Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail:...
-
Upload
moses-ward -
Category
Documents
-
view
215 -
download
0
Transcript of Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail:...
![Page 1: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/1.jpg)
Managerial Economics
Professor Geoffrey Heal
616 Uris Hall
Phone: (212) 854-6459
e-mail: [email protected]
(note - gmh “one” not “L”)
![Page 2: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/2.jpg)
Course Outline:
(I) Analyzing the structure of a market
Part A: Demand & Supply
Part B: Costs
(II) Pricing (most important part of course)
(III) e-con.com (application and review)
(IV) Foundations of Strategy
![Page 3: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/3.jpg)
Aim: to understand key aspects of markets:
nature of demands for the products
closeness or otherwise of competitors
structure of costs
dependence of profits on the level of output
Analyzing the Structure of a Market
![Page 4: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/4.jpg)
Material to be covered:
Analysis of demand
– demand curves, – price, income & cross elasticities of demand– use of demand parameters in forecasting
Structure of costs:– fixed & variable costs– break-even analysis– opportunity costs and sunk costs– learning curves & economies of scale.
![Page 5: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/5.jpg)
How much product should you produce and what price should you charge for it?
How can you best segment your market if there are different types of buyers with different demand characteristics (e.g., business travelers vs. vacation travelers, home PC buyers vs. corporate buyers)?
What are the types of pricing schemes available (e.g., bundling, promotional offers, loyalty bonuses, volume discounts)?
Pricing
![Page 6: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/6.jpg)
e-con.com
Applications of market analysis to electronic commerce
How does the internet affect demand, pricing, and other aspects of running a business.
e-commerce business strategies. Auctions and the internet.
![Page 7: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/7.jpg)
Foundations of Strategy
Interacting with competitors Anticipating their reactions Forecasting the final outcome when
everyone has reacted.
![Page 8: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/8.jpg)
Aim of Course
To teach you to use basic economic ideas in making business decisions.
Decisions about opening and closing businesses.
Decisions about pricing and other policies.
![Page 9: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/9.jpg)
Level of Course
Emphasis on understanding concepts and where and how they can be used.
Don’t aim to make you an economist, but an intelligent consumer of economics.
Evaluate and understand works of consultants, staff. Ask the right questions.
Recognize BS when you see it!
![Page 10: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/10.jpg)
![Page 11: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/11.jpg)
Consumption & Price of Copper 1880-1998
![Page 12: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/12.jpg)
![Page 13: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/13.jpg)
Profit margin 1999/2001
Operating margin 1999/2001
MSFT
40.0%/30.5% 49.5%/46.3%
INTC 25%/17.7% 34.2%/20.7%
CPQ 1.5%/0.8% 2.4%/1.2%
DELL 7%/6.7% 9.9%/8%
![Page 14: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/14.jpg)
Compare Internet companies
eBay AOL Yahoo Amazon.com
![Page 15: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/15.jpg)
Demand and Supply
![Page 16: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/16.jpg)
Demand Curve
Shows amount purchased as a function of price
Depends on:
- income
- tastes
- prices of competitive products
- prices of complementary products
![Page 17: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/17.jpg)
Supply Curve
Amount offered for sale as a function of price
Depends on costs of production, which in turn depend on
- costs of inputs
- technology
![Page 18: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/18.jpg)
The Market Mechanism
Quantity
D
S
The curves intersect atequilibrium, or market-
clearing, price. At P0 thequantity supplied is equalto the quantity demanded
at Q0 .
P0
Q0
Price($ per unit)
![Page 19: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/19.jpg)
The Market Mechanism
Characteristics of the equilibrium or market clearing price: QD = QS
No shortage No excess supply No pressure on the price to change
![Page 20: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/20.jpg)
Demand Curve -Income Rises
![Page 21: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/21.jpg)
Demand Shifts
![Page 22: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/22.jpg)
Supply shifts
![Page 23: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/23.jpg)
D & S shift
![Page 24: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/24.jpg)
The Market Mechanism
D
S
Q1
Assume the price is P1 , then:1) Qs : Q1 > Qd : Q2 2) Excess supply is Q1:Q2.3) Producers lower price.4) Quantity supplied decreases
and quantity demanded increases.
5) Equilibrium at P2Q3
P1
Surplus
Q2 Quantity
Price($ per unit)
P2
Q3
![Page 25: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/25.jpg)
The Market Mechanism
The market price is above equilibrium There is excess supply Producers lower prices Quantity demanded increases and quantity
supplied decreases The market continues to adjust until the
equilibrium price is reached.
A SurplusA Surplus
![Page 26: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/26.jpg)
The Market Mechanism
D
S
Q1 Q2
P2
Shortage
Quantity
Price($ per unit)
Assume the price is P2 , then:1) Qd : Q2 > Qs : Q1
2) Shortage is Q1:Q2.3) Producers raise price.
4) Quantity supplied increases and quantity demanded decreases.
5) Equilibrium at P3, Q3
Q3
P3
![Page 27: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/27.jpg)
The Market Mechanism
The market price is below equilibrium: There is a shortage Producers raise prices Quantity demanded decreases and quantity
supplied increases The market continues to adjust until the new
equilibrium price is reached.
ShortageShortage
![Page 28: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/28.jpg)
The Market Mechanism
Market Mechanism - Summary:
1) Supply and demand interact to determine the market-clearing price.
2) When not in equilibrium, the market will adjust to alleviate a shortage or surplus and return the market to equilibrium.
3) Markets must be competitive for the mechanism to be efficient.
![Page 29: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/29.jpg)
![Page 30: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/30.jpg)
![Page 31: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/31.jpg)
Consumption & Price of Copper 1880-1998
![Page 32: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/32.jpg)
The Long-Run Behaviorof Natural Resource Prices
Observations Consumption of copper has increased about a
hundred fold from 1880 through 1998 indicating a large increase in demand.
The real price for copper has remained relatively constant.
![Page 33: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/33.jpg)
S1998
D1998
D1900
S1900
S1950
D1950
Long-Run Path of
Price and Consumption
Changes In Market Equilibrium
Quantity
Price
![Page 34: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/34.jpg)
Conclusion Decreases in the costs of production have
increased the supply by more than enough to offset the increase in demand.
Changes In Market Equilibrium
![Page 35: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/35.jpg)
Changes In Market Equilibrium
Wage Inequality in the United States
Real after-tax income from 1977 to 1999:
– Rose 40+% for the top 20% of the income distribution
– Fell 10+% for the bottom 20%
![Page 36: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/36.jpg)
Changes In Market Equilibrium
Question
Why did the income distribution become more unequal for 1977 to 1999?
![Page 37: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/37.jpg)
Price elasticity of demand:
Measures responsiveness of demand to price.
Defined as E = (Q/Q)/(P/P) = (Q/P)*(P/Q)
Why is it defined in proportional terms?
- Unit free.
- Scale sensitive.
A negative number.
![Page 38: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/38.jpg)
![Page 39: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/39.jpg)
Q = 8 - 2P or P = 4 - 0.5Q
Elasticity = (Q/Q)/(P/P) = (Q/P)*(P/Q) = -2*(P/Q)
![Page 40: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/40.jpg)
Elasticity and Pricing
If elasticity is between 0 and -1 then raising price will raise profits - it will raise revenues and lower costs.
If elasticity is lower than -1 then raising price will lower revenues and also costs, so the effect on profits is not clear.
Moral - never operate where the elasticity is between 0 and -1.
![Page 41: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/41.jpg)
Q = 8 - 2P
or
P = 4 - 0.5Q
so as revenue R is price times quantity
R = 4Q - 0.5Q2
Relationship between demand, quantity and revenue:
![Page 42: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/42.jpg)
PED = -1 PED = 0
Revenue rises as price rises
Revenue falls as price rises
![Page 43: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/43.jpg)
This is a quadratic pointing up.
The slope is:
R Q
which is zero at Q = 4.
Slope is positive for Q<4 and vice versa.
Maximum revenue comes when Q = 4, therefore P = 2, and max revenue is 8
= 4 - Q
![Page 44: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/44.jpg)
PED when revenue is maximum
Revenue is max when Q = 4, P = 2. E = (Q/Q)/(P/P) = (Q/P)*(P/Q) So E = (Q/P)*(1/2) and Q/P = -2 so E = -2 * 1/2 = -1 when R is
at a maximum.
![Page 45: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/45.jpg)
The responsiveness of demand for good A to change in price of good B:
QA/QA = QA * PB
PB/PB PB PA
Example:
responsiveness of demand for Dell computers to
prices of Gateway computers
Cross price elasticity of demand:
![Page 46: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/46.jpg)
Supply Elasticity
The responsiveness of supply to price changes.
(S/S)/(P/P), proportional change in supply divided by proportional change in price.
Usually positive.
![Page 47: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/47.jpg)
Elasticities of Supply and Demand
1981 Supply Curve for Wheat QS = 1,800 + 240P
1981 Demand Curve for Wheat QD = 3,550 - 266P
The Market for WheatThe Market for Wheat
![Page 48: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/48.jpg)
Elasticities of Supply and Demand
Equilibrium: Q S = Q D
PP 266550,3240800,1
750,1506 P
bushelP /46.3
bushels million 630,2)46.3)(240(800,1 Q
The Market for WheatThe Market for Wheat
![Page 49: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/49.jpg)
The Market for WheatThe Market for Wheat
Elasticities of Supply and Demand
ED=(P/Q) (QD/P) = (3.46/2630)(-266)= -0.35 ES=(P/Q) (QS/P) = (3.46/2630)(+240)= 0.32
![Page 50: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/50.jpg)
1981 1800 + 240P 3550 - 266P 1800+240P = 3550-266P506P = 1750
P1981 = $3.46/bushel
1998 1,944 + 207P 3,244 - 283P 1,944+207P = 3,244-283P P1998 = $2.65/bushel
Supply (Qs) Demand (QD) Equilibrium Price (Qs = QD)
Changes in the Market: 1981-1998The Market for WheatThe Market for Wheat
![Page 51: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/51.jpg)
Marginal Revenue
Increase in revenue from one extra sale Rate of change of revenue with respect to
sales Typically less than price as demand curve
slopes down Depends on PED
![Page 52: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/52.jpg)
Marginal Revenue & PED
MR = P{1 + 1/PED} Remember PED < 0 so MR < P. The larger PED as a number the nearer MR is to P If PED = - 1, then MR = 0. (Top of revenue curve) ………………………………………… Derivation - dR/dQ = d{P(Q).Q}/dQ = P + Q*dP/dQ = P{1 + (Q/P)*dP/dQ}
![Page 53: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/53.jpg)
Responsiveness of demand to changes in income
IED = (Q/Q)/I/I) = (Q/I)*(I/Q)
Use to define necessities and luxuries
Income Elasticity of Demand:
![Page 54: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/54.jpg)
Necessities - IED < 1
Luxuries - IED > 1
Cyclical vs. defensive sectors
Cyclical - high IED - foreign travel, consumer durables
Defensive - low IED - food, utilities
![Page 55: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/55.jpg)
![Page 56: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/56.jpg)
![Page 57: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/57.jpg)
Critical in understanding oil market, energy markets, metal markets
Responding to a price movement takes time - possibly many years
Long-run elasticity measures total responseShort-run elasticity measures immediate response
Short-run vs. long-run elasticities
![Page 58: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/58.jpg)
Short-run dropin demand
Long-run drop in demand
Po
P1
Short-rundemand
Long-run demand
![Page 59: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/59.jpg)
Price -0.11 -0.22 -0.32 -0.49 -0.82 -1.17
Income 0.07 0.13 0.20 0.32 0.54 0.78
Years Following Price or Income Change
Elasticity 1 2 3 4 5 6
The Demand for GasolineThe Demand for Gasoline
Short-Run Versus Long-Run Elasticities
![Page 60: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/60.jpg)
Price -1.20 -0.93 -0.75 -0.55 -0.42 -0.40
Income 3.00 2.33 1.88 1.38 1.02 1.00
Years Following Price or Income Change
Elasticity 1 2 3 4 5 6
The Demand for AutomobilesThe Demand for Automobiles
Short-Run Versus Long-Run Elasticities
![Page 61: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/61.jpg)
Data Explains:
1) Why the price of oil did not continue to rise above $30/barrel even though it rose very rapidly in the early 1970s.
2) Why automobile sales are so sensitive to the business cycle.
Short-Run Versus Long-Run Elasticities
The Demand forGasoline and Automobiles
The Demand forGasoline and Automobiles
![Page 62: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/62.jpg)
The World Oil Market
In 1995: P* = $18/barrel World demand and total supply = 23 bb/yr (= 63
mbd) OPEC supply = 10 bb/yr (= 27 mbd) Non-OPEC supply = 13 bb/yr (= 35 mbd) US consumption about 17 mbd = 5.5 bb/yr
![Page 63: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/63.jpg)
Price of Crude Oil
![Page 64: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/64.jpg)
![Page 65: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/65.jpg)
D
Quantity(billions barrels/yr)
Price($ per barrel)
5
18
ST
0 5 15 20 25 30 3510
10
15
20
25
30
35
40
45
23
Impact of Saudi Production CutSC
Short-RunEffect
S’T
![Page 66: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/66.jpg)
D
Quantity(billions barrels/yr)
Price($ per barrel)
5
ST
0 5 15 20 25 30 3510
10
15
20
25
30
35
40
45
23
18
Impact of Saudi Production Cut
SC
Due to the elasticityof the long-run
supply and demand curves, the long-run
effect of a cutin production is
much less.
S’T Long-run Effect
![Page 67: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/67.jpg)
AMAX Case
![Page 68: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/68.jpg)
Price (1980 $)
0
1
2
3
4
5
6
7
8
9
10
1975 1976 1977 1978 1979 1980
Year
Price (1980 $)
![Page 69: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/69.jpg)
Moly Consumption & Production
0
50
100
150
200
250
1975 1976 1977 1978 1979
Year
Consumption
Production
![Page 70: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/70.jpg)
MC
0
2
4
6
8
10
12
140
25
50
75
10
0
12
5
15
0
17
5
20
0
22
5
25
0
27
5
30
0
32
5
35
0
Output
Ma
rgin
al C
os
t
MC
Marginal Costs
![Page 71: Managerial Economics Professor Geoffrey Heal 616 Uris Hall Phone: (212) 854-6459 e-mail: gmh1@columbia.edu (note - gmh “one” not “L”)](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649d705503460f94a5290d/html5/thumbnails/71.jpg)