BUS-525,

MANAGERIAL ECONOMICS

COURSE CONVENER:
DR. TAMGID AHMED CHOWDHURY

ASSOCIATE PROFESSOR
SCHOOL OF BUSINESS AND ECONOMICS
GENERAL ADMINISTRATION

 About the course

 Class schedule and attendance

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 Required text and materials: Pindyck
R. S., Rubinfeld D. L. and Mehta, P.
L. (2011) Microeconomics (7th Ed),
Pearson Publications.
 Syllabus

 Assessment

2
BASICS OF DRAWING GRAPHS IN
ECONOMICS
 Following are the issues you need to know:
1. Label horizontal and vertical axis with appropriate
variable name

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2. Find/assume the relationship between the variables with
logic
3. Prepare a table to show the relationship between the
variables
4. Plot the values (for both the variables) in the diagram and
connect the points to get a continuous line. Remember, if
you are given a coordinate point such as (5, 7), first
number (in our case 5) is for the X-axis variable and
second number (in our case 7) for the Y-axis variable. 3
BASICS OF DRAWING GRAPHS IN
ECONOMICS
 You may have any of the following relations between
two variables under consideration:
Positive (the line should be upward slopping)

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1.

2. Negative (line is downward slopping)

3. One variable has constant/fixed impact on another .
That is, when one variable changes the other one
experiences no change(either a perfectly horizontal or
perfectly vertical line)

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WHAT TO BEGIN WITH:
FUNDAMENTALS
 Economics: It is the study of how societies use scarce
resources to produce and deliver the valuable goods in
order to fulfill the unlimited needs of the people.

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 Economics divides into two main parts

 Microeconomics – study of choices that individuals and

businesses make, the way those choices interact in
markets, and the influence of governments.
 Macroeconomics – study of the performance of the
national and global economies

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THE BASICS OF SUPPLY AND DEMAND
 Supply : Amount of goods
and services that a producer is
willing to supply at different

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market prices.
 The curve: Relationship
between the quantity of a good
that producers are willing to
sell and the price of the good.
 A positive relationship. Why??

 Because it follows:

QS = QS(P) (Movement along)

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OTHER VARIABLES THAT AFFECT
SUPPLY: SHIFTING OF THE CURVE

 The quantity that producers are willing to sell depends not

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only on the price they receive but also on their production
costs, including wages, interest charges, and the costs of
raw materials.
 When production costs decrease, output increases no matter
what the market price happens to be. The entire supply
curve thus shifts to the right.
 Economists often use the phrase change in supply to refer to
shifts in the supply curve, while reserving the phrase change
in the quantity supplied to apply to movements along the
supply curve. 7
LET’S WORKOUT

 What will be the shape of the supply curve for

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Zamuna Bridge?
 What is the shape of the supply curve for very
competitive products
 What may be the supply curve for labor

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THE DEMAND CURVE
 Demand: The amount of goods and
services that an individual is willing and
able to buy at given market prices.

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 Flow is: Need then Want and then
Demand
 If food is need, fish, vegetable and meat
can be want. But the one you can effort
(ability factor) is demand. Try other
examples.
 Demand curve shows the relationship
between quantity demand at different
prices. (Movement)
 QD = QD(P)
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 Equation for demand curve
OTHER FACTORS INFLUENCING
DEMAND (SHIFTING THE LINE)
 Substitutes: Two goods for which an increase in the

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price of one leads to an increase in the quantity
demanded of the other. Example: Tea/Coffee,
Coke/Pepsi, Private/Public Uni??
 Complements: Two goods for which an increase in the
price of one leads to a decrease in the quantity demanded
f the other. Example: Blade/Razor, Pair of shoes,
Tea/Sugar etc.
 How do they affect the position of the demand curve?
Try with the stated examples.
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MARKET MECHANISM
 Equilibrium is the most
efficient point in a market as
it is found with the

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interactions of DD and SS
curve. Why not other
points ?? Surplus and shortage
and equilibrium distortion?
 Equilibrium price is the one
that equates demand and
supply of a product.

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APPLICATIONS OF MARKET
MECHANISM: MANAGERIAL
IMPLICATIONS
Explain different cases of shift in demand and supply curve
(Hint: Market is already in Equilibrium).
 What if demand for private schooling increases because of

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population growth
 What if cost of production increases because of an increment
in price of an ingredient
 What if per/hour labor charge increases to harvest rice

 What happens to the market equilibrium of Coke if the price of

Pepsi decreases
 What happens to the market of Keyboard if the price of
processor increases
 What happens to Rice market if cost of producing Noodles
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declines?
A DIFFERENT APPLICATION:
GOVERNMENT INTERVENTION IN THE
MARKET

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 Show the effects of price control (For example,
apartment renting business)
 Show the effect of price floor (Such as agricultural
food buying market)

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MANAGERIAL APPLICATIONS

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 Assume, Qd = 80 – P and Qs = -10 + 0.5P. Find the
equilibrium quantity and price. Show the equilibrium in
a diagram.

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MANAGERIAL APPLICATIONS

 Deriving demand and supply equations from a set of data

Price QD QS

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12 14020
20 100100
28 60 180
36 20 260
Find the demand and supply equations and then find the
equilibrium.
Draw the diagram for the problem

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MANAGERIAL APPLICATIONS

At a price of $5, 1,000 movie tickets would be demanded

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in a small town, but only 200 would be supplied, while,
At a price of $15, 300 movie tickets would be demanded
and 1,200 would be supplied.
Derive the demand and supply equation and calculate
equilibrium price and quantity.

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PREDICTING CHANGE IN THE MARKET:
CONCEPTS OF ELASTICITY

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 Why applying elasticity:
- It measures the responsiveness of one variable with
respect to a change in another (such as price and quantity
demand).
- Provides exact measure of change.
- Types of product and demand can be identified
- Appropriate for competitor’s strategic analysis

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ELASTICITY EXAMINED

 Price Elasticity of Demand

Price elasticity of demand measures percentage change in

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quantity demanded of a good resulting from a 1-percent
change in its price.

Question: Are PED and slope of the demand curve

same??? 18
ELASTICITY AT DIFFERENT
POINTS OF DD CURVE
 The price elasticity of demand
depends not only on the slope of
the demand curve but also on the

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price and quantity.
 The elasticity, therefore, varies
along the curve as price and
quantity change. Slope is constant
for this linear demand curve.
 At the top portion of the demand
curve, as price is high and quantity
is small , elasticity is large.
 The elasticity becomes smaller as
we move down the curve. 19
EXTREME CASES OF
ELASTICITY

 (a) For a horizontal demand

curve, ∆Q/∆P is infinite.
Because a tiny change in price

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leads to an enormous change
(too much responsive) in
demand, the elasticity of
demand is infinite.
 For a vertical demand curve,
∆Q/∆P is zero. Because the
quantity demanded is the same
(thus non-responsive) no
matter what the price, the 20
elasticity of demand is zero.
A NUMERICAL EXAMPLE
Quantity Q2-Q1 Price P2-P1 PED

1 125

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2 1 100 -25 (1/-25)X(125/1) = - 0.04x125 = - 5
4 2 50 -50 (2/-50)x(100/2) = - 0.04x50 = - 2
5 1 10 -40 (1/-40)x(50/4) = - 0.025x12.5 = - 0.3

 How to interpret the results

 Two interpretations to make:

1) Look at the sign and say whether the good is normal or giffen

2) Now look at the absolute value and say whether it is demand

elastic or inelastic 21
RELATION BETWEEN ELASTICITY AND
REVENUE: MANAGERIAL APPLICATION

 If ED>1 (elastic demand) that means ∆Q>∆P thus this

product is price sensitive. A small reduction of price will

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significantly increase the quantity demand. Decision: Reduce
price and maximize revenue. Example, daily necessary
 In case of ED<1 (inelastic demand) do the opposite. Example
, luxury and addictive goods such as automobiles, cigarette,
perfume etc.
 Decision: Increase price and thus revenue.

 If ED=1 (unit-elastic demand), wait and observe.

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CRITICAL DECISION MAKING: A
NUMERICAL EXAMPLE

 Your supermarket is selling 1000 containers of butter a

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week at $ 1.50 each. You know that the own price
elasticity for butter is –0.8. If you decide to reduce the
price by 10%, how many more butter containers would
you be selling that week?

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FINDING THE SOLUTION
Since E= Q/Q / P/P = -0.8, and
P/P=-0.10
Q/Q= -0.8 *- 0.10
Q=-0.8*-0.10 * 1000 = 80 more margarine containers to be

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sold

What would be the total revenue gain?

Revenue without price reduction= 1000*1.50 = 1500
New revenue= 1080 *1.35 = 1458
Was it a good decision?
 What if you increase the price by 10%??

New revenue = 920 * 1.65 = 1518

Now you are a good manager!!!! 24
LET’S WORKOUT ONE MORE

 Assume that you are in an interview session and the

panel asks you to give a pricing decision that will

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maximize company’s interest (that’s revenue) based on
the following functions:
Demand: QD = 3550 – 266P
Supply: QS = 1800 + 240P

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CROSS PRICE ELASTICITY OF DEMAND: EXPLORING
THE RELATION WITH SUBSTITUTE AND COMPLEMENTS

 Shows the percentage change in the quantity demanded

of good Y in response to a change in the price of good X.

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 EDYX = % Change in QDY / % change in PX

 Algebraically: Qy Px Qy Px

EdYX    
Qy Px Px Qy

Read as the cross-price elasticity of demand for commodity

Y with respect to commodity X.
Units of Y demanded Price of X EDYX___________

60 $10

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40 $12 (-20/2)x(10/60) = - 1.66
INTERPRETING RESULTS
 If CED is (+)ve, goods are substitute to each other
 If CED is (-)ve, goods are complements

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 Our value of -1.66 can be interpreted as: Goods are
complements and 1% increase in price of X will have
more than 1% (1.66%) reduction in demand for X. Thus
Y will be more popular.

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INCOME ELASTICITY OF DEMAND
 Shows the percentage change in the quantity demanded
of good Y in response to a percentage change in Income.

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EI = % Change in QY / % change in I

Qy I Qy I
 Algebraically: EI    
Qy I I Qy

Units of Y demanded Income EI

100 $1200

150 $1600 (50/400)x(1200/100) = 1.5

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INTERPRETING RESULTS
 If IED is Positive, good is normal
 If IED is negative good is inferior

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 Our value of 1.5 can be interpreted as: Good is normal
and 1% increase in income will have more than 1%
(1.5%) increase in demand for this goods.

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MANAGERIAL APPLICATION
 Advertising elasticity: It shows the responsiveness of the
quantity demanded of a particular product with respect to
a change in advertising expenditure (budget).

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 Interpretation of the result: If a 10% increase in
advertising expenditure causes an increase in sales by
4%, advertising elasticity is 0.40.
This means, advertising campaign was not effective from a
sales perspective.

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