Managerial Economics

MBA ZC 416

Leela Rani, PhD

Assistant Professor, Management
BITS Pilani Email: leela_r@pilani.bits-pilani.ac.in
Pilani Campus
 BITS Pilani
Pilani|Dubai|Goa|Hyderabad

Managerial Economics
Demand analysis II- Lecture 3
Agenda for today

1. Present value and NPV.

2. Demand and supply schedule (laws),

3. Other determinants of demand
4. Consumer choice: individual’s example: Utility & satisfaction
5. Individual’s budget line
6. Income effect & substitution effect (numerical)
7. Circular flow in an economy

3 BITS Pilani, Deemed to be University under Section 3, UGC Act

 All answers

4
 PV and NPV examples

For solutions, refer to excel sheet in Imparts bagpack

5 https://support.microsoft.com/en-us/office/pv-function-23879d31-0e02-4321-be01-da16e8168cbd
 Q on NPV

Answer
What will happen as the cost of capital changes?
6 Or what cost of capital is admissible to justify starting this business?
Demand, supply and price

Pre rec video 2.2

7 BITS Pilani, Deemed to be University under Section 3, UGC Act
If the demand and supply curve for computers is:
Demand D=100-6P Supply S=28+3P
Q: Where P is the price of computers, what is the quantity of computers bought and sold at
equilibrium?

Solution :
We know that equilibrium quantity will be where supply meets or equals demand. So first we’ll set supply
equal to demand:
100-6P= 28+3P
If we re-arrange this we get: 72=9P

Which simplifies to P=8.

Now we know the equilibrium price, we can solve for the equilibrium quantity by simply substituting P=8
into the supply or the demand equation. For instance, substitute it into the supply equation to get:
S=28+3*8=28+24=52
Thus, the equilibrium price is 8, and the equilibrium quantity is 52.
 Demand and supply schedule (laws)
Equilibrium price, other determinants
Solve: for Q d = 10,000 - 8P equal to
Q s = 5000+ 25P
10,000 - 8P = 5000+ 25P
33P = 5, 000 => P = 151.5
At P= 152, Q = 5000+25*152 = ??
Dx = 1000- 2Px +3Pr +10I
How to interpret the signs?
What are TR, AR (range),
MR?
https://ittecon.wordpress.com/2009/03/19/graphing-supply-and-demand-curves-in-excel/
9 BITS Pilani, Deemed to be University under Section 3, UGC Act
Demand function with single
variable … example on left
Or
Demand function with
multiple variables
Dx = f(Px, Pr, I, T, F, PD, S) Where,
Dx = Market demand of commodity x
Px = Price of given commodity x
Pr = Prices of Related Goods (complimentary)
I = Income of the consumers
T = Tastes and Preferences
F = Expectation of Change in Price in future
P0 = Size and Composition of population
S = Season and Weather
Discussion question 1
Q1. You are the manager of a ketchup manufacturing
company. How will the following events affect the
price of a bottle of ketchup you can get from the
market?
1. The price of tomatoes increases
2. The govt. shifts you from GST level 4% to GST 12%
3. 4 more ketchup manufacturing units come up in
the same area
4. People have taken to Italian food which requires 5. Price of a bottle of ketchup would be lowered to keep
use of ketchup more frequently.
5. A new technology for processing in ketchup
manufacturing is designed to reduce costs.
6. The unemployment rate in your area shoots up.
Derived demand: demand for tomatoes by manufacturer
Perishable demand: tomatoes as a perishable product.
Normal good?
10
Answers
1. Price of a bottle of ketchup will have to be raised to
accommodate higher input costs (shift)
2. Same as above, otherwise profit margins will suffer (shift)
3. Competition increases, more supplies available at competing
prices, price falls (supply curve shifts, demand curve same, so
eq. price goes down)
4. Demand curve shifts (preference change), so prices of a bottle
of ketchup can be increased.
competitive as lower input costs are possible for other
manufacturers too. (shift)
6. Income falls, so demand curve shifts towards the origin and eq.
price drops.
All other things remaining constant
BITS Pilani, Deemed to be University under Section 3, UGC Act
TR, AR, MR and their relationships If: Q d = 2000 – 100P
What are: total revenue-TR, Average
TR -TR' revenue - AR &
P Q TR AR = MR
0 11 0 0 - Marginal revenue - MR
1 10 10 1 8 for P = 5 to 25?
2 9 18 2 6
3 8 24 3 4
4 7 28 4 2 TR -TR' MR =
5 6 30 5 0 P Q TR AR =a a/Q
6 5 30 6 -2 5 500 2500 5    
7 4 28 7 -4 6 400 2400 6 100 0.25
8 3 24 8 -6 7 300 2100 7 300 1
9 2 18 9 -18
8 200 1600 8 500 2.5
9 100 900 9 700 7
10 0 0 10 900  
MR = ΔTR /ΔQ 11 -100 -1100 11 1100 -11
Point MR and arc MR 12 -200 -2400 12 1300 -6.5

11
Which factors determine prices?
Prices are influenced by
many market conditions:
1. Competitor's prices
2. Substitute products
3. New product features

Market conditions influence

the prices buyers are ready to
pay – this gives rise to the
demand pattern curve & it’s
slope
Companies try to estimate how
Q will change if they change P…
according they decide how
much P to change

Demand for cement is a derived demand ELASTICITY

12 BITS Pilani, Deemed to be University under Section 3, UGC Act
Elasticity
%  in dependent variable
%  in independen t variabl e Typical behavior

Price elasticity of demand

%  in quantity demanded
%  in price

BITS Pilani, Pilani Campus

 % method, point method, arc method

14
15
 a. False
b. False
c. True
d. False
e. NA
f. True

For example, there were few substitutes for White-Out when it was first
introduced so its demand curve was steep or relatively inelastic. As other
liquid correcting fluids were introduced, the demand curve for White-Out
became flatter or more elastic.
While a change in the price of salt will have a small affect on the quantity
demanded of salt, a change in the price of yachts will have a larger affect
on the quantity demanded of yachts because of the relatively elastic
demand curve.
While a change in the price of water will have a small affect on the
quantity demanded of water in the short run, it will have a larger effect on
the quantity demanded in the long run because of the relatively elastic
demand curve.
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Shyam Resturaunts sells sandwiches at Rs. 26.00 per unit and it sells 20,000 units
in a week. The managers have suggested to owner a price cut of Rs. 4.00 and they
say that Ep in this price range is (-1.16).
a) Calculate showing all steps (mandatory) what will be the monthly quantity sold
is price cut is implemented (use arc method).  
b) What will be the weekly revenue after price cut?
Ans: Q2 = 22 K units (approx.), TR after price cut = 484,000
Q2. A 10 percent increase in the quantity of spinach demanded results from a 20 percent
decline in its price. What is the price elasticity of demand for spinach?

Q3. The price elasticity of demand is 5.0 if a 10 percent increase in the price results in a ____
decrease in the quantity demanded.

Q4. Fred’s income has just risen from $940 per week to $1,060 per week. As a result, he
decides to purchase 9 percent more steak per week. What is the income elasticity of Fred’s
demand for steak?

17
Income elasticity of demand  Compare points B and A for normal good curve
 Points C and A for luxury goods curve

Elasticity is different
from slope

Slope can be negative or

(+)
Along any slope
elasticities values
normally vary

Curve for inferior good Slope is just Δ y /Δ x

18
Income elasticity practice questions Home assignment:
For the table given below, calculate the
Q1. J’s income has just risen from Rs. income elasticity of demand for 2
940 per week to Rs. 1,060 per week. competing software's (s/w). Q stands for
As a result, she decides to purchase quantity purchased and P stand for price
1.2 Kg of apples per week as compared
to earlier purchase of 1 kg per week. Month P. S/W 1 Q. S/W 1 Income P. S/W 2
Income elasticity of Joan’s demand for 1 120 200 4000 130
2 120 210 4000 145
lettuce is: ……………… Ei = 1.0 3 120 220 4200 145
4 110 240 4200 145
Q2. A 10 percent increase in income 5 114 230 4200 145
causes the quantity of orange juice 6 115 215 4200 125
demanded to change so as to show 7 115 220 4400 125
income elasticity of demand = 0.8. if 8 115 230 4400 125
the initial amount of consumption was 9 105 235 4600 125
10 105 220 4600 115
19,200 gallons, what is the later
amount of consumption? 20,800 gallons Cross price elasticity of demand: self study
19 Elasticity and taxation: not in syllabus
Indifference curve, budget lines, consumer
choice & diminishing MRS

2 ways of solving for consumer’s choice point: using

slope or iterative method
20 BITS Pilani, Deemed to be University under Section 3, UGC Act
Marginal utility and price for consumer choice

50+30+
40= 120

120+6+
10+25=
161

Max. utility by choosing the highest value of MU/C till total C becomes = 167

21 BITS Pilani, Deemed to be University under Section 3, UGC Act

Employees also choose at workplace from a menu

Benefit offering and spending varies substantially by industry, type of task, legal factors.

Within most industries, employee occupations and pay grades vary widely.
For example, although the professional, scientific, and technical services sector is frequently associated with lawyers and
scientists, establishments in that industry also employ lower-paid support staff, administrative and janitorial workers, and
others whose occupations, authority, and pay do not generally command high levels of benefit spending.
Nevertheless, significant differences in benefit spending exist across industries, even after controlling for pay,
establishment size, worker union status, region, and other characteristics.
Establishments in the mining and extraction industry and in utilities spend significantly more on benefits than do
employers in other sectors. For instance, the average mining job provides over $5 more in benefits per hour worked than
the average construction job.

22 BITS Pilani, Deemed to be University under Section 3, UGC Act

How much should a person be compensated to
breathe China’s polluted air? If you’re an expatriate
employee of The Coca Cola Co. , the answer is a 15%
bonus, according to a report last week in the
Australian Financial Review. (Local Chinese are
excluded from the bonus, despite breathing the
same air.)
Is offering an environmental hardship allowance
enough for multinational companies in China to
retain expatriate employees?

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 Substitution effect income effect of price change

25
26
Circular flow in economy

27 BITS Pilani, Deemed to be University under Section 3, UGC Act

Thank You

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956