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ECON 1 Lecture Notes - Lecture 4: Demand Curve, Competitive Equilibrium

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pinkhedgehog498
5 Oct 2018
School
UCSB
Department
Economics
Course
ECON 1
Professor
Ryan Oprea

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ECON 1 Lecture Notes - Lecture 4: Demand Curve, Competitive Equilibrium

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Document Summary

Theory to explain what happened in exp 1. Who bought and sold values it the highest. Should give to people who want it the most (higher buyer value) Allocate responsibility to produce at the lowest cost, and give to buyer who. Variations in price in the same round due to many individual factors. Should be general-- works in many situations/environments. Let me tell you how the world really works(cid:397) Some are just more explicit than others (ex. Assumption 1: market comes up with one price. So many people in the market that price cannot be changed by yourself-- you. If you were only buyer, would have all the power to control/change the price. Economists like competition b/c it removes individual power over others. Removal of power allows prices to lower. Demand schedule: how much is demanded at every possible price. Supply schedule: how much is supplied at every possible price. Equilibrium: a price at which demand = supply.

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Related Questions

View the video transcript below and share your thoughts on the economic concepts that you believe are applicable.

Question# 1. Provide a rationale on whether or not a firm has to possess market power in order to raise prices.

How to Raise Prices Without Losing Customers

JJ RAMBERG, anchor:

With gas prices soaring and the economy tightening, you may think it’s not possible to charge your customers more. But, it turns out you can successfully raise prices without driving those customers away. Bob Prosen runs the consulting company, Prosen Center for Business. He’s helped business leaders rapidly increase performance, productivity and profits, and he’s also author of the book, “Kiss Theory Goodbye: Five Proven Ways to Get Extraordinary Results in Any Company.” Bob, welcome.

Mr. BOB PROSEN: Thank you.

RAMBERG: So, if you’re going to raise prices on your customers, one of the things you say is don’t surprise them. So, how do you give them warning?

Mr. PROSEN: Well, our customers are very important to us, lets not surprise them. Let’s let them know in advance that prices will increase. But, it’s important to explain to them in their language as to why prices are increasing. For instance, if its fuel surcharges, they’ll understand that. But its important we put it in their language so that they, in turn, can pass that along and plan for it in their own business.

RAMBERG: So, a lot of times when people are paying more, they expect to get more. So, you should communicate increased value I assume. But is saying, um--gas prices are going up for me, is that uh--the same as saying, you’re going to get more for your money?

Mr. PROSEN: No, definitely it’s not. In fact, the equation for value is benefits plus price. So, if prices are going to go up we have to have increased benefits for our customers. So, we can do things like under promise and over deliver. Give them a little bit more. Understand their customer’s customer. So that when we provide our services to them, they’re customized for our customers. They see more value, we understand their business, and therefore they’ll be more appreciative of what we do and less sensitive to price increases.

RAMBERG: That seems to--to follow into your next point, or go right into your next point, which is, track the quality of your products.

Mr. PROSEN: This is absolutely critical, and we can track the quality of our products many ways. Customers call us, complaints, warranty, rework. If we’ll deal with that, capture that, and inside of “Kiss Theory Goodbye” I teach business people how to reduce these problem occurrences and increase the quality of their product. You do it for two reasons: One, customers like us a lot more when things work the way they’re supposed to; and our cost structure goes down therefore maybe we don’t have to increase our prices as much and we can be more competitive.

RAMBERG: And then, also, relationships matter.

Mr. PROSEN: Oh this…

RAMBERG: So, if you have a good relationship, you can do more within that relationship.

Mr. PROSEN: Oh, definitely. People like to do business with people they like. So, lets make sure we stay in touch with our clients. Customize what we touch them with. You know, for instance, when I travel and I deal with business people, I always carry thank you notes in my briefcase. When I’m finished, I send them a note. It’s a rarity these days to even get a thank you note.

RAMBERG: Yeah, it absolutely is. So, about how much can you raise prices by? Can you suddenly figure out that your costs are gone up so much because of energy prices, or food prices, or gas prices, whatever it is, um--and raise it by 50%? Should you do it incrementally? Should you do it all at once? How does it work?

Mr. PROSEN: Yeah, that’s a great question. It depends on what industry you’re in. It depends on what you customers are doing. It depends on a number of things that determine how much, and when, and the frequency of our ability to raise prices. Therefore, what I always recommend to business leaders is work on your cost structure; make sure you’re efficient and effective. Keep your costs as low as you can. Therefore, you can be more competitive on your pricing. Sometimes, you have to pass along the price. Other times, try to absorb what you can through improved efficiencies.

RAMBERG: Should you be looking at your competitors and how much they’re charging?

Mr. PROSEN: Yes, you should absolutely be looking at your competitors. We always want to know what they’re charging. And by the way, we want to differentiate our products and services from our competitors. And, if we can prove a higher value by dealing with us versus our competitor we should be able to articulate that, and we do it based on facts because we know what’s going on in the industry.

RAMBERG: Alright, Bob I know a lot of people are thinking about raising prices so thanks for giving them some tips on how to actually do it.

Mr. PROSEN: My pleasure.

View the video transcript below and share your thoughts on the economic concepts that you believe are applicable.

Question# 1. Why does a firm have to posses market power in order to raise prices.

How to Raise Prices Without Losing Customers

JJ RAMBERG, anchor:

With gas prices soaring and the economy tightening, you may think it’s not possible to charge your customers more. But, it turns out you can successfully raise prices without driving those customers away. Bob Prosen runs the consulting company, Prosen Center for Business. He’s helped business leaders rapidly increase performance, productivity and profits, and he’s also author of the book, “Kiss Theory Goodbye: Five Proven Ways to Get Extraordinary Results in Any Company.” Bob, welcome.

Mr. BOB PROSEN: Thank you. RAMBERG: So, if you’re going to raise prices on your customers, one of the things you say is don’t surprise them. So, how do you give them warning?

Mr. PROSEN: Well, our customers are very important to us, lets not surprise them. Let’s let them know in advance that prices will increase. But, it’s important to explain to them in their language as to why prices are increasing. For instance, if its fuel surcharges, they’ll understand that. But its important we put it in their language so that they, in turn, can pass that along and plan for it in their own business.

RAMBERG: So, a lot of times when people are paying more, they expect to get more. So, you should communicate increased value I assume. But is saying, um--gas prices are going up for me, is that uh--the same as saying, you’re going to get more for your money?

Mr. PROSEN: No, definitely it’s not. In fact, the equation for value is benefits plus price. So, if prices are going to go up we have to have increased benefits for our customers. So, we can do things like under promise and over deliver. Give them a little bit more. Understand their customer’s customer. So that when we provide our services to them, they’re customized for our customers. They see more value, we understand their business, and therefore they’ll be more appreciative of what we do and less sensitive to price increases.

RAMBERG: That seems to--to follow into your next point, or go right into your next point, which is, track the quality of your products.

Mr. PROSEN: This is absolutely critical, and we can track the quality of our products many ways. Customers call us, complaints, warranty, rework. If we’ll deal with that, capture that, and inside of “Kiss Theory Goodbye” I teach business people how to reduce these problem occurrences and increase the quality of their product. You do it for two reasons: One, customers like us a lot more when things work the way they’re supposed to; and our cost structure goes down therefore maybe we don’t have to increase our prices as much and we can be more competitive.

RAMBERG: And then, also, relationships matter.

Mr. PROSEN: Oh this…

RAMBERG: So, if you have a good relationship, you can do more within that relationship.

Mr. PROSEN: Oh, definitely. People like to do business with people they like. So, lets make sure we stay in touch with our clients. Customize what we touch them with. You know, for instance, when I travel and I deal with business people, I always carry thank you notes in my briefcase. When I’m finished, I send them a note. It’s a rarity these days to even get a thank you note.

RAMBERG: Yeah, it absolutely is. So, about how much can you raise prices by? Can you suddenly figure out that your costs are gone up so much because of energy prices, or food prices, or gas prices, whatever it is, um--and raise it by 50%? Should you do it incrementally? Should you do it all at once? How does it work?

Mr. PROSEN: Yeah, that’s a great question. It depends on what industry you’re in. It depends on what you customers are doing. It depends on a number of things that determine how much, and when, and the frequency of our ability to raise prices. Therefore, what I always recommend to business leaders is work on your cost structure; make sure you’re efficient and effective. Keep your costs as low as you can. Therefore, you can be more competitive on your pricing. Sometimes, you have to pass along the price. Other times, try to absorb what you can through improved efficiencies.

RAMBERG: Should you be looking at your competitors and how much they’re charging?

Mr. PROSEN: Yes, you should absolutely be looking at your competitors. We always want to know what they’re charging. And by the way, we want to differentiate our products and services from our competitors. And, if we can prove a higher value by dealing with us versus our competitor we should be able to articulate that, and we do it based on facts because we know what’s going on in the industry.

RAMBERG: Alright, Bob I know a lot of people are thinking about raising prices so thanks for giving them some tips on how to actually do it.

Mr. PROSEN: My pleasure.

Please no cursive or typed out

1. (65 points total).

a) (5 points) Fill in the Table below.

Number of workers

Units of output

MPN

0

0

1

20

2

38

3

53

4

66

5

77

6

86

7

93

b. (10 points) Define the marginal product of labor and explain how it relates to the production function (with N on horizontal axis and Y on vertical axis). What shape does a production function typically take and why? Does this production function take the 'typical' shape?

c)(5 points) Assume that you sell your output to Europe for a US price = $10. The exchange rate is this time is $1.07 per Euro. What is the price of your product in Euros? Please round to 2 decimal places.

d) (5 points) You can hire all the workers you want at $80 per worker. Along with the US price = $10, calculate the number of workers that you will hire and the associated profit in REAL terms (as we did in class, we 'assume away' all other costs of production). Please give me the marginal REAL profit of each worker hired and then add them up and that is the total profit in real terms.

e)(5 points) Inflation data in the US is weaker than the Fed would like and thus, expectations change such that the Fed is less likely to raise interest rates. As a result, the new and updated exchange rate is $1.23 per Euro. What has happened to the value of the US dollar and what is the new Euro price of your product, assuming that your American price stays at $10?

f).(5 points) Given the change in conditions you decide to raise the price of your product in US dollar terms so that the Euro price stays the same as it was before the change in the exchange rate (part c above). What is the new US dollar price? Please show all work.

g) (10 points) What has happened to the marginal revenue product (MRPN) for each worker (has it gone up or down?) and why given the change in price? Be sure to define what the marginal revenue product is and what it means in 'laypersons' terms.

h) (10 points) Given that the US$ price of your product has changed, explain how and why you would change your behavior. Please provide the intuition beginning your answer with... at the same level of labor input I am no longer ......... (please be as specific as possible). Again, explain in REAL terms, not nominal terms.

i. (5 points) Calculate the new level of profits in REAL terms given the change in condition including the change in the exchange rate, the change in the US $ price of your product. and the change in your behavior.

j)(5 points) The Fed has had its eye on inflation for a long time and have been disappointed in that inflation has been too low. Is the change in the value the dollar vs the Euro a welcome development for the Fed? Why or why not? Assume that these conditions changed in a similar way for many US firms.