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MBA 710 Applied Economic Analysis Instructor: Bernard Malamud – Office: BEH 502 Phone (702) 895 –3294 Fax: 895 – 1354 » Email: [email protected] Website: www.unlv.edu/faculty/bmalamud Office hours: TR 11:30 – 12:30; 2:30 – 3:30 pm And by appointment Economics for Strategic Thinking You and your adversaries/partners • Your customers, suppliers, competitors, colleagues • Anticipate what they’ll do • Figure they’re as smart as you are Tools of economic analysis • Build simple, tractable models of complex situations … Capture the essence • Assume purposeful behavior –Maximize profit … subject to constraints • Anticipate outcomes … what happens when everyone does their best • Evaluate outcomes • Seek improvements The Mantra: Marginal Benefits = Marginal Costs Demand and Supply Buyer Demand Price Income Tastes Other Prices – Substitutes – Complements Expectations Seller Supply Price Costs Input prices – Wages, rents, ... – Supplies Technology Expectations GM’s Story Gotta give rebates to old-truck owners = X Coupon can be resold to others (for Q) – They get smaller rebate = x – There’s also a brokerage fee = k Demand: 2.0 million trucks @ $20K • 0.6 million old-truck owners • 1.4 million other buyers Price elasticity of demand = 4 GM’s Story, continued Price elasticity of demand = 4 – For each 1% increase in price above $20K there’s a 4% decrease in quantity demanded below 2.0 million – If price rises by 1% to $20.2K, sales drop by 80,000 (4% of 2 million) to 1.92 million This is highly elastic demand ↑P Q↓↓ … Total Revenue = TR ↓ ↓P Q↑↑ … Total Revenue = TR ↑ GM’s Story, continued Cost of truck to GM = $15K Marginal Cost = $15K … doesn’t change GM wants to maximize profit Profit = Total Revenue – Total Cost It should produce to point where MARGINAL REVENUE = MARGINAL COST Note: If GM wants to sell another truck, it has to drop its price a bit on all those it’s already selling MR < Price