Demand

1
Demand

• IMBA NCCU
• Managerial Economics
• Lecturer Jack Wu

2
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.

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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

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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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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).

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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 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

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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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INDIVIDUAL DEMAND CURVE
10
7.50
Price ( per movie)
5
individual demand curve
2.50

0
1
4
7
2
Quantity (Movies a month)
12
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, 1992

• A negative price case
• Hoovers 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 Income

• Changes in income
• normal 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

19
Recorded Music
Argentina 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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Market demand
Market demand horizontal summation of
individual demands
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Buyer Surplus

• individual buyer surplus difference between
  consumers benefit and price she must pay for the
  item
• market buyer surplus sum of individual buyer
  surpluses.

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INDIVIDUAL BUYER SURPLUS
10
individual buyer surplus at 2.50 price
d
a
7.50
Price ( per movie)
individual demand (marginal benefit) curve
5
b
e
c
c
f
2.50
h
g
j
0
1
2
4
7
Quantity (Movies a month)
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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

26
Package Deal

• charge buyer just a little less than her/his
  total benefit
• leave buyer with almost zero surplus

27
Two-part pricing

• fixed payment
• usage charge

usage charge
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Buyer surplus Two-part pricing
Business Provider Fixed Fee Usage Fee
Broadband access, Hong Kong PCCW Netvigator 3M Single User Plan HK298 per month (incl. 100 free hrs) HK2 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)