While price elasticities are typically negative, there are some notable exceptions which decision makers need to be aware of. For example, when you increase price and experience an increase in demand - and vice versa. Executives and entrepreneurs need to understand these paradoxes to capitalize on.
- While price elasticities are typically negative,…there are some notable exceptions…which decision makers need to be aware of.…Normally when you increase price, you decrease demand.…And when you decrease price, you increase demand.…The exception is that a positive elasticity…when you increase the price…and experience an increase in demand, and vice verse.…I would like to illustrate such a paradox,…using an experiment I was running…at my business school in Switzerland.…Over the last four years I have presented…the following scenario to 413 participants.…
You are in the process…of planning your 25th wedding anniversary party.…You have already selected the menu.…Now you need to decide on the red wine.…Which one do you choose,…given that you need about 12 bottles?…I presented them four different wines…from different regions with a different price tag.…7% would choose a Cabernet for less than seven euros.…36% would choose the Chateauneuf-du-Pape for 20 euros.…42% would buy a Chianti for 24 euros.…
And 15% would pick the Shiraz for 36% euros.…
- 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