1. 1 Welcome to EC 209: Managerial Economics- Group A By: Dr. Jacqueline Khorassani Week Two

2. 2 Class One Monday, September 10 Monday, September 10 11:00-11:50 Fottrell (AM) 11:00-11:50 Fottrell (AM)

3. 3 Announcement We are looking for 2 students from 2nd Commerce to come forward for the Staff/Student Liaison Committee; as well as two students from the B.Comm Intl and BSc in BIS classes. Contact: We are looking for 2 students from 2nd Commerce to come forward for the Staff/Student Liaison Committee; as well as two students from the B.Comm Intl and BSc in BIS classes. Contact: Mairéad MacKenzie Administrative Assistant Commerce Faculty NUI, Galway Phone: 091 492612 Fax: 091 494546 E-mail: mairead.mackenzie@nuigalway.ie Mairéad MacKenzie Administrative Assistant Commerce Faculty NUI, Galway Phone: 091 492612 Fax: 091 494546 E-mail: mairead.mackenzie@nuigalway.ie

4. 4 Good morning How was your weekend? How was your weekend? I am fine I am fine I am adjusting I am adjusting This morning, I thought I saw a 6-7 year old boy driving!!!! This morning, I thought I saw a 6-7 year old boy driving!!!! –Oooops, the wrong side of the car!!!

5. 5 I did not receive any questions from you on Chapter One, so let’s practice If the interest rate is 7% and cash flows are $4,000 at the end of year one and $6,000 at the end of year two, then the present value of these cash flows is If the interest rate is 7% and cash flows are $4,000 at the end of year one and $6,000 at the end of year two, then the present value of these cash flows is –A) $8,979. –B) $11,149. –C) $309. –D) $9,346. The answer is A The answer is A

6. 6 Answer PV = (4000/1.07) + (6000/(1.07) 2 ) PV = (4000/1.07) + (6000/(1.07) 2 )

7. 7 Let’s practice If the interest rate is 4%, the present value of $1000 received at the end of 3 years is If the interest rate is 4%, the present value of $1000 received at the end of 3 years is –A) $970. –B) $1,040. –C) $889. –D) $961. The answer is C The answer is C

8. 8 Answer PV = 1000/(1.04) 3 PV = 1000/(1.04) 3

9. 9 Let’s practice Maximizing the firm's current profits is the same as maximizing the lifetime value of the firm when the Maximizing the firm's current profits is the same as maximizing the lifetime value of the firm when the –A) growth rate in profits is larger than the interest rate. –B) growth rate in profits and the interest rate are equal. –C) interest rate is constant and is smaller than the growth rate in profits. –D) interest rate is larger than the growth rate in profits and both are constant. The answer is D The answer is D

10. 10 Chapter 2: You have already seen these topics in other courses. You did not send me any questions. So we move fast. What is the demand curve for managerial textbook at NUI-Galway? What is the demand curve for managerial textbook at NUI-Galway? –It is a curve that shows the number of textbooks that will be purchased at alternative prices, holding other factors constant. D

11. 11 What is the law of demand? It states that, all else being constant, the demand curve is downward sloping. It states that, all else being constant, the demand curve is downward sloping. Quantity Price

12. 12 What factors other than price affect the demand for managerial textbook? Number of students in managerial class Number of students in managerial class Income (budget) of students Income (budget) of students Tuitions and fees at NUI (the price of complements) Tuitions and fees at NUI (the price of complements) What else? What else? If the above factors change the demand curve will shift. If the above factors change the demand curve will shift.

13. 13 What is a demand function? It is an equation representing the demand curve It is an equation representing the demand curve Q x d = f(P x, P Y, M, H,) –Q x d = quantity demand of good X (textbooks). –P x = price of good X (textbooks). –P Y = price of a related good (tuitions). –M = income. –H = any other variable affecting demand.

14. 14 What is an inverse Demand Function Price as a function of quantity demanded. Price as a function of quantity demanded. Example: Example: –Demand Function Q x d = 10 – 2P x Q x d = 10 – 2P x –Inverse Demand Function: 2P x = 10 – Q x d 2P x = 10 – Q x d P x = 5 – 0.5Q x d P x = 5 – 0.5Q x d

15. 15 What changes the quantity demanded? Price Quantity D0D0 4 7 6 A to B: Increase in quantity demanded B 10 A Quantity demanded increased because price decreased.

16. 16 Price Quantity D0D0 D1D1 6 7 D 0 to D 1 : Increase in Demand Change in Demand 13 Demand increased because tuitions went down.

17. 17 Let’s practice Which of the following is most likely to shift the demand curve for electricity to the left? Which of the following is most likely to shift the demand curve for electricity to the left? –A) Consumers becoming more energy conscious. –B) An increase in income. –C) A decrease in the price of electricity. –D) An increase in the price of natural gas, a substitute source of energy. The answer is A The answer is A

18. 18 What is the consumer surplus? The value consumers get from a good but do not have to pay for. Or, The value consumers get from a good but do not have to pay for. Or, The difference between the highest price consumers will pay and the actual market price. The difference between the highest price consumers will pay and the actual market price.

19. 19 I got a great deal! That company offers a lot of bang for the buck! That company offers a lot of bang for the buck! Dell provides good value. Dell provides good value. Total value greatly exceeds total amount paid. Total value greatly exceeds total amount paid. Consumer surplus is large. Consumer surplus is large.

20. 20 I got a lousy deal! That car dealer drives a hard bargain! That car dealer drives a hard bargain! I almost decided not to buy it! I almost decided not to buy it! They tried to squeeze the very last cent from me! They tried to squeeze the very last cent from me! Total amount paid is close to total value. Total amount paid is close to total value. Consumer surplus is low. Consumer surplus is low.

21. 21 Price Quantity D 10 8 6 4 Market price =2 1 2 3 4 5 Consumer Surplus= the value received but not paid for = (8-2) + (6-2) + (4- 2) = $12. What is consumer surplus?

22. 22 Consumer Surplus: The Continuous Case Price $ Quantity D 10 8 6 4 Market price =2 1 2 3 4 5 Total Value of 4 units=area under the demand curve= $24 C onsumer Surplus = $24 - $8 = $16 Expenditure on 4 units = $2 x 4 = $8

23. 23 Managerial Economics: Week Two, Class 2 Week One- Class 2 Week One- Class 2 –Tuesday, September 11 –Cairness In class In class –Please turn off your phones. –Have paper, pencil, calculator, notes with you

24. 24 Teaching Assistant Darragh Flannery Darragh Flannery d.flannery@nuigalway.ie d.flannery@nuigalway.ie.flannery@nuigalway.ie Office: 234, St. Anthony's Office: 234, St. Anthony's Office Hours beginning September 24 Office Hours beginning September 24 Mondays Mondays –10 AM till 1 PM and 3 PM till 6 PM

25. 25 The first set of Aplia assignments are up You have till September 25 to complete the assignment You have till September 25 to complete the assignment –Do the practice questions first –There are 4 graded problems and 4 multiple choice question. –You can work on it a little at a time

26. 26 You will need to purchase the book as soon as possible. Don’t have to buy from the bookshop Don’t have to buy from the bookshop –You will need a copy of a chapter in another book later I have left a copy of the first 3 chapters of the book at the media center (printing services) in this building. I have left a copy of the first 3 chapters of the book at the media center (printing services) in this building.

27. 27 What is the Supply Curve for managerial textbook at NUI-Galway? The supply curve shows the number of a textbooks that will be supplied at alternative prices. The supply curve shows the number of a textbooks that will be supplied at alternative prices. Price Quantity S0S0

28. 28 What is the law of supply? All else being constant, the supply curve is upward sloping. All else being constant, the supply curve is upward sloping.

29. 29 What are some of the other determinants of supply besides price? Price of paper Price of paper Technology Technology Tax on books Tax on books Tariff on imported ink Tariff on imported ink Price of accounting book (substitute in production) Price of accounting book (substitute in production) What else? What else?

30. 30 What is the Supply Function? An equation representing the supply curve: An equation representing the supply curve: Q x S = f(P x,P, W, H,) Q x S = f(P x,P R, W, H,) –Q x S = quantity supplied of books. –P x = price of book. –P R = price of accounting book –W = price of inputs (e.g., wages). –H = other variable affecting supply.

31. 31 What is an inverse Supply Function? Price as a function of quantity supplied. Price as a function of quantity supplied. Example: Example: –Supply Function Q x s = 10 + 2P x Q x s = 10 + 2P x –Inverse Supply Function: 2P x = 10 + Q x s 2P x = 10 + Q x s P x = 5 + 0.5Q x s P x = 5 + 0.5Q x s

32. 32 Change in Quantity Supplied Price Quantity S0S0 20 10 B A 5 A to B: Increase in quantity supplied Quantity supplied will increase only if price increases

33. 33 Price Quantity S0S0 S1S1 8 7 5 S 0 to S 1 : Increase in supply Change in Supply Supply will increase because of a change in a factor other than price of the good.

34. 34 Is the following statement true or false? An additional tariff on imported wine from France will decrease the quantity of French wine supplied in Ireland. An additional tariff on imported wine from France will decrease the quantity of French wine supplied in Ireland. –False An additional tariff on imported wine from France will decrease the supply of French wine in Ireland. An additional tariff on imported wine from France will decrease the supply of French wine in Ireland.

35. 35 Let’s practice Graphically, a hurricane that destroys 30 percent of the orange trees in Florida will cause the supply curve for oranges to Graphically, a hurricane that destroys 30 percent of the orange trees in Florida will cause the supply curve for oranges to –A) shift rightward. –B) shift leftward. –C) become flatter. –D) become steeper. The answer is B The answer is B

36. 36 Let’s practice Holding all else constant, as additional firms leave an industry Holding all else constant, as additional firms leave an industry –A) more output is available at each given price. –B) less output is available at each given price. –C) the same output is available at each given price. –D) Unable to tell. Answer: B Answer: B

37. 37 What is producer surplus? The amount producers receive in excess of the amount necessary to induce them to produce the good. The amount producers receive in excess of the amount necessary to induce them to produce the good. Price Quantity S0S0 Q*Q* P*P* Producer surplus = P – marginal cost The points on the supply curve represent the price necessary to induce suppliers to supply = marginal cost

38. 38 What is market equilibrium? Balancing supply and demand Balancing supply and demand Q x S = Q x d Steady-state Steady-state

39. 39 Price Quantity S D 5 6 12 Shortage 12 - 6 = 6 6 If price is too low… 7

40. 40 Price Quantity S D 9 14 Surplus 14 - 6 = 8 6 8 8 If price is too high… 7

41. 41 Managerial Economics Week Two, Class 3 Week Two, Class 3 Thursday, September 13 Thursday, September 13 15:10-16:00 15:10-16:00 Tyndall Tyndall

42. 42 Don’t forget to register for Aplia Directions on my course contract at Directions on my course contract at www.mareitta.edu/~khorassj www.mareitta.edu/~khorassj www.mareitta.edu/~khorassj Assignment 1 is due September 25 Assignment 1 is due September 25

43. 43 Comparative Static Analysis shows how the equilibrium price and quantity will change when a determinant of supply or demand changes. shows how the equilibrium price and quantity will change when a determinant of supply or demand changes.

44. 44 How can managers use the comparative static analysis to make decisions? Event: The WSJ reports that the prices of PC components are expected to fall by 5-8 percent over the next six months. Event: The WSJ reports that the prices of PC components are expected to fall by 5-8 percent over the next six months. Scenario 1: You manage a small firm that manufactures PCs. Scenario 1: You manage a small firm that manufactures PCs.

45. 45 As a manager of a small PC maker, you will need to Step 1: Look for the “Big Picture.” Step 1: Look for the “Big Picture.” Step 2: Organize an action plan (worry about details). Step 2: Organize an action plan (worry about details).

46. 46 Step 1: Consider the market for PCs Price of components are expected to go down Price of components are expected to go down Cost of production of PCs is expected to go Cost of production of PCs is expected to go –down Supply of PCs is expected to go Supply of PCs is expected to go –up

47. 47 Price of PCs Quantity of PC’s S D S* P0P0 P* Q0Q0 Q* Big Picture: Impact of decline in component prices on PC market Price of PCs is expected to go down and quantity of PCs is expected to go up

48. 48 Equilibrium price of PCs will fall, and equilibrium quantity of computers sold will increase. Equilibrium price of PCs will fall, and equilibrium quantity of computers sold will increase. Use this to organize an action plan Use this to organize an action plan –contracts/suppliers? –inventories? –human resources? –marketing? –do I need quantitative estimates? Big Picture Analysis: PC Market

49. 49 How can managers use the comparative static analysis to make decisions? Event: The WSJ reports that the prices of PC components are expected to fall by 5-8 percent over the next six months. Event: The WSJ reports that the prices of PC components are expected to fall by 5-8 percent over the next six months. Scenario 2: You manage a small software company. Scenario 2: You manage a small software company.

50. 50 Scenario 2: Software Maker Step 1: Use analysis like that in Scenario 1 to deduce that lower component prices will lead to Step 1: Use analysis like that in Scenario 1 to deduce that lower component prices will lead to –a lower equilibrium price for computers. –a greater number of computers sold. Step 2: How will these changes affect the “Big Picture” in the software market? Step 2: How will these changes affect the “Big Picture” in the software market?

51. 51 Price of Software Quantity of Software S D Q0Q0 D* P1P1 Q 1 Big Picture: Impact of lower PC prices on the software market P0P0 Price goes up and quantity goes up

52. 52 Software prices are likely to rise, and more software will be sold. Software prices are likely to rise, and more software will be sold. How will you use this to organize an action plan? How will you use this to organize an action plan? Big Picture Analysis: Software Market

53. 53 Conclusion Use supply and demand analysis to Use supply and demand analysis to –clarify the “big picture” (the general impact of a current event on equilibrium prices and quantities). –organize an action plan (needed changes in production, inventories, raw materials, human resources, marketing plans, etc.).

54. 54 What are price restrictions? Government decides to set a price above or below market equilibrium price Government decides to set a price above or below market equilibrium price 1. Price Ceilings –The maximum legal price that can be charged. –Examples: Gasoline prices in the 1970s. Gasoline prices in the 1970s. Rent control in New York City. Rent control in New York City.

55. 55 Price Quantity S D P* Q* P Ceiling Q s Impact of a Price Ceiling Shortage Q d

56. 56 Full Economic Price The dollar amount paid to a firm under a price ceiling, plus the nonpecuniary price. The dollar amount paid to a firm under a price ceiling, plus the nonpecuniary price. P F = P c + (P F - P C ) P F = full economic price P F = full economic price P C = price ceiling P C = price ceiling P F - P C = nonpecuniary price P F - P C = nonpecuniary price

57. 57 An Example from the 1970s Ceiling price of gasoline: $1. Ceiling price of gasoline: $1. 3 hours in line to buy 15 gallons of gasoline 3 hours in line to buy 15 gallons of gasoline –Opportunity cost: $5/hr. –Total value of time spent in line: 3  $5 = $15. –Non-pecuniary price per gallon: $15/15=$1. Full economic price of a gallon of gasoline: $1+$1=2. Full economic price of a gallon of gasoline: $1+$1=2.

58. 58 price restrictions 2. Price Floors –The minimum legal price that can be charged. –Examples: Minimum wage. Minimum wage. Agricultural price supports. Agricultural price supports.

59. 59 Impact of a Price Floor Price Quantity S D P* Q* Surplus PFPF QdQd QSQS

60. 60 Let’s practice When government imposes a price ceiling above the market price, the result will be that When government imposes a price ceiling above the market price, the result will be that A) surpluses occur. A) surpluses occur. B) shortages become a problem. B) shortages become a problem. C) supply and demand will shift up to the new equilibrium. C) supply and demand will shift up to the new equilibrium. D) A price ceiling set above the equilibrium price will have no effect on the market equilibrium. D) A price ceiling set above the equilibrium price will have no effect on the market equilibrium. Answer: D Answer: D