MANAGERIAL ECONOMICS

 Market Structure. Can be defined as, the number of firms

producing the identical goods and services in
the market and whose structure is determined on the
basis of the competition prevailing in that market.
Four types of market structures
 Perfect Competition Market Structure. ...
 Monopolistic Competition Market Structure. ..
 Monopoly Market Structure. ...
 Oligopoly Market Structure
5 characteristics of a free market system
 Private Property. People own stuff, not the government
 Freedom of choice
 Motivation of self interest
 Competition
 Limited Government
What are the main characteristics of market
economy?
 One of the most important characteristics of a market
economy, also called a free enterprise economy, is the
role of a limited government. Most economic decisions are
made by buyers and sellers, not the government. A
competitive market economy promotes the efficient use of
its resources.
What is perfect market structure?
 Pure or perfect competition is a theoretical market
structure in which the following criteria are met: all firms
sell an identical product (the product is a "commodity" or
"homogeneous"); all firms are price takers (they cannot
influence the market price of their product); market share
has no influence on price; buyers .
What is monopolistic competition and its features?
 Definition: Under, the Monopolistic Competition, there
are a large number of firms that produce differentiated
products which are close substitutes for each other. In other
words, large sellers selling the products that are similar, but
not identical and compete with each other on other factors
besides price.
 Monopolistic competition is a market
structure characterized by a large number of relatively
small firms. While the goods produced by the firms in the
industry are similar, slight differences often exist. ... In
effect, monopolistic competition is something of a
hybrid between perfect competition and monopoly
Features of monopoly
 One Seller and Large Number of Buyers: The monopolist's
firm is the only firm; it is an industry.
 No Close Substitutes: There shall not be any close substitutes
for the product sold by the monopolist.
 Difficulty of entry of new firms
 Monopoly is also an Industry
 Price Maker
Oligopoly
An oligopoly is an industry with only a few firms. If they
collude, they reduce output and drive up profits the way a
monopoly does
What is Elasticity in Economics?
 Elasticity is a measure of how much the quantity demanded
of a service/good changes in relation to its price, consumer
income or supply.
ELASTICITY
What is elasticity and example?
 Inelastic Goods and Services
 The most famous example of relatively inelastic demand is
that for gasoline. ... Put another way, for every 10% rise in
price, gas demand would only be expected to fall by 1%.
With an elasticity of less than 1, that means this good is
very inelastic
Elasticity of Demand Formula and Examples
 While there are several types of elasticity in economics, the
most commonly used is demand elasticity (or price
elasticity), which shows how consumer demand is affected
when prices go up or down.
 The formula for demand elasticity is:
Demand Elasticity = (% Change in Quantity Demanded) / (%
Change in Price)
 If demand elasticity is greater than one, the good or service is
considered price sensitive and elastic. If the elasticity of a
good or service is less than one, it is considered price
insensitive and inelastic
Elastic Goods and Services
 Elastic goods and services generally have plenty of
substitutes. As an elastic service/good's price increases, the
quantity demanded of that good can drop fast.
Elastic Goods and Services
 Elastic goods and services generally have plenty of
substitutes. As an elastic service/good's price increases, the
quantity demanded of that good can drop fast.
 For example, assuming that the price of Cable TV Service A
goes up by 10%. Because consumers can easily switch to less-
expensive Cable TV Service B or other forms of
entertainment, cable subscribers (quantity) for Cable TV
Service A fall by 15%. In this case:
 Demand Elasticity = 15% / 10% = 1.5
 In other words, for every 1% increase in service price, the
company can expect to lose 1.5% of its subscribers. This
shows how elastic (or price sensitive) the cable tv service is,
as the quantity demanded changes at a larger rate than the
price.
 Other examples of elastic goods and services include
furniture, motor vehicles, instrument engineering products,
professional services, and transportation.
Inelastic Goods and Services
 Inelastic goods have fewer substitutes and price
change doesn't affect quantity demanded as much.
 Most famous example of relatively inelastic demand is that
for gasoline. As the price of gasoline increases, the quantity
demanded doesn't decrease all that much. Even if gas prices
are high, consumers are still willing to buy it because they
still need to commute and there are very few good
substitutes for gasoline.
 Example: Gas prices increased by 50% and consumer
demand (quantity) only fell by 5%. That would mean gas'
elasticity was:
Demand Elasticity = 5% / 50% = 0.1
 In parallel, for every 10% rise in price, gas demand would
only be expected to fall by 1%. With an elasticity of less than
1, that means this good is very inelastic.
 More examples of inelastic goods include electricity, water,
drinks, clothing, tobacco, food, and oil.
Elasticity of Supply and Income Elasticity
 Income Elasticity of Demand: the responsiveness of quantity
demanded to a change in income.

Price Elasticity of Demand (PED): the responsiveness of

quantity demanded to a change in price.

Elasticity of Supply: the responsiveness of the quantity

supplied to a change in price.
1. Perfectly Elastic Demand:
 When a small change in price of a product causes a major
change in its demand, it is said to be perfectly elastic
demand. In perfectly elastic demand, a small rise in price
results in fall in demand to zero, while a small fall in price
causes increase in demand to infinity. In such a case, the
demand is perfectly elastic or ep = 00.
 From an organization’s point of view, in a perfectly elastic
demand situation, the organization can sell as much as much
as it wants as consumers are ready to purchase a large
quantity of product. However, a slight increase in price
would stop the demand.
3. Relatively Elastic Demand:
 Relatively elastic demand refers to the demand when the
proportionate change produced in demand is greater than the
proportionate change in price of a product. The numerical
value of relatively elastic demand ranges between one to
infinity.
 Mathematically, relatively elastic demand is known as more
than unit elastic demand (ep>1). For example, if the price of
a product increases by 20% and the demand of the product
decreases by 25%, then the demand would be relatively
elastic.
4. Relatively Inelastic Demand:
 Relatively inelastic demand is one when the percentage
change produced in demand is less than the percentage
change in the price of a product. For example, if the price of
a product increases by 30% and the demand for the product
decreases only by 10%, then the demand would be called
relatively inelastic. The numerical value of relatively elastic
demand ranges between zero to one (ep<1). Marshall has
termed relatively inelastic demand as elasticity being less
than unity.
Given:
Price of Milk (per liter) Qty Demanded (li)
PhP15 100
pHp20 90

Calculate the price elasticity of demand and determine the type of price elasticity.
Solution:
 P= 15
 Q = 100
 P1 = 20
 Q1 = 90
 Therefore, change in the price of milk is:
 ∆P = P1 – P
 ∆P = 20 – 15
 ∆P = 5
 Similarly, change in quantity demanded of milk is:
 ∆Q = Q1 – Q
 ∆Q = 90 – 100
 ∆Q = -10
 The change in demand shows a negative sign, which can be
ignored. This is because of the reason that the relationship
between price and demand is inverse that can yield a negative
value of price or demand.
 Price elasticity of demand for milk is:
 ep = ∆Q/∆P * P/Q
 ep = 10/5 * 15/100
 ep = 0.3
 The price elasticity of demand for milk is 0.3, which is less
than one. Therefore, in such a case, the demand for milk is
relatively inelastic.
5. Unitary Elastic Demand:
 When the proportionate change in demand produces the
same change in the price of the product, the demand is
referred as unitary elastic demand. The numerical value for
unitary elastic demand is equal to one (ep=1).