Managerial Economics

Welcome to
EC 209: Managerial
EconomicsGroup A
Week
Three
By: Dr. Jacqueline Khorassani
1
Class One
Monday, September 17
11:10-12:00
Fottrell (AM)
The textbook is now available at the
bookshop
Dont forget that the first aplia assignment
is due before September 25
It is the week 4 assignment
Remember that if you dont ask questions, I

assume you know.
I did not get any questions on this weeks
study guide. So,I will briefly go over
what you must know.
What does the

elasticity measure?
It measures how responsive

(sensitive) is variable G to one
percent change in variable S
EG , S
%G
%S
If EG,S > 0, then S and G are directly related.

If EG,S < 0, then S and G are inversely related.
If EG,S = 0, then S and G are unrelated.
3
How can elasticity be

shown (measured) using
calculus?
Suppose G = f (S), then
EG ,S
dG S
dS G
Where dG/dS is
the partial
derivative of G
with respect to S
What is the own price

elasticity of demand?
Measures how sensitive the

quantity demand is to one
percent change in price.
How is it measured?
EQX , PX
%QX
%PX
Is it negative or positive?
Negative, according to the law of
demand.
Lets practice
If quantity demanded for sneakers falls
by 12% when price increases 4%, we
know that the absolute value of the
own-price elasticity of sneakers is
A) 0.3.
B) 0.8.
C) 3.0.
D) 3.3.
Answer: C
7
What is the difference

between elastic, inelastic
and unitary elastic
demands?
Elastic:
EQX , PX 1
Inelastic:
EQX , PX 1
Unitary
elastic:
EQ X , PX 1
8
How does elasticity change

along a linear demand curve?
At any point on demand, the absolute

value of elasticity = lower portion of
demand /upper portion of demand
At point A:
EQX , PX BA / AC
What is the
elasticity at point
C?
Infinity
What is the elasticity

at point B?
B
Q
Zero
How does elasticity change

along a linear demand curve?
The lower half of demand is inelastic

The upper half of demand is elastic
Mid point of demand is unitary elastic
P
C
Elasti
c
Unitary elastic
//
A
Inelastic
//
B
Q
10
How is a perfectly elastic

demand curve different from a
perfectly inelastic
demand
d
%QX
curve?
EQ , P
Price
%PX
Price
D
D
Quantity
%P = 0
Perfectly Elastic ( EQ X ,PX )
Quantity
% Q = 0
Perfectly Inelastic ( EQX , PX 0)
11
How does the own price

elasticity of demand relate
total revenue?
P
100
TR
10
20
30
40
50
12
Elasticity, Total Revenue

and Linear Demand
P
100
TR
80
800
10
20
30
40
50
10
20
30
40
50
13

and Linear Demand
P
100
TR
80
1200
60
800
10
20
30
40
50
10
In the elastic portion of demand,

as you lower the price, TR goes
20
30
40
50
14

and Linear Demand
P
100
TR
80
1200
60
40
800
10
20
30
40
50
10
20
30
40
50
15

and Linear Demand
P
100
TR
80
1200
60
40
800
20
10
20
30
40
50
10
20
In the inelastic portion of demand, as

you lower the price, TR goes down.
30
40
50
16

and Linear Demand
P
100
TR
Elastic
80
1200
60
40
800
20
10
20
30
40
50
10
20
Elastic
30
40
50
17

and Linear Demand
P
100
TR
Elastic
80
1200
60
Inelastic
40
800
20
10
20
30
40
50
10
Elastic
20
30
40
Inelastic
50
18

and Linear Demand
P
100
TR
Elastic
80
Unit elastic
Unit elastic
1200
60
Inelastic
40
800
20
10
20
30
40
50
In the meddle of demand, TR is at

its max
10
Elastic
20
30
40
Inelastic
50
19
Managerial Economics
Week Three, Class 2
Tuesday, September 18
15:10-16:00
Cairnes
Remember: If you dont ask, I

assume you know.
20
About Aplia
Assignments
25% of grade
Fees = $20
Need to be paid in 5 days or they kick you
out of the program
I have no control over this
Course Key: R8WC-VRSZ-SCBQ
Assignment 1 is due before noon on

September 25
5 grades question sets
21
Lets practice
Assume that the price elasticity of

demand is -2 for a certain firm's product.
If the firm raises price, the firm's
managers can expect total revenue to:
a) Decrease
b) Increase
c) Remain constant
d) Either increase or remain constant
depending upon the size of the price increase.
Answer: A
22
How does the own-price

elasticity related to
marginal revenue?
What is marginal Revenue,
MR?
Revenue resulting from selling
one more unit of output
MR = TR/Q
23

marginal revenue?
MR = P(1 + E)/E
Suppose E < -1
which means |E| >1 (elastic), then
MR is positive
Suppose E = -1
which means |E|=1 then MR is zero
Suppose E > -1
which means |E|<1 (inelastic), then
MR is negative
24

marginal
Between 0 to Q*revenue?
demand is elastic and
MR>0
At Q* demand is unitary elastic and MR =
0
Above Q* demand is inelastic and MR <0
P
Elastic
MR >0
Unitary
elastic MR =
0
Inelastic
MR <0
D
Q*
MR
25
Which factors affect the

own price ?
You need to study this one on your own.
PP 79-82
Ask me questions
26
Lets practice
The demand for Adidas brand shoes is

A) more elastic than the demand for
shoes in general.
B) less elastic than the demand for shoes
in general.
C) equally elastic to the demand for
shoes in general.
D) none of the above.
Answer: A
27
Lets practice
Lemonade, a good with many

close substitutes, should have an
own-price elasticity that is:
a)
b)
c)
d)
unitary.
relatively elastic.
relatively inelastic.
perfectly inelastic.
Answer: B
28
What does the cross

price elasticity of
demand
measure?
It measures how sensitive the quantity demand
for good X is to one percent change in the price
of good Y
EQX , PY
%QX
%PY
If EQX,PY > 0,
then X and Y are substitutes.
If EQX,PY < 0,
then X and Y are complements.
29
Suppose that a firm sells two related good

and the price of one good changes; how
can the cross price elasticity help us predict
the
the
revenue?
R changes
R X 1 in
E
RY EQY , PX %PX
Q X total
, PX
R = change in total revenue,
Rx = good Xs revenue,
RY = good Ys revenue
30
What is the income

elasticity?
Measure the percentage change in
quantity demand for good X as the income
of consumer changes by one percent.
EQX , M
%QX
%M
If EQX,M > 0,
then X is a normal good.
If EQX,M < 0,
then X is a inferior good.
31
Uses of Elasticity
Example 1: Pricing and Cash
Flows
(revenue)
According
to an FTC Report by
Michael Ward, AT&Ts own price

elasticity of demand for long
distance services is
-8.64.
AT&T needs to boost revenues in
order to meet its marketing goals.
To accomplish this goal, should
AT&T raise or lower its price?
32
Answer: Lower price!

Since
demand is elastic, a
reduction in price will
increase quantity demanded
by a greater percentage than
the price decline, resulting in
more revenues for AT&T.
33
Example 2: Quantifying
the Change
If
AT&T lowered price by 3

percent, what would
happen to the volume of
long distance telephone
calls routed through
AT&T?
34
Answer
Calls would increase by 25.92 percent!
EQX , PX
%QX
8.64
%PX
%QX
8.64
3%
d
3% 8.64 %QX
d
%QX 25.92%
35
Example 3: Impact of a
change in a competitors
price
According to an FTC Report by
According to an FTC Report by

Michael Ward, AT&Ts cross price
elasticity of demand for long
distance services is 9.06.
If competitors reduced their prices
by 4 percent, what would happen
to the demand for AT&T services?
36
Answer
AT&Ts demand would fall by 36.24 percent!
EQX , PY
%QX
9.06
%PY
%QX
9.06
4%
d
4% 9.06 %QX
d
%QX 36.24%
37
Interpreting Demand
Functions
Mathematical representations of
demand curves.
Example:
d
QX 10 2 PX 3PY 2 M
Where M is income
38
QX 10 2 PX 3PY 2 M
What can you say about the relationship

between good X and good Y?
X and Y are substitutes (coefficient of PY is
positive).
Is X a normal or an inferior good?

X is an inferior good (coefficient of M is
negative).
Holding price of Y and income constant,

as price of X goes up by 1, quantity
demanded for X goes ______ by ______.
down
39
Managerial EconomicsGroup A
Week Three- Class 3
Thursday, September 20
15:10-16:00
Tyndall
Aplia Assignment 1
due before noon on Tuesday,
September 25
25% of grade
40
I received a question on how to

calculate own elasticity when we
have the demand function and only
one price and one quantity
Remember
Suppose G = f (S), then
EG ,S
dG S
dS G
Where dG/dS is
the partial
derivative of G
with respect to S
41
A General Linear
Demand Functions
QX 0 X PX Y PY M M H H
d
EQX , PX
EQX , M
P
X X
QX
Own Price
Elasticity =
(dQdx/dPx)*Px/Qx
EQX , PY
PY
Y
QX
Cross Price
Elasticity=
(dQdX/dPy)*Py/Qx
M
M
QX
Income
Elasticity=
(dQdX/dM)*M/Qx
42
Example: What is own

elasticity if P = 1
P = 5 1/2 Qd
What is this?
Inverse demand function
Need to change it to a demand function
Qd = 5 P
Qd = 10 - 2P.
Own-Price Elasticity = dQd/dP * P/Q
= (-2)* P/Q
If P=1, then Q is
8 (since 10 - 2 = 8).
Own price elasticity at P=1, Q=8:

(-2)(1)/8= - 0.25.
43
General Log-Linear
Demand Function
ln QX 0 X ln PX Y ln PY M ln M H ln H
d
X
Cross Price Elasticity : Y
Income Elasticity :
M
Own Price Elasticity :
44
Example of Log-Linear
Demand
ln(Qd)
= 10 - 2 ln(P).
Own Price Elasticity: -2.
45
Graphical Representation
of Linear and Log-Linear
P
Demand
P
Elasticity
varies along
this
demand
curve
Elasticity
is constant
along this
demand
curve
D
Linear
D
Q
Log Linear
Q
46
Regression Analysis
Will not be covered at this time.

PP: 95 -109
47
Lets practice
Given a log-linear demand curve,

we know that
A) demand is elastic at high prices.
B) demand is inelastic at low prices.
C) demand is unitary elastic at low
prices.
D) the elasticity is constant at all
prices.
Answer: D
48
Chapter 4
What are the properties of

consumer preferences and what
do they mean?
1.
2.
3.
Completeness
More is Better
Diminishing Marginal Rate of
Substitution?
4. Transitivity?
49
Property 1:
Completeness
Given the choice between 2

bundles of goods (A & B)
consumer must have an opinion,
meaning that she should
prefers bundle A to bundle B: A B;
or, prefers bundle B to bundle A: A B;
or, be indifferent between the two: A
B.
50
Property 2: More is
better
Bundles that have at least as much

of every good and more of some
good are preferred to other bundles.
Example
Bundle A: 2 apples and 3 oranges
Bundle B: 2 apples and 5 oranges
Which one will you prefer?
B A
B is preferred to A
51
Property 3:Diminishing
Marginal Rate of
Marginal Rate of Substitution
Substitution?
(MRS)
The rate at which a consumer is willing to

substitute one good for another and
maintain the same satisfaction level.
Example:
You are indifferent between

10 apples + 4 oranges
Or 7 apples +5 oranges
MRS of oranges for apples= number of apples

you are willing to give up to get 1 more
orange
3
and stay as satisfied as before = _________. 52
Property 3: Diminishing
Marginal Rate of
Substitution?
The more oranges you have, the

fewer apples you are willing to
give up for an additional orange.
For the 5th orange, you gave up 3
apples
For 2the 6th orange, you will give up
__________apples
53
Property 4: Transitivity
For the three bundles A, B, and C,

the transitivity property implies that
if C B and
B A,
then C A.
If you prefer apples to oranges and

oranges to bananas, then
You must prefer apples to bananas
54
What is an indifference curve and how

does it reflect the properties of
consumer preferences?
Indifference Curve
A curve that defines the
combinations of 2 goods
(X and Y) that give a
consumer the same level
of satisfaction.
Consumer
is indifferent
between these
combinations
55

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Welcome to

Remember that if you dont ask questions, I

What does the

It measures how responsive

If EG,S > 0, then S and G are directly related.

How can elasticity be

Suppose G = f (S), then

What is the own price

Measures how sensitive the

What is the difference

How does elasticity change

At any point on demand, the absolute

What is the elasticity

How does elasticity change

The lower half of demand is inelastic

How is a perfectly elastic

Perfectly Inelastic ( EQX , PX 0)

How does the own price

Elasticity, Total Revenue

Elasticity, Total Revenue

In the elastic portion of demand,

Elasticity, Total Revenue

Elasticity, Total Revenue

In the inelastic portion of demand, as

Elasticity, Total Revenue

Elasticity, Total Revenue

Elasticity, Total Revenue

In the meddle of demand, TR is at

Week Three, Class 2

Remember: If you dont ask, I

Assignment 1 is due before noon on

Assume that the price elasticity of

How does the own-price

How does the own-price

How does the own-price

Which factors affect the

The demand for Adidas brand shoes is

Lemonade, a good with many

What does the cross

Suppose that a firm sells two related good

What is the income

Michael Ward, AT&Ts own price

Answer: Lower price!

AT&T lowered price by 3

According to an FTC Report by

What can you say about the relationship

Is X a normal or an inferior good?

Holding price of Y and income constant,

Week Three- Class 3

I received a question on how to

Example: What is own

Own price elasticity at P=1, Q=8:

Own Price Elasticity :

Will not be covered at this time.

Given a log-linear demand curve,

What are the properties of

Given the choice between 2

Bundles that have at least as much

The rate at which a consumer is willing to