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

Managerial Economics
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)

4
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

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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
5
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 only on the price they receive but also on

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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.
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LETS 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

8
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)
9
Equation for demand curve
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

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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.
10
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

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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 12
Noodles 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.

14
MANAGERIAL APPLICATIONS

Deriving demand and supply equations from a set of

data
Price QD QS

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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

15
MANAGERIAL APPLICATIONS

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

demanded in a small town, but only 200 would be

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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

Why applying elasticity:

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- 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

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ELASTICITY EXAMINED

Price Elasticity of Demand

Price elasticity of demand measures percentage

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change in 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

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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. 19
EXTREME CASES OF ELASTICITY

(a) For a horizontal

demand curve, Q/P is
infinite. Because a tiny

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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 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

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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.

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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

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be 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
LETS WORKOUT ONE MORE

Assume that you are in an interview session and

the panel asks you to give a pricing decision that

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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.

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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
40 $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

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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.

27
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

28
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.

29
MANAGERIAL APPLICATION
Advertising elasticity: It shows the
responsiveness of the quantity demanded of a
particular product with respect to a change in

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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.

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