The demand curve shows how many customers are willing to buy your product or service at any given price. As such, the demand curve is central to every pricing and production decision a firm makes. In practice, managers hardly ever know the exact demand curve. However, the closer our assumptions are, the more likely are we going to be profitable.
- In this session, we are going to cover…a very important concept in economics,…the demand curve.…The demand curve shows how many customers…are willing to buy your product or service…at any given price.…Managers sometimes ask me,…"How much can I charge for my product?"…I typically tell them they can charge whatever they want.…The real question is, how much can they sell…at what price and still achieve their objectives?…If the objective is market share,…the price might be low to sell more.…
But if the objective is profitability,…a higher price is the way to go.…A simple way to illustrate the nature of the demand curve…is an experiment I frequently run in my classrooms.…I ask 40 students to write down on a piece of paper…how much they are willing to pay for the next…not yet revealed iPhone.…They should tell me the amount they are willing…to put on the table right now…to have the newest iPhone delivered to them…on the very first day of its sale.…
I then collect all the papers and rank them…from the highest bidder to the lowest bidder.…
- What are customers buying? (demand theory)
- What should we produce? (production theory)
- Which costs do I need to worry about now? (cost theory)
- What market am I in? (competition theory)
- What should we charge for it? (pricing theory)
To understand what managerial economics looks like in practice, Stefan explains how Google's auction-based advertising system employs the principles of game theory and how understanding this can help decision makers to outmaneuver their competitors.
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- Using economics to solve business problems
- Understanding price elasticity
- Demand curve shifts
- Economics of scale vs. scope
- Break-even and what-if analysis
- Profit maximization
- Economics in action