D EMAND IMBA NCCU Managerial Economics Lecturer: Jack Wu

M ANAGERIAL E CONOMICS Managerial economics: Science of directing scarce resources to manage more effectively resources – financial, human, physical management of customers, suppliers, competitors, internal organization organizations – business, nonprofit, household Managerial economics is based on Microeconomics. Managerial economics applies to new economy.

NEW ECONOMY: INTERNET Differences between “ New ” and “ Old ” economy: role of network effects in demand **network effects – benefit/cost depends on total number of other users

O RGANIZATION 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)

O RGANIZATION Horizontal boundaries – scale and scope of activities Samsung Electronics – horizontal boundaries broader than LG.Philips LCD – specializes in LCD Motorola – specializes in mobile phones

MANAGERIAL ECONOMICS 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).

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.

I NDIVIDUAL D EMAND C URVE 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

I NDIVIDUAL D EMAND S CHEDULE Price Quantity ($ per movie) (movies per month)

individual demand curve Quantity (Movies a month) Price ($ per movie) INDIVIDUAL DEMAND CURVE

I NDIVIDUAL D EMAND S CHEDULE II Price Quantity ($ per movie) (movies per month) …. …

A NOTHER T YPE OF I NDIVIDUAL DEMAND C URVE

T WO V IEWS 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

D EMAND C URVE : S LOPE diminishing marginal benefit -- each additional unit of consumption/usage provides less benefit than the preceeding unit  demand curve slopes downward

H OOVER, 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

D EMAND AND I NCOME Changes in income normal product – demand increases with income inferior product – demand falls with income

D EMAND AND O THER F ACTORS prices of related products substitutes complements advertising

R ECORDED M USIC ArgentinaCanada CD purchases cassette purchases GDP/capita$9,413$19,831 CD price$13.80$11.55 cassette price$ 7.80$ 6.06

R ECORDED M USIC Why the average Canadian bought more of both CDs and cassettes? Why the ratio of CD to cassette purchases was relatively higher in Canada?

M ARKET DEMAND Market demand = horizontal summation of individual demands

B UYER S URPLUS individual buyer surplus: difference between consumer ’ s benefit and price she must pay for the item market buyer surplus: sum of individual buyer surpluses.

c be h j g da individual buyer surplus at $2.50 price individual demand (marginal benefit) curve Quantity (Movies a month) Price ($ per movie) c f INDIVIDUAL BUYER SURPLUS

B UYER SURPLUS : I NDIVIDUAL

G AINS 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

P ACKAGE D EAL charge buyer just a little less than her/his total benefit leave buyer with almost zero surplus

T WO - PART PRICING fixed payment usage charge fixed payment

B UYER SURPLUS : T WO - PART PRICING BusinessProviderFixed FeeUsage Fee Broadband access, Hong Kong PCCW Netvigator 3M Single User Plan HK$298 per month (incl. 100 free hrs) HK$2 per additional hr Mobile telephone service, UAE Etisalat Corporation, GSM Standard Service 125 dirham connection fee; 60 dirham per qtr 0.24/0.18 dirham per min (peak/ offpeak)