lecture 2 elasticity control on prices production l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Lecture 2: Elasticity, Control on Prices & Production PowerPoint Presentation
Download Presentation
Lecture 2: Elasticity, Control on Prices & Production

Loading in 2 Seconds...

play fullscreen
1 / 59

Lecture 2: Elasticity, Control on Prices & Production - PowerPoint PPT Presentation


  • 348 Views
  • Uploaded on

Lecture 2: Elasticity, Control on Prices & Production Dr. Rajeev Dhawan Director Given to the EMBA 8400 Class Classroom South #608 January 6, 2007 Chapter 5 Elasticity Elasticity & Its Application Evaluating questions like-

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Lecture 2: Elasticity, Control on Prices & Production' - Audrey


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
lecture 2 elasticity control on prices production
Lecture 2: Elasticity, Control on Prices & Production

Dr. Rajeev Dhawan

Director

Given to the

EMBA 8400 Class

Classroom South #608

January 6, 2007

chapter 5

Chapter 5

Elasticity

elasticity its application
Elasticity & Its Application
  • Evaluating questions like-
    • Banana Republic store manager/headquarters needs to decide on sale on jeans vs. sale on shirts
    • Rain destroys strawberry crop, prices go . Does it benefit growers ?
    • Why don’t you ever see sale or discounts on pure milk but see it on orange juice ?
  • These can be answered with the concept of elasticity (or responsiveness of buyers & sellers to changes in market conditions)
elasticity
Elasticity
  • Price elasticity of demand: a measure of how much the quantity demanded of a good responds to a change in the price of that good
continued
Continued..
  • Two types of demand:
    • Elastic – responds a lot e.g. luxury cars ( luxuries)
    • Inelastic – not much change e.g. milk, certain food items, gasoline ( necessities)
  • Preferences: Luxuries vs. Necessities
  • Availability of close substitutes: Elastic
    • Butter & margarine; cars, booze
  • Time horizon:
    • Gasoline – necessity in short run
    • Substitute long run (electric cars, walk, bike)
elasticity6
Elasticity
  • Inelastic Demand
    • Quantity demanded does not respond strongly to price changes.
    • Price elasticity of demand is < one.
  • Elastic Demand
    • Quantity demanded responds strongly to changes in price.
    • Price elasticity of demand is > one.
demand curves
Demand Curves
  • Question: Can I tell from the graphical shape of the demand curve what kind of elasticity the curve has?
  • Answer: Yes, but not all the time.
perfectly inelastic demand

Demand

$5

4

1. An

increase

in price . . .

100

2. . . . leaves the quantity demanded unchanged.

Perfectly Inelastic Demand

Elasticity = 0

Price

Quantity

0

3. . . . revenue goes from $4 x 100 to $5 x 100

inelastic demand

$5

4

1. A 22%

Demand

increase

in price . . .

90

100

2. . . . leads to an 11% decrease in quantity demanded.

Inelastic Demand

Elasticity < 1

Price

Quantity

0

3. . . . revenue goes from $4 x 100 to $5 x 90

unit elastic demand

$5

4

Demand

1. A 22%

increase

in price . . .

80

100

2. . . . leads to a 22% decrease in quantity demanded.

Unit Elastic Demand

Elasticity = 1

Price

Quantity

0

3. . . . revenue goes from $4 x 100 to $5 x 80

elastic demand

$5

Demand

4

1. A 22%

increase

in price . . .

50

100

2. . . . leads to a 67% decrease in quantity demanded.

Elastic Demand

Elasticity > 1

Price

Quantity

0

3. . . . revenue goes from $4 x 100 to $5 x 50

perfectly elastic demand

1. At any price

above $4, quantity

demanded is zero.

$4

Demand

2. At exactly $4,

consumers will

buy any quantity.

3. At a price below $4,

quantity demanded is infinite.

Perfectly Elastic Demand

Elasticity = Infinity

Price

Quantity

0

relationship between total revenue sales elasticity
Relationship Between Total Revenue (Sales) & Elasticity
  • Total Revenue = Price x Qty Sold = P x Qty
  • If demand is elastic, then a price decrease increases revenue
  • If demand is inelastic, then a price increase increases revenue
  • Example  class to contribute
slide14
Box Shows the 50% Drop of New Paying Customers for the May & August 2004 Conference Caused by the Latest Price Hike

1st Price Hike

2nd Price Hike

applications of supply demand elasticity
Applications of Supply, Demand & Elasticity
  • Can good news for farmers be bad news for farmers?
  • Wheat is inelastic: Bumper crop  bad news
increase in supply in market for wheat

1. When demand is inelastic,

an increase in supply

. . .

2. . . . leads

to a large fall

S1

S2

in price . . .

$3

2

Demand

100

110

3. . . . and a proportionately smaller

increase in quantity sold. As a result,

revenue falls from $300 to $220.

Increase In Supply In Market For Wheat

Price of

Wheat

Quantity of

0

Wheat

chapter 6

Chapter 6

Controls on Prices

controls on prices
Controls on Prices
  • Price Ceiling (e.g. rent control)
    • A legal maximum on the price at which a good can be sold.
    • If the price ceiling is set below the equilibrium price, it leads to a shortage.
  • Price Floor (e.g. minimum wage)
    • A legal minimum on the price at which a good can be sold.
    • If the price ceiling is set above the equilibrium price, it leads to a surplus.
price ceiling

Supply

Equilibrium

price

$3

2

Price

ceiling

Shortage

Demand

75

125

Quantity

Quantity

supplied

demanded

Price Ceiling:

Beer Shortage

…RentControl Too

Beer

0

Pints

price floor beer surplus

Supply

Surplus

Equilibrium

$4

price

Price

floor

$3

Demand

75

125

Quantity

Quantity

supplied

demanded

Price Floor: Beer Surplus

Price of

Beer

Quantity of

0

Beer

slide21

Article: Too Many Cars, WSJ; by: Paul Ingrassia

  • Overcapacity is the biggest problem for any automobile company in the world
    • GM buys Daewoo Motor, Fiat Auto, Saab
    • Ford motor owns Mazda, Land Rover
    • Daimler Chrysler is riding to rescue Mitsubishi
    • Oldsmobile and Chrysler’s Plymouth, are the first major automobile companies in 40 years
  • Why do ailing automobile companies who decry overcapacity keep ailing car companies?
    • National pride plays a big role
    • More brands mean more dealerships mean more sales.
    • But this also means more costs and complexity in business operations.

In reality, overcapacity is not really a problem.

One man’s overcapacity is other’s bargain.

Thus, lower priced leases and generous rebates abound in today’s car market.

chapter 2

Chapter 2

Production

production
Production
  • What is production?
    • The activity by which we convert inputs (labor, land & capital) into goods and services
  • What limits production?
    • Inputs (resources)
    • Technology
    • Government interference
circular flow diagram

MARKETS

FOR

GOODS AND SERVICES

  • Firms sell

Goods and

Goods

  • Households buy

services

and services

bought

sold

HOUSEHOLDS

FIRMS

  • Buy and consume
  • Produce and sell

goods and services

goods and services

  • Own and sell factors
  • Hire and use factors

of production

of production

MARKETS

Labor, land,

Factors of

FOR

and capital

production

FACTORS OF PRODUCTION

  • Households sell

Wages, rent,

  • Firms buy

and profit

Circular Flow Diagram

Circular Flow Diagram

Revenue

Spending

Income

= Flow of inputs

= Flow of inputs

and outputs

and outputs

= Flow of dollars

= Flow of dollars

production possibilities frontier
Production Possibilities Frontier
  • Definition: the amount of goods a firm or society can produce given a fixed amount of land, labor and other inputs.
production possibilities frontier26

4,000

D

3,000

C

2,200

E

2,100

2,000

Production

A

possibilities

frontier

B

1,000

300

600

700

750

1,000

Production Possibilities Frontier

Quantity of

Pretzels

Produced

a

b

d .

c

Quantity of

0

Beer Produced

production function i
Production Function I

Y (Production) = F (Inputs)

Y = I

Marginal Product: it is the increase in output that arises from an additional unit of input.

Marginal Product (MP) = ∆ Output / ∆Input

production function ii
Production Function II

Y = I2

Marginal Product (MP) = ∆ Output / ∆Input

production function iii
Production Function III

Y = √I

Marginal Product (MP) = ∆ Output / ∆Input

returns to scale
Returns to Scale
  • Returns to Scale: the property of the production function that when you double your inputs, your output either doubles, more than doubles, or less than doubles.

DRS

Y=I

MP ↑  IRS

MP ↓  DRS

CRS

Y = √I

Y=I2

IRS

article japanese auto giants accelerate shift to u s wsj by shirouzu zaun
Article: Japanese Auto Giants Accelerate Shift to U.S.WSJ; by: Shirouzu, Zaun
  • For Japanese auto giants Toyota, Honda, Nissan, what American consumers want is becoming more important than the wish lists of consumers in Japan’s shrinking market
  • The Japanese are accelerating their shift away from their home market, which they see headed for long-term decline
  • Simple Math: With the market shrinking back home, even boosting your share of the pie might not mean higher sales and profit for Japanese
    • Weak yen helps Japanese car makers
    • Japanese companies don't have pension and health-care costs
    • Customization for high demand products
    • Quality takes a back seat?
automobile industry

Automobile Industry

Economic Analysis of

General Motors – Light Truck Sector

strengths
Strengths
  • General Motors is currently a dominant force in the North American light truck market.
  • Strong history and brand name
  • Limited competition from foreign firms in the past
  • Owns GMAC Financing, so can offer financing incentives
  • Global automotive sales leader since 1931
strengths34
Strengths
  • 8.6 million cars and trucks sold in 2002
  • 15% of global vehicle market
  • Controls almost a third of the US market
  • 2002 U.S. industry sales records for total trucks and SUVs, 2003 may be the 3rd in a row of increased market share in US
  • 341,000 employees, 32 countries
  • Vehicles sold in over 190 countries
weaknesses
Weaknesses
  • GM’s productivity at 24 labor hrs/vehicle is the second lowest
  • GM has huge pension liabilities; $1900 per vehicle (retiree pension and health care)
  • Along with other US manufacturers Health care costs for all employees vs. overseas mfg with national health
opportunities
Opportunities
  • Efficiency improvements through flexible manufacturing techniques, benchmarking Toyota to reduce costs
  • Product differentiation through options, like body styles, power packages, chassis.
  • Lead in Environment and Safety - Experimental fuel hybrid that is more advanced than Honda and Toyota
industry costs
Industry Costs
  • Emissions, fuel efficiency, safety, performance, and technology
  • Vehicle updates lead to increased design, production, testing, marketing, and advertising costs
  • Steel as input cost
  • Pension costs
  • Product liability lawsuits
macroeconomic factors
Macroeconomic Factors

Key macroeconomics factors that influence new truck demand :

  • Consumer income
  • Unemployment level
  • Personal income growth
  • Inflation and interest rates
other macroeconomics factors
Other Macroeconomics Factors
  • Current GDP growth
  • Recession
  • Current Trade Deficit- FE Rates (U$, ¥)
  • Monetary & Fiscal Policy
  • Extraneous forces - OPEC oil prices
  • Labor Unions (UAW, etc)
comparative efficiency of us japanese automakers a stochastic frontier production function approach

Comparative Efficiency of US & Japanese Automakers: A Stochastic Frontier Production Function Approach

Rajeev Dhawan & Marvin Lieberman

RCB & The Anderson School at UCLA

observations from technical efficiency scatter plot japanese producers
Observations from technical efficiency scatter plot (Japanese producers):
  • Technical efficiency increased 50% from the mid-1960s to the mid-1980s. Little growth in subsequent years, even a decline.
  • Toyota has the highest technical efficiency (A close second is Honda). Toyota’s lead in technical efficiency is smaller than its lead in labor productivity.
  • A number of the Japanese producers have historical performance that is well below the efficiency frontier.
  • Efficiency estimates fluctuate with business cycle.
observations from technical efficiency scatter plot us producers
Observations from technical efficiency scatter plot (US producers):
  • GM’s efficiency is slightly above the Japanese level in the mid-1960s. By the 1990s, GM’s efficiency falls below that of all Japanese producers except Fuji and Mazda.
  • Chrysler’s efficiency falls sharply in the late 1970s but recovers strongly in the 1980s. Ford also shows strong improvement in the 1980s. Both Chrysler and Ford have efficiency levels comparable to the Japanese average in the late 1980s and 1990s.
conclusion
Conclusion
  • Get away from firm-size issue and focus on cutting inventory (WIP) costs via flexible plants and JIT inventory methods i.e. suppliers
  • Increase speed of new product introduction to market - benchmark Toyota
  • Make cars that people in cities want not when you go Pheasant hunting in South Dakota!