MANAGERIAL ECONOMICS Prepared by: Sayed Abu Sufyan

Lecture No.: 02 Student ID: ZR 1801005

Date: July 17, 2018
Key takeaways from Lecture 02
Shift in demand and supply curve: Demand of a product (x) is a function of certain factors such as price
of h product (x), income of consumers, taste and preferences, substitute product’s (y) price,
advertisement of the product, consumers purchasing power etc.
𝐷𝑥 = 𝑓(𝑃𝑥 , 𝐼, 𝑇, 𝑃𝑦 , 𝑎𝑑𝑣. , 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑖𝑛𝑔 𝑝𝑜𝑤𝑒𝑟).

Similarly, supply of a product (x) is a function of factors like price of h product (x), cost of input, tax, subsidy
or govt grants etc. 𝑆𝑥 = 𝑓(𝑃𝑥 , 𝐶𝑖 , 𝑇𝑎𝑥, 𝑆𝑑 )
Changes in factors like average income and preferences can cause an entire demand curve to shift right
or left. This causes a higher or lower quantity to be demanded at a given price. When a demand curve
shifts, it will then intersect with a given supply curve at a different equilibrium price and quantity.

 When demand of a product shifts along the demand curve from one point to another, due to the
changes in price while other factors remain unchanged, it’s called change in quantity demanded.
 When demand curve itself shifts from left to right or right or left due to the changes of any other
factors other than price, it’s called change in demand.
Changes in cost of production and related factors can cause an entire supply curve to shift right or left.
This causes a higher or lower quantity to be supplied at a given price.
 When supply of a product shifts along the supply curve from one point to another, due to the
changes in price while other factors remain unchanged, it’s called change in quantity supplied.
 When supply curve itself shifts from left to right or right or left due to the changes of any other
factors other than price, it’s called change in supply.
The ceteris paribus assumption: Demand and Supply curves relate prices and quantities demanded and
supplied respectively assuming no other factors change. Demand equation: 𝑄𝑥 = 8.5 − 0.05𝑃 and supply
equation: 𝑄𝑥 = 10𝑃; at equilibrium: 8.5 − 0.05𝑃 = 10𝑃; from this equation we can get P* & Q*.
Marginal Analysis:
Total revenue= Price x Quantity sold (TR= P*Q); Marginal revenue is the additional revenue generated
𝜕𝑇𝑅
from the sale of one more unit of a good. 𝑀𝑅 = 𝜕𝑄
; whenever the demand curve (AR curve) falls, the
MR curve falls at twice the rate.
𝑉𝐶
Total cost= Fixed cost+ variable cost (𝑇𝐶 = 𝐹𝐶 + 𝑢𝑛𝑖𝑡 ∗ 𝑛𝑜. 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑). The marginal cost
𝜕𝑇𝐶
of production is the change in total cost that comes from producing one additional item. 𝑀𝐶 = 𝜕𝑄
.

Total revenue= Total revenue- total cost (𝑇𝜋 = 𝑇𝑅 − 𝑇𝐶)

𝜕𝑇𝜋
Marginal profit is the increase in profit when one more unit is sold (𝑀𝜋 = 𝜕𝑄
). Profits are maximized
when marginal profit is zero (M𝜋=0) or where marginal revenue (MR) equals marginal cost (MC), and total
profits will be falling when marginal profit is negative i.e. (MC>MR).
%∆𝑄𝑑𝑥
Sensitivity Analysis: Elasticity: (% change in quantity / % change in price); |𝑒𝑥 | = %∆𝑃𝑥
; for |𝑒𝑥 | > 1:
demand is said to be price elastic; |𝑒𝑥 | = 1 unitary elastic, |𝑒𝑥 | < 1inelastic and for extreme condition
when |𝑒𝑥 | = ∞ it is perfectly elastic and |𝑒𝑥 | = 0: perfectly inelastic.