DEMAND
IMBA NCCU
Managerial Economics
Lecturer: Jack Wu
MANAGERIAL ECONOMICS
Managerial economics: Science of directing
scarce resources to manage more effectively
 resources – financial, human, physical
 management of customers, suppliers, competitors,
internal organization
 organizations – business, nonprofit, household
Managerial economics is based on
Microeconomics.
Managerial economics applies to new economy.
NEW ECONOMY: INTERNET
Differences between “New” and “Old” economy:
role of network effects in demand
**network effects – benefit/cost depends on total
number of other users

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)

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

MANAGERIAL ECONOMICS CASE:
RISING GASOLINE PRICES

Between September 2004 and September 2005,
the monthly average retail price of gasoline
jumped from $1.85 per gallon to $3.08 per gallon.
Sales of full-size SUVs dropped 16.8% over the
same time period (with a particularly sharp
42.5% drop for full-size GM SUVs).
MANAGERIAL ECONOMICS
QUESTIONS
 How
important are gasoline prices to the sales of
SUVs and other types of automobiles?
 How should the auto manufacturers respond to
the increasing price of gasoline?
 Are manufacturer incentives (i.e. price reductions)
an effective response?
 What are the combined effects of incentives and
increasing gas prices?
MANAGERIAL ECONOMICS TOOL:
DEMAND

We apply demand to show how the rising price of
gasoline has caused decreases in large SUV sales,
and how manufacturer incentives can offset these
reductions.
INDIVIDUAL DEMAND CURVE
Definition: graph of quantity that buyer will
purchase at every possible price
 Construction -- “Other things equal, how many
would you buy at a price of ….?’’
 vertical axis -- price
 horizontal axis -- quantity
INDIVIDUAL DEMAND SCHEDULE

Price
($ per movie)
10.00
7.50
5.00
2.50
0.00
Quantity
(movies per month)
0
1
2
4
7
INDIVIDUAL DEMAND CURVE
Price ($ per movie)
10
7.50
individual demand curve
5
2.50
0
1
2
4
Quantity (Movies a month)
7
INDIVIDUAL DEMAND SCHEDULE II

Price
($ per movie)
20.00
19.00
18.00
….
0.00
Quantity
(movies per month)
0
1
2
…
20
ANOTHER TYPE OF INDIVIDUAL DEMAND
CURVE
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

DEMAND CURVE: SLOPE

diminishing marginal benefit -- each additional
unit of consumption/usage provides less benefit
than the preceeding unit
 demand
curve slopes downward
HOOVER, 1992
A 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
DEMAND AND INCOME
Changes in income
normal product – demand
increases with income
inferior product – demand falls
with income
DEMAND AND OTHER FACTORS

prices of related products
substitutes
 complements


advertising
RECORDED MUSIC
Argentina Canada
CD purchases
0.5
2.6
cassette
purchases
GDP/capita
0.2
0.4
$9,413
$19,831
CD price
$13.80
$11.55
cassette price
$ 7.80
$ 6.06
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?

MARKET DEMAND
Market demand = horizontal summation
of individual demands
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
$0
7
6
4
17
BUYER SURPLUS
individual buyer surplus: difference between
consumer’s benefit and price she must pay for the
item
 market buyer surplus: sum of individual buyer
surpluses.

INDIVIDUAL BUYER SURPLUS
Price ($ per movie)
10
individual buyer surplus at $2.50 price
7.50 d
5 c
a
b
e
individual demand
(marginal benefit) curve
f
2.50 g
h
j
0
1
2
4
Quantity (Movies a month)
7
BUYER SURPLUS: INDIVIDUAL
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

PACKAGE DEAL
charge buyer just a little less than her/his total
benefit
 leave buyer with almost zero surplus

TWO-PART PRICING
fixed payment
 usage charge

fixed
payment
usage
charge
BUYER SURPLUS: TWO-PART PRICING
Business
Provider
Broadband
access, Hong
Kong
PCCW Netvigator HK$298 per HK$2 per
3M Single User
month (incl. additional
Plan
100 free
hr
hrs)
Mobile telephone Etisalat
service, UAE
Corporation,
GSM Standard
Service
Fixed Fee
125 dirham
connection
fee; 60
dirham per
qtr
Usage Fee
0.24/0.18
dirham per
min (peak/
offpeak)