Welcome to EC 209: Managerial Economics- Group ABy: Dr. Jacqueline KhorassaniWeek Three

Class OneMonday, September 17 11:10-12:00Fottrell (AM)The textbook is now available at the bookshopDont forget that the first aplia assignment is due before September 25It is the week 4 assignmentRemember that if you dont ask questions, I assume you know.I did not get any questions on this weeks study guide. So,I will briefly go over what you must know.

What does the elasticity measure?It measures how responsive (sensitive) is variable G to one percent change in variable S

If EG,S > 0, then S and G are directly related.If EG,S < 0, then S and G are inversely related.If EG,S = 0, then S and G are unrelated.

How can elasticity be shown (measured) using calculus?

Suppose G = f (S), then

Where dG/dS is the partial derivative of G with respect to S

What is the own price elasticity of demand? Measures how sensitive the quantity demand is to one percent change in price.

How is it measured?

Is it negative or positive?

Negative, according to the law of demand.

Lets practiceIf quantity demanded for sneakers falls by 12% when price increases 4%, we know that the absolute value of the own-price elasticity of sneakers is A) 0.3. B) 0.8. C) 3.0. D) 3.3.Answer: C

What is the difference between elastic, inelastic and unitary elastic demands?

Elastic: Inelastic: Unitary elastic:

How does elasticity change along a linear demand curve?At any point on demand, the absolute value of elasticity = lower portion of demand /upper portion of demand

PQABC

At point A:What is the elasticity at point B?ZeroWhat is the elasticity at point C?Infinity

How does elasticity change along a linear demand curve?The lower half of demand is inelasticThe upper half of demand is elasticMid point of demand is unitary elastic

PQBC

////AInelasticElasticUnitary elastic

How is a perfectly elastic demand curve different from a perfectly inelastic demand curve?

DPriceQuantityDPriceQuantity

%P = 0% Q = 0

How does the own price elasticity of demand relate total revenue?

QQPTR100001020304050

Elasticity, Total Revenue and Linear Demand

QQPTR10001020304050 8080001020304050

Elasticity, Total Revenue and Linear Demand

QQPTR100 80800 6012000102030405001020304050In the elastic portion of demand, as you lower the price, TR goes up

Elasticity, Total Revenue and Linear Demand

QQPTR100 80800 601200 400102030405001020304050

Elasticity, Total Revenue and Linear Demand

QQPTR100 80800 601200 40 200102030405001020304050

In the inelastic portion of demand, as you lower the price, TR goes down.

Elasticity, Total Revenue and Linear Demand

QQPTR100 80800 601200 40 20ElasticElastic0102030405001020304050

Elasticity, Total Revenue and Linear Demand

QQPTR100 80800 601200 40 20InelasticElasticElasticInelastic0102030405001020304050

Elasticity, Total Revenue and Linear Demand

QQPTR100 80800 601200 40 20InelasticElasticElasticInelastic0102030405001020304050Unit elasticUnit elasticIn the meddle of demand, TR is at its max

Managerial EconomicsWeek Three, Class 2

Tuesday, September 1815:10-16:00CairnesRemember: If you dont ask, I assume you know.

About Aplia Assignments25% of gradeFees = $20

Need to be paid in 5 days or they kick you out of the programI have no control over thisCourse Key: R8WC-VRSZ-SCBQ Assignment 1 is due before noon on September 25

5 grades question sets

Lets practiceAssume that the price elasticity of demand is -2 for a certain firm's product. If the firm raises price, the firm's managers can expect total revenue to:

a) Decreaseb) Increasec) Remain constantd) Either increase or remain constant depending upon the size of the price increase.Answer: A

How does the own-price elasticity related to marginal revenue?

What is marginal Revenue, MR? Revenue resulting from selling one more unit of outputMR = TR/Q

How does the own-price elasticity related to marginal revenue?

MR = P(1 + E)/E

Suppose E < -1which means |E| >1 (elastic), then MR is positiveSuppose E = -1 which means |E|=1 then MR is zeroSuppose E > -1 which means |E|

How does the own-price elasticity related to marginal revenue?

Between 0 to Q* demand is elastic and MR>0At Q* demand is unitary elastic and MR = 0Above Q* demand is inelastic and MR 0Inelastic MR

Which factors affect the own price ?You need to study this one on your own.

PP 79-82Ask me questions

Lets practiceThe demand for Adidas brand shoes is

A) more elastic than the demand for shoes in general. B) less elastic than the demand for shoes in general. C) equally elastic to the demand for shoes in general. D) none of the above.Answer: A

Lets practiceLemonade, a good with many close substitutes, should have an own-price elasticity that is:

a) unitary.b) relatively elastic.c) relatively inelastic.d) perfectly inelastic.Answer: B

What does the cross price elasticity of demand measure?

If EQX,PY > 0, then X and Y are substitutes.If EQX,PY < 0, then X and Y are complements.It measures how sensitive the quantity demand for good X is to one percent change in the price of good Y

Suppose that a firm sells two related good and the price of one good changes; how can the cross price elasticity help us predict the changes in the total revenue?

R = change in total revenue, Rx = good Xs revenue, RY = good Ys revenue

What is the income elasticity?

If EQX,M > 0, then X is a normal good.If EQX,M < 0, then X is a inferior good.Measure the percentage change in quantity demand for good X as the income of consumer changes by one percent.

Uses of ElasticityExample 1: Pricing and Cash Flows (revenue)According to an FTC Report by Michael Ward, AT&Ts own price elasticity of demand for long distance services is -8.64. AT&T needs to boost revenues in order to meet its marketing goals.To accomplish this goal, should AT&T raise or lower its price?

Answer: Lower price!Since demand is elastic, a reduction in price will increase quantity demanded by a greater percentage than the price decline, resulting in more revenues for AT&T.

Example 2: Quantifying the ChangeIf AT&T lowered price by 3 percent, what would happen to the volume of long distance telephone calls routed through AT&T?

Answer

Calls would increase by 25.92 percent!

Example 3: Impact of a change in a competitors priceAccording to an FTC Report by Michael Ward, AT&Ts cross price elasticity of demand for long distance services is 9.06. If competitors reduced their prices by 4 percent, what would happen to the demand for AT&T services?

Answer

AT&Ts demand would fall by 36.24 percent!

Interpreting Demand FunctionsMathematical representations of demand curves.Example:

Where M is income

What can you say about the relationship between good X and good Y?

X and Y are substitutes (coefficient of PY is positive).Is X a normal or an inferior good?

X is an inferior good (coefficient of M is negative).Holding price of Y and income constant, as price of X goes up by 1, quantity demanded for X goes ______ by ______.

down2

Managerial Economics- Group AWeek Three- Class 3

Thursday, September 2015:10-16:00TyndallAplia Assignment 1

due before noon on Tuesday, September 2525% of grade

I received a question on how to calculate own elasticity when we have the demand function and only one price and one quantity

RememberSuppose G = f (S), then

Where dG/dS is the partial derivative of G with respect to S

A General Linear Demand Functions

Own PriceElasticity = (dQdx/dPx)*Px/QxCross PriceElasticity=(dQdX/dPy)*Py/QxIncomeElasticity=(dQdX/dM)*M/Qx

Example: What is own elasticity if P = 1P = 5 1/2 Qd What is this?Inverse demand functionNeed to change it to a demand function Qd = 5 PQd = 10 - 2P.Own-Price Elasticity = dQd/dP * P/Q

= (-2)* P/QIf P=1, then Q is

8 (since 10 - 2 = 8).Own price elasticity at P=1, Q=8:

(-2)(1)/8= - 0.25.

General Log-Linear Demand Function

Example of Log-Linear Demandln(Qd) = 10 - 2 ln(P).Own Price Elasticity: -2.

Graphical Representation of Linear and Log-Linear Demand

QDDLinearLog Linear PElasticity varies along this demand curveElasticity is constant along this demand curve

Regression AnalysisWill not be covered at this time.

PP: 95 -109

Lets practiceGiven a log-linear demand curve, we know that

A) demand is elastic at high prices. B) demand is inelastic at low prices. C) demand is unitary elastic at low prices. D) the elasticity is constant at all prices.Answer: D

Chapter 4What are the properties of consumer preferences and what do they mean?

CompletenessMore is BetterDiminishing Marginal Rate of Substitution?Transitivity?

Property 1: CompletenessGiven the choice between 2 bundles of goods (A & B)

consumer must have an opinion, meaning that she should prefers bundle A to bundle B: A B;or, prefers bundle B to bundle A: A B;or, be indifferent between the two: A B.

Property 2: More is betterBundles that have at least as much of every good and more of some good are preferred to other bundles.

ExampleBundle A: 2 apples and 3 orangesBundle B: 2 apples and 5 orangesWhich one will you prefer?B AB is preferred to A

Property 3:Diminishing Marginal Rate of Substitution?

Marginal Rate of Substitution (MRS)

The rate at which a consumer is willing to substitute one good for another and maintain the same satisfaction level.Example:You are indifferent between 10 apples + 4 orangesOr 7 apples +5 orangesMRS of oranges for apples= number of apples you are willing to give up to get 1 more orange and stay as satisfied as before = _________.

3

Property 3: Diminishing Marginal Rate of Substitution?

The more oranges you have, the fewer apples you are willing to give up for an additional orange.

For the 5th orange, you gave up 3 applesFor the 6th orange, you will give up __________apples

2

Property 4: Transitivity

For the three bundles A, B, and C, the transitivity property implies that

if C B and B A, then C A.If you prefer apples to oranges and oranges to bananas, thenYou must prefer apples to bananas

What is an indifference curve and how does it reflect the properties of consumer preferences?

Indifference CurveA curve that defines the combinations of 2 goods (X and Y) that give a consumer the same level of satisfaction.Consumer is indifferent between these combinations