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HBX Core Economics for Managers Exam
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HBX Core Economics for Managers Exam 2023-2024What is the demand? - ANSWER You need a benchmark, find out what people are willing to
pay
WTP - ANSWER willingness to pay
*maximum price you are willing to pay for a product or service.
** it does not relate to you necessarily
***WTP AND PRICE are two totally different concepts
irrationality - ANSWER paying more than WTP
Actual value - ANSWER = WTP
intrinsic vs extrinsic - ANSWER Differences in consumer WTP that arise from differences in,
say, age, gender, income, or education are what we call "extrinsic" or "observable"
differences
Other differences are "intrinsic"—things that you couldn't know about a person without
asking him or her. They're hard to observe (and for that reason are also referred to as
"unobserved differences"). For example, a person's tolerance for risk, his or her wish to fit in
with others or stand out from others, or even the intensity of his or her passion for Taylor
Swift or the New England Patriots.
if there is a sale going on - ANSWER your WTP does not change
The demand curve - ANSWER flip graph, create steps, inversely related
demand curve- quantity on x axis, price on y axis
revenue - ANSWER the rectangle under demand
price x number of consumers
shifting demand curve - ANSWER You recall that the demand curve is nothing more than a
depiction of many people's WTP. So as people's WTP changes, the demand curve will also
change. Specifically, when a factor that affects people's WTP changes, the demand curve will
shift (left or right) in response. Why? Because now, at any given price the number of people
with a WTP equal to that price will be different (higher or lower, depending on the event).
A cautionary note: notice that price is not a factor that shifts the demand curve
, diminishing marginal returns - ANSWER usually people are willing to pay less for the second
ticket, even less for the third, etc etc. that is diminishing marginal return, its like 8,6,4,2,...etc.
steep vs flat - ANSWER steep: quantity demanded is not sensitive to price
flat: customers are much more sensitive to price changes
But what factors determine whether the demand curve for a product is steep or flat? -
ANSWER close substitutes
necessity vs luxury
time horizon
inelastic vs elastic - ANSWER Colloquially, we sometimes refer to steep demand curves as
"inelastic" curves, and to flat demand curves as "elastic" ones. (In the next lesson, we'll get
more precise about this terminology and the concept of price elasticity.)
individual vs. aggregate demand curve - ANSWER both are downward sloping because
diminishing marginal returns
demand curve tell you about price sensitivity? - ANSWER So far we have learned that a
steep curve is associated with low price-sensitivity, and that a flat curve is associated with
high price-sensitivity. However there is a problem with using slope as a measure of price
sensitivity because the slope is dependent on the units of measurement. In addition, we can't
see how significant the change in price is.
The Definition of Elasticity - ANSWER The elasticity of a demand curve is the percentage
change in quantity demanded divided by the percentage change in price. *The elasticity of a
demand curve is the percentage change in quantity demanded divided by the percentage
change in price. Here's the formal definition
Percentage change: (New−Old)/Old
formula takes the absolute value
Revenue-Maximizing Prices and Demand Elasticity - ANSWER elasticity of 1~
And that illustrates how "optimal prices" are closely linked to elasticities. - ANSWER When
demand is elastic, you can't afford to raise prices. When demand is inelastic, you surely can!
elasticity of demand and revenue! - ANSWER When elasticity of demand = 1, revenue is
maximized.
When elasticity of demand is less than 1, demand is inelastic and lowering price will lower
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