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MBA 710
Applied Economic Analysis
 Instructor: Bernard Malamud
– Office: BEH 502
Phone (702) 895 –3294
Fax:
895 – 1354
» Email: [email protected]
Website: www.unlv.edu/faculty/bmalamud
Office hours: TR 11:30 – 12:30; 2:30 – 3:30 pm
And by appointment
Economics for Strategic Thinking
You and your adversaries/partners
• Your customers, suppliers, competitors,
colleagues
• Anticipate what they’ll do
• Figure they’re as smart as you are
Tools of economic analysis
• Build simple, tractable models of complex
situations
… Capture the essence
• Assume purposeful behavior
–Maximize profit … subject to constraints
• Anticipate outcomes … what happens when
everyone does their best
• Evaluate outcomes
• Seek improvements
The Mantra:
Marginal Benefits = Marginal Costs
Demand and Supply
Buyer Demand
 Price
 Income
 Tastes
 Other Prices
– Substitutes
– Complements

Expectations
Seller Supply
 Price
 Costs
 Input prices
– Wages, rents, ...
– Supplies
Technology
 Expectations

GM’s Story
Gotta give rebates to old-truck owners = X
 Coupon can be resold to others (for Q)

– They get smaller rebate = x
– There’s also a brokerage fee = k
 Demand: 2.0 million trucks @ $20K
• 0.6 million old-truck owners
• 1.4 million other buyers
Price elasticity of demand = 4
GM’s Story, continued

Price elasticity of demand = 4
– For each 1% increase in price above $20K
there’s a 4% decrease in quantity demanded
below 2.0 million
– If price rises by 1% to $20.2K, sales drop by
80,000 (4% of 2 million) to 1.92 million
This is highly elastic demand
 ↑P Q↓↓ … Total Revenue = TR ↓
 ↓P Q↑↑ … Total Revenue = TR ↑

GM’s Story, continued

Cost of truck to GM = $15K
Marginal Cost = $15K … doesn’t change

GM wants to maximize profit
Profit = Total Revenue – Total Cost
It should produce to point where
MARGINAL REVENUE = MARGINAL COST
Note: If GM wants to sell another truck, it
has to drop its price a bit on all those it’s
already selling
MR < Price