Managerial Economics Finals

Demand elasticity

measures the degree of responsiveness of quantity demanded with a given change in one its determinants.

Price elasticity

measures the degree of responsiveness of quantity demand with a given change in price.

Necessity and luxury

What are the two (2) importance of degree of necessity of the goods?

Inelastic

Elastic or inelastic - Necessity

Elastic

Elastic or inelastic - Luxury

Greater substitutes, less or no substitutes

What are the number of available substitutes?

Elastic

Elastic or inelastic - Greater substitutes

Inelastic

Elastic or inelastic - Less or no substitutes

• Change in price have no effect on income or budget

• Change in price with substantial effect on income

What is the proportion of income in price changes?

Inelastic

Elastic or inelastic - Changes in price have no effect on income or budget

Elastic

Elastic or inelastic - Changes in price with substantial effect on income

Longer and short time period

Types of time period

More elastic

Determinants of price elasticity of demand

In the time period, More elastic or less elastic - Longer time period

Less elastic

More elastic or less elastic - Shorter time period

Elastic

If the absolute value of the price elasticity of demand is greater than 1, demand is termed price elastic. Consumer are responsive to price changes.

Examples: cars, furniture, housing

Inelastic

If the absolute value of the price elasticity of demand is less than 1, demand price is ?
Consumers are unresponsive to price changes.

Examples: salt, tobacco, prescription

Unitary

If the absolute value of the price elasticity of demand is equal to 1, demand is unit price elastic.

Percent change in price and quantity are equal.

Perfectly elastic

Quantity responds enormously to changes in price.

Perfectly inelastic

Consumers are completely unresponsive to price changes.

Example: Insulin

Cross price elasticity of demand

measures the degree of responsiveness of quantity demanded of one good with a given charger in price related goods/commodities.

The two goods are substitutes

If the cross price elasticity of demand is positive…. the two are what?

The two goods are complements

If the cross price elasticity of demand is negative… the two good are what?

the two goods are unrelated

If the cross price elasticity of demand is exactly equal to zero… the two goods are what?

Income elasticity of demand

measures the degree of responsiveness of quantity demanded with a given change in income.

Normal good

If the income elasticity of demand is positive, it is what?

Luxury good

If the income elasticity of demand is between is positive, it is a normal good specifically what?

Necessity good

If the income elasticity of demand is between 0 and 1 or exactly equal to 1, it is normal good specifically what?

Inferior good

If the income elasticity of demand is negative it is a what?

• Pricing strategy and Revenue Maximization

• Product Bundling

• Revenue forecasting and inventory management

What are the real-world applications of elasticity of demand?

Pricing strategy and revenue maximization

Real world applications of elasticity of demand

A luxury car manufacturer might realize that the demand for their cars is inelastic because consumers are less sensitive to price changes for high-end products. As a result, the company might raise prices without significantly reducing sales, thereby increasing total revenue.

Product bundling

Real world applications of elasticity of demand

Fast food chains like McDonalds offer value meals (a bundle of burger, fries and drink) If customers are more price sensitive to the individual items (elastic), bundling them at a discount increase total sales and profits.

Revenue forecasting and inventory management

Real world applications of elasticity of demand

Retailers might notice that holiday decorations see a spike in demand around the Christmas season. By understanding that demand is more elastic during this time, they can increase inventory before the season starts, ensuring that they don’t miss out on sales.

Economics

is the study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources (Mcconnell, 1993)

Management

is the discipline of organizing and allocating a firm’s scarces resources to achieve its desired objectives.

Managerial Economics

is the use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.

Risk

is the chance or possibility that actual future outcomes will differ from those expected today.

• Changes in demand and supply

• Technological changes and the effect of competition

• Changes in interest rates and inflation rates

• Exchange rates for companies in international trade

• Political risk for companies with foreign operations

What are the types of risk in managerial decision making?

Microeconomics

is the study of individual consumers and producers in specific markets.

Macroeconomics

is the study of the aggregate economy.

Scarcity

is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people.

Opportunity cost

is the amount or subjective value that must be sacrificed in choosing one activity over the next best alternative.

Resources

• Factors of production or inputs

  • Land,labor, capital, entrepreneurship

Entrepreneurship

is the willingness to take certain risks in the pursuit of goals.

Management

is the ability to organize and administer various tasks in pursuit of certain objectives.

Firm

is a collection of resources that is transformed into products demanded by consumers.

Profit

revenue minus cost?

• Business risk

• Financial risk

What are the two major types of risk in maximizing the wealth of stockholders?

Business risk

involves variation in returns due to the ups and downs of the economy, the industry, ,and the firm.

Financial risk

concerns the variation in returns that is induced by leverage.

Leverage

is the proportion of a company financed by debt.

The greater the potential fluctuations in stockholder earnings

the higher the leverage, the higher the what?

Market value added

Represents the market value of the company and the capital that the investors have paid into the company.

Future growth value

Measure used to rank companies. It measures how much of the company’s value is due to expected growth.

Economic profits

revenue minus economic cost

Accounting costs

are based on historical costs.

Economic costs

are based on replacement costs and also include opportunity costs

Normal profit

is the amount of profit that is equal to the profit that could be earned in the firm’s next best alternative activity. It is the minimum profit necessary to keep resources engaged in a particular activity.

Demand

Quantities for a good or service that people are ready ( willing and able) to buy at various prices within some given time period, other factors besides price held constant.

Market demand

is the sum of all the individual demands.

Law of demand

The inverse relationship between price and the quantity demanded of a good or service is called what?

• Taste and preferences

• Income

• Prices of related products

• Future expectations

• Number of buyers

What are some examples of nonprice determinants of demand?

Supply

Quantities of a good or service that people are ready to sell at various prices within some given time period, other factors besides price held constant.

• Technology

• Cost of production

• Future expectations

• Number of sellers

• Price of related goods

• Government regulation and taxes

• Government subsidies

• Weather

Nonprice determinants of supply

Equilibrium price

The price that equates the quantity demanded with the quantity supplied.

Equilibrium quantity

The amount that people are willing to buy and sellers are willing to offer at the equilibrium price level.

Shortage

A market situation in which the quantity demanded exceeds the quantity supplied

Surplus

A market situation in which the quantity supplied exceeds the quantity demanded.

Comparative statics analysis

A commonly used method in economic analysis: a form of sensitivity, or what if analysis.

Rationing function of price

is the change in market price to eliminate the imbalance between quantities supplied and demanded.

guiding or allocating function

Price is the movement of resources into or out of markets in response to a change in the equilibrium price.

Normal good

Example of this are basic necessities like rice, utilities like electricity, water movie tickets.

Inferior good

Examples: sardines, tinapa, tuyo, public transportation etc

• Quality of the product

• Season

• Promotion and Advertisement

• Religion

• Fashion/Fad

• Customs and traditions

What are the non-price determinants of demand?

• Technology

• Cost of production

• Future expectations

• Number of sellers

• Price of related Goods

• Government regulation and taxes

• Government Subsidies

• Weather

What are the non price determinants of supply?