Managerial Economics & Business Strategy

Chapter 1The Fundamentals of Managerial

Economics

Key Functions we will be using

• Five key functions Demand

• Linear Total Revenue

• Quadratic Production

• Cubic Total cost

• Cubic Profit

• Cubic

$

Q

Demand

P=a-bQ

(or Q = a-bP)

$

Q

Total Revenue

TR=a+bQ-cQ2

a=0

$

Q

Production (short run)

TP=a+bL+cL2-dL3

a=0

$

Q

Cost (short run)

TC=a+bQ-cQ2+dQ3

$

Q

Profit = a-bQ+cQ2-dQ3

a<0

Why is this important?

• The more data that can be obtained

• The more mathematics can be used

• The more precise we can be

• The closer we can get to maximized profits

Managerial Economics & Business Strategy

Chapter 2 Market Forces: Demand and Supply

Market Demand Curve• Shows the amount of a good that will be

purchased at alternative prices, holding other factors constant.

• Law of Demand As price increases (decreases) QUANTITY demanded

decreases (increases) Negative Slope

Quantity

D

Price

Do we remember the difference??

• Change in Quantity Demanded Movement along the demand curve do to change in PRICE

• Change in Demand Shift of the demand curve do to other non-price determinates

Change in Quantity DemandedPrice

Quantity

D0

4 7

6

A to B: Increase in quantity demanded

B

10A

Price

Quantity

D0

D1

6

7

D0 to D1: Increase in Demand

Change in Demand

13

Determinants of Demand

• Income Normal good Inferior good

• Prices of Related Goods Prices of substitutes Prices of complements

• Advertising and consumer tastes

• Population• Consumer expectations

Quick Example…

• Milk market: The price of cereal increases

• Milk market: The price of milk decreases

• Milk market: People become lactose intolerant

• Milk market: The price of soy milk increases

• Milk market: An outbreak of mad cow disease has killed 2/3 of the nation’s cow supply. Consumers now fear that prices for milk will increase over the next several months.

SELF TEST-Do we understand??SELF TEST-Do we understand??• Substitutes

Coke vs. Pepsi --- what happens if the price of Coke increases? Qd of Pepsi?

• NOTHING Qd of Coke?

• DECREASES Demand for Coke?

• NOTHING Demand for Pepsi?

• INCREASES

• Compliments Tennis Balls and Tennis Rackets --- what happens if the price of

Tennis Rackets increase? Qd of Tennis Balls?

• NOTHING Qd of Tennis Rackets?

• DECREASES Demand for Tennis Balls?

• DECREASES Demand for Tennis Rackets?

• NOTHING

The Demand Function• The functional form representing the demand

curveQx

d = f(Px , PY , M, H,)

Qxd = quantity demand of good X.

Px = price of good X. PY = price of a related good Y.

• Substitute good.• Complement good.

M = income.• Normal good.• Inferior good.

H = any other variable affecting demand.

Linear Demand Curve

• What do we know??• Px price of good x

Law of demand holds

• Py price of good y The goods are substitutes

• M income Good is inferior

• A advertising Advertising helps sell the good

xyxdx AMPPQ 2132000,8

Inverse Demand Function• Linear demand curve is Qx = f (P….)

• BUT…when we graph it we use Price as a function of quantity demanded.

• Example: Demand Function

• Qxd = 10 – 2Px

Inverse Demand Function:• 2Px = 10 – Qx

d

• Px = 5 – 0.5Qxd