk e t E q u ilib riu m 6 5 4 Price
■
Managerial Economics - 3.57
E q u ilib riu m p o in t
3 2 Dem and
1
S u p lly
0 0 2 4 6 8 1 01 2 1 41 6 1 8 2 0 Q u a n tity
Dr. H. Stoessel
S A V
Managerial Economics 1999
S h ift
Managerial Economics - 3.58
Demand and supply shifts ■
Demand shifts because
Dr. H. Stoessel
■
S A V
Supply shifts because
Managerial Economics 1999
The allocation of resources ■
By determining the equilibrium prices and quantities of input and output, the market allocates the scarce goods of the society among the possible uses
Dr. H. Stoessel
Managerial Economics - 3.59
■
S A V
The rationing is done by the marketplace through the interaction of demand and supply
Managerial Economics 1999
Managerial Economics - 3.60
Discussion and Practice
Look at three different markets ■ Read newspaper ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.61
The market for Land Land 6 5 Price
4 Demand
3
Supply
2 1 0 0
10
20
30
Quantity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.62
Oil cartel OPEC fixes the price and limits quantity
O il c a r te l
Price
■
45 40 35 30 25 20 15 10 5 0
Dem and
0
10
20
Q u a n ti ty
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.63
Used cars usedcars 6
Price
5 4
Demand
3
Supply
2 1 0 0
20
40
Quantity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.64
Summary
Dr. H. Stoessel
S A V
Managerial Economics 1999
SM1.21 Managerial Economics ■
Welcome to session 3
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.2
Course Timetable Week 1
Week 3
Week 4
Introduction Theory of the Firm
Week 2 Optimization Management Tools
Demand and Theory of the consumer
Demand Estimatioon and Forecasting
Week 5
Week 6
Week 7
Week 8
Production and Cost Analysis
Cost Theory and Estimation
Market Structure
Strategies and Pricing
Week 9
Week 10
Week 11
Week 12
The Role of The Government
Risk Analysis and Capital Budgeting
Tutorial and Reserve
Final Exam
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.3
SM1.21 Managerial Economics ■
Optimization Techniques and New Management Tools
Dr. H. Stoessel
S A V
Managerial Economics 1999
Methods of expressing Economic Relationships
Managerial Economics - 3.4
Equation ■ Tables ■ Graphs ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Optimization Analysis ■
Managerial Economics - 3.5
Examining the process by which a firm determines the output level at which it maximizes total profits
Dr. H. Stoessel
S A V
Managerial Economics 1999
Optimization Analysis
Managerial Economics - 3.6
Total revenue/cost approach ■ Marginal Analysis ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.7
New Management Tools
Benchmarking ■ Total Quality Management (TQM) ■ Reengineering ■ The Learning Organization ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.8
Course Timetable Week 1
Week 3
Week 4
Introduction Theory of the Firm
Week 2 Optimization Management Tools
Demand and Theory of the consumer
Demand Estimatioon and Forecasting
Week 5
Week 6
Week 7
Week 8
Production and Cost Analysis
Cost Theory and Estimation
Market Structure
Strategies and Pricing
Week 9
Week 10
Week 11
Week 12
The Role of The Government
Risk Analysis and Capital Budgeting
Tutorial and Reserve
Final Exam
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.9
SM1.21 Managerial Economics ■
Optimization Techniques and New Management Tools
Dr. H. Stoessel
S A V
Managerial Economics 1999
Methods of expressing Economic Relationships
Managerial Economics - 3.10
Equation ■ Tables ■ Graphs ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Optimization Analysis ■
Managerial Economics - 3.11
Examining the process by which a firm determines the output level at which it maximizes total profits
Dr. H. Stoessel
S A V
Managerial Economics 1999
Optimization Analysis
Managerial Economics - 3.12
Total revenue/cost approach ■ Marginal Analysis ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.13
New Management Tools
Benchmarking ■ Total Quality Management (TQM) ■ Reengineering ■ The Learning Organization ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.14
SM1.21 Managerial Economics ■
Welcome to session 3
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.15
Course Timetable
Week 4
Demand Analysis Managerial Tools
Week 3 Demand and Theory of the consumer
Week 5
Week 6
Week 7
Week 8
Production and Cost Analysis
Cost Theory and Estimation
Market Structure
Strategies and Pricing
Week 9
Week 10
Week 11
Week 12
The Role of the Governmaentg
Risk Analysis
Tutorial
Reserve Final Exam
Week 1
Week 2
Introduction Theory of the Firm
Capital Budgeting
Dr. H. Stoessel
S A V
Demand Estimatioon
Managerial Economics 1999
Objectives of Session 3
Managerial Economics - 3.16
To understand how consumer preferences determine demand for commodities, while business cost are the foundation of the supply of commodities ■ To see how supply and demand are brought into balance by the price mechanism ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Demand Theory ■
Managerial Economics - 3.17
You can make even a parrot into a learned economist; all it must learn are the two words “supply” and “demand”
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.18
Markets ■ ■ ■ ■ ■ ■
Capital Market Labor Market Vegetable Market Wedding Market Education Market Stock market
Dr. H. Stoessel
S A V
Managerial Economics 1999
The demand for a commodity
Managerial Economics - 3.19
The individual demand ■ The market demand ■ The demand faced by the firm ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Individual Demand
■
Managerial Economics - 3.20
Qdx = f(Px, I, Py, T)
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.21
Theory of the Consumer
To explain the principles of consumer behavior ■ To understand the concept of consumer surplus ■ “normal” and “inferior”goods ■ Income and substitution effect ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Choice and Utility ■
Managerial Economics - 3.22
People tend to choose those goods and services they value most highly
? Dr. H. Stoessel
S A V
Managerial Economics 1999
Marginal Utility ■
Managerial Economics - 3.23
The law of diminishing marginal utility states that as the amount of a good consumed increases, the marginal utility of that good tends to diminish
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.24
The utility of a hamburger
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.25
Total and marginal utility
The Marginal Utility is the additional utility gained by consuming one more unit of the same commodity ■ The total utility is the sum of the marginal utilities ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.26
Equilibrium ■ ■
Equal marginal utility per Dollar for Every Good A consumer with a fixed income and given market prices will get maximum satisfaction when the marginal utility of the last dollar spent on each good is exactly the same as the marginal utility of the last dollar spent on any other good Dr. H. Stoessel
S A V
Managerial Economics 1999
Why the demand curve slopes downward?
Managerial Economics - 3.27
Why the higher the price the less quantity demanded? ■ Because a higher price for a good reduces the consumer’s optimal consumption of commodities - he will buy less to increase marginal utility! ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Substitution effect ■
Managerial Economics - 3.28
When the price of a good rises, consumers will tend to substitute other goods for the more expensive good in order to achieve the desired satisfaction most cheaply
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.29
Market Demand
■
QDx = F(Px, I, N, Py, T, S)
Dr. H. Stoessel
S A V
Managerial Economics 1999
From Individual to Market Demand
Managerial Economics - 3.30
The market demand curve is the the sum of individuals demand at each price
Dung+Hung=Market 10 Dung Demand
8 Price
■
6
Hung Demand
4
Total demand
2 0 0 1 2 3 4 5 6 7 8 Qua ntity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.31
Behind the demand curve The good’s own price ■ The average income ■ Population ■ Prices of related goods ■ Tastes ■ Special Influences ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Shift of demand
Managerial Economics - 3.32
Demand curves shift, if and when the influence other than the price change ■ change in quantity demanded versus change in demand ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.33
Shift in demand M a rk e t E q u ilib riu m
■
6 5
Price
4
Demand shifts because people change their habits
3 2
E q u ilib riu m p o in t Dem and
1
S u p lly
0 0 2 4 6 8 1 01 21 41 61 82 0
S h ift d e m a n d
Q u a n tity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Three Hurdles
Managerial Economics - 3.34
■
“Other things equal”
■
Movement along curves vs. shifts
■
Equilibrium
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.35
Budget Line ■
Clothing 1 $
Budget line 7 6 5 4 3 2 1 0
Series1
0
2
4
6
Food 1.5 $
Dr. H. Stoessel
S A V
The budget line sums up all the possible combinations of the two goods that would just exhaust the consumer’s income
Managerial Economics 1999
Changes in Income and Price
Managerial Economics - 3.36
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.37
Price elasticity of demand
The price elasticity is the responsiveness of the quantity demanded of a good to changes in the good’s price ■ (The percentage change in quantity demanded divided by the percentage change in price) ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.38
Elastic demand ■
Halving the price has tripled quantity demanded
■
=elastic demand
Elastic demand
10 5
1
3 Dr. H. Stoessel
S A V
Managerial Economics 1999
Unit-Elastic Demand ■
Halving the price has doubled the quantity demanded
■
= Unit Elastic
10
5
1
Managerial Economics - 3.39
2 Dr. H. Stoessel
S A V
Managerial Economics 1999
Inelastic demand ■
Halving the price leads to a fifty percent increase in quantity demanded
■
= inelastic demand
1 0
5
1 0
Managerial Economics - 3.40
1 5 Dr. H. Stoessel
S A V
Managerial Economics 1999
Examples of elasticity Commodity Tomatoes Furniture Bus travel Cigarettes Margarine Flour Cars
Dr. H. Stoessel
Managerial Economics - 3.41
Price
Income
elasticity
elasticity
4.6 1 0.2 0.5
S A V
1.5 0.6 -0.2 -0.4 2.5
Managerial Economics 1999
Managerial Economics - 3.42
Income effect ■
The impact of a price change on consumers’ real incomes
Dr. H. Stoessel
S A V
Managerial Economics 1999
Income Elasticity ■
Managerial Economics - 3.43
The percentage change of quantity demanded divided by the percentage change of income
Dr. H. Stoessel
S A V
Managerial Economics 1999
Consumer Surplus ■
Managerial Economics - 3.44
Consumer surplus measures the extra utility consumers receive over what they pay for the commodity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Application of consumer surplus
Managerial Economics - 3.45
■
The Concept of Consumer surplus is extremely useful in making decisions about public goods, airports, roads, bridges, parks
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.46
The Indifference Curve ■ In d iffe r e n c e C u r v e 6 5 Clothing
4 3
S e rie s 1
2 1 0 0
1
2
3
4
5
Every point on the curve represents a different combination of two goods where the consumer is indifferent
Food
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.47
The Indifference Map The indifference maps shows various indifference curves
In d iffe r e n c e M a p 6 5
U1
4 Clothing
■
U2
3
U3
2
U4
1 0 0
1
2
3
4
5
6
Food
Dr. H. Stoessel
S A V
Managerial Economics 1999
7
8
Managerial Economics - 3.48
The Law of Substitution ■
The scarcer a good the greater is it’s relative substitution value: it’s marginal utility rises relative to the marginal utility of the good that has become plentiful
Dr. H. Stoessel
S A V
Managerial Economics 1999
Equilibrium
Managerial Economics - 3.49
Clothing 1 $
12 10 Series1
8
U2
6
U3 U4
4 2 0 0
2 Dr. H. Stoessel
4 6 Food 1.5 $
S A V
8 Managerial Economics 1999
Managerial Economics - 3.50
Constraints
The budget line ■ The income ■ Normal or inferior good? ■ Macroeconomic influences ■ The Bandwagon and the snob effects ■ Tastes ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
The Paradox of Value ■
Managerial Economics - 3.51
Why the water which is essential to life has little value and fur coats which are quite unnecessary have a high price?
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.52
Supply The supply curve relates quantity supplied to price
S u p p ly o f c o r n 6 5 4 Price
■
3
S u p p ly
2 1 0 0
10
20
Q u a n tity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.53
Behind the supply curve
Businesses supply commodities for profit (not for charity) ■ The key is the cost of production ■ Cost of production are affected by technological change and prices of inputs ■ Prices of related goods ■ The market organization ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.54
Changes of supply The good’s own price ■ Technology ■ Input prices ■ Prices of related goods ■ Market organization ■ Special influences ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Shifts of Supply
Managerial Economics - 3.55
Supply shifts when influences other than the commodity’s own price changes ■ Supply increases or decreases when the amount supplied increases or decreases at each market price ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.56
The market equilibrium The equilibrium point, where supply and demand curve meet, is the market clearing price
M a rk e t E q u ilib riu m 6 5 4 Price
■
E qu ilib riu m p o in t
3 2 1
Dem and
0
S u p lly 0 2 4 6 8 1 01 2 14 1 6 18 20 Q u a n tity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Supply shift and equilibrium A supply shift caused by bad weather e.g. will result in higher price and lower quantity supplied.
M a rk e t E q u ilib riu m 6 5 4 Price
■
Managerial Economics - 3.57
E q u ilib riu m p o in t
3 2 Dem and
1
S u p lly
0 0 2 4 6 8 1 01 2 1 41 6 1 8 2 0 Q u a n tity
Dr. H. Stoessel
S A V
Managerial Economics 1999
S h ift
Managerial Economics - 3.58
Demand and supply shifts ■
Demand shifts because
Dr. H. Stoessel
■
S A V
Supply shifts because
Managerial Economics 1999
The allocation of resources ■
By determining the equilibrium prices and quantities of input and output, the market allocates the scarce goods of the society among the possible uses
Dr. H. Stoessel
Managerial Economics - 3.59
■
S A V
The rationing is done by the marketplace through the interaction of demand and supply
Managerial Economics 1999
Managerial Economics - 3.60
Discussion and Practice
Look at three different markets ■ Read newspaper ■
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.61
The market for Land Land 6 5 Price
4 Demand
3
Supply
2 1 0 0
10
20
30
Quantity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.62
Oil cartel OPEC fixes the price and limits quantity
O il c a r te l
Price
■
45 40 35 30 25 20 15 10 5 0
Dem and
0
10
20
Q u a n ti ty
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.63
Used cars usedcars 6
Price
5 4
Demand
3
Supply
2 1 0 0
20
40
Quantity
Dr. H. Stoessel
S A V
Managerial Economics 1999
Managerial Economics - 3.64
Summary
Dr. H. Stoessel
S A V
Managerial Economics 1999
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