Transcript Managerial Economics & Business Strategy

Managerial Economics &
Business Strategy
Chapter 1
The Fundamentals of Managerial
Economics
Key Functions we will be using
• Five key functions
Demand

• Linear

Total Revenue
• Quadratic

Production
• Cubic

Total cost
• Cubic

Profit
• Cubic
$
Demand
P=a-bQ
(or Q = a-bP)
Q
$
Total Revenue
TR=a+bQ-cQ2
a=0
Q
$
Production (short run)
TP=a+bL+cL2-dL3
a=0
Q
$
Cost (short run)
TC=a+bQ-cQ2+dQ3
Q
$
Profit
= a-bQ+cQ2-dQ3
a<0
Q
Why is this important?
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The more data that can be obtained
The more mathematics can be used
The more precise we can be
The closer we can get to maximized profits
Managerial Economics &
Business Strategy
Chapter 2
Market Forces: Demand and Supply
Market Demand Curve
• Shows the amount of a good that will be
purchased at alternative prices, holding
other factors constant.
• Law of Demand


As price increases (decreases) QUANTITY demanded
decreases (increases)
Negative Slope Price
D
Quantity
Do we remember the
difference??
• Change in Quantity Demanded

Movement along the demand curve do to change in PRICE
• Change in Demand

Shift of the demand curve do to other non-price determinates
Change in Quantity Demanded
Price
A to B: Increase in quantity demanded
10
A
B
6
D0
4
7
Quantity
Change in Demand
Price
D0 to D1: Increase in Demand
6
D1
D0
7
13
Quantity
Determinants of Demand
• Income


Normal good
Inferior good
• Prices of Related Goods


Prices of substitutes
Prices of complements
• Advertising and consumer
tastes
• Population
• Consumer expectations
Quick Example…
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Milk market: The price of cereal increases
Milk market: The price of milk decreases
Milk market: People become lactose intolerant
Milk market: The price of soy milk increases
Milk market: An outbreak of mad cow disease has
killed 2/3 of the nation’s cow supply. Consumers
now fear that prices for milk will increase over the
next several months.
SELF TEST-Do we understand??
• Substitutes


Coke vs. Pepsi --- what happens if the price of Coke increases?
Qd of Pepsi?
• NOTHING

Qd of Coke?
• DECREASES

Demand for Coke?
• NOTHING

Demand for Pepsi?
• INCREASES
• Compliments


Tennis Balls and Tennis Rackets --- what happens if the price of
Tennis Rackets increase?
Qd of Tennis Balls?
• NOTHING

Qd of Tennis Rackets?
• DECREASES

Demand for Tennis Balls?
• DECREASES

Demand for Tennis Rackets?
• NOTHING
The Demand Function
• The functional form representing the demand
curve
Qxd = f(Px , PY , M, H,)



Qxd = quantity demand of good X.
Px = price of good X.
PY = price of a related good Y.
• Substitute good.
• Complement good.

M = income.
• Normal good.
• Inferior good.

H = any other variable affecting demand.
Linear Demand Curve
d
Qx  8,000 2Px  3Py 1M  2 Ax
• What do we know??
• Px  price of good x

Law of demand holds
• Py  price of good y

The goods are substitutes
• M  income

Good is inferior
• A  advertising

Advertising helps sell the good
Inverse Demand Function
• Linear demand curve is Qx = f (P….)
• BUT…when we graph it we use

Price as a function of quantity demanded.
• Example:

Demand Function
• Qxd = 10 – 2Px

Inverse Demand Function:
• 2Px = 10 – Qxd
• Px = 5 – 0.5Qxd