MBA 710 Applied Economic Analysis Instructor: Bernard Malamud –Office: BEH 502 Phone (702) 895 –3294 Fax: 895 – 1354 » Website: Office hours: TR 11:30 – 12:30; 2:30 – 3:30 pm And by appointment

Economics for Strategic Thinking You and your adversaries/partners Your customers, suppliers, competitors, colleagues Anticipate what they’ll do Figure they’re as smart as you are

Tools of economic analysis Build simple, tractable models of complex situations … Capture the essence Assume purposeful behavior –Maximize profit … subject to constraints Anticipate outcomes … what happens when everyone does their best Evaluate outcomes Seek improvements The Mantra: Marginal Benefits = Marginal Costs

Demand and Supply Buyer Demand Price Income Tastes Other Prices –Substitutes –Complements Expectations Seller Supply Price Costs Input prices –Wages, rents,... –Supplies Technology Expectations

GM’s Story Gotta give rebates to old-truck owners = X Coupon can be resold to others (for Q) –They get smaller rebate = x –There’s also a brokerage fee = k Demand : 2.0 million $20K 0.6 million old-truck owners 1.4 million other buyers Price elasticity of demand = 4

GM’s Story, continued Price elasticity of demand = 4 –For each 1% increase in price above $20K there’s a 4% decrease in quantity demanded below 2.0 million –If price rises by 1% to $20.2K, sales drop by 80,000 (4% of 2 million) to 1.92 million This is highly elastic demand ↑P Q↓↓ … Total Revenue = TR ↓ ↓P Q↑↑ … Total Revenue = TR ↑

GM’s Story, continued Cost of truck to GM = $15K Marginal Cost = $15K … doesn’t change GM wants to maximize profit Profit = Total Revenue – Total Cost It should produce to point where MARGINAL REVENUE = MARGINAL COST Note: If GM wants to sell another truck, it has to drop its price a bit on all those it’s already selling MR < Price