BUS-525,

MANAGERIAL ECONOMICS
COURSE CONVENER:
DR. TAMGID AHMED
CHOWDHURY
ASSISTANT PROFESSOR
SCHOOL OF BUSINESS AND ECONOMICS

GENERAL ADMINISTRATION
About the course
Class schedule and attendance
Required text and materials:
Pindyck R. S., Rubinfeld D. L.
and Mehta, P. L. (2011)
Microeconomics (7th Ed),
Pearson Publications.
Syllabus
Assessment

Managerial Economics

BASICS OF DRAWING GRAPHS IN

ECONOMICS

1.

3.
4.

Managerial Economics

2.

Following are the issues you need to know:

Label horizontal and vertical axis with appropriate
variable name
Find/assume the relationship between the
variables with logic
Prepare a table to show the relationship between
the variables
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.

BASICS OF DRAWING GRAPHS IN

ECONOMICS

2.
3.

Managerial Economics

1.

You may have any of the following relations

between two variables under consideration:
Positive (the line should be upward slopping)
Negative (line is downward slopping)
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)

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.
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

Managerial Economics

THE BASICS OF SUPPLY AND

DEMAND
Supply : Amount of goods
and services that a producer
is willing to supply at
different 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)

Managerial Economics

OTHER VARIABLES THAT AFFECT

SUPPLY: SHIFTING OF THE CURVE
The quantity that producers are willing to sell
depends not 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.

Managerial Economics

LETS WORKOUT

Managerial Economics

What will be the shape of the supply curve for

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

THE DEMAND CURVE

Demand: The amount of goods and
services that an individual is willing
and able to buy at given market
prices.
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)
Equation for demand curve

Managerial Economics

OTHER FACTORS
INFLUENCING DEMAND
(SHIFTING THE LINE)
Substitutes: Two goods for which an increase in
the 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.

Managerial Economics

10

MARKET MECHANISM
Equilibrium is the most
efficient point in a market
as it is found with the
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.

Managerial Economics

11

APPLICATIONS OF MARKET
MECHANISM: MANAGERIAL
IMPLICATIONS

Managerial Economics

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 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 declines?

12

A DIFFERENT APPLICATION:
GOVERNMENT INTERVENTION IN
THE MARKET
Managerial Economics

Show the effects of price control (For

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

13

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

Managerial Economics

14

MANAGERIAL APPLICATIONS
Deriving demand and supply equations from a set of data
PriceQD QS
12 140 20
20 100 100
28 60 180
36 20 260
Find the demand and supply equations and then find the
equilibrium.
Draw the diagram for the problem

Managerial Economics

15

MANAGERIAL APPLICATIONS
At a price of $5, 1,000 movie tickets would be
demanded 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.

Managerial Economics

16

PREDICTING CHANGE IN THE MARKET:

CONCEPTS OF ELASTICITY
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 competitors strategic analysis

Managerial Economics

17

ELASTICITY EXAMINED
Price Elasticity of Demand
Price elasticity of demand measures percentage
change in quantity demanded of a good resulting
from a 1-percent change in its price.

Managerial Economics

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 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.

Managerial Economics

19

EXTREME CASES OF
ELASTICITY
(a) For a horizontal
demand curve, Q/P is
infinite. Because a tiny change
in price 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
elasticity of demand is zero.

Managerial Economics

20

A NUMERICAL EXAMPLE
Quantity

Q2-Q1

Price

P2-P1

PED

125
1

100

-25

(1/-25)X(125/1) = - 0.04x125 = - 5

50

-50

(2/-50)x(100/2) = - 0.04x50 = - 2

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

Managerial Economics

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 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.

Managerial Economics

22

CRITICAL DECISION MAKING: A

NUMERICAL EXAMPLE
Your supermarket is selling 1000 containers of butter a
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?

Managerial Economics

23

FINDING THE SOLUTION

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!!!!

Managerial Economics

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 sold

24

LETS WORKOUT ONE MORE

Managerial Economics

Assume that you are in an interview session and

the panel asks you to give a pricing decision that
will maximize companys interest (thats revenue)
based on the following functions:
Demand: QD = 3550 266P
Supply: QS = 1800 + 240P

25

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.
E
DYX = % Change in QDY / % change in PX

Algebraically:

EdYX

Qy Px
Qy Px

Qy
Px
Px Qy

Read as the cross-price elasticity of demand for commodity

Y with respect to commodity X.
Units of Y demanded
60
40

Price of X

Managerial Economics

EDYX___________

$10
$12

(-20/2)x(10/60) = - 1.66

26

INTERPRETING
RESULTS
If CED is (+)ve, goods are substitute to each other
If CED is (-)ve, goods are complements

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.

Managerial Economics

27

INCOME ELASTICITY OF DEMAND

Shows the percentage change in the quantity demanded
of good Y in response to a percentage change in Income.
EI = % Change in QY / % change in I

Algebraically:

Qy I
Qy
I
EI

Qy
I
I
Qy

Units of Y demanded
100

$1200

150

$1600

Managerial Economics

Income EI

(50/400)x(1200/100) = 1.5
28

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

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.

Managerial Economics

29

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).
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.

Managerial Economics

30