Learning how to draw and calculate a demand curve and a cost curve enables managers and entrepreneurs to set a price that results in the highest possible profit. A the optimal price point, a price increase would reduce the demand too strongly while a price reduction would affect the profit margin too strongly.
- In this video, I will show you how to set the price…that maximizes your profit.…Now, I'm fully aware that in the real world…setting prices is not as easy as this example.…Nevertheless, it is very important that you understand…the basic foundation of profit maximization.…In the simplest models, all we need to know…is the demand curve for our service of product…and the variable costs.…Let's assume that you are the pricing manager for Iberia,…the national land line of Spain.…You fly from Zurich to Barcelona twice a day…with an aircraft that has a capacity of 300 passengers.…
Your research indicates that at the ticket price…of 500 francs you can sell 150 tickets.…Let's forget for a moment that airline use…dynamic pricing and customer pay very different prices.…For the sake of the argument,…let's assume that the airline sets a price…and the demand reacts accordingly.…If Iberia is lowering the price to 300 francs…the demand would increase to 210 tickets.…If we assume a linear relationship,…the Demand Curve looks like this.…
- 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