Welcome to

EC 209: Managerial
Economics-
Week Three Group A
By: Dr. Jacqueline Khorassani
1
Class One
Monday, September 17
11:10-12:00
Fottrell (AM)
The textbook is now available at the
bookshop
Dont forget that the first aplia assignment
is due before September 25
It is the week 4 assignment
Remember that if you dont ask questions, I
assume you know.
I did not get any questions on this weeks
study guide. So,I will briefly go over
what you must know.
2
What does the
elasticity measure?
It measures how responsive
(sensitive) is variable G to one
percent change in variable S
%G
EG , S
%S
If EG,S > 0, then S and G are directly related.
If EG,S < 0, then S and G are inversely related.
If EG,S = 0, then S and G are unrelated.

3
How can elasticity be
shown (measured) using
calculus?
Suppose G = f (S), then
Where dG/dS is
dG S
EG ,S the partial
dS G derivative of G
with respect to S

4
What is the own price
elasticity of demand?

Measures how sensitive the

quantity demand is to one
percent change in price.

5
How is it measured?

d
%QX
EQX , PX
%PX
Is it negative or positive?
Negative, according to the law of
demand.

6
Lets practice

If quantity demanded for sneakers falls

by 12% when price increases 4%, we
know that the absolute value of the
own-price elasticity of sneakers is
A) 0.3.
B) 0.8.
C) 3.0.
D) 3.3.
Answer: C
7
What is the difference
between elastic, inelastic
and unitary elastic
demands?
Elastic:
EQX , PX 1

Inelastic: EQX , PX 1

Unitary EQ X , PX 1
elastic:
8
How does elasticity change
along a linear demand curve?

At any point on demand, the absolute

value of elasticity = lower portion of
demand /upper portion of demand
At point A: What is the
P
elasticity at point
C EQX , PX BA / AC C?
Infinity

A What is the elasticity

at point B?
B
Zero
Q
9
How does elasticity change
along a linear demand curve?

The lower half of demand is inelastic

The upper half of demand is elastic
Mid point of demand is unitary elastic
P
Elasti
C c Unitary elastic
//

A Inelastic
//
B
Q
10
 How is a perfectly elastic
demand curve different from a
perfectly inelastic
d
demand
curve? %QX
EQ , P
Price X X
%PX Price
D

Quantity Quantity

%P = 0 % Q = 0

Perfectly Elastic ( EQ X ,PX ) Perfectly Inelastic ( EQX , PX 0)

11
 How does the own price
elasticity of demand relate
total revenue?
P
TR
100

0 10 20 30 40 50 Q 0 Q

12
 Elasticity, Total Revenue
and Linear Demand
P
TR
100

80

800

0 10 20 30 40 50 Q 0 10 20 30 40 50 Q

13
 Elasticity, Total Revenue
and Linear Demand
P
TR
100

80

60 1200

800

0 10 20 30 40 50 Q 0 10 20 30 40 50 Q

In the elastic portion of demand,

as you lower the price, TR goes 14
 Elasticity, Total Revenue
and Linear Demand
P
TR
100

80

60 1200

40

800

0 10 20 30 40 50 Q 0 10 20 30 40 50 Q

15
 Elasticity, Total Revenue
and Linear Demand
P
TR
100

80

60 1200

40

20 800

0 10 20 30 40 50 Q 0 10 20 30 40 50 Q

In the inelastic portion of demand, as

you lower the price, TR goes down. 16
 Elasticity, Total Revenue
and Linear Demand
P
TR
100
Elastic
80

60 1200

40

20 800

0 10 20 30 40 50 Q 0 10 20 30 40 50 Q

Elastic
17
 Elasticity, Total Revenue
and Linear Demand
P
TR
100
Elastic
80

60 1200
Inelastic
40

20 800

0 10 20 30 40 50 Q 0 10 20 30 40 50 Q

Elastic Inelastic
18
 Elasticity, Total Revenue
and Linear Demand
P TR
100
Elastic Unit elastic
80 Unit elastic

60 1200
Inelastic
40

20 800

0 10 20 30 40 50 Q 0 10 20 30 40 50 Q

In the meddle of demand, TR is at Elastic Inelastic

its max 19
Managerial Economics
Week Three, Class 2
Tuesday, September 18
15:10-16:00
Cairnes
Remember: If you dont ask, I
assume you know.

20
About Aplia
Assignments
25% of grade
Fees = $20
Need to be paid in 5 days or they kick you
out of the program
I have no control over this
Course Key: R8WC-VRSZ-SCBQ
Assignment 1 is due before noon on
September 25
5 grades question sets

21
Lets practice
Assume that the price elasticity of
demand is -2 for a certain firm's product.
If the firm raises price, the firm's
managers can expect total revenue to:
a) Decrease
b) Increase
c) Remain constant
d) Either increase or remain constant
depending upon the size of the price increase.
Answer: A

22
How does the own-price
elasticity related to
marginal revenue?
What is marginal Revenue,
MR?
Revenue resulting from selling
one more unit of output
MR = TR/Q

23
How does the own-price
elasticity related to
marginal revenue?
MR = P(1 + E)/E
Suppose E < -1
which means |E| >1 (elastic), then
MR is positive
Suppose E = -1
which means |E|=1 then MR is zero
Suppose E > -1
which means |E|<1 (inelastic), then
MR is negative
24
 How does the own-price
elasticity related to
marginal
Between 0 to Q*revenue?
demand is elastic and
MR>0
At Q* demand is unitary elastic and MR =
0
Above Q* demand is inelastic and MR <0
P Elastic
MR >0
Unitary
elastic MR =
0
Inelastic
MR <0
0
D
Q
Q*
MR 25
Which factors affect the
own price ?

You need to study this one on your own.

PP 79-82
Ask me questions

26
Lets practice
The demand for Adidas brand shoes is
A) more elastic than the demand for
shoes in general.
B) less elastic than the demand for shoes
in general.
C) equally elastic to the demand for
shoes in general.
D) none of the above.
Answer: A

27
Lets practice
Lemonade, a good with many
close substitutes, should have an
own-price elasticity that is:
a) unitary.
b) relatively elastic.
c) relatively inelastic.
d) perfectly inelastic.
Answer: B

28
 What does the cross
price elasticity of
demand measure?
It measures how sensitive the quantity demand
for good X is to one percent change in the price
of good Y
d
%QX
EQX , PY
%PY
If EQX,PY > 0,
then X and Y are substitutes.
If EQX,PY < 0,
then X and Y are complements.
29
Suppose that a firm sells two related good
and the price of one good changes; how
can the cross price elasticity help us predict

R X 1 in
R changes
the E the , PX
Q X total
RY EQY , PX %PX
revenue?

R = change in total revenue,

Rx = good Xs revenue,
RY = good Ys revenue

30
What is the income
elasticity?
Measure the percentage change in
quantity demand for good X as the income
of consumer changes by one percent.
d
%QX
EQX , M
%M
If EQX,M > 0,
then X is a normal good.
If EQX,M < 0,
31
then X is a inferior good.
Uses of Elasticity
Example 1: Pricing and Cash
Flows (revenue)
According to an FTC Report by
Michael Ward, AT&Ts own price
elasticity of demand for long
distance services is -8.64.
AT&T needs to boost revenues in
order to meet its marketing goals.
To accomplish this goal, should
AT&T raise or lower its price?

32
 Answer: Lower price!

Sincedemand is elastic, a
reduction in price will
increase quantity demanded
by a greater percentage than
the price decline, resulting in
more revenues for AT&T.

33
Example 2: Quantifying
the Change
If
AT&T lowered price by 3
percent, what would
happen to the volume of
long distance telephone
calls routed through
AT&T?
34
Answer
Calls would increase by 25.92 percent!
d
%QX
EQX , PX 8.64
%PX
d
%QX
8.64
3%
3% 8.64 %QX
d

d
%QX 25.92%
35
Example 3: Impact of a
change in a competitors
price
According to an FTC Report by
According to an FTC Report by
Michael Ward, AT&Ts cross price
elasticity of demand for long
distance services is 9.06.
If competitors reduced their prices
by 4 percent, what would happen
to the demand for AT&T services?

36
Answer
AT&Ts demand would fall by 36.24 percent!

d
%QX
EQX , PY 9.06
%PY
d
%QX
9.06
4%
d
4% 9.06 %QX
d
%QX 36.24%
37
Interpreting Demand
Functions
Mathematical representations of
demand curves.
Example:
d
QX 10 2 PX 3PY 2 M
Where M is income

38
 d
QX 10 2 PX 3PY 2 M
What can you say about the relationship
between good X and good Y?
X and Y are substitutes (coefficient of PY is
positive).
Is X a normal or an inferior good?
X is an inferior good (coefficient of M is
negative).
Holding price of Y and income constant,
as price of X goes up by 1, quantity
demanded for X goes ______ by ______.
down 2 39
Managerial Economics-
Group A
Week Three- Class 3
Thursday, September 20
15:10-16:00
Tyndall
Aplia Assignment 1
due before noon on Tuesday,
September 25
25% of grade

40
I received a question on how to
calculate own elasticity when we
have the demand function and only
one price and one quantity
Remember
Suppose G = f (S), then

Where dG/dS is
dG S the partial
EG ,S derivative of G
dS G with respect to S

41
 A General Linear
Demand Functions
QX 0 X PX Y PY M M H H
d

M
P EQX , M M
EQX , PX X X QX
QX
PY
Own Price EQX , PY Y Income
QX
Elasticity = Elasticity=
(dQdx/dPx)*Px/Qx (dQdX/dM)*M/Qx
Cross Price
Elasticity=
(dQdX/dPy)*Py/Qx
42
 Example: What is own
elasticity if P = 1
P = 5 1/2 Qd
What is this?
Inverse demand function
Need to change it to a demand function
Qd = 5 P
Qd = 10 - 2P.
Own-Price Elasticity = dQd/dP * P/Q
= (-2)* P/Q
If P=1, then Q is
8 (since 10 - 2 = 8).
Own price elasticity at P=1, Q=8:
(-2)(1)/8= - 0.25.
43
 General Log-Linear
Demand Function

ln QX 0 X ln PX Y ln PY M ln M H ln H
d

Own Price Elasticity : X

Cross Price Elasticity : Y
Income Elasticity : M
44
Example of Log-Linear
Demand
ln(Qd)
= 10 - 2 ln(P).
Own Price Elasticity: -2.

45
Graphical Representation
of Linear and Log-Linear
Demand
P P

Elasticity
Elasticity
varies along
is constant
this
along this
demand
demand
curve
curve

D D

Q Q
Linear Log Linear

46
Regression Analysis

Will not be covered at this time.

PP: 95 -109

47
Lets practice
Given a log-linear demand curve,
we know that
A) demand is elastic at high prices.
B) demand is inelastic at low prices.
C) demand is unitary elastic at low
prices.
D) the elasticity is constant at all
prices.
Answer: D
48
Chapter 4

What are the properties of

consumer preferences and what
do they mean?
1. Completeness
2. More is Better
3. Diminishing Marginal Rate of
Substitution?
4. Transitivity?

49
Property 1:
Completeness
Given the choice between 2
bundles of goods (A & B)
consumer must have an opinion,
meaning that she should
prefers bundle A to bundle B: A B;
or, prefers bundle B to bundle A: A B;

or, be indifferent between the two: A

B.

50
Property 2: More is
better
Bundles that have at least as much
of every good and more of some
good are preferred to other bundles.
Example
Bundle A: 2 apples and 3 oranges
Bundle B: 2 apples and 5 oranges
Which one will you prefer?
B A
B is preferred to A

51
Property 3:Diminishing
Marginal Rate of
Marginal Rate of Substitution
Substitution?
(MRS)
The rate at which a consumer is willing to
substitute one good for another and
maintain the same satisfaction level.
Example:
You are indifferent between
10 apples + 4 oranges
Or 7 apples +5 oranges
MRS of oranges for apples= number of apples
you are willing to give up to get 1 more
3 orange
and stay as satisfied as before = _________. 52
Property 3: Diminishing
Marginal Rate of
Substitution?
The more oranges you have, the
fewer apples you are willing to
give up for an additional orange.
For the 5th orange, you gave up 3
apples
For 2the 6th orange, you will give up
__________apples

53
Property 4: Transitivity

For the three bundles A, B, and C,

the transitivity property implies that
if C B and
B A,
then C A.
If you prefer apples to oranges and
oranges to bananas, then
You must prefer apples to bananas

54
What is an indifference curve and how
does it reflect the properties of
consumer preferences?

Indifference Curve
A curve that defines the
combinations of 2 goods
(X and Y) that give a
consumer the same level
of satisfaction.
Consumer is indifferent
between these
combinations
55