Managerial Economics & Business Strategy Chapter 1 The Fundamentals of Managerial Economics

Key Functions we will be using Five key functions n Demand Linear n Total Revenue Quadratic n Production Cubic n Total cost Cubic n Profit Cubic

$ Q Demand P=a-bQ (or Q = a-bP)

$ Q Total Revenue TR=a+bQ-cQ 2 a=0

$ Q Production (short run) TP=a+bL+cL 2 -dL 3 a=0

$ Q Cost (short run) TC=a+bQ-cQ 2 +dQ 3

$ Q Profit  = a-bQ+cQ 2 -dQ 3 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 n As price increases (decreases) QUANTITY demanded decreases (increases) n Negative Slope Quantity D Price

Do we remember the difference?? Change in Quantity Demanded n Movement along the demand curve do to change in PRICE Change in Demand n Shift of the demand curve do to other non-price determinates

Change in Quantity Demanded Price Quantity D0D A to B: Increase in quantity demanded B 10 A

Price Quantity D0D0 D1D1 6 7 D 0 to D 1 : Increase in Demand Change in Demand 13

Determinants of Demand Income n Normal good n Inferior good Prices of Related Goods n Prices of substitutes n 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?? Substitutes n Coke vs. Pepsi --- what happens if the price of Coke increases? n Qd of Pepsi? NOTHING n Qd of Coke? DECREASES n Demand for Coke? NOTHING n Demand for Pepsi? INCREASES

Compliments n Tennis Balls and Tennis Rackets --- what happens if the price of Tennis Rackets increase? n Qd of Tennis Balls? NOTHING n Qd of Tennis Rackets? DECREASES n Demand for Tennis Balls? DECREASES n Demand for Tennis Rackets? NOTHING

The Demand Function The functional form representing the demand curve Q x d = f(P x, P Y, M, H,) n Q x d = quantity demand of good X. n P x = price of good X. n P Y = price of a related good Y. Substitute good. Complement good. n M = income. Normal good. Inferior good. n H = any other variable affecting demand.

Linear Demand Curve What do we know?? Px  price of good x n Law of demand holds Py  price of good y n The goods are substitutes M  income n Good is inferior A  advertising n Advertising helps sell the good

Inverse Demand Function Linear demand curve is Qx = f (P….) BUT…when we graph it we use n Price as a function of quantity demanded. Example: n Demand Function Q x d = 10 – 2P x n Inverse Demand Function: 2P x = 10 – Q x d P x = 5 – 0.5Q x d