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Managerial Economics

Comm 295 and FRE 295


Class 1

1. Course Outline
2. Introduction
3. Supply and Demand

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1. Outline

Instructor: James Brander

Time: Tues-Thurs: 3:30 – 5:00 pm


(start on time and finish on time -- by 4:50).

Office Hours: After class and Wed: 1:30 – 3:00

Phone Number: 604.822.8483

The best way to contact me is using e-mail through Vista.

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Outline cont’d
Vista: Class notes, other course content, e-mail, discussion
groups. A detailed course outline is currently posted.
From now on, class notes will be posted before class.

Course Description: Economic foundations of managerial


decision–making. Some topics were introduced in
Principles of Economics and will be extended to more
advanced applications here. Some topics will be new.

Textbook: Managerial Economics, Second Custom Edition,


University of British Columbia. Last year’s book, the first
custom edition, will NOT be sufficient.
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Outline cont’d

Clickers: All students will need a clicker. Please make


sure you have an operational clicker by next class.

Evaluation:
Two Assignments – 5% each
Midterm on October 27 (evening) – 35%
Class Participation – 5%
Final Exam – 50%

Total 100%
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2. Introduction: Defining
Economics
1. Analysis of the allocation of scarce resources, or

2. Study of the “economy” – consumption (demand), production


(supply), investment, employment, finance, etc .
Microeconomics focuses on individual economic units: consumers,
firms, workers and investors – and the markets in which they interact.

Macroeconomics focuses economy-wide aggregates like


unemployment, inflation, aggregate economic growth, interest rates.

Managerial economics consists mostly of microeconomic topics,


especially topics related to decision-making within firms.

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Introduction cont’d
Why Study Managerial Economics
Objectives: 1) Learn to “think like an economist”
2) Learn to improve managerial decision-making
“Thinking like an economist” requires
i) a focus on economic incentives
ii) marginal reasoning
iii) familiarity with major “models” of economic
behaviour including the “supply and demand” model
iv) analytical tools such as diagrams, algebra, and calculus.

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3. Supply and Demand

Supply and demand does not mean you Demand a credit


card and I supply the Payments
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Clicker Question 1

Which of the following causes a movement along the demand curve?


a) A change in the income of consumers
b) A change in the price of substitute goods
c) A change in the cost of production
d) A change in a good’s own price
e) All of the above

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Clicker Question 2

The prices of grains such as rice and wheat have risen sharply in
recent months, causing significant problems in a number of
countries. Some of this countries have responded by imposing
price controls on grain prices. A likely effect of such price
controls in those countries is:

a) Shortages of grain.
b) Increased time spent in line to buy grain
c) A decline in local grain production.
d) Increased hoarding of grain
e) All of the above.

(Use a diagram to illustrate the effect.)


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Clicker Question 3

According to the basic model of supply and demand, a carbon tax of $.50
per litre on gasoline would be likely to

a)Cause the consumer price of gasoline to rise by more than $0.50.


b)Cause the consumer price of gasoline to rise by less than $0.50.
c)Cause the consumer price of gasoline to rise by exactly $0.50
d)Cause consumption of gasoline to rise.
e)Impossible to say based on the information given.

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Clicker Question 4
A demand function is given by QD = 104 – 40p + 20pt + 0.01Y and a
supply function is given by QS = 58 + 15p – 20pf

where Q = quantity, p = price, pt is the price of another good, pf is


the price of an input, and Y is income.

What is the equilibrium price, p, if pt = $0.80, pf = $0.40 and Y =


$4000?

a) $1.50
b) $1.75
c) $2.00
d) $2.35
e) none of the above
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Clicker Questions

One question relates to the effect of a carbon tax on activities that


use gasoline? How much of a price increase can we expect?

This question is one of many that can be addressed using the


supply-demand model.

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The Demand Curve

The amount of a good that consumers are willing to buy at a given


price, holding other factors constant, is the quantity demanded.

A demand curve shows the quantity demanded at each possible


price, holding constant the other factors that influence purchases.

For example, the demand curve for avocados shows the quantity of
avocados that would be purchased at each price.

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A Demand Curve for Avocados

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Finding the Quantity Demanded at
a Given Price
The demand curve hits the vertical axis at $4, indicating that no
quantity is demanded when the price is $4 per lb.

The demand curve hits the horizontal quantity axis at 160 million
lbs, the quantity demanded if price is zero.

To find the quantity demanded at a price between 0 and $4, pick


that price on the vertical axis—say, $2—draw a horizontal line to
the demand curve, then draw a vertical line to the quantity axis.

As the figure shows, the quantity demanded at a price of $2 per lb


is 80 million lbs per month.

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The Law of Demand: Demand


curves slope downwards.

The “Law of Demand” states that quantity demanded rises when


price falls: Demand curve slopes downward. This is an empirical
statement. It does not have to be true on purely logical grounds,
but it is usually true in real cases.

A change in a good’s own price causes a movement along the


demand curve.

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Shifts in Demand

What will cause a demand curve to shift position?


1. Changes in income
2. Changes in prices of related goods (substitutes or complements)
Substitutes are goods that can replace each other
Complements are goods that go together
3. Changes in information
4. Changing consumer tastes
5. Other factors

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The Demand Curve Shifts Out if a


Substitute’s Price Rises

Figure 2.2 A Shift of the Demand Curve. The demand curve for avocados
shifts to the right from D1 to D2 as the price of tomatoes, a substitute, increases
by 55¢ per pound. More avocados are demanded at any given price.

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The Demand Function
The demand curve shows the relationship between the quantity
demanded and a good’s price, holding other factors constant.
The demand function shows the effect of all relevant factors on the
quantity demanded. If the factors that affect the amount of avocados
demanded include the price of avocados, the price of tomatoes, and
income, the demand function can be written as
Q = D(p, pt, Y)

The demand function for avocados per month is


Q = 104 – 40p + 20pt + .01Y.

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Obtaining a Demand Curve from a


Demand Function
For demand curve D1 we hold pt = $0.80, and Y = $4,000 per month.
Substituting these values in the demand function yields
QD = 160 – 40p.
This is the equation of the demand curve with particular values for
the price of tomatoes and for income.

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The Supply Curve

A supply curve shows the quantity supplied at each possible price,


holding constant the other factors that influence supply decisions.

The supply curve shown is given by QS = 50 + 15p

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Supply Curve Shifts


What might shift the supply curve?
Changes in the cost of inputs
Changes in technology
Weather, natural disasters, etc.

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Market Equilibrium: Supply = Demand

Market equilibrium occurs when the quantity supplied equals the


quantity demanded. Diagrammatically, this is where the supply curve
and the demand curve intersect.

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What happens at other prices?

What happens if the price is above the equilibrium price?


What happens if the price is below the equilibrium price?
The market mechanism moves price toward the equilibrium (market-
clearing) level.

The theory of supply and demand predicts that prices (in free
competitive markets) will equate supply and demand. In other
words, the theory predicts that the price in a market will occur at
the intersection of the supply and demand curves.

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Excess Supply and Excess
Demand
At a price of $2.40 there is excess supply. At $1.60 there is
excess demand. At the equilibrium price of $2.00 the market
clears

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Solving supply and demand


equations for equilibrium
The supply and demand curves can be represented using algebra.
QD = 160 – 40P
QS = 50 + 15P
In equilibrium, quantity demanded must equal quantity supplied:

QD = QS , or 160 – 40P = 50 + 15P


We add 40P to both sides and subtract 50 from both sides to obtain
110 = 55P or P = 2.

We then put this value for P into either the demand curve or the supply
curve to obtain Q = 80.

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Summary

1. Outline
2. Definitions of economics and managerial economics
3. Why Study Managerial Economics
4. The Theory of Supply and Demand
The Demand Curve
The Supply Curve
Equilibrium
Demand and Supply Shifts
NEXT CLASS: Read Ch. 2 in text and Section 3.1 of Ch. 3
Clicker questions at beginning of class on supply and demand
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