To better understand how to apply the demand curve, decision makers need to learn how to distinguish between a shift on the demand curve and a shift of the demand curve. If WE change the price, the change of demand is a shift on the demand curve. However, if the demand changes for other reasons—weather, competition,our innovation—this signifies a shift of the demand curve.
- In this video, we want to solve a mystery…that confuses many decision makers.…We need to learn how to distinguish…between a shift on the demand curve…and a shift off the demand curve.…I would like to use an example from the Swiss retail market…where two large grocery chains, Migros and Coop,…have been dominating the industry for decades.…But, in 2009, two German discounters announced…plans to aggressively enter the Swiss market…by building their own stores outside of larger cities.…
Everyone would assume that prices at Migros and Coop…would decrease once they face…competition from Lidl and Aldi.…The question I have for you is,…starting with the given demand curve…for a typical product at Migros,…how can you explain, in economic terms,…why the market entry of competitors…would lead to a lower price?…Let's start with the current demand.…At the price of 10 francs,…Migros can sell 500 units in a given period of time.…
Once the low cost competitor enters the market,…some of those customers may switch to the new store.…
- 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