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Lecture1 PDF
Lecture1 PDF
Economics
Rudolf Winter-Ebmer
Dep. of Economics
1
Preliminaries
2
More preliminaries
Teaching Assistant:
Office Hours:
Tuesday, 17.00 - 18.00
Room: K 152D1
The teaching assistant shall be the first person to contact if you have problems understanding
something and also for organizational issues.
Textbook: Allen, Doherty, Weigelt and Mansfield Managerial Economics, 6th edition
7th edition is ok as well
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Norton Media Library
W. Bruce Allen
Neil A. Doherty
Keith Weigelt
Edwin Mansfield
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Grading
2 exams, 48 points each, mostly MC questions
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What is Managerial Economics?
Applied micro-economics, but with a focus on
decision making
What shall a manager do in this and that
situation?
Pricing decisions in different circumstances
Market entry, innovation, auction theory
Organization of the firm
Personnel policy, how to motivate workers
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Theory of the firm
A theory indicating how a firm behaves
and what its goals are
7
Present value of expected
future profits
n
TR t TC t
t =1 (1 + i) t
8
Economic profit concept
Profit the firm owner makes over and above
what their labor and capital employed in the
business could earn elsewhere.
Risk involved
11
The market demand curve shows the total
quantity of the good that would be purchased
at each price
3200
3000
2800
Price
2600
2400
2200
2000
0 500 1000 1500 2000
qua ntity
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Other determinants of market demand
besides the price
13
Price elasticity of demand
Q P
=
P Q
(called eta)
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15
Calculating elasticities
Point estimate: (demand function is known); calculated
at a specific point of demand.
Q P
=
Use statistic regression analysis (ch.5) P Q
Q ( P1 + P2 ) / 2 (Q2 Q1 ) ( P1 + P2 ) / 2
= =
P (Q1 + Q2 ) / 2 ( P2 P1 ) (Q1 + Q2 ) / 2
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Price elasticity of demand
and gross revenues
17
Total revenue, marginal revenue
and price elasticity
then TR = aQ - bQ2
MR = dTR/dQ = a - 2bQ
1 (a bQ )
=
b Q
18
Total revenue, marginal revenue
and price elasticity
Price a
< 1 Demand
= 1 and MR
> 1
a/2b Quantity
a/b
Dollars
Total
Revenue
Quantity
19
Marginal Revenue, price
and price elasticity
d ( PQ )
MR = ..... note P = P ( Q ) .... why ?
dQ
dP Q dP
MR = P + Q = P 1 + =
dQ P dQ
1
= P 1 +
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Determinants of price
elasticity of demand
Elasticity is greater (in absolute values,
i.e more elastic) when:
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Puzzle
23
Price setting: a simple rule
Do not set price so low that demand is price-inelastic (>-1):
Marg. Revenue is negative, i.e. by raising price, total revenue will increase and (!) costs
will decrease.
1
MC = MR = P (1 + ) ... pricing rule
1
P = MC .... optimal price
1 + 1 /
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25
26
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Income elasticity
The percentage change in quantity
demanded resulting from a 1 percent
change in consumer income (I)
Q I
I =
I Q
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Table 3.6 Income Elasticity of Demand,
Selected Commodities, United States
Commodity Income elasticity of demand
Alcohol 1.54
Housing, owner-occupied 1.49
Furniture 1.48
Dental services 1.42
Restaurant meals 1.40
Shoes 1.10
Medical insurance 0.92
Gasoline and oil 0.48
Butter 0.42
Coffee 0
Margarine -0.20
Flour -0.36
Source: H. Houthakker and L. Taylor, Consumer Demand in the United States
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Cross price elasticity
The percentage change in quantity demanded of good X
resulting from a 1 percent change in the price of good Y
Q X PY
X ,Y =
PY QX
How does demand for your product react to other
companies price hikes?
How does demand for your products 2-n react to price
changes of your product 1?
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Use elasticities for market
forecasts
Price elasticity: what will happen to my demand if I
change the price?
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Advertising elasticity
The percentage change in quantity demanded
resulting from a 1 percent change in
advertising expenditure
Q A
A =
A Q
Is it worth to spend more on advertising?
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