Economics For Managers: Preliminaries, Markets and Market Equilibrium

Economics for Managers
Preliminaries, Markets
and Market Equilibrium
Welcome!....Not relevant now!
 A few things for our online course!

 Since I am TFH (Teaching from Home!) there might
be power/ wifi interruptions. Just hang on, I will be
back in a few minutes
 Put your video on, as far as possible
 Be muted
 However, whenever you want to ask a question, or
interject, unmute and jump in. Need not raise hand or
send a chat message
The Course
 Read the course outline?

And Expectations
 Any of you?
Learning Objective
 At the end of this session, with ‘Principles of

economics” as the backdrop, you should be
able to:
– Define a ‘business’, ‘industry’ , markets
– Understand how market equilibrium is arrived at,
through the interplay of supply and demand
forces
Principles of economics
To be kept as a Backdrop….
How people make decisions
- people face trade-offs

“ There ain’t no such thing as a free lunch”
“guns and butter”
Efficiency and equality
Principles of Economics
To be kept as a Backdrop….
How people make decisions
- people face trade-offs

“ There ain’t no such thing as a free lunch”
“guns and butter”
Efficiency and equality
- The cost of something is what you give up to

get it- Opportunity cost
- Rational people think at the Margin.
Margin = Edge
Principles of Economics
 How people interact

- markets are usually a good way to
organize economic activity- The invisible
Hand
- Govts can sometimes improve market
outcomes
Economics is about…??
 Let us dive deeper!

– What sort of managerial decisions do you think
we will talk about in this course?
– What are some of the terms (jargon, if you may)
you think will keep recurring?
Economics: Micro and Macro
Demand, Production, Costs,

Prices, Supply, Sensitivity of
Demand
Inflation, Interest Rates, GDP,

Unemployment, Budget,
Fiscal Deficit
Later in the
course
Economics.. the two streams
 1. Microeconomics: At the level of the

individual: consumer, or producer
 2. Macroeconomics: At the aggregate level:
Region, or Nation
Later!
Microeconomics
Demand, Production, Costs,

Prices, Supply, Sensitivity of
Demand
 But, for this, we need to ask:

– What business are you in? Which is your industry?
– Who is your customer? Who is your competitor?
– Market ?
Business Economics: Market
Places; the Kurukshetra
Amazon in 2020
What business is Amazon in?
Who are Amazon’s customers, competitors?
……
………
………..
Questions!
 ‘What business ‘ is Amazon in? ’Business’,

‘Industry’
 Has the retailer spread thin? Are they into
seemingly unrelated products?
 What does it have to do to successfully run

its business?
What Business are we in?
 Theodore Levitt- That Cos should stop defining

themselves by what they ‘produced’…instead
they should reorient themselves to what
customers ‘need’……….
The railroads industry declined because they
thought they were in the Railroad industry and
NOT in the transportation Business!
They were railroad oriented ..NOT transportation
oriented…They were production oriented and
NOT…..
Amazon
 It has created Value for customers beyond its

price….. In the form of trust and service.
This is the business of a ‘retailer’.

Amazon
 Towards this objective, it has created an

‘ecosystem’ of products and services .
And…thereby built a Competitive Advantage.

Amazon
 Allowed third party merchants-therefore…

Variety without keeping inventory
 Data
 Network effects
 IT BECAME A PLATFORM.
‘Business’, Industry
Read!!Supplementary rough note on

“Business and Industry”
Equilibrium Analysis
 Equilibrium Analysis
Interaction of Supply and Demand
Recurring Themes:
1. Markets, and Prices
If you were to
plot demand,
how will the
Price
graph look?
Quantity (kgs)
DEMAND
Price
Quantity (kgs)
If you were to
plot demand,
how will the
graph look?
Price
And supply?
Quantity (kgs)
DEMAND
So,
SUPPLY
now?
Price
Quantity (kgs)
DEMAND
The equilibrium, market
clearing price ‘discovered’
through the interaction of the SUPPLY
forces of demand and supply
in the market
Price
Quantity (kgs)
A numerical example
 Demand Equation: P = 300 – Q
 Supply Equation: P = 60 + 2Q
A numerical example
 Demand Equation: P = 300 – Q or Q= 300 - P
 Supply Equation: P = 60 + 2Q or Q= -30+0.5P
 Equating the two and solving for Q or for P, we have,
 Q = 80; P = 220
 Equilibrium Analysis
Interaction of Supply and Demand
 We will see this in the context of a

hypothetical market: a market for pencils
 Supply Side Analysis

– How many pencils can possibly come to the
‘market’, maximum?

‘market’, maximum: 7
– How many would ‘suppliers’ be willing to bring to
the market/ want to sell?

‘market’, maximum: 7
– How many would ‘suppliers’ be willing to bring to
the market/ want to sell: all 7, because unsold
pencils are worth nothing (assumption)
– Therefore, how will the supply curve, ‘supply
schedule’ look like?
SS
Interpretation: Note the

notation
Suppliers willing to
sell all 7 pencils at
any price greater
Price
than zero
Quantity 7
 Demand Side Analysis

– How do we begin?

– How do we begin?
– Unlike the supply side analysis, here we must
look at the demand schedule for each of the three
people on the demand side individually and then
aggregate the demand; because each ‘consumer’
has different ‘preferences’ and thus different
valuations for the number of pencils
– How will you start your analysis? A method?
 Demand Side Analysis; If price = 1, what is

their net benefit (value minus cost)?
Q 0 1 2 3 >4
Buyer 1 0
Buyer 2 0
Buyer 3 0

Q 0 1 2 3 >4
Buyer 1 0 1-1 = 0
Buyer 2 0 1-1 = 0
Buyer 3 0 .5-1 = -.5


their net benefit (value minus total cost) ?
Q 0 1 2 3 >4 Now , how
will Buyer
1, Buyer 2
Buyer 1 0 1-1 = 0 1.5-2 = 1.8-3 = 1.85-4 = and Buyer
3 arrive at
-.5 -1.2 -2.15 and their
choice of
so on quantity?
The rule:
Buyer 2 0 1-1 = 0 1.3 – 2 = 1.5 – 3 = 1.6 – 4 = Each
buyer will
-.7 -1.5 -2.4 and choose a
so on quantity
that
maximizes
Buyer 3 0 .5-1 = -.5 1-2 = -1 1.5- 3 = net benefit
-1.5 and
so on

Q 0 1 2 3 >4
And
therefore
Buyer 1 0 1-1 = 0 1.5-2 = 1.8-3 = 1.85-4 = what is the
-.5 -1.2 -2.15 and aggregate
demand at
so on price = 1?
Buyer 2 0 1-1 = 0 1.3 – 2 = 1.5 – 3 = 1.6 – 4 =

-.7 -1.5 -2.4 and
so on
Buyer 3 0 .5-1 = -.5 1-2 = -1 1.5- 3 =
-1.5 and
so on

– At price = 1, quantity demanded can be 0, 1 or 2
(Assumption: indifference between points of equal
net benefit)
– And quantity supplied remains 7
– Therefore, what would happen to the price?
SS
1
At price = 1, SS > DD
Note the
notation
Price
2 Quantity 7

– At price = 1, quantity demanded can be 0, 1 or 2
net benefit)
– The price falls!
Your first lesson in market dynamics!
 Demand Side Analysis; If price = .9, what is

Q 0 1 2 3 >4
Buyer 1 0 1-.? = ? 1.5-? = ? 1.8-? = ? 1.85-?

=?
Buyer 2 0 1-.? = ? 1.3 – ? 1.5 – ? 1.6 – ?

=? =? =?
Buyer 3 0 .5-? = 1-? = 1.5- ? = ?
? ?

Q 0 1 2 3 >4
Buyer 1 0 1-.9 = .1 1.5-1.8 = 1.8-2.7 = 1.85-3.6

-.3 -0.9 =-1.75
and so on
Buyer 2 0 1-.9 = .1 1.3 – 1.8 1.5 – 2.7 1.6 – 3.6
= -.5 = -1.2 = -2.0
and so on
Buyer 3 0 .5-.9 = 1-1.8 = 1.5- 2.7 =
-.4 -.8 -1.2 and
so on

Q 0 1 2 3 >4
Buyer 1 0 1-.9 = .1 1.5-1.8 = 1.8-2.7 = 1.85-3.6 And

therefore
-.3 -0.9 =-1.75 what is the
aggregate
and so on demand at
price = .9?
Buyer 2 0 1-.9 = .1 1.3 – 1.8 1.5 – 2.7 1.6 – 3.6
= -.5 = -1.2 = -2.0
and so on
Buyer 3 0 .5-.9 = 1-1.8 = 1.5- 2.7 =
-.4 -.8 -1.2 and
so on

– At price = 0.9, quantity demanded will be 2
net benefit)
– Falls again
SS
1
0.9
Note the
At price = .9 also, SS > notation
DD
Price
2 Quantity 7

their net benefit (value minus cost)? Now do!
Q 0 1 2 3 >4
Buyer 1
Buyer 2
Buyer 3

Q 0 1 2 3 >4
Buyer 1 0 1-.5 = .5 1.5-1 = .5 1.8-1.5 1.85-2 And

therefore
= .3 =- .15 what is the
aggregate
and so on demand at
price = .5?
Buyer 2 0 1-.5 = .5 1.3 – 1.5 – 1.5 1.6 – 2 =
1= .3 =0 -.4 and
so on
Buyer 3 0 .5-.5 = 0 1-1 = 0 1.5- 1.5 = 1.5- 2 =
0 and so -.5 and
on so on
SS
1
0.9
Note the
notation
0.5
At price = .5 also, SS is
Price
slightly more than DD
2 Quantity 6 7

Q 0 1 2 3 >4
Buyer 1 0 1-.3 = .7 1.5-.6 1.8-.9 1.85-1.2 And

therefore
= .9 = .9 = .65 and what is the
aggregate
so on demand at
price = .3?
Buyer 2 0 1-.3 = .7 1.3 1.5 – .9 = 1.6 –1.2
–.6= .7 .6 = .4 and
so on
Buyer 3 0 .5-.3 = .2 1-.6 = .4 1.5- .9
= .6 and
so on

– At price = 0.3, quantity demanded can be 7 or 8
net benefit)
– Nothing! Equilibrium is achieved!
SS
1
0.9
Note the
notation
DD
Price
0.5
0.3
2 Quantity 6 7
SS
1
0.9
DD
Price
0.5
An equilibrium
price has been
0.3 discovered!
2 Quantity 6 7
Equilibrium Analysis; Price
Discovery
The equilibrium, market

DEMAND clearing price ‘discovered’
through the interaction of the
forces of demand and supply
in the market. Price discovery SUPPLY
is the basic function of a
market mechanism
Price
Quantity
Microeconomics
 P. 28
 Therefore, microeconomics looks at how
consumers make purchase decisions under
budgetary constraints and how firms make
production decisions with the objective of
maximizing profits
 Note the important role of markets and prices
in this analysis
Read …
 Chapter 1.1 The Themes of Microeconomics

 Chapter 1.2 What is a Market?
Price Series
 The second-to-second price changes that

you see of stock prices for eg- each of these
prices- is an outcome of the interaction of
demand and supply
 Similarly, for the time series of prices of any
good or service
EXAMPLE 2.8 THE BEHAVIOR OF COPPER PRICES
FIGURE 2.20
COPPER PRICES, 1965–2011
Copper prices are shown in both nominal (no adjustment for inflation) and real
(inflation-adjusted) terms. In real terms, copper prices declined steeply from the
early 1970s through the mid-1980s as demand fell. In 1988–1990, copper prices
rose in response to supply disruptions caused by strikes in Peru and Canada but
later fell after the strikes ended. Prices declined during the 1996–2002 period but
then increased sharply starting in 2005.
Copyright © 2015 Pearson Education • Microeconomics • Pindyck/Rubinfeld, 8e, GE. 58 of 49

Having gone through Example 2.8
– And how do you think a similar chart for

computers/ semiconductors/ mobile telephony
look like?
– And for Valentine Cards with roses?
Markets = Supply AND Demand
Learning Objective
 At the end of this session you should be able

to:
– Define a ‘business’, ‘industry’
– Design markets with simple matching logic for
price discovery
OK?
So ……...
Before the next class …..
 1. Read Chapter 1 of P&R, except 1.3. Ensure that you read

examples 1.1 and 1.2.
 2. Visit www.saladdays.co. What business are they in,
according to you?
 3. Read the Note on “Business and Industry”
- And bring along the excel template that will be

sent to you
Before the next class …..
 And read Chapter 1 (except 1.3) of P&R

Economics For Managers: Preliminaries, Markets and Market Equilibrium

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Economics for Managers

 A few things for our online course!

 Read the course outline?

 At the end of this session, with ‘Principles of

- people face trade-offs

- people face trade-offs

- The cost of something is what you give up to

 How people interact

 Let us dive deeper!

Demand, Production, Costs,

Inflation, Interest Rates, GDP,

 1. Microeconomics: At the level of the

Demand, Production, Costs,

 But, for this, we need to ask:

 ‘What business ‘ is Amazon in? ’Business’,

 What does it have to do to successfully run

 Theodore Levitt- That Cos should stop defining

 It has created Value for customers beyond its

This is the business of a ‘retailer’.

 Towards this objective, it has created an

And…thereby built a Competitive Advantage.

 Allowed third party merchants-therefore…

Read!!Supplementary rough note on

 Supply Equation: P = 60 + 2Q or Q= -30+0.5P

 Equating the two and solving for Q or for P, we have,

 We will see this in the context of a

 Supply Side Analysis

 Supply Side Analysis

 Supply Side Analysis

Interpretation: Note the

 Demand Side Analysis

 Demand Side Analysis

 Demand Side Analysis; If price = 1, what is

 Demand Side Analysis; If price = 1, what is

Buyer 3 0 .5-1 = -.5

 Demand Side Analysis; If price = 1, what is

 Demand Side Analysis; If price = 1, what is

Buyer 2 0 1-1 = 0 1.3 – 2 = 1.5 – 3 = 1.6 – 4 =

 Demand Side Analysis

 Demand Side Analysis

 Demand Side Analysis; If price = .9, what is

Buyer 1 0 1-.? = ? 1.5-? = ? 1.8-? = ? 1.85-?

Buyer 2 0 1-.? = ? 1.3 – ? 1.5 – ? 1.6 – ?

 Demand Side Analysis; If price = .9, what is

Buyer 1 0 1-.9 = .1 1.5-1.8 = 1.8-2.7 = 1.85-3.6

 Demand Side Analysis; If price = .9, what is

Buyer 1 0 1-.9 = .1 1.5-1.8 = 1.8-2.7 = 1.85-3.6 And

 Demand Side Analysis

 Demand Side Analysis; If price = .5, what is

 Demand Side Analysis; If price = .5, what is

Buyer 1 0 1-.5 = .5 1.5-1 = .5 1.8-1.5 1.85-2 And

slightly more than DD

 Demand Side Analysis; If price = .3, what is

Buyer 1 0 1-.3 = .7 1.5-.6 1.8-.9 1.85-1.2 And

 Demand Side Analysis

The equilibrium, market

 Chapter 1.1 The Themes of Microeconomics

 The second-to-second price changes that

Copyright © 2015 Pearson Education • Microeconomics • Pindyck/Rubinfeld, 8e, GE. 58 of 49

– And how do you think a similar chart for

 At the end of this session you should be able

 1. Read Chapter 1 of P&R, except 1.3. Ensure that you read

- And bring along the excel template that will be