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Managerial Economics: Tirthatanmoy Das April 18, 2022

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24 views24 pages

Managerial Economics: Tirthatanmoy Das April 18, 2022

Uploaded by

thegr8.prakash7607
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Managerial

Economics
Tirthatanmoy Das Lecture 3 April 18, 2022
Previous class

Key concepts..
q Opportunity cost

q Marginal benefit (MB)

q Marginal cost (MC)

q MB = MC determines ‘how-much’ kind of choices


2
Marginal analysis – contd.

q We found profit maximizing output level using marginal analysis

q But, how does a manager change his or her decision in light of


changes in economic conditions?

q Use marginal analysis again, i.e., use 𝑀𝑅 = 𝑀𝐶 condition

3
Marginal analysis – contd.

q Examples:

q Increased overhead: suppose the overhead cost rises from $100,000 to


$120,000
q Answer: No effect whatsoever !!

q Increased material costs: suppose the per lot cost rises to $40,000 to $50,000
q Answer: profit maximizing level output falls as 𝑀𝐶 has gone up now

4
Marginal analysis – contd.

q Examples:

q Demand for microchip rises: suppose demand for microchip rises


dramatically
q Answer: Increase production

q What about the price for each of these scenarios?

5
Marginal analysis – contd.

q Another examples:

q A domestic steel manufacturer’s decision and exchange rate


fluctuations

q Suppose two countries, the US (domestic) and Japan (foreign)

q Suppose exchange rate falls 100 yen/$ to 82 yen/$ 6


Marginal analysis – contd.

q Another examples:

q Japanese steel is more expensive for the US buyers (assuming


Japanese production costs and price in yen is constant)

q US steel is cheaper in Japan

q Domestic US firm would produce more and sell at a higher $ price


7
Demand and Supply

“There’s no brand loyalty so strong that the offer of “penny off” can’t
overcome it”

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Demand and Supply

q The most famous picture in economics…Graph of demand and


supply

q Demand and supply is a model

q It can be applied to marketing, human resources, operations,


service management, and other functional areas of management

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Why study demand

Demand is an important determinant of profit…

It helps firms to decide:


q The amount to produce
q Capacity to invest
q Whether to enter in the market (new firms)
q On price/advertising
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Demand and Supply

q The most famous picture in economics…Graph of demand and


supply

11
Demand

q Example: think of an airline company

q Some important questions


q the cost aspect (e.g., fuel, labour, and administrative costs)
q the historical trends of business and leisure use on the route
q overall economic conditions
qthe prices charged by competing airlines

12
Under managers’ control

Can managers influence demand?

Yes, by changing
q Advertising
q Product quality
q Distribution strategies…etc.

How do these changes influence demand?


13
Beyond managers’ control

q Availability of substitute and complementary goods, their prices,


competitors advertising strategy ….etc.

q Macroeconomic factors such as interest rate, taxes etc.

14
Law of demand

q Law of demand: other things remaining the same, higher the price of
a good smaller is the quantity demanded, and lower the price of a
good larger is the quantity demanded

Why?

15
Demand schedule and curve

q Market demand schedule: Table showing the total quantity of the


good demanded at each price

q Market demand curve: Plot of the market demand schedule on a


graph

16
Demand curve

q Relationship between quantity of goods that consumers are


willing to buy and the price of the good, holding all other
influences same

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A demand curve

A demand curve:

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Two ways to read demand curve

q At a given price how much would the consumers buy

q For a given quantity of the good, the maximum price that


consumers are willing to pay

19
Quantity demanded vs. demand

q Quantity demanded: Amount consumers want to buy at a particular


time period at a particular price

q Demand: entire relationship between price and quantity demanded

20
Movement along the demand curve

Price changes with quantity:

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Factors influencing market demand

The following factors change the relationship between price and


quantity demanded

q Expected future prices

q Consumers’ income: Normal good, inferior good

q Consumers’ taste and preference

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Factors influencing market demand

The following factors change the relationship between price and


quantity demanded

q Price of related goods (substitutes and complements)

q Consumers’ expected future income and credit

q Population

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Shifts in demand curve

How do they change?: demand curve shifts when those determinants


change:

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