i ntroduction and d emand mba nccu managerial economics lecturer: jack wu
DESCRIPTION
NEW ECONOMY: INTERNET Managerial Economics also applies to the new economy. Example: In pricing, Airlines use online auctions to segment their market between business and leisure travelers. Example: In competitive strategy, Google competes fiercely with Yahoo.TRANSCRIPT
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INTRODUCTION AND DEMANDMBA NCCUManagerial EconomicsLecturer: Jack Wu
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INTRODUCTION
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NEW ECONOMY: INTERNET Managerial Economics also applies to the
new economy. Example: In pricing, Airlines use online
auctions to segment their market between business and leisure travelers.
Example: In competitive strategy, Google competes fiercely with Yahoo.
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OLD/NEW ECONOMY Differences between “New” and “Old”
economy: _ role of network effects in demand **network effects – benefit/cost depends on
total number of other users example: Internt _ importance of economies of scale and scope example: Information in Yahoo is scalable
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ORGANIZATION Vertical boundaries – closer to or further from
end user Samsung Electronics – vertical boundaries
longer than Intel – specializes in semiconductors (upstream) Motorola – specializes in mobile phones
(downstream)
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ORGANIZATION Horizontal boundaries – scale and scope of
activities Samsung Electronics – horizontal boundaries
broader than LG.Philips LCD – specializes in LCD Motorola – specializes in mobile phones
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MARKET Market: Buyers and sellers communicate with
one another for voluntary exchange market need not be physical industry -- businesses engaged in the
production or delivery of the same or similar items
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MARKET: CONTINUED Competitive Markets Market Power Imperfect Markets
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DEMAND
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CASE: RISING GASOLINE PRICES Between September 2004 and September
2005, the monthly average retail price of gasoline jumped from $1.85 per gallon to $3.08 per gallon. Sales of full-size SUVs dropped 16.8% over the same time period (with a particularly sharp 42.5% drop for full-size GM SUVs).
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GM VICE CHAIRMAN: BOB LUTZ May 31, 2004: “It sounds cavalier, but in any
household budget, gasoline isn't a factor”, Business Week.
July 1, 2005: “The demise of the full-size truck is a figment of the imagination of the popular press. Everybody assumes it is true but the market is still buying”, Reuters.
“The effect will decrease over time as people adjust to the thought of $3 a gallon, just as they did when it was $2 a gallon and just as they did when it was $1 a gallon”, New York Times.
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MANAGERIAL ECONOMICS QUESTIONS How important are gasoline prices to the
sales of SUVs and other types of automobiles?
How should the auto manufacturers respond to the increasing price of gasoline?
Are manufacturer incentives (i.e. price reductions) an effective response?
What are the combined effects of incentives and increasing gas prices?
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MANAGERIAL ECONOMICS TOOL: DEMAND We apply demand to show how the rising
price of gasoline has caused decreases in large SUV sales, and how manufacturer incentives can offset these reductions.
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INDIVIDUAL DEMAND CURVEDefinition: graph of quantity that buyer will purchase at every possible price Construction -- “Other things equal, how many would you buy at a price of ….?’’ vertical axis -- price horizontal axis -- quantity
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INDIVIDUAL DEMAND SCHEDULE Price Quantity ($ per movie) (movies per month) 10.00 0 7.50 1 5.00 2 2.50 4 0.00 7
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0
2.50
5
7.50
10
1 4 72
individual demand curve
Quantity (Movies a month)
Price
($ p
er m
ovie
)
INDIVIDUAL DEMAND CURVE
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INDIVIDUAL DEMAND SCHEDULE II Price Quantity ($ per movie) (movies per month) 20.00 0 19.00 1 18.00 2 …. … 0.00 20
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ANOTHER TYPE OF INDIVIDUAL DEMAND CURVE
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TWO VIEWS for every possible price, it shows the quantity
demanded for each unit of item, it shows the maximum
price that the buyer is willing to pay
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DEMAND CURVE: SLOPE diminishing marginal benefit -- each
additional unit of consumption/usage provides less benefit than the preceeding unit demand curve slopes
downward
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HOOVER, 1992A negative price case:Hoover’s special promotion -- two free air
tickets (worth more than £400) for purchase of appliance over £100. promotion attracted over 100,000 customers Hoover incurred £48 million loss
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DEMAND AND INCOMEChanges in incomenormal product – demand increases with income
inferior product – demand falls with income
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DEMAND AND OTHER FACTORS prices of related products
substitutes complements
advertising
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RECORDED MUSICArgentina Canada
CD purchases 0.5 2.6
cassette purchases
0.2 0.4
GDP/capita $9,413 $19,831
CD price $13.80 $11.55
cassette price $ 7.80 $ 6.06
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RECORDED MUSIC Why the average Canadian bought more of
both CDs and cassettes? Why the ratio of CD to cassette purchases
was relatively higher in Canada?
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RECORDED MUSIC Canadians enjoyed higher incomes Cassettes were a relatively inferior product
compared to CDs Another possible explanation: difference in
the relative prices of CDs and cassettes _ Canada: 11.55/6.06=1.9 _ Argentina: 13.80/7.80=1.77 * don’t not explain why Canadians bought
relatively more CDs than Argentines.
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MARKET DEMAND
Price Joy Max Lucas Market $10 0 0 0 0
$7.50 1 0 0 1 $5 2 1 0 3
$2.50 4 2 3 9 $0 7 6 4 17
Market demand = horizontal summation of individual demands
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BUYER SURPLUS individual buyer surplus: difference between
consumer’s benefit and price she must pay for the item
market buyer surplus: sum of individual buyer surpluses.
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0
2.50
5
7.50
10
1 2 4 7
c b e
h
j
g
d aindividual buyer surplus at $2.50 price
individual demand(marginal benefit) curve
Quantity (Movies a month)
Price
($ p
er m
ovie
)
c
f
INDIVIDUAL BUYER SURPLUS
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BUYER SURPLUS: INDIVIDUAL
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GAINS FROM PRICE CUT lower price on the quantity that he/she would
have purchased at the original price (inframarginal units)
he/she can buy more (marginal units) Case: Student discount price for movie
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PACKAGE DEAL charge buyer just a little less than her/his
total benefit leave buyer with almost zero surplus
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BUYER SURPLUS:TWO-PART PRICING
fixed payment usage charge
usage charge
fixed payment
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BUYER SURPLUS: TWO-PART PRICINGBusiness Provider Fixed Fee Usage
Fee Broadband access, Hong Kong
PCCW Netvigator 3M Single User Plan
HK$298 per month (incl. 100 free hrs)
HK$2 per additional hr
Mobile telephone service, UAE
Etisalat Corporation, GSM Standard Service
125 dirham connection fee; 60 dirham per qtr
0.24/0.18 dirham per min (peak/offpeak)