Economics for Managers: Short Run and Long Run, Elasticity of Demand, Budget Line, Indifference Map, Behavioral Economics

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ECONOMICS FOR MANAGERS

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Table of contents
Exercise 1.........................................................................................................................................3
Exercise 2.........................................................................................................................................5
Exercise 3.........................................................................................................................................5
Exercise 4.........................................................................................................................................6
Reference.........................................................................................................................................7

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Exercise 1
(a)
Short run and the long run denotes the time period in economics. Flexibility is the differentiating
factor between the short run and the long run. While in the short run the inputs to the production
process cannot be changed, in the long run, the inputs can be changed. From the perspective of
the customers also, in the short run the amount of output and choices of the product is limited
(Cowell, 2018). However, there is no fixed time period that can be considered as the short run or
long run. For example, a baby crying for 7 hours continuously can be considered as a long run,
while two years of operation of a company can be considered as a short run.
(b)
Elasticity is the responsiveness of the quantity demanded with respect to the change in other
variables such as own price, the price of a substitute, the price of complementary goods and the
income of the consumer. The price elasticity of demand is basically the percentage change in the
quantity demanded divided by percentage change in the price of that product. Here these two
numbers denote the price elasticity of demand for gasoline in the short run and long run. The
minus sign before the figure denotes the negative relationship between the price and the quantity
demanded of gasoline. Depending on the absolute value of elasticity the demand is either elastic
or inelastic (Mankiw, 2016).
The price elasticity of demand is generally denoted by ep. When the absolute value of the ep is
more than 1, the percentage change in the quantity is more than the percentage change in the
price. On the other hand, when the absolute value of the ep is less than 1, the percentage change
in quantity demanded is less than the percentage change in the price of the product.
|e|>1 => elastic demand
|e|<1 => inelastic demand (e denotes the price elasticity)
(c)