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Basic Economics for
Management: supply and
demand elasticity
DMBA 620 You will need to
the notes that explain the slides.
Supply & Demand

Economics has information for
managers setting price
Assumes nothing changes but price
Marketing looks to improve the product
or service to satisfy customer needs
Supply and Demand – basics

If Supply goes up and Demand stays
the same, price goes down – gasoline
If Demand goes up and Supply stays
the same, price goes up – UBER at New
Years Eve.
If Demand goes up and price is
restricted, long lines – gasoline 1978
Demand

Demand is an economic concept
It is the quantity that people will buy at
a price
It is not what people would like, desire,
or need.
It is just what they will buy if allowed to
make purchase decisions freely
Price Elasticity for a product

Tells what happens with price changes
To Demand
To Supply
Important for managers to
understand and manage Price
Elasticity – Simple

Change in Quantity / Original Quantity
Change in Price / Original Price
Elasticity = % ΔQuantity / % ΔPrice
Elasticity of Demand is usually negative
Elasticity of Supply is usually positive
Δ means change
This is sufficient for our purposes
Elasticity

Inelastic if less than 1

Elastic if more than 1

Examples -.5 and +.8
Examples -1.4 and +4.5
Even if you sell more with lower price,
seldom does profit increase
Need to sell lots more to increase profit
Elasticity of Demand Example

is price inelastic.
If you raise your hourly rate 20%, then
demand drops 10%
% ΔQuantity/% Δ Price = -10% / 20% =
-.5
Note: Elasticity of Demand is negative and
inelastic as it is minus -0.5
Elasticity of Demand Example

Example: suppose that as a UMUC MBA, your income
was \$100,000 for 2,000 hours work.
That works out to \$50 per hour, 40 hours per week
with 2 weeks vacation.
Raise your rate to \$60 (20%) but hours worked drop
10% to 1,800 hours

Elasticity -.5
New income is \$60 x 1,800 = \$108,000 AND you
only have to work 36 hours per week or take
another 25 days vacation
Elasticity and Algebra
New demand after price change

Calculate demand with 10% lower rate

% change quantity (Q1 – Q0)/Q0

\$45 instead of \$50 per hour
(Q1 – 2,000 )/2000 = 1- (Q1 /2000)
% change price -10% = (P1 – P0)/P0
Elasticity = -.5 = [(Q1 /2000)-1]/-10%

Solve and get Q1 = 2000 x 1.05 = 2100
Demand goes up 100 hours
P x Q = Revenue = \$45 x 2100 = \$94,500
Small Price changes

Raise your rates from \$50 to \$60, and
good things happened.
Lower rates and your revenue declines
Raise rates to \$200 per hour and result
may be no income
Small price changes generally work
much better than big changes.
Elasticity of Supply
Work 40 hrs. @ \$20

Would you willingly work 7 days a week
for 70 hours at \$20 per hour?
Would you willingly work 7 days a week
for 70 hours at \$400 per hour?
\$20 per hr. x 70 = \$1,400
\$400 per hr. x 70 = \$28,000
Your elasticity of supply is inelastic
Elasticity of Supply
Work 40 hrs. @ \$20

40 hrs. x \$20 = \$800

Example: will work overtime up to 20
hours for two times the pay rate

\$800 x 52 = \$41,600
ΔQ =+50%
ΔP = +100%
Elasticity = 50% / 100% = +.5
Your elasticity of supply is inelastic
Supply

Consumers dislike price increases emotionally
Supply increases with price
Oil, food, gas, housing, chemotherapy drugs
We prefer higher prices for our labor
LAG TIME: Supply adjusts slower than
Demand (housing, gas, food)
Why are gasoline prices down and food prices
up in 2016?
Elasticity

Predicts consumer behavior & Profits
Explains much but often misunderstood
We want to pay less – 50% off Sales
We often act by paying more – Why?
Price matters but so do

Convenience
Quality
Courtesy
Security
Style
Personal Safety
Regulations also matter

Minimum prices for gasoline, milk,
raisins
55 Different “blends” for gasoline?
Licensing requirements – UBER
EPA – regulates
FDA – still hasn’t approved sunblock
used in Europe
Profit

Revenue = price x units sold
Minus Costs equals
Profits
Note: Revenue can go up and profits go
down
TAKE AWAY – Small price increases
help
Hints for Conference Work

Personal Opinions are worth little
Use examples to make points

Personal Experience worth a lot
References
Articles
Videos
Text
Quote experts
Use facts carefully
Required

MUST use Excel for math.
Explain what you do in words
Explain what the answer means for
management

What would you say if the CEO asks you,
“So what?”