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COURSE SYLLABUS

COURSE SYLLABUS. Course Title : Managerial Economics Credit Hours : 3 Hours Prerequisites : Microeconomics Professor Name : Dr. Fakhry El-Fiky Email Address : f_elfiky@yahoo.com Text Book : Paul G. Keat, And Philip K.Y. Young,

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COURSE SYLLABUS

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  1. COURSE SYLLABUS Course Title :Managerial Economics Credit Hours:3 Hours Prerequisites:Microeconomics Professor Name:Dr. Fakhry El-Fiky Email Address:f_elfiky@yahoo.com Text Book : Paul G. Keat, And Philip K.Y. Young, Managerial Economics :Economic Tools for Today’s Decision Makers, Fifth Edition. Pearson Education International, 2006.

  2. COURSE OBJECTIVES The aim of this course is to present a clear understanding of the principles of managerial decision-making.which lays the foundation for a comprehensive awareness of what is going on a round us in the real business world. To that end, the professor together with the participants will review the basic microeconomic concepts and theories that are centered toward the consumer and firm economic rational behavior.

  3. TEACHING TOOLS Lecture : Coverage of course material using power point slides Home & Class Assignments: Four assignments. A gradual development of thegraduate student’s interactive learning skills and Invest more time in deepening the participants understanding of the course material . Case Studies : Each chapter opens with a real-life mini-case studies, that is developed through the chapter. Examples from all over The world ,and the following mini-case studies are demonstrated and discussed in depth . Exams : mid-term, and a final exams.

  4. COURSE EVALUATION & REQUIREMENTS Evaluation System Weight Participation & Assignments : 20 % Midterm Exam : 20 % Final Exam : 60 % Requirements Attendance : Participants are advised to attend classes in timely fashion .Attendance is an important element in the evaluation system. Make up Policy : All assignments should be handed in on timely manner. Make ups for some missing academic works may be granted in exceptional circumstances. Format of assignments:All assignment and take-home exams are to Be typed , not hand written

  5. COURSE OUTLINE: 1-The Market Demand & Supply (Ch. 3) 2- Elasticity of Demand & Supply (Ch. 4) 3- Demand Estimations & Forecasting (Ch. 5) 4- The theory & Estimation of production (Ch. 6) 5- The Theory & Estimation of Cost (Ch. 7) 6- Pricing & Output Decisions : Perfect Competition & Monopoly. (Ch. 8) 7- he Game Theory (Ch. 11) 8- Capital Budgeting & Risk (Ch. 12)

  6. PART (1) :MARKET SUPPLY AND DEMAND CHAPTER (3) OUTLINE: 1-DEMAND &SUPPLY(D&S) CURVES THE DEMAND CURVE &SHIFTS IN THE (D) CURVE THE SUPPLY CURVE & SHIFTS IN THE (S) CURVE 2-EQUILIBRIUM PRICE (Pe) & QUNTITY (Qe) 3-ADJUSTMENT TO CHANGES IN(D)OR(S),ITS EFFECTS ON (Pe)&(Qe ) 4-GOVERNMENT INTERVENTION IN MARKETS: PRICE CONTROL RENT CONTROL : WHO BENEFITS , WHO LOSES

  7. DEMAND & SUPPLY CURVES A-DEMAND: Qs THAT CONSUMERS ARE WILLING & ABLE TO BUY AT A CERTAIN (P) AND DURING A PERIOD OF TIME. a-FACTORS AFFECTING(D) FOR (X) COMMODITY: 1-THE ( Px ) Q Dx THE LAW OF(D):THERE IS AN OPPOSITE RELATIONSHIP B/W (Px) AND (Q Dx) , IF WE HOLD OTHER FACTORS CONSTANT. Px 2 4 6 8 10 Qx/DY 500 400 300 200 100 - Px D 10 8 6 4 D 2 Qx 0 100 200 300 400 500

  8. A-DEMAND CONT,D – FACTORS AFFECTING (Dx) + - + 2-INCOME (I): - NORMAL GOODS: ( I ) Dx - INFERIOR GOODS: ( I ) Dx 3-PRICE OF OTHER RELATED GOODS ( Py ): - SUBSTITUTES ( Py ) Dx - COMPLEMENTS ( Py ) Dx 4-TASTE : CONSUMER PREFERANCES WOULD BE AFFECTED BY COMMERCIALS, SEASONALITY, TRADITION ,..etc. 5-NUMBER OF CONSUMERS (# Cs): # Cs Dx 6-CONSUMER EXPECTATIONS(EXP): (P) c exp Dx - + +

  9. CHANGES IN THE DEMAND Px I, Py, T, #Cs, Pexp A CHANG IN THE ABOVE FACTOR ONLY WILL CAUSE A MOVEMENT ALONG THE SAME (D) CURVE A CHANGE IN ONE OR ALL OF THE ABOVE FACTORS ONLY WILL CAUSE SHIFTS IN THE (D) CURV Px Px D1 D D + + A D2 10 B 6 D1 D - D D2 Qx Qx 0 0 100 300

  10. Demand & Algebra • Demand Algebra QX = 500 – 2(PX )+ 0.5(PY) + 1.5(I) (Demand Function) PX = 250 + 0.25(PY )+ 0.75(I) – 0.5(QX )(Inverse Demand Function) • Consumer Surplus • Benefit buyers receive from paying prices less than they’d be willing to pay • Measured as area below Demand but above Price

  11. Assignment (1) - DemandManagerial Economics :_________________________________________________________________________ Name ID# __________________________________________________________________________1. What happens to the demand for SONY television sets when each of the following happens: a. the price of LG TVs rises b. the price of SONY TVs rises c. personal income falls d. dramatic price reductions occur for CD recorders e. gov’t imposes tariffs on Japanese TVs beginning next year2. Suppose the demand for a product (X) can be expressed as a function of its price (PX), consumer monthly income (I), and the price of a related good R (PR) QX = 180 - 10 PX - 0.2 I + 10 PR a. Interpret the slope coefficient on Px b. Is good X a normal or inferior good? How do you know? c. Are goods X and R substitutes or complements? How do you know? d. Forgetting income and the price of a related good, how much consumer surplus exists in this market if the price of X were $10?

  12. DEMAND & SUPPLY CURVES CONT”D B-SUPPLY: Qs THAT PRODUCERS ARE WILLING & ABLE TO SELL AT A CERTAIN( P) AND DURING A PERIOD OF TIME. a-FACTORS AFFECTING (S) FOR X COMMODITY: 1-THE (Px) : Q Sx THE LAW OF (S):THERE IS A POSITIVE RELATIONSHIP B/W (Px)AND THE (Q Sx),IF WE HOLD OTHER FACTORS CONSTANT Px 2 4 6 8 10 QSx 100 200 300 400 500 2-PRODUCTION COST (PROD.cost): ( PROD.cost )Sx 3-TECHNOLOGY (TECH): ( BETTER TECH) Sx + Px S 10 8 6 4 - 2 S Qx + 0 100 200 300 400 500

  13. B-SUPPLY CONT’D – FACTORS AFFECTING (Sx) - + 4-FISCAL POLICY:GOV’T POLICIES REGARDING TAXEX & SPENDING HIGHER TAXES LESS Sx (VICE VESA) MORE SUBSIDY MORE Sx (VICE VERSA 5- NUMBER OF PRODUCERS( # PRODx): (# PRDs) Sx 6- PRODUCER’S EXPECTATIONS (P prod exp) : (P prod exp) Sx + -

  14. CHANGES IN THE SUPPLY COST, Py, TECH., #Ps, Pexp, FISCAL POLICY Px A CHANGE IN ONE OR ALL OF THE ABOVE FACTORS ONLY WILL CAUSE SHIFTS IN THE (S) CURV A CHANG IN THE ABOVE FACTOR ONLY WILL CAUSE A MOVEMENT ALONG THE SAME (S) CURVE Px Px s2 S - S S1 A 10 s1 B + 6 S S1 S Qx Qx 0 0 300 500

  15. Supply & Algebra • Supply • Algebra • QX = 500 + 2PX = • Positive relationship between QS and Price • PX = -250 + 0.5QX (Inverse Supply Function) • This is graphed • Producer Surplus • Benefit sellers receive from receiving prices more than they’d be willing to accept • Measured as area above Supply but below Price

  16. EX:THE EQILIBRIUM Pe = 6 AND Qx = 300 Px 2 4 6 8 10 THIS BECAUSE: QDx 500 400 300 200 100 1- Qs = Qd QSx 100 200 300 400 500 2- STABLE , B/C ANY ANY DEVATION FROM THE (Pe) WILL CREATE AUOTOMATIC FORCES ( SHORTAGE OR SURPLUS )THAT WILL BRING THE PRICE BACK TO THE (Pe) 2-DETERMINATION OF THE EQUILIBRIUM (Pe) AND (Qe) Px D S 10 8 Pe 6 4 D 2 S Qx 0 300 100 200 400 500 Qe

  17. 3- ADJUSTMENT IN Dx & Sx AND ITS IMPACT ON (Px) & (Qx) A-CHANGES (+&-) IN (Dx) , NO CHANGE IN (Sx ): - INCREASE IN (Dx): - DECREASE IN (Dx) Pe & Qe INCREASE Pe & Qe DECREASE A-CHANGES (+&-) IN (Dx) , NO CHANGE IN (Sx ): - INCREASE IN (Dx): - DECREASE IN (Dx) Pe & Qe INCREASE Pe & Qe DECREASE Sx Sx Px S D2 D2 PX PX D D D 8 8 D1 6 6 6 4 D2 D2 D Sx Sx D D S D1 Qx 0 0 Qx 300 300 400 400 O 200 300

  18. 3- ADJUSTMENT IN Dx & Sx AND ITS IMPACT ON (Px) & (Qx) – Cont’d B-CHANGES (+&-) IN (Sx) , NO CHANGE IN (Dx): - INCREASE IN (Sx): - DECREASE IN (Sx ) Pe DECREASE & Qe INCEASE Pe INCREASE & Qe DECREASE PX S2 PX S S S1 D D 8 6 6 S2 4 D S D S S1 Qx Qx 0 0 200 300 400 300

  19. 3- ADJUSTMENT IN Dx & Sx AND ITS IMPACT ON (Px) & (Qx) – Cont’d C- CHANGES (+&-) IN BOTH (Sx) &AND (Dx): - INCREASE IN BOTH (Sx)& (Dx): - DECREASE IN BOTH (Sx )&(Dx): Pe INCREASE & Qe INCEASE Pe NO CHANGE & Qe DECREASE B/C + IN Dx > + Sx B/C - IN Dx = - IN Ax PX S2 D1 PX S S S1 D D D2 7 6 6 D1 S2 D S D S D2 S1 Qx Qx 0 0 200 300 300 500

  20. 4- GOV’T. INTERVENTION IN MARKETS:A-PRICE CEILING : B- PRICE FLOOR: CAUSE SHORTAGE (AB) CAUSE SURPLUS(CD) Px Px Px Px Px Px Px S D S D D C Pf Pf 8 8 e e 6 6 6 6 6 6 6 A B 4 4 4 4 Pc Pc Pc Pc 4 Pc S D D S Qx Qx 0 0 0 0 400 200 300 200 200 300 300 400 400

  21. CASE STUDY DISCUSSION: RENT CONTROL IN EGYPT Market Pe = 800Ceiling price (P)= 500 Black market (P) = 1000 SHORTAGE = 100,000 UNITS Px S D Black market price 1000 Black market price 1000 Black market price 1000 Black market price 1000 e Marketprice 800 Marketprice 800 Marketprice 800 Marketprice 800 Ceiling price 500 Ceiling price 500 Ceiling price 500 D D S Qx 0 0 0 200,000 200,000 300,000 300,000 100,000 100,000

  22. Example: Demand ,Supply Equations & Market Equilibrium I- Use the following generalized linear demand relation to answer the following questions: Qx = 680 - 9 Px + 0.006 I – 4 PY 1- where (I) is income and Py is the price of a related good, y. From this relation it is apparent that the good is: a- an inferior good b- a substitute for good R c- a normal good d- a complement for good R e- both c and d

  23. Example: Demand ,Supply Equations & Market Equilibrium (Cont’d) • If (I) = $15,000 and Py = $20, the demand function is Qx = 680 - 9 Px + 0.006 (I) – 4 Py a. b. c. d. e.

  24. 3. If (I) = $15,000 and Py = $20 and the supply function is Qx = 30 + 3 Px , equilibrium price and quantity are, respectively, a. P = $55 and Q = 195. b. P = $9 and Q = 609. c. P = $12 and Q = 200. d. P = $50 and Q = 170. e. P = $40 and Q = 250.

  25. 4. If (I) = $15,000 and Py= $20 and the supply function is , then, when the price of the good is $40 a. there is a shortage of 180 units of the good. B. there is equilibrium in the market. C. there is a surplus of 180 units of the good. D. the quantities demanded and supplied are indeterminate.

  26. 5-If (I) = $15,000 and Py= $20 and the supply function is , then, when the price of the good is $60, a. there is equilibrium in the market.b. there is a shortage of 60 units of the good.c. there is a surplus of 60 units of the good.d. there is a shortage of 80 units of the good.

  27. Assignment (2): Use the following demand and supply functions to answer the next 3 questions: Demand: Supply:1.Equilibrium price (Qe) and equilibrium quantity (Pe) are a. P = $5 and Q = 30. b. P = $11 and Q = 30. c. P = $12 and Q = 44. d. P = $15 and Q = 50. e. none of the above

  28. 2.If the price is $10, there is aa. surplus of 35 units. b. shortage of 30 units. c. surplus of 30 units. d. shortage of 10 units. e. none of the above3. If the price is $2, there is a a. surplus of 10 units. b. shortage of 10 units. c. surplus of 30 units. d. shortage of 18 units. e. none of the above

  29. (4) :Answer The Following Questions- Assume that the equilibrium price of Nokia mobile brand name (x) Pe =1000 and equilibrium quantity Qe = 400 , show this graphically. what will happen if the price of the Samsung mobile brand name -Y increases and the cost of producing the Nokia mobile increased by the same percentage (Hint :Make shift in D =shift in S)

  30. Answer The Following Questions (cont’d) 5- The following function describes the demand for a company making flags for the Egyptian National Team : Qx= 2,000 – 100 Px , answer the following: a. How many flags could be sold at LE 12 ? b. What should be the price in order for the company to sell 1,000 flags? c. At what price would flag sales equal zero?

  31. 6-Briefly list and elaborate on the factors that will Be affecting the demand for the following products In the next several years . Do you think these factors will cause the demand to increase or decrease.? • Products purchased on the internet. • Fax machines • Film and cameras • Pay-per- view television programming • Airline local travel in Egypt • Gasoline

  32. 7-Briefly list and elaborate on the factors that will Be affecting the supply for the following products In the next several years . Do you think these factors will cause the supply to increase or decrease.? • Crude oil • Beef • Computer memory chips • Hotel rooms • Laptop computers • Credit cards issued by financial institutions

  33. Part (2) Elasticity of Demand & Supply • Elasticity The degree of responsiveness (sensitivity) of the quantity demanded (QDx) or quantity supplied (QSx) to changes in another variable affecting each one of them , such as (Px , I , Py, etc..) Coefficient of elasticity= % ∆ in Qx/ % ∆ in any factor • The absolute value is taken as a A good measure the elasticity

  34. I - DEMAND ELASTICITIES 1- PRICE ELSTICITY OF DEMAND (PED) a- DEFINITION (PED):THE DEGREE OF RESPONSIVENESS (SESITIVITY) OF THE Q Dx TO THE CHANGES IN THE Px. b- MEASURING THE(PED): - DISCRETE POINT ELASTICITY FORMULA PED = % ∆ Qx / % ∆ Px ∆ Qx Px PEDx = x THE SIGN IS NORMALLY ( - ) , IF : ∆ Px Qx ∞ >PED > 1 PED=1 0<PED< 1 ELASTIC UNITE ELASTIC INELASTIC EX :LUXTURIES (RECEREATION TRIPS) NECESSITIES (MEDICIN)

  35. 1 –PRICE ELASTICITY OF DEMAND (PED) (CONT’D) - ARC ELASTICITY FORMULA: PED = THE SIGN NORMALLY( - ) - CONTINUES POINT PED = DQX/DPX . PX/QX FACTORS DETERMINING PED: 1-TYPE OF THE COMMODITY: BASIC GOODS (BREAD) ARE LESS ELASTIC, WHILE LUXURIES (TRIPS) ARE HIGHLY ELASTIC. 2-NUMBER & DEGREE OF SUBSTITUTES:LESS NUMBER OF SUBSTITUTES(OIL)MEANS LESS PED , WHILE CLOSE SUBSTITUTES (DELL & HP COMPUTER) MEANS HIGH PED. 3-PERCENTAGE OF INCOME SPENT ON THE COMMODITY: IF THE % IS VERY LITTLE (SALT) , THE PED WILL BE LITTLE. 4-THE TIME NEEDED TO ADJUST: IF THE TIME AVAILABLE TO THE CONSUMER IS NOT ENOUGH TO ADJUST TO THE CHANGES IN THE (P) OF A CERTAIN GOOD,THEN THE PED IS LESS AND VICE VERSA . Q1 + Q2 Qx 2 P1 + P2 Px 2

  36. 1 – PRICE ELASTICITY OF DEMAND (PED) (CONT’D) -THE RELATIONSHIP B/W THE PED & TOTAL REVENUE (TR): 1-PED > 1 ,THEN, THERE IS A NEGATIVE RELATIONSHIP B/W (P) AND (TR). THAT IS WHEN THE (P) , THEN (TR) AND VICE VERSA. 2-PED< 1 , THEN, THERE IS A POSITIVE RELATIONSHIP B/W (P) AND (TR) . THAT IS , WHEN THE (P) , THEN (TR) AND VICE VERSA. 3-PED = 1, THEN, THERE NO CHANGE IN THE(TR) WHEN THE (P) IS CHANGING

  37. 2- INCOME ELASTICITY OF DEMAND Qx Qx IED = THE SIGN COULD BE : ( + ) IF THE GOOD IS NORMAL OR ( - ) IF THE GOOD IS INFERIOR 3- CROSS PRICE ELASTICITY OF DEMAND (CPED): CPED = THE SIGN COULD BE : ( - ) IF GOOD x COMPLEMENT GOOD y ( + ) IF GOOD x SUBSTITUTE GOOD y I I Qx Qx Py Py

  38. II- THE PRICE ELSTICITY OF SUPPLY(PES) PES = THE VALUE COULD TAKE 5 CASES: 1-PES = 0 COMPLETELY INELASTIC 2-PES = ∞ COMPLETELY ELASTIC 3-PES < 1INELASTIC 4-PES = 1 UNIT ELASTIC 5-PES > 1 ELASTIC FACTORS AFFECTING PES 1-FLEXIBILTY IN USING FACTORS OF PRODUCTION 2-TIME NEEDED TO ADJUST PRODUCTION Qsx Qsx Px Px

  39. Assignment (3) 1-When the Sony TV price decreases from LE 1000 to LE 800 , consumers increases their quantity demand from 100,000 units/ month to 120,000 units /month. calculate the price elasticity of demand (PED). Also , While this is happening, the price LG TV increases from le 500 to le 600, calculate the cross-price elasticity.

  40. Answer the Following Questions 2- Discuss the relative (PED) of the following products: a. Mayonnaise b. Chevrolet automobiles c. Washing machines d. Air travel (vacation) e. Diamond rings 3- Would you expect the (CPED) coefficient b/w each of the following pairs of products to be (+) or (-) a. Personal computers and software. b. Electricity and natural gas c. Bread and CDs

  41. Answer the Following Questions 4- Discuss the (IED) of the following consumer products: a. Fine Jewelry b. Studio apartments c. Fool and Falafel sandwiches d. Riding microbus e. Salt 5- The equation for a demand curve has been estimated to be : Qx = 100 – 10 Px + 0.5 (I). Assume Px = 7 and (I) = 50 . a. Interpret the equation. b. At a Px = 7, what is the PED? c. At an income of 50, what is IED? d. Now assume (I) = 70,what is the PED at Px = 8 ?

  42. Answer the Following Questions 6- Dr. El Fiky has the following demand eqution for a certain product: Q = 30 – 2 P a. At a price of LE , What is the point elasticity? b. Between prices of LE 5 and LE 6, what is the arc PED? c. If the market is made up 100 individuals with demand curves identical to Dr El Fiky’s, what will be the point and arc PED for the conditions specified in parts a and b?

  43. Part (3) Demand Estimations • Specify the Regression Equation & Obtaining the Data: 1- determine all the factors that might influence the demand based on the economic policy of demand 2- availability of data and the cost of generating these data. 3- data in regression analysis could be used in two ways : a. Cross-section b. Time-series QX = a0 + a1 Pxt + a2 Py + a3 (I) + a4 Pxt+1 + a5 B Where : Pxt+1 : Expected price of product x B : Budget for marketing campaign

  44. Estimating & interpreting the Regression Analysis El-Fiky Company uses the per capita income (in thousand LE) to help forecast its demand for computer (brand x) units in million LE . The firm collected the data in the following table (which is presented on annual basis. Year I Dx 2003 5.15 3.25REGRESS : dependent variable (Demand for x 2004 5.05 3.10 computer Using the income per head as 2005 5.25 3.30 independent variable during the period 2006 5.40 3.65 (2003 – 2009) 2207 5.60 3.90 2008 5.70 4.10 2009 5.65 4.15

  45. Variable Coefficient Std Err T-statCONST -5.20679 0.616404 -8.44704 (I) 1.63750 0.114037 14.3594No. of Observations = 7 R² = .9763 (adj)= .9716Sum of Sq. Resid. = .260089E-01Std. Error of Reg.= .721234E-01 Durbin-Watson = 2.0012F ( 1, 5) = 206.191 Significance = .05

  46. Statistical Evaluation of Regulation Results 1. t – test or statistics = b / SE (standard error) measure the statistical significance of each estimated regression coefficient. If the absolute value of a coefficient t – statistics is greater than 2, we can conclude that the estimated coefficient is significant at the 0.05 level or we are 95 % confident that the results obtained from the sample are representative of the population. 2. Coefficient of Determination = R2 . This measure shows the % of the variation in a dependent accounted for by variation in all the explanatory variables in the regression equation, thus it ranges between 0 and 1. The closer R2 is to (1) the greater the explanatory power of the regression equation 3. F- test are used in conjunction with R2 . It measure the statistical significance of the entire regression equation rather than of each individual coefficient as in the case of t-test. In fact, the F-test is a measure of the statistical significance of R2 . By comparing between the estimated value of F-test and its value from the table with a degree of freedom of (k),(n-k-1) { n = sample size – k = no. of the independent variables} at the 0.05 significance level.

  47. Review of Key Steps for Analyzing Regression Results Step 1: Check Signs and Magnitudes. Step 2: Compute Elasticity Coefficients. Step 3: Determine Statistical Significance.

  48. Problems in The Use of Regression Analysis 1- The Identification Problem 2- Multicollinearity 3- Auto correlation

  49. 1-What is the equation of the estimated least squares regression? - Dx = -5.20679 + 1.63750 (I)2-Test the hypothesis that there is no relationship between the dependent and independent variable (at the 95 percent confidence level) in El Fiky Company Regression. Your results indicate that- you would reject the null hypothesis and conclude that the two variables are related

  50. 3-The coefficient of determination for this El Fiky Company regression indicates that- 97.63 percent of the variation in Dx is explained by variation in (I)4-Suppose that per capta income 6,300 is expected in 2007. What would be the estimate of El Fiky Company's demand for its coputer in year 2007 ?a. $ 4.62 million b. $ 4.95 million c. $ 4.99 million d. $ 5.11 million

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