Transcript Lecture One
INTRODUCTION AND DEMAND
MBA NCCU
Managerial Economics
Lecturer: Jack Wu
INTRODUCTION
NEW ECONOMY: INTERNET
Managerial Economics also applies to the new
economy.
Example: In pricing, Airlines use online auctions
to segment their market between business and
leisure travelers.
Example: In competitive strategy, Google
competes fiercely with Yahoo.
OLD/NEW ECONOMY
Differences between “New” and “Old” economy:
_ role of network effects in demand
**network effects – benefit/cost depends on total
number of other users
example: Internt
_ importance of economies of scale and scope
example: Information in Yahoo is scalable
ORGANIZATION
Vertical boundaries – closer to or further from
end user
Samsung Electronics – vertical boundaries longer
than
Intel – specializes in semiconductors (upstream)
Motorola – specializes in mobile phones
(downstream)
ORGANIZATION
Horizontal boundaries – scale and scope of
activities
Samsung Electronics – horizontal boundaries
broader than
LG.Philips LCD – specializes in LCD
Motorola – specializes in mobile phones
MARKET
Market: Buyers and sellers communicate with
one another for voluntary exchange
market need not be physical
industry -- businesses engaged in the production
or delivery of the same or similar items
MARKET: CONTINUED
Competitive Markets
Market Power
Imperfect Markets
DEMAND
CASE: RISING GASOLINE PRICES
Between September 2004 and September 2005,
the monthly average retail price of gasoline
jumped from $1.85 per gallon to $3.08 per gallon.
Sales of full-size SUVs dropped 16.8% over the
same time period (with a particularly sharp
42.5% drop for full-size GM SUVs).
GM VICE CHAIRMAN: BOB LUTZ
May 31, 2004: “It sounds cavalier, but in any
household budget, gasoline isn't a factor”,
Business Week.
July 1, 2005: “The demise of the full-size truck is
a figment of the imagination of the popular press.
Everybody assumes it is true but the market is
still buying”, Reuters.
“The effect will decrease over time as people
adjust to the thought of $3 a gallon, just as they
did when it was $2 a gallon and just as they did
when it was $1 a gallon”, New York Times.
MANAGERIAL ECONOMICS
QUESTIONS
How
important are gasoline prices to the sales of
SUVs and other types of automobiles?
How should the auto manufacturers respond to
the increasing price of gasoline?
Are manufacturer incentives (i.e. price reductions)
an effective response?
What are the combined effects of incentives and
increasing gas prices?
MANAGERIAL ECONOMICS TOOL:
DEMAND
We apply demand to show how the rising price of
gasoline has caused decreases in large SUV sales,
and how manufacturer incentives can offset these
reductions.
INDIVIDUAL DEMAND CURVE
Definition: graph of quantity that buyer will
purchase at every possible price
Construction -- “Other things equal, how many
would you buy at a price of ….?’’
vertical axis -- price
horizontal axis -- quantity
INDIVIDUAL DEMAND SCHEDULE
Price
($ per movie)
10.00
7.50
5.00
2.50
0.00
Quantity
(movies per month)
0
1
2
4
7
INDIVIDUAL DEMAND CURVE
Price ($ per movie)
10
7.50
individual demand curve
5
2.50
0
1
2
4
Quantity (Movies a month)
7
INDIVIDUAL DEMAND SCHEDULE II
Price
($ per movie)
20.00
19.00
18.00
….
0.00
Quantity
(movies per month)
0
1
2
…
20
ANOTHER TYPE OF INDIVIDUAL DEMAND
CURVE
TWO VIEWS
for every possible price, it shows the quantity
demanded
for each unit of item, it shows the maximum price
that the buyer is willing to pay
DEMAND CURVE: SLOPE
diminishing marginal benefit -- each additional
unit of consumption/usage provides less benefit
than the preceeding unit
demand
curve slopes downward
HOOVER, 1992
A negative price case:
Hoover’s special promotion -- two free air tickets
(worth more than £400) for purchase of appliance
over £100.
promotion attracted over 100,000 customers
Hoover incurred £48 million loss
DEMAND AND INCOME
Changes in income
normal product – demand
increases with income
inferior product – demand falls
with income
DEMAND AND OTHER FACTORS
prices of related products
substitutes
complements
advertising
RECORDED MUSIC
Argentina Canada
CD purchases
0.5
2.6
cassette
purchases
GDP/capita
0.2
0.4
$9,413
$19,831
CD price
$13.80
$11.55
cassette price
$ 7.80
$ 6.06
RECORDED MUSIC
Why the average Canadian bought more of both
CDs and cassettes?
Why the ratio of CD to cassette purchases was
relatively higher in Canada?
RECORDED MUSIC
Canadians
enjoyed higher incomes
Cassettes were a relatively inferior product
compared to CDs
Another possible explanation: difference in the
relative prices of CDs and cassettes
_ Canada: 11.55/6.06=1.9
_ Argentina: 13.80/7.80=1.77
* don’t not explain why Canadians bought
relatively more CDs than Argentines.
MARKET DEMAND
Market demand = horizontal summation
of individual demands
Price
Joy
Max
Lucas
Market
$10
0
0
0
0
$7.50
1
0
0
1
$5
2
1
0
3
$2.50
4
2
3
9
$0
7
6
4
17
BUYER SURPLUS
individual buyer surplus: difference between
consumer’s benefit and price she must pay for the
item
market buyer surplus: sum of individual buyer
surpluses.
INDIVIDUAL BUYER SURPLUS
Price ($ per movie)
10
individual buyer surplus at $2.50 price
7.50 d
5 c
a
b
e
individual demand
(marginal benefit) curve
f
2.50 g
h
j
0
1
2
4
Quantity (Movies a month)
7
BUYER SURPLUS: INDIVIDUAL
GAINS FROM PRICE CUT
lower price on the quantity that he/she would
have purchased at the original price
(inframarginal units)
he/she can buy more (marginal units)
Case: Student discount price for movie
PACKAGE DEAL
charge buyer just a little less than her/his total
benefit
leave buyer with almost zero surplus
BUYER SURPLUS:
TWO-PART PRICING
fixed payment
usage charge
fixed
payment
usage
charge
BUYER SURPLUS: TWO-PART PRICING
Business
Provider
Broadband
access, Hong
Kong
PCCW Netvigator HK$298 per HK$2 per
3M Single User
month (incl. additional
Plan
100 free
hr
hrs)
Mobile telephone Etisalat
service, UAE
Corporation,
GSM Standard
Service
Fixed Fee
125 dirham
connection
fee; 60
dirham per
qtr
Usage Fee
0.24/0.18
dirham per
min (peak/
offpeak)