Welcome to EC 209: Managerial Economics- Group A By: Dr. Jacqueline Khorassani

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Welcome to Welcome to EC 209: Managerial EC 209: Managerial Economics- Group AEconomics- Group ABy:By: Dr. Jacqueline KhorassaniDr. Jacqueline Khorassani

Week TwoWeek Two

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Class OneClass One

Monday, September 10Monday, September 10

11:00-11:5011:00-11:50Fottrell (AM)Fottrell (AM)

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AnnouncementAnnouncement We are looking for 2 students from 2nd We are looking for 2 students from 2nd

Commerce to come forward for the Commerce to come forward for the Staff/Student Liaison Committee; as well Staff/Student Liaison Committee; as well as two students from the B.Comm Intl and as two students from the B.Comm Intl and BSc in BIS classes.BSc in BIS classes.

Contact:Contact: Mairéad MacKenzie Mairéad MacKenzie

Administrative Assistant Administrative Assistant Commerce Faculty Commerce Faculty NUI, Galway NUI, Galway

Phone: 091 492612 Phone: 091 492612 Fax:     091 494546 Fax:     091 494546 E-mail: [email protected]: [email protected]

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Good morningGood morning

How was your weekend?How was your weekend? I am fineI am fine I am adjustingI am adjusting This morning, I thought I saw a 6-This morning, I thought I saw a 6-

7 year old boy driving!!!!7 year old boy driving!!!!– Oooops, the wrong side of the car!!! Oooops, the wrong side of the car!!!

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I did not receive any questions I did not receive any questions from you on Chapter One, so from you on Chapter One, so let’s practicelet’s practice

If the interest rate is 7% and cash flows If the interest rate is 7% and cash flows are $4,000 at the end of year one and are $4,000 at the end of year one and $6,000 at the end of year two, then the $6,000 at the end of year two, then the present value of these cash flows is present value of these cash flows is – A)A) $8,979. $8,979. – B)B) $11,149. $11,149. – C)C) $309. $309. – D)D) $9,346. $9,346.

The answer is AThe answer is A

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AnswerAnswer

PV = (4000/1.07) + (6000/(1.07)PV = (4000/1.07) + (6000/(1.07)22))

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Let’s practiceLet’s practice

If the interest rate is 4%, the If the interest rate is 4%, the present value of $1000 received present value of $1000 received at the end of 3 years is at the end of 3 years is – A)A) $970. $970. – B)B) $1,040. $1,040. – C)C) $889. $889. – D)D) $961. $961.

The answer is C The answer is C

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AnswerAnswer

PV = 1000/(1.04)PV = 1000/(1.04)33

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Let’s practiceLet’s practice

Maximizing the firm's current profits is Maximizing the firm's current profits is the same as maximizing the lifetime the same as maximizing the lifetime value of the firm when the value of the firm when the – A)A) growth rate in profits is larger than the growth rate in profits is larger than the

interest rate. interest rate. – B)B) growth rate in profits and the interest growth rate in profits and the interest

rate are equal. rate are equal. – C)C) interest rate is constant and is smaller interest rate is constant and is smaller

than the growth rate in profits. than the growth rate in profits. – D)D) interest rate is larger than the growth interest rate is larger than the growth

rate in profits and both are constant. rate in profits and both are constant. The answer is DThe answer is D

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Chapter 2: You have already seen Chapter 2: You have already seen these topics in other courses. You did these topics in other courses. You did not send me any questions . So we not send me any questions . So we move fast.move fast.

What is the demand curve for What is the demand curve for managerial textbook at NUI-managerial textbook at NUI-Galway? Galway? – It is a curve that shows the number of It is a curve that shows the number of

textbooks that will be purchased at textbooks that will be purchased at alternative prices, holding other alternative prices, holding other factors constant.factors constant.

D

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What is the law of What is the law of demand?demand? It states that, all else being It states that, all else being

constant, the demand curve is constant, the demand curve is downward sloping.downward sloping.

Quantity

Price

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What factors other than price What factors other than price affect the demand for affect the demand for managerial textbook?managerial textbook?

Number of students in managerial Number of students in managerial classclass

Income (budget) of studentsIncome (budget) of students Tuitions and fees at NUI (the price Tuitions and fees at NUI (the price

of complements)of complements) What else?What else? If the above factors change the If the above factors change the

demand curve will shift.demand curve will shift.

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What is a demand What is a demand function?function?

It is an equation representing the It is an equation representing the demand curvedemand curve

QQxxd d = f(P= f(Px x ,, PPY Y , M, H,), M, H,)

– QQxxd d = quantity demand of good X = quantity demand of good X

(textbooks). (textbooks). – PPx x = price of good X (textbooks).= price of good X (textbooks).– PPY Y = price of a related good (tuitions).= price of a related good (tuitions).– M = income.M = income.– H = any other variable affecting demand.H = any other variable affecting demand.

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What is an inverse What is an inverse Demand FunctionDemand Function

Price as a function of quantity Price as a function of quantity demanded.demanded.

Example:Example:– Demand FunctionDemand Function

QQxxd d = 10 – 2P= 10 – 2Px x

– Inverse Demand Function:Inverse Demand Function: 2P2Px x = 10 – Q= 10 – Qxx

dd

PPx x = 5 – 0.5Q= 5 – 0.5Qxxdd

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What changes the What changes the quantity demanded?quantity demanded?

Price

Quantity

D0

4 7

6

A to B: Increase in quantity demanded

B

10 A Quantity demanded increased because price decreased.

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Price

Quantity

D0

D1

6

7

D0 to D1: Increase in Demand

Change in DemandChange in Demand

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Demand increased because tuitions went down.

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Let’s practiceLet’s practice

Which of the following is most likely to Which of the following is most likely to shift the demand curve for electricity to shift the demand curve for electricity to the left? the left? – A)A) Consumers becoming more energy Consumers becoming more energy

conscious. conscious. – B)B) An increase in income. An increase in income. – C)C) A decrease in the price of electricity. A decrease in the price of electricity. – D)D) An increase in the price of natural gas, a An increase in the price of natural gas, a

substitute source of energy.substitute source of energy. The answer is AThe answer is A

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What is the consumer What is the consumer surplus? surplus?

The value consumers get from a The value consumers get from a good but do not have to pay for. good but do not have to pay for. Or,Or,

The difference between the The difference between the highest price consumers will pay highest price consumers will pay and the actual market price.and the actual market price.

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I got a great deal!I got a great deal!

That company offers a That company offers a lot of bang for the lot of bang for the buck!buck!

Dell provides good Dell provides good value.value.

Total value greatly Total value greatly exceeds total amount exceeds total amount paid.paid.

Consumer surplus is Consumer surplus is large.large.

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I got a lousy deal!I got a lousy deal!

That car dealer drives a That car dealer drives a hard bargain! hard bargain!

I almost decided not to I almost decided not to buy it!buy it!

They tried to squeeze They tried to squeeze the very last cent from the very last cent from me!me!

Total amount paid is Total amount paid is close to total value.close to total value.

Consumer surplus is lowConsumer surplus is low..

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Price

Quantity

D

10

8

6

4

Market price =2

1 2 3 4 5

Consumer Surplus=the value received but notpaid for = (8-2) + (6-2) + (4-2) = $12.

What is consumer What is consumer surplus? surplus?

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Consumer Surplus:Consumer Surplus:The Continuous CaseThe Continuous Case

Price $

Quantity

D

10

8

6

4

Market price =2

1 2 3 4 5

Total Valueof 4 units=area under the demand curve= $24Consumer

Surplus = $24 - $8 = $16

Expenditure on 4 units = $2 x 4 = $8

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Managerial Economics: Managerial Economics: Week Two, Class 2Week Two, Class 2 Week One- Class 2 Week One- Class 2

– Tuesday, September 11Tuesday, September 11– CairnessCairness

In classIn class– Please turn off your phones.Please turn off your phones.– Have paper, pencil, calculator, notes Have paper, pencil, calculator, notes

with youwith you

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Teaching AssistantTeaching Assistant

Darragh Flannery Darragh Flannery [email protected]@nuigalway.ie Office: 234 , St. Anthony'sOffice: 234 , St. Anthony's Office Hours beginning September Office Hours beginning September

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– 10 AM till 1 PM and 3 PM till 6 PM10 AM till 1 PM and 3 PM till 6 PM

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The first set of Aplia The first set of Aplia assignments are upassignments are up You have till September 25 to You have till September 25 to

complete the assignmentcomplete the assignment– Do the practice questions firstDo the practice questions first– There are 4 graded problems and 4 There are 4 graded problems and 4

multiple choice question.multiple choice question.– You can work on it a little at a timeYou can work on it a little at a time

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You will need to You will need to purchase the book as purchase the book as soon as possible.soon as possible. Don’t have to buy from the Don’t have to buy from the

bookshopbookshop– You will need a copy of a chapter in You will need a copy of a chapter in

another book lateranother book later I have left a copy of the first 3 I have left a copy of the first 3

chapters of the book at the media chapters of the book at the media center (printing services) in this center (printing services) in this building.building.

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What is the Supply Curve for What is the Supply Curve for

managerial textbook at NUI-Galway?managerial textbook at NUI-Galway?

The supply curve shows the number The supply curve shows the number of a textbooks that will be supplied of a textbooks that will be supplied at alternative prices.at alternative prices.

Price

Quantity

S0

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What is the law of What is the law of supply?supply? All else being constant, All else being constant, the supply the supply

curve is upward sloping.curve is upward sloping.

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What are some of the other What are some of the other determinants of supply besides determinants of supply besides price?price?

Price of paperPrice of paper TechnologyTechnology Tax on booksTax on books Tariff on imported inkTariff on imported ink Price of accounting book (substitute in Price of accounting book (substitute in

production)production) What else?What else?

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What is the Supply What is the Supply Function?Function? An equation representing the supply An equation representing the supply

curve:curve:

QQxxS S = f(P= f(Px x ,P,PR, W, H,), W, H,)

– QQxxS S = quantity supplied of books. = quantity supplied of books.

– PPx x = price of book.= price of book.

– PPR R = price of accounting book= price of accounting book

– W = price of inputs (e.g., wages).W = price of inputs (e.g., wages).– H = other variable affecting supply.H = other variable affecting supply.

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What is an inverse What is an inverse Supply Function?Supply Function?

Price as a function of quantity Price as a function of quantity supplied.supplied.

Example:Example:– Supply FunctionSupply Function

QQxxs s = 10 + 2P= 10 + 2Px x

– Inverse Supply Function:Inverse Supply Function: 2P2Px x = 10 + Q= 10 + Qxx

ss

PPx x = 5 + 0.5Q= 5 + 0.5Qxxss

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Change in Quantity Change in Quantity SuppliedSuppliedPrice

Quantity

S0

20

10

B

A

5 10

A to B: Increase in quantity supplied

Quantity supplied will increase only if price increases

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Price

Quantity

S0

S1

8

75

S0 to S1: Increase in supply

Change in SupplyChange in Supply

Supply will increase because of a change in a factor other than price of the good.

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Is the following Is the following statement true or statement true or false?false? An additional tariff on imported An additional tariff on imported

wine from France will decrease wine from France will decrease the quantity of French wine the quantity of French wine supplied in Ireland.supplied in Ireland.– FalseFalse

An additional tariff on imported wine An additional tariff on imported wine from France will decrease the supply of from France will decrease the supply of French wine in Ireland.French wine in Ireland.

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Let’s practiceLet’s practice

Graphically, a hurricane that destroys Graphically, a hurricane that destroys 30 percent of the orange trees in 30 percent of the orange trees in Florida will cause the supply curve for Florida will cause the supply curve for oranges to oranges to – A)A) shift rightward. shift rightward. – B)B) shift leftward. shift leftward. – C)C) become flatter. become flatter. – D)D) become steeper. become steeper.

The answer is BThe answer is B

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Let’s practiceLet’s practice

Holding all else constant, as additional Holding all else constant, as additional firms leave an industry firms leave an industry – A)A) more output is available at each given more output is available at each given

price. price. – B)B) less output is available at each given less output is available at each given

price. price. – C)C) the same output is available at each the same output is available at each

given price. given price. – D)D) Unable to tell. Unable to tell.

Answer: BAnswer: B

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What is producer What is producer surplus?surplus?

The amount producers receive in excess of the The amount producers receive in excess of the amount necessary to induce them to produce the amount necessary to induce them to produce the good.good.

Price

Quantity

S0

Q*

P*

Producer surplus = P – marginal cost

The points on the supply curve represent the price necessary to induce suppliers to supply = marginal cost

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What is market What is market equilibrium?equilibrium?

Balancing supply and Balancing supply and demanddemand

QQxxS S = Q= Qxx

dd

Steady-stateSteady-state

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Price

Quantity

S

D

5

6 12

Shortage12 - 6 = 6

6

If price is too low…If price is too low…

7

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Price

Quantity

S

D

9

14

Surplus14 - 6 = 8

6

8

8

If price is too high…If price is too high…

7

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Managerial EconomicsManagerial Economics

Week Two, Class 3Week Two, Class 3 Thursday, September 13Thursday, September 13 15:10-16:0015:10-16:00 TyndallTyndall

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Don’t forget to Don’t forget to register for Apliaregister for Aplia Directions on my course contract Directions on my course contract

atat www.mareitta.edu/~khorassjwww.mareitta.edu/~khorassj Assignment 1 is due September Assignment 1 is due September

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Comparative Static Comparative Static AnalysisAnalysis

shows how the equilibrium price shows how the equilibrium price and quantity will change when a and quantity will change when a determinant of supply or demand determinant of supply or demand changes.changes.

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How can managers use How can managers use the comparative static the comparative static analysis to make analysis to make decisions?decisions? Event: The Event: The WSJWSJ reports that reports that

the prices of PC components the prices of PC components are expected to fall by 5-8 are expected to fall by 5-8 percent over the next six percent over the next six months.months.

Scenario 1:Scenario 1: You manage a You manage a small firm that manufactures small firm that manufactures PCs.PCs.

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As a manager of a small As a manager of a small PC maker, you will PC maker, you will need toneed to

Step 1: Look for the “Big Picture.”Step 1: Look for the “Big Picture.” Step 2: Organize an action plan Step 2: Organize an action plan

(worry about details).(worry about details).

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Step 1: Consider the Step 1: Consider the market for PCsmarket for PCs Price of components are expected Price of components are expected

to go downto go down Cost of production of PCs is Cost of production of PCs is

expected to go expected to go – downdown

Supply of PCs is expected to go Supply of PCs is expected to go – upup

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Priceof

PCs

Quantity of PC’s

S

D

S*

P0

P*

Q0 Q*

Big Picture: Impact of decline Big Picture: Impact of decline in component prices on PC in component prices on PC marketmarket

Price of PCs is expected to go down and quantity of PCs is expected to go up

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Equilibrium price of PCs will fall, Equilibrium price of PCs will fall, and equilibrium quantity of and equilibrium quantity of computers sold will increase.computers sold will increase.

Use this to organize an action planUse this to organize an action plan– contracts/suppliers?contracts/suppliers?– inventories?inventories?– human resources?human resources?– marketing?marketing?– do I need quantitative estimates?do I need quantitative estimates?

Big Picture Analysis: PC Big Picture Analysis: PC MarketMarket

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How can managers use How can managers use the comparative static the comparative static analysis to make analysis to make decisions? decisions? Event: The Event: The WSJWSJ reports that the reports that the

prices of PC components are prices of PC components are expected to fall by 5-8 percent expected to fall by 5-8 percent over the next six months.over the next six months.

Scenario 2Scenario 2: You manage a small : You manage a small software company.software company.

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Scenario 2: Software Scenario 2: Software MakerMaker

Step 1: Use analysis like that in Step 1: Use analysis like that in Scenario 1 to deduce that lower Scenario 1 to deduce that lower component prices will lead tocomponent prices will lead to– a lower equilibrium price for computers.a lower equilibrium price for computers.– a greater number of computers sold.a greater number of computers sold.

Step 2: How will these changes affect Step 2: How will these changes affect the “Big Picture” in the software the “Big Picture” in the software market?market?

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Priceof Software

Quantity ofSoftware

S

D

Q0

D*

P1

Q1

Big Picture: Impact of lower Big Picture: Impact of lower PC prices on the software PC prices on the software marketmarket

P0

Price goes up and quantity goes up

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Software prices are likely to rise, Software prices are likely to rise, and more software will be sold.and more software will be sold.

How will you use this to organize How will you use this to organize an action plan?an action plan?

Big Picture Analysis: Big Picture Analysis: Software MarketSoftware Market

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ConclusionConclusion

Use supply and demand analysis toUse supply and demand analysis to– clarify the “big picture” (the general clarify the “big picture” (the general

impact of a current event on impact of a current event on equilibrium prices and quantities).equilibrium prices and quantities).

– organize an action plan (needed organize an action plan (needed changes in production, inventories, changes in production, inventories, raw materials, human resources, raw materials, human resources, marketing plans, etc.).marketing plans, etc.).

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What are price What are price restrictions?restrictions? Government decides to set a Government decides to set a

price above or below market price above or below market equilibrium priceequilibrium price

1.1. Price CeilingsPrice Ceilings– The The maximummaximum legal price that can legal price that can

be charged.be charged.– Examples:Examples:

Gasoline prices in the 1970s.Gasoline prices in the 1970s. Rent control in New York City.Rent control in New York City.

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Price

Quantity

S

D

P*

Q*

P Ceiling

Q s

Impact of a Price Impact of a Price CeilingCeiling

Shortage

Q d

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Full Economic PriceFull Economic Price

The dollar amount paid to a firm under The dollar amount paid to a firm under a price ceiling, plus the nonpecuniary a price ceiling, plus the nonpecuniary price.price.

PPF F = P= Pc c + (P+ (PFF - P - PCC) ) PPF F = full economic price= full economic price PPC C = price ceiling= price ceiling PPFF - P - PC C = nonpecuniary price= nonpecuniary price

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An Example from the An Example from the 1970s1970s Ceiling price of gasoline: $1.Ceiling price of gasoline: $1. 3 hours in line to buy 15 gallons of gasoline3 hours in line to buy 15 gallons of gasoline

– Opportunity cost: $5/hr.Opportunity cost: $5/hr.– Total value of time spent in line: 3 Total value of time spent in line: 3

$5 = $15.$5 = $15.– Non-pecuniary price per gallon: Non-pecuniary price per gallon:

$15/15=$1.$15/15=$1. Full economic price of a gallon of gasoline: Full economic price of a gallon of gasoline:

$1+$1=2.$1+$1=2.

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price restrictionsprice restrictions

2. Price Floors2. Price Floors– The The minimumminimum legal price that can legal price that can

be chargedbe charged..– Examples:Examples:

Minimum wage.Minimum wage. Agricultural price supports.Agricultural price supports.

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Impact of a Price FloorImpact of a Price Floor

Price

Quantity

S

D

P*

Q*

Surplus

PF

Qd QS

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Let’s practiceLet’s practice

When government imposes a price ceiling When government imposes a price ceiling above the market price, the result will be above the market price, the result will be that that

A)A) surpluses occur. surpluses occur. B)B) shortages become a problem. shortages become a problem. C)C) supply and demand will shift up to the supply and demand will shift up to the

new equilibrium. new equilibrium. D)D) A price ceiling set above the equilibrium A price ceiling set above the equilibrium

price will have no effect on the market price will have no effect on the market equilibrium. equilibrium.

Answer: DAnswer: D