Download Week 2

Welcome to
EC 209: Managerial
Economics- Group A
By: Dr. Jacqueline Khorassani
Week Two
1
Class One
Monday, September 10
11:00-11:50
Fottrell (AM)
2
Announcement


We are looking for 2 students from 2nd
Commerce to come forward for the
Staff/Student Liaison Committee; as well as
two students from the B.Comm Intl and BSc in
BIS classes.
Contact:
Mairéad MacKenzie
Administrative Assistant
Commerce Faculty
NUI, Galway
Phone: 091 492612
Fax: 091 494546
E-mail: [email protected]
3
Good morning




How was your weekend?
I am fine
I am adjusting
This morning, I thought I saw a 6-7
year old boy driving!!!!
– Oooops, the wrong side of the car!!!
4
I did not receive any questions from
you on Chapter One, so let’s practice

If the interest rate is 7% and cash flows are
$4,000 at the end of year one and $6,000 at
the end of year two, then the present value
of these cash flows is
–
–
–
–

A) $8,979.
B) $11,149.
C) $309.
D) $9,346.
The answer is A
5
Answer

PV = (4000/1.07) + (6000/(1.07)2)
6
Let’s practice

If the interest rate is 4%, the present
value of $1000 received at the end of
3 years is
– A) $970.
– B) $1,040.
– C) $889.
– D) $961.

The answer is C
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Answer

PV = 1000/(1.04)3
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Let’s practice

Maximizing the firm's current profits is the
same as maximizing the lifetime value of the
firm when the
– A) growth rate in profits is larger than the
interest rate.
– B) growth rate in profits and the interest rate
are equal.
– C) interest rate is constant and is smaller than
the growth rate in profits.
– D) interest rate is larger than the growth rate in
profits and both are constant.

The answer is D
9
Chapter 2: You have already seen these
topics in other courses. You did not send
me any questions . So we move fast.

What is the demand curve for
managerial textbook at NUI-Galway?
– It is a curve that shows the number of
textbooks that will be purchased at
alternative prices, holding other factors
constant.
D
10
What is the law of
demand?

It states that, all else being constant,
the demand curve is downward
sloping.
Price
Quantity
11
What factors other than price affect
the demand for managerial
textbook?





Number of students in managerial
class
Income (budget) of students
Tuitions and fees at NUI (the price of
complements)
What else?
If the above factors change the
demand curve will shift.
12
What is a demand function?

It is an equation representing the demand
curve
Qxd = f(Px , PY , M, H,)
–
–
–
–
–
Qxd = quantity demand of good X (textbooks).
Px = price of good X (textbooks).
PY = price of a related good (tuitions).
M = income.
H = any other variable affecting demand.
13
What is an inverse Demand
Function
Price as a function of quantity
demanded.
 Example:

– Demand Function

Qxd = 10 – 2Px
– Inverse Demand Function:
2Px = 10 – Qxd
 Px = 5 – 0.5Qxd

14
What changes the
quantity demanded?
Price
A to B: Increase in quantity demanded
Quantity
demanded
increased because
price decreased.
A
10
B
6
D0
4
7
Quantity
15
Change in Demand
Price
D0 to D1: Increase in Demand
Demand increased
because tuitions
went down.
6
D1
D0
7
13
Quantity
16
Let’s practice

Which of the following is most likely to shift
the demand curve for electricity to the left?
–
–
–
–

A) Consumers becoming more energy conscious.
B) An increase in income.
C) A decrease in the price of electricity.
D) An increase in the price of natural gas, a
substitute source of energy.
The answer is A
17
What is the consumer
surplus?


The value consumers get from a good
but do not have to pay for. Or,
The difference between the highest
price consumers will pay and the
actual market price.
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I got a great deal!




That company offers a
lot of bang for the buck!
Dell provides good
value.
Total value greatly
exceeds total amount
paid.
Consumer surplus is
large.
19
I got a lousy deal!





That car dealer drives
a hard bargain!
I almost decided not to
buy it!
They tried to squeeze
the very last cent from
me!
Total amount paid is
close to total value.
Consumer surplus is
low.
20
What is consumer surplus?
Consumer Surplus=
the value received but not
paid for = (8-2) + (6-2) + (42) = $12.
Price
10
8
6
4
Market price =2
D
1
2
3
4
5
Quantity
21
Consumer Surplus:
The Continuous Case
Price $
Total Value
of 4 units=area under
the demand curve= $24
10
Consumer
Surplus =
$24 - $8 =
$16
8
6
Expenditure on 4 units =
$2 x 4 = $8
4
Market price =2
D
1
2
3
4
5
Quantity
22
Managerial Economics:
Week Two, Class 2

Week One- Class 2
– Tuesday, September 11
– Cairness

In class
– Please turn off your phones.
– Have paper, pencil, calculator, notes with
you
23
Teaching Assistant





Darragh Flannery
[email protected]
Office: 234 , St. Anthony's
Office Hours beginning September 24
Mondays
– 10 AM till 1 PM and 3 PM till 6 PM
24
The first set of Aplia
assignments are up

You have till September 25 to
complete the assignment
– Do the practice questions first
– There are 4 graded problems and 4
multiple choice question.
– You can work on it a little at a time
25
You will need to purchase
the book as soon as
possible.

Don’t have to buy from the bookshop
– You will need a copy of a chapter in
another book later

I have left a copy of the first 3
chapters of the book at the media
center (printing services) in this
building.
26
What is the Supply Curve for managerial
textbook at NUI-Galway?

The supply curve shows the number of a
textbooks that will be supplied at
alternative prices.
Price
S0
Quantity
27
What is the law of
supply?

All else being constant, the supply
curve is upward sloping.
28
What are some of the other
determinants of supply besides
price?






Price of paper
Technology
Tax on books
Tariff on imported ink
Price of accounting book (substitute in
production)
What else?
29
What is the Supply Function?

An equation representing the supply
curve:
QxS = f(Px ,PR, W, H,)
– QxS = quantity supplied of books.
– Px = price of book.
– PR = price of accounting book
– W = price of inputs (e.g., wages).
– H = other variable affecting supply.
30
What is an inverse Supply
Function?
Price as a function of quantity
supplied.
 Example:

– Supply Function

Qxs = 10 + 2Px
– Inverse Supply Function:
2Px = 10 + Qxs
 Px = 5 + 0.5Qxs

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Change in Quantity
Supplied
Price
A to B: Increase in quantity supplied
S0
B
20
Quantity
supplied will
increase only if
price increases
A
10
5
10
Quantity
32
Change in Supply
S0 to S1: Increase in supply
Price
S0
S1
Supply will
increase
because of a
change in a
factor other
than price of
the good.
8
5
7
Quantity
33
Is the following
statement true or false?

An additional tariff on imported wine
from France will decrease the quantity
of French wine supplied in Ireland.
– False

An additional tariff on imported wine from
France will decrease the supply of French
wine in Ireland.
34
Let’s practice

Graphically, a hurricane that destroys 30
percent of the orange trees in Florida will
cause the supply curve for oranges to
–
–
–
–

A) shift rightward.
B) shift leftward.
C) become flatter.
D) become steeper.
The answer is B
35
Let’s practice

Holding all else constant, as additional firms
leave an industry
– A) more output is available at each given price.
– B) less output is available at each given price.
– C) the same output is available at each given
price.
– D) Unable to tell.

Answer: B
36
What is producer surplus?

The amount producers receive in excess of the
amount necessary to induce them to produce the
good.
Price
Producer
surplus = P
– marginal
cost
S0
The points on the supply
curve represent the price
necessary to induce
suppliers to supply =
marginal cost
P*
Q*
Quantity
37
What is market equilibrium?

Balancing supply and
demand
QxS = Qxd

Steady-state
38
If price is too low…
Price
S
7
6
5
D
Shortage
12 - 6 = 6
6
12
Quantity
39
If price is too high…
Surplus
14 - 6 = 8
Price
S
9
8
7
D
6
8
14
Quantity
40
Managerial Economics




Week Two, Class 3
Thursday, September 13
15:10-16:00
Tyndall
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Don’t forget to register
for Aplia



Directions on my course contract at
www.mareitta.edu/~khorassj
Assignment 1 is due September 25
42
Comparative Static
Analysis

shows how the equilibrium price and
quantity will change when a
determinant of supply or demand
changes.
43
How can managers use the
comparative static analysis
to make decisions?
Event: The WSJ reports that the
prices of PC components are
expected to fall by 5-8 percent
over the next six months.
 Scenario 1: You manage a small
firm that manufactures PCs.

44
As a manager of a small
PC maker, you will need to


Step 1: Look for the “Big Picture.”
Step 2: Organize an action plan (worry
about details).
45
Step 1: Consider the
market for PCs


Price of components are expected to
go down
Cost of production of PCs is expected
to go
– down

Supply of PCs is expected to go
– up
46
Big Picture: Impact of decline in
component prices on PC market
Price
of
PCs
S
S*
P0
P*
Price of PCs
is expected
to go down
and quantity
of PCs is
expected to
go up
D
Q0
Q*
Quantity of PC’s
47
Big Picture Analysis: PC
Market


Equilibrium price of PCs will fall, and
equilibrium quantity of computers sold
will increase.
Use this to organize an action plan
– contracts/suppliers?
– inventories?
– human resources?
– marketing?
– do I need quantitative estimates?
48
How can managers use the
comparative static analysis
to make decisions?


Event: The WSJ reports that the
prices of PC components are expected
to fall by 5-8 percent over the next six
months.
Scenario 2: You manage a small
software company.
49
Scenario 2: Software
Maker

Step 1: Use analysis like that in Scenario
1 to deduce that lower component
prices will lead to
– a lower equilibrium price for computers.
– a greater number of computers sold.

Step 2: How will these changes affect
the “Big Picture” in the software
market?
50
Big Picture: Impact of lower PC
prices on the software market
Price
of Software
S
P1
P0
Price
goes up
and
quantity
goes up
D*
D
Q0 Q1
Quantity of
Software
51
Big Picture Analysis:
Software Market


Software prices are likely to rise, and
more software will be sold.
How will you use this to organize an
action plan?
52
Conclusion

Use supply and demand analysis to
– clarify the “big picture” (the general impact
of a current event on equilibrium prices
and quantities).
– organize an action plan (needed changes
in production, inventories, raw materials,
human resources, marketing plans, etc.).
53
What are price restrictions?

1.
Government decides to set a price
above or below market equilibrium
price
Price Ceilings
– The maximum legal price that can be
charged.
– Examples:


Gasoline prices in the 1970s.
Rent control in New York City.
54
Impact of a Price Ceiling
Price
S
P*
P Ceiling
D
Shortage
Qs
Q*
Qd
Quantity
55
Full Economic Price

The dollar amount paid to a firm under a
price ceiling, plus the nonpecuniary price.
PF = Pc + (PF - PC)



PF = full economic price
PC = price ceiling
PF - PC = nonpecuniary price
56
An Example from the
1970s


Ceiling price of gasoline: $1.
3 hours in line to buy 15 gallons of gasoline
– Opportunity cost: $5/hr.
– Total value of time spent in line: 3 
$5 = $15.
– Non-pecuniary price per gallon:
$15/15=$1.

Full economic price of a gallon of gasoline:
$1+$1=2.
57
price restrictions
2. Price Floors
– The minimum legal price that can be
charged.
– Examples:
Minimum wage.
 Agricultural price supports.

58
Impact of a Price Floor
Price
Surplus
S
PF
P*
D
Qd
Q*
QS
Quantity
59
Let’s practice






When government imposes a price ceiling above
the market price, the result will be that
A) surpluses occur.
B) shortages become a problem.
C) supply and demand will shift up to the new
equilibrium.
D) A price ceiling set above the equilibrium price
will have no effect on the market equilibrium.
Answer: D
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