YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining...

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0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 YEAR of Passenger cars sold In- tro - duc - tor y Pe- rio Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

Transcript of YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining...

Page 1: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

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YEAR

# of Passenger cars sold

In-tro-duc-tory

Pe-riod

GrowthPeriod

MaturePeriod

DecliningPeriod

Factory Sales of Passenger Cars in the U.S.

Page 2: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

DEMAND

What Buyers are Willing and Able to Buy, during a given Time

Period, ceteris paribus.

Page 3: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

KEY POINTS ABOUT DEMAND

“WILLINGNESS AND ABILITY” (not stridently wanting)

“BUYERS” (not sellers) “during a given time period” is a FLOW

(not a STOCK) “ceteris paribus”- all other things are

held constant except price and quantity. Whole set of P-Q combinations (not

QUANTITY DEMANDED)

Page 4: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

GENERALIZED DEMAND FUNCTION

f = f( Price:

Taxes,Price of Complements

Price of SubstitutesTastes for good/service

Income,Buyer Expectations,Number of buyers)

Q

P

Page 5: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

SUPPLY

What Buyers Sellers are Willing and Able to buy Sell, during a given Time

Period, ceteris paribus.

XXXXXXXX

Page 6: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

KEY POINTS ABOUT SUPPLY

“WILLINGNESS AND ABILITY” (not stridently wanting)

“BUYERS” (not sellers) “during a given time period” is a FLOW

(not a STOCK) “ceteris paribus”- all other things are

held constant except price and quantity. Whole set of P-Q combinations (not

QUANTITY DEMANDED)

XXXXXXXXXXXXXXXXXXX Sellers (not buyers)

XXXXXXXXXXX SUPPLIED

Page 7: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

GENERALIZED SUPPLY FUNCTION

f = f( Price:

Price of Resources

Technology,Seller Expectations,Number of Sellers)

Page 8: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

HOW TO BE SHERLOCK HOLMES IN READING BETWEEN THE LINES

If You Know P and Q then you know whether demand or supply is involved as well as the direction of the shift.

If You Know the shift in demand or supply, then you know what is likely to happen to price and quantity

If You Know the determinant that has changed and price, then you know what is happening to quantity demanded.

If You Know the determinant that has changed and quantity demanded, then you know what is happening to price.

Page 9: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

Lower Price Higher Price

LowerOutput

HigherOutput

Leftward (downward)

Shift of Demand

Rightward(upward)

Shift of Demand

Rightward(downward)

Shift ofSupply

Leftward(upward)Shift of Supply

Breakdown all shifts into their output and price vectors

Page 10: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

MARKET BOUNDARIES

BUYER POINT OF VIEW: No potential seller exists outside of the market boundaries (within a reasonable price range)

SELLER POINT OF VIEW: No potential buyer exists outside of the market boundaries (within a reasonable price range)

BOTH POINTS OF VIEW MUST HOLD CROSS PRICE ELASTICITY measures

Page 11: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

MARKET BOUNDARIES

X

X

X

XX

O

O

O

X represents buyers

O represents sellers

Page 12: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

MARKET DEMAND FOR CARS

30

15

Price ($1000/car)

Price ($1000/car)

Price ($1000/car)

7 9 4 5 11 14U.S quantity (mill/yr) + Foreign Q (mill/yr) = Market Demand

Page 13: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

MUSTANG DEMAND

DEMAND

150 550 (000’s Mustangs/year)

Price of Mustangs

95108000

TR= $1426 million

TR= $4400 Million

LOSS

GAIN

GAINS-LOSS=$2974 M.

Page 14: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

MARGINAL REVENUE (MR)

MR DEMAND

150 550 (000’s Mustangs/year)

Price

95108000

GAINS-LOSSMR= CHANGE IN CARS

$2974 M./400,000 CARS=$7,435 PER CAR

LOSS

7435GAIN

Page 15: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

REVENUE MAXIMIZATION

MR DEMAND

(000’s Mustangs/year)

Price

5037

1,334,000 MUSTANGS

Page 16: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

(000’s Mustangs/year)

MR=0

Price ($/car)

5037

1,334,000 MUSTANGS

Q(000’s Mustangs/year)

Total Revenue ($/year)$6.5 billion

MAXIMUMREVENUE

MR>0

|elas|>1

|elas|=1

|elas|<1

MR<0

Page 17: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

MUSTANG DEMAND

DEMAND

150(000’s Mustangs/year)

9510

Price of Mustangs

550

1966 DEMAND

1970 DEMAND

Page 18: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

DEMAND ELASTICITY

ALWAYS THE PERCENTAGE CHANGE IN QUANTITY DIVIDED BY THE PERCENTAGE CHANGE IN A DETERMINANT OF DEMAND

NOT THE SAME AS MARGINAL REVENUE WHICH IS THE CHANGE IN REVENUE OVER THE CHANGE IN QUANTITY

Page 19: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

PRICE ELASTICITY

E p=

PERCENTAGECHANGE IN QUANTITYPERCENTAGE CHANGE IN PRICE

Q1-Q2Q1+Q2P1-P2P1+P2

=

Note: This formula requires the knowledge of two different situations;The price (P1) and quantity demanded (Q1) in an initial situation andA price (P2) and quantity demanded (Q2) after a change has occurred

Page 20: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

E p =Q1-Q2Q1+Q2P1-P2P1+P2

IN EXCEL:Suppose you have the EXCEL worksheet:

A B C D

1 Quantity

3 5

2 Price 10 6

3 E = -1

4

In C3, write the formula:=((B1-C1)/(B1+C1))/((B2-C2)/(B2+C2))

IT IS UNIT ELASTIC!

Page 21: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

E p =Q1-Q2Q1+Q2P1-P2P1+P2

IN EXCEL:Suppose you have the EXCEL worksheet:

A B C D

1 Quantity

3 5 to 6

2 Price 10 6

3 E = -1.333

4In C3, write the formula:=((B1-C1)/(B1+C1))/((B2-C2)/(B2+C2))

XXXNOW IT IS ELASTIC!

Page 22: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

E p =Q1-Q2Q1+Q2P1-P2P1+P2

IN EXCEL:Suppose you have the EXCEL worksheet:

A B C D

1 Quantity

3 5 to 4

2 Price 10 6

3 E = -.57143

4In C3, write the formula:=((B1-C1)/(B1+C1))/((B2-C2)/(B2+C2))

XXXNOW IT IS INELASTIC!

Page 23: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

TOTAL REVENUE RULE

IF PRICE RISESTHEN:

IF PRICE FALLSTHEN:

ELASTIC(MR>0,|E|>1)

UNIT ELASTIC(MR=0,|E|=1)

INELASTIC(MR<0,|E|<1

IF ELASTI-CITY IS:

TR

TR stays same TR stays same

TR TR

TR

Page 24: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

REVENUE MAXIMIZATION

MR DEMAND

150 550 (000’s Mustangs/year)

Price

951080007435

5037

1,334,000 MUSTANGS

LOSS

GAIN4000

BIG LOSS IN REVENUEIF PRICES BELOW REV-ENUE MAXIMIZING PRICE

Page 25: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

CROSS-PRICE ELASTICITY

EX,Y=

PERCENTAGECHANGE IN QUANTITY (X)PERCENTAGE CHANGE IN PRICEOF ANOTHER GOOD (Y)

Qx-QxQx+QxPy-PyPy+Py

=

Page 26: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

CROSS-PRICE ELASTICITY

Exy<0===> x and y are complements

Exy>0 ===> x and y are substitutes (or in same market)

Exy =0 ==> x and y are unrelated

Page 27: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

MARKET BOUNDARIES

X

X

X

XX

O

O

O

X represents buyers

O represents sellers

U represents your firm

UN

N represents a new firm

Cross Price Elasticity w.r.t. New Firm?

Page 28: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

MARKET BOUNDARIES

X

X

X

XX

O

O

O

X represents buyers

O represents sellers

U represents your firm

U

N represents a new firm

Cross Price Elasticity w.r.t. New Firm?

N

Positive , Negative, or Zero

Page 29: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

75 85 95

Oil

Line 2

Auto Sales

Percentage Change

Page 30: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

75 85 95

Oil

Line 2

Auto Sales

Percentage Change

Page 31: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

INCOME ELASTICITY

EY=

PERCENTAGECHANGE IN QUANTITYPERCENTAGE CHANGE IN INCOME

Q1-Q2Q1+Q2Y1-Y2Y1+Y2

=

Page 32: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

INCOME ELASTICITY

Ey<0===> An INFERIOR GOOD

Ey>0 ===> A NORMAL GOOD Ey >1 ==> A SUPERIOR GOOD 0<Ey<1=> A NECESSITY

Page 33: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

75 85 95

Line 1GDPAuto Sales

Percentage Change

Page 34: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

Oil

GDP

Auto Sales

Line 4

Page 35: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

MR=0

Price ($/car)

Q(000’s Mustangs/year)

MR>0|elas|>1

|elas|=1 |elas|<1

MR<0

Price ($/car)

Q(000’s Mustangs/year)

LIINEAR DEMANDMAXIMUM REVENUE

MULTIPLICATIVE DEMANDCONSTANT REVENUE FLAT MARGINAL REVENUE CURVE

Page 36: YEAR # of Passenger cars sold In- tro- duc- tory Pe- riod Growth Period Mature Period Declining Period Factory Sales of Passenger Cars in the U.S.

Q

MULTIPLICATIVE DEMAND

Price ($/car)

(000’s Mustangs/year)


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