Players Theater Company

Should the theater cut prices?


The theater has 500 seats; about 200 are filled
in a typical performance
The PTC has been charging $30/seat
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Demand Function
Q = f(X1, X2,…, Xn)
 Example:

Q = 117 – 6.6P + 1.66Ps – 3.3 Pr + .0066I
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Demand Curve
Ticket Price
in Dollars
Income = $50,000
Price of Symphony tickets = $50
Price of meal at nearby restaurant = $40
60
30
Demand
200
400
Quantity of
PTC Tickets
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Demand Curve
Ticket Price
in Dollars
Income = $50,000  $51,000
Price of Symphony tickets = $50
61
Price of meal at nearby restaurant = $40
60
30
200
400 406.6
Quantity of
PTC Tickets
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Elasticity of Demand

Definition


η = -(% change in Q) / (% change in P)
Calculating
Q


  Q  Q   
2
 1

2

    

P


   P1  P2   
 
 
2
 
 
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Arc Elasticity
Ticket Price
in Dollars
67


   200  133  



2 

  
 1.4

10


   30  40   
 
 
2
 
 
60
40
30
133
200
400
Quantity of
PTC Tickets
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Estimates of Price Elasticities
Sugar = 0.31
 Potatoes = 0.31
 Tires = 1.20
 Electricity = 1.20
 Haddock = 2.20
 Movies = 3.70

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Total Revenue, Marginal Revenue

Total Revenue = P x Q

Marginal Revenue = the change in total
revenue associated with selling one more
unit of the product
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Ticket Price,
Marginal Revenue
In Dollars
η>1
η=1
30
Demand
Q
Total Revenue
in Dollars
MR
Total
Revenue
Q
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Other Factors Influencing Demand

Prices of related products



Complements vs. Substitutes
Defining a Market
Cross Price Elasticity of Demand

Qx

   Qx1  Qx 2 

2

 xy  
Py


   Py1  Py 2 
2












This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Estimates of Cross Elasticities
Electricity and Natural Gas = 0.20
 Beef and Pork = 0.20
 Natural Gas and fuel oil = 0.44
 Margarine and Butter = 0.81

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Other Factors Influencing Demand

Income


Normal vs. Inferior goods
Income Elasticity of demand
Q


  Q  Q   
2
 1


2 

I  

I


   I1  I 2   
 
 
2
 
 
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Estimates of Income Elasticities
Flour = -.36
 Natural Gas = 0.44
 Margarine = -0.20
 Milk = 0.07
 Dentist Services = 1.41
 Restaurant Consumption = 1.48

This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Advanced Issues
Network Effects
 Product Attributes
 Product Life Cycles

Industry
Quantity
of output
Intro
Decline
Growth
Maturity
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Time
Demand Estimation
Interviews
 Price Experimentation
 Statistical Analysis




Omitted Variables Bias
Multicollinearity
Identification Problem
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
The Identification Problem

Suppose that this is a history of recent price and
quantity changes in our industry:
Year
Price
Quantity
2004
25
4.5 million
2005
29
5.25 million
2006
22
7 million
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
The Identification Problem
Price in
dollars
2005
29
2004
25
2006
22
4.5
5.25
7
Industry output
In millions
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Blank Workspace
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Blank Workspace
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.
Blank Workspace
This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and
Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004.