Economic Analysis for Managers (ECO 501) Khurrum S. Mughal

Theme of the Lecture Theory of Demand Production Theory Introduction Regression Analysis Regression equation for demand Managerial Decision Making and Link with Elasticities Economic Forecasting Production Theory Introduction The Production Function

Regression Analysis Qty (Q) Price (P) 100 15 90 18 85 19 110 14 120 13 105 16 3

Regression Analysis Qty (Q) Price (P) Q-Mean P-Mean (P-Mean)2 100 15 -1 1 90 18 -10 2 4 -20 85 19 -15 3 9 -45 110 14 10 -2 120 13 20 -3 -60 -30 105 16 5 800 128 40 -175 Sum Mean 4

Managerial Decision Making Tasty Company Markets Coffee Brand “X”……… Qx = 1.5 - 3.0Px + 0.8I + 2.0Py - 0.6Ps + 1.2 A Qx: Sale of Coffee brand in millions of pounds per year Px: Price in dollars per pound I: Personal disposable income, trillions of dollars per year Py: Competitors price in dollars per pound Ps: Price of sugar in dollars per pound A: advertising expenditure hundreds of thousands of dollars per year Compute Qx when Px= $2, I= $ 2.5, Py= $ 1.80, Ps= $ 0.50, A= $1, then Compute Elasticities 5

Regression equation for demand of Chevrolets Qc = 100,000 - 100Pc + 2,000N + 50I + 30PF – 1,000PG + 3A Qc quantity demanded of cars per year Pc price in dollars N population in millions I per capita disposable income in dollars PF price of Ford cars in dollars PG price of gasoline in cents per liter A advertising expenditure in dollars per year

Indicate the change in the number of Chevrolets purchased per year (Qc) for each unit change in explanatory variables. Qc = 100,000 - 100Pc + 2,000N + 50I + 30PF – 1,000PG + 3A Qc quantity demanded of cars per year Pc price in dollars N population in millions I per capita disposable income in dollars PF price of Ford cars in dollars PG price of gasoline in cents per liter A advertising expenditure in dollars per year

Compute QC when PC= $9,000, I= $ 10,000, PF= $ 8000, PG= 80 cents, A= $1, N= 200 million Qc = 100,000 - 100Pc + 2,000N + 50I + 30PF – 1,000PG + 3A Qc quantity demanded of cars per year Pc price in dollars N population in millions I per capita disposable income in dollars PF price of Ford cars in dollars PG price of gasoline in cents per liter A advertising expenditure in dollars per year

Derive equation for demand curve and plot the graph if the average value of N=200 million, I= $10,000, PF= $8,000, PG = 80 cents, and A= $ 200,000 Qc = 100,000 - 100Pc + 2,000N + 50I + 30PF – 1,000PG + 3A Qc quantity demanded of cars per year Pc price in dollars N population in millions I per capita disposable income in dollars PF price of Ford cars in dollars PG price of gasoline in cents per liter A advertising expenditure in dollars per year

Forecasting Macroeconomic Forecast Micro-forecast General level of economic activity Micro-forecast Firm’s demand and sales Historical market share Planned marketing strategy

Forecasting Expert Opinion Consumer Surveys Delphi Technique Bias/ambiguity in questions or bias in sample can bias the results Levis 501 Jeans, Black Flag Roach Disk, Population Census of a province in China

Forecasting Market Experiments Observational Research Consumer Clinics Consumer perception of a product Pricing strategy Consumer reaction to an ad campaign Risks Involved: Potential Loss of Customers due to change in price Cannot hold everything constant Observational Research Consumer Clinics

Theme of the Lecture Theory of Demand Production Theory Introduction Regression equation for demand Managerial Decision Making and Link with Elasticities Economic Forecasting Production Theory Introduction The Production Function

Production Function General equation for Production Function: Q = f (K,L), where L = Labour K = Capital Maximum rate of output per unit of time obtainable from given rate of Capital and Labour An engineering concept: Relates out puts and inputs Devoid of economics

Production Function Cobb-Douglas Production Function Q = A Kα Lβ Assume a production function: Q = 100 K0.5 L0.5 Combination K L Output A 6 1 245 B 3 2 C D

Production Function Substitutability between factors of production Returns to Scale Returns to Factor