SM 1.21.32 Mecoverheadsession3

Managerial Economics - 3.
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 2 Week 3 Week 4

Introduction Optimization Demand and Theory of Demand Estimatioon
Theory of the Firm Management the consumer and Forecasting
Tools

Production and Cost Cost Theory and Market Structure Strategies and Pricing
Analysis Estimation

The Role of The Risk Analysis and Tutorial and Reserve Final Exam
Government Capital Budgeting

1999
■ Optimization Techniques and New

Management Tools

1999
Methods of expressing Managerial Economics - 3.4
Economic Relationships
■ Equation
■ Tables
■ Graphs

1999
Optimization Analysis
■ Examining the process by which a

firm determines the output level
at which it maximizes total
profits

1999
■ Total revenue/cost approach

■ Marginal Analysis

1999
New Management Tools
■ Benchmarking
■ Total Quality Management (TQM)
■ Reengineering
■ The Learning Organization

1999
Course Timetable

Introduction Optimization Demand and Theory of Demand Estimatioon
Theory of the Firm Management the consumer and Forecasting
Tools

Analysis Estimation

The Role of The Risk Analysis and Tutorial and Reserve Final Exam
Government Capital Budgeting

1999
■ Optimization Techniques and New

Management Tools

1999
Methods of expressing Managerial Economics - 3.10
Economic Relationships
■ Equation
■ Tables
■ Graphs

1999
■ Examining the process by which a

firm determines the output level
at which it maximizes total
profits

1999
■ Total revenue/cost approach

■ Marginal Analysis

1999
New Management Tools
■ Benchmarking
■ Total Quality Management (TQM)
■ Reengineering
■ The Learning Organization

1999
■ Welcome to session 3

1999
Course Timetable

Introduction Demand Analysis Demand and Demand Estimatioon
Theory of the Firm Managerial Tools Theory of the
consumer

Analysis Estimation

The Role of the Risk Analysis Tutorial Reserve
Governmaentg Capital Budgeting Final Exam

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

1999
Demand Theory
■ You can make even a parrot into

a learned economist; all it must
learn are the two words “supply”
and “demand”

1999
Markets
■ Capital Market
■ Labor Market
■ Vegetable Market
■ Wedding Market
■ Education Market
■ Stock market

1999
The demand for a Managerial Economics - 3.19
commodity
■ The individual demand

■ The market demand
■ The demand faced by the firm

1999
Individual Demand
■ Qdx = f(Px, I, Py, T)

1999
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

1999
Choice and Utility
■ People tend to
choose those
goods and
services they
value most highly
?
1999
Marginal Utility
■ 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

1999
The utility of a hamburger

1999
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

1999
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

1999
Why the demand curve Managerial Economics - 3.27
slopes downward?
■ 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!

1999
Substitution effect
■ 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

1999
Market Demand
■ QDx = F(Px, I, N, Py, T, S)

1999
From Individual to Market Managerial Economics - 3.30
Demand
■ The market Dung+Hung=Market
demand curve is 10
the the sum of 8 Dung
individuals 6
Demand
demand at each
Hung
Price
Demand
4
price 2
Total demand
0
0 1 2 3 4 5 6 7 8
Qua ntity

1999
Behind the demand curve
■ The good’s own price

■ The average income
■ Population
■ Prices of related goods
■ Tastes
■ Special Influences

1999
Shift of demand
■ Demand curves shift, if and when

the influence other than the price
change
■ change in quantity demanded
versus change in demand

1999
Shift in demand
M a rk e t E q u ilib riu m ■ Demand shifts

because people
change their
6
habits
5
4
Price
3
E q u ilib riu m p o in t
2
Dem and
1
S u p lly
0
S h ift d e m a n d
0 2 4 6 8 1 01 21 41 61 82 0
Q u a n tity

1999
Three Hurdles
■ “Other things equal”
■ Movement along curves vs. shifts
■ Equilibrium

1999
Budget Line
■ The budget line

Budget line
sums up all the
7
possible
6
5
combinations of
Clothing 1 $
4
3
Series1 the two goods
2
1 that would just
exhaust the
0
0 2 4 6
Food 1.5 $
consumer’s
income

1999
Changes in Income and Managerial Economics - 3.36
Price

1999
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)

1999
Elastic demand
■ Halving the price

has tripled
quantity
Elastic demand
demanded
10
5 ■ =elastic demand
1 3

1999
Unit-Elastic Demand

has doubled the
10 quantity
demanded
5 ■ = Unit Elastic
1 2

1999
Inelastic demand

leads to a fifty
1 percent increase
0 in quantity
demanded
5
■ = inelastic
demand
1 1
0 5
1999
Examples of elasticity
Commodity Price Income

elasticity elasticity
Tomatoes 4.6
Furniture 1 1.5
Bus travel 0.2
Cigarettes 0.5 0.6
Margarine -0.2
Flour -0.4
Cars 2.5

1999
Income effect
■ The impact of a price change on

consumers’ real incomes

1999
Income Elasticity
■ The percentage change of

quantity demanded divided by the
percentage change of income

1999
Consumer Surplus
■ Consumer surplus measures the

extra utility consumers receive
over what they pay for the
commodity

1999
Application of consumer Managerial Economics - 3.45
surplus
■ The Concept of Consumer surplus
is extremely useful in making
decisions about public goods,
airports, roads, bridges, parks

1999
The Indifference Curve
■ Every point on
In d iffe r e n c e C u r v e the curve
6 represents a
5 different
4
combination of
Clothing
3 S e rie s 1
2
two goods where
1 the consumer is
0 indifferent
0 1 2 3 4 5
Food

1999
The Indifference Map
■ The indifference In d iffe r e n c e M a p

maps shows
6
various
5
indifference 4
U1
curves U2
Clothing
3
U3
2
U4
1
0
0 1 2 3 4 5 6 7 8
Food

1999
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

1999
Equilibrium
12
10
Clothing 1 $
8 Series1
U2
6
U3
4 U4
0
0 2 4 6 8
Food 1.5 $
1999
Constraints
■ The budget line

■ The income
■ Normal or inferior good?
■ Macroeconomic influences
■ The Bandwagon and the snob effects
■ Tastes

1999
The Paradox of Value
■ Why the water which is essential

to life has little value and fur
coats which are quite
unnecessary have a high price?

1999
Supply
■ The supply curve S u p p ly o f c o r n

relates quantity 6
supplied to price 5
3 S u p p ly
Price
2
0
0 10 20
Q u a n tity

1999
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
■ The market organization

1999
Changes of supply
■ The good’s own price

■ Technology
■ Input prices
■ Market organization
■ Special influences

1999
Shifts of Supply
■ 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

1999
The market equilibrium
■ The equilibrium M a rk e t E q u ilib riu m

point, where 6
supply and 5
demand curve 4
meet, is the E qu ilib riu m p o in t
Price
3
market clearing 2
price 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

1999
Supply shift and Managerial Economics - 3.57
equilibrium
■ A supply shift M a rk e t E q u ilib riu m
caused by bad 6
weather e.g. will 5
result in higher 4
E q u ilib riu m p o in t
price and lower
Price
3
quantity supplied. 2
Dem and
1
S u p lly
0
S h ift
0 2 4 6 8 1 01 2 1 41 6 1 8 2 0
Q u a n tity

1999
Demand and supply shifts
■ Demand shifts ■ Supply shifts

because because

1999
The allocation of Managerial Economics - 3.59
resources
■ By determining the ■ The rationing is
equilibrium prices done by the
and quantities of
marketplace
input and output,
the market allocates through the
the scarce goods of interaction of
the society among demand and
the possible uses supply

1999
Discussion and Practice
■ Look at three different markets

■ Read newspaper

1999
The market for Land
Land
6
5
4
Demand
Price
3
Supply
2
1
0
0 10 20 30
Quantity

1999
Oil cartel
■ OPEC fixes the O il c a r te l
price and limits 45

quantity 40
35
30
25
Dem and
Price
20
15
10
5
0
0 10 20
Q u a n ti ty

1999
Used cars
usedcars
6
5
4
Price
Demand
3
Supply
2
1
0
0 20 40
Quantity

1999
Summary

1999

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Managerial Economics - 3.

SM1.21 Managerial Economics

Dr. H. Stoessel S A V Managerial Economics

Week 1 Week 2 Week 3 Week 4

Week 5 Week 6 Week 7 Week 8

Week 9 Week 10 Week 11 Week 12

Dr. H. Stoessel S A V Managerial Economics

SM1.21 Managerial Economics

■ Optimization Techniques and New

Dr. H. Stoessel S A V Managerial Economics

Dr. H. Stoessel S A V Managerial Economics

■ Examining the process by which a

Dr. H. Stoessel S A V Managerial Economics

■ Total revenue/cost approach

Dr. H. Stoessel S A V Managerial Economics

New Management Tools

Dr. H. Stoessel S A V Managerial Economics

Week 1 Week 2 Week 3 Week 4

Week 5 Week 6 Week 7 Week 8

Week 9 Week 10 Week 11 Week 12

Dr. H. Stoessel S A V Managerial Economics

SM1.21 Managerial Economics

■ Optimization Techniques and New

Dr. H. Stoessel S A V Managerial Economics

Dr. H. Stoessel S A V Managerial Economics

■ Examining the process by which a

Dr. H. Stoessel S A V Managerial Economics

■ Total revenue/cost approach

Dr. H. Stoessel S A V Managerial Economics

New Management Tools

Dr. H. Stoessel S A V Managerial Economics

SM1.21 Managerial Economics

Dr. H. Stoessel S A V Managerial Economics

Week 1 Week 2 Week 3 Week 4

Week 5 Week 6 Week 7 Week 8

Week 9 Week 10 Week 11 Week 12

Dr. H. Stoessel S A V Managerial Economics

■ To understand how consumer

Dr. H. Stoessel S A V Managerial Economics

■ You can make even a parrot into

Dr. H. Stoessel S A V Managerial Economics

Dr. H. Stoessel S A V Managerial Economics

■ The individual demand

Dr. H. Stoessel S A V Managerial Economics

■ Qdx = f(Px, I, Py, T)

Dr. H. Stoessel S A V Managerial Economics

Theory of the Consumer

■ To explain the principles of

Dr. H. Stoessel S A V Managerial Economics

Choice and Utility

■ The law of diminishing marginal

Dr. H. Stoessel S A V Managerial Economics

The utility of a hamburger

Dr. H. Stoessel S A V Managerial Economics

Total and marginal utility

■ The Marginal Utility is the

Dr. H. Stoessel S A V Managerial Economics

■ Equal marginal utility per Dollar

Dr. H. Stoessel S A V Managerial Economics

Dr. H. Stoessel S A V Managerial Economics

■ When the price of a good rises,

Dr. H. Stoessel S A V Managerial Economics

■ QDx = F(Px, I, N, Py, T, S)