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Econ_5313_SP12_L3

# Managerial economics managerial economics table 1

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Unformatted text preview: interest rates, (p and so on) Firm Demand: Firm demand is affected by general economic influences and competitor decisions (prices, advertising, and so on) Parameter Estimate (2) Estimated Value for Independent Variable During the Coming Year (3) Estimated Demand (4)=(2)*(3) Average Price for New Cars (P) (\$) To derive an estimate of industry demand in any given year, each parameter in the previous equation is multiplied by the value of the related variable and summed. Table 1 illustrates this process. -500 \$25,000 -12,500,000 Average Price for New Luxury Cars (Px) (\$) 210 \$50,000 10,500,000 Disposable Income, per Household Disposable Income, per Household (I) (I) (\$) 200 \$45,000 9,000,000 Population (pob) (millions) Average Interest Rate (I) (%) Industry Advertising Expenditures (A) (\$million) 20000 300 6,000,000 -1,000,000 8% -8,000,000 600 \$5,000 3,000,000 Total Demand (millions of cars) 8,000,000 35 Managerial Economics 36 Managerial Economics 9 Examples Examples Examples The Basis for Supply Definition: Definition: Supply is the quantity of a good or service that producers are willing and able to sell during a given period. Supply is offered when producers are able to at least cover the marginal cost of production. Factors that Influence Supply: Anything that influences the profitability of production has the potential to influence supply. Supply determinants include the price of the product itself, prices of competing products, state of technology, input prices, and whether, and so on. The Market Supply Function Definition: Definition: shows the relation between the quantity supplied and all factors affecting that quantity. Quantity of Product X Supplied = Q = f(Price of X, Price of Related Goods, Current State of Technology, Input Prices, Whether, and so on) on). B. B. Determinants of Supply. Consider the automobile industry example and assume that the supply function has been specified as follows: Q b1P b 2 Psuv b 3 W b 4S b 5 E b 6i (5) 37 Managerial Economics 38 Managerial Economics Examples The Market Supply Function Determinants Determinants of Supply. Consider the automobile industry example and assume that the supply function has been specified as follows: Q b1P b 2 Psuv b3 W b 4S b5 E b6i Q = Number of new domestic automobiles supplied during a given period (in Millions) P = Average Price of new domestic cars (in \$) Psuv = average price of new sport utility vehicles (SUVs) (in \$) W = Average hourly price of labor (wages in \$ per hour) S = Average cost of steel (\$ per ton) E = Average cost of energy (\$ per mcf natural gas) i = Average interest rate (cost of capital in percent) The terms b1, b2,…….,b6 are the parameters of the supply function Examples The Market Supply Function Substitute Substitute a set of assumed parameter values into equation 5 gives the following supply function for the automobile industry. Q 2000P 400Psuv 100000W 13750S 125000E 1000000i This equation indicates that automobile supply increases by 2000 units for each \$1 increase in the average price charged; It It decreases by 400 units for each \$1 increases in the average price of new sport u...
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