1 / 57

Producer & Consumer Decisions

Producer & Consumer Decisions. Executive MBA 512 Session #5 Presented by Brian Greber October 19, 2012. 5- 1. INTRODUCTION TO INSTRUCTOR. Brian Greber, Ph.D. B.S. Forestry (WVU) M.S. (WVU), Ph.D.(VT) Resource Economics

mason
Download Presentation

Producer & Consumer Decisions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Producer & Consumer Decisions • Executive MBA 512 • Session #5 • Presented by • Brian Greber • October 19, 2012 5-1

  2. INTRODUCTION TO INSTRUCTOR Brian Greber, Ph.D. B.S. Forestry (WVU) M.S. (WVU), Ph.D.(VT) Resource Economics 19 years industry/executive experience (most recently VP Marketing & Technology in a Fortune 100 Forest Products Firm) 16years teaching, research, policy experience at universities (VT, OSU, BSU) Lots of public policy work at the state & federal levels Senior Economist/Director at ECONorthwest Live in Boise – avid fitness buff and enjoy most things outdoors Active with not-for-profits (Pres.The Arc Board) Motorcycle safety instructor 5-2

  3. Today’s Objectives • Enable a structured approach to thinking through consumer, supplier, and competitor reactions to changing events and how that can/should influence your enterprise’s decisions. • Focus on demand as a reflection of the value that consumers place on products and supply as a reflection of costs of providing those products. • Practical application of demand and costs analysis to make wise production and marketing decisions in the immediate, short-run, and long-run scenarios. • Understand common sources of data for demand and supply analyses. 5-3

  4. The Book • Chosen to get you to think about economic models; not a political statement • I like it because it makes people think beyond the rhetoric that normally is in text books. • The discussion of market failures is critical to discussions of economics and economic policy. • Most of my discussion will be the conventional view but the anti-text should broaden your views. 5-4

  5. Today’s Agenda • Establish a framework for economic thinking. • Use economic logic to think through consumer decision making. • Use economic logic to think through producer/supplier decision making. • Extend the logic of individual decisions to a rational model of the market. • Provide guidance on how to conduct applied market analysis. 5-4

  6. Business Research An A? 5-6

  7. Economic Thinking • Economics is the study of choice • It focuses on how rationale choices are made. • There tends to be a particular focus on consumer and producer choices within a market context (that is where exchange is facilitated with a common currency) • Two principle fields in legacy thinking • Micro-economics – focused on individual firms, consumers, and product markets. • Macro-economics – focused on the aggregate performance of economic systems. 5-7

  8. Keys to Economic Thinking • Scarcity • Forces choice • Creates value • Thinking “on the margin” • Leave nothing on the table • Do not sub-optimize • Recognizing opportunity cost as a real cost • Scarcity forces sacrifices • Purposeful behavior • Rationale and self interested individuals • Firms pursue profits • Individuals pursue “utility” – OK, happiness! 5-8

  9. Economic Models • Predictive • Based on conditioning assumptions • Destined to be wrong (a correct one is a lucky one) • Extrapolative/inferential • Best use is sensitivity analysis. • Paradigm • A logical model to discuss cause and effects • Provides a common frame of reference • We will be focusing principally on Paradigms – models for explaining behavior and thinking through consequences of actions (or inaction!). 5-9

  10. Law of Demand • Other things equal, as price falls quantity demanded rises • Corollary: as quantities consumed increase, marginal value declines. • WHY? 5-10

  11. Demand to an Economist • The marginal value that consumers place on the next increment of consumption, thus • To put “marginal value” in context, think about “for each dollar/penny I lower price what new purchases do I entice consumers to make” – the incremental quantity sold at this lower price reflects the vale that was placed on that and only that increment (the rest of the volume clearly was valued higher. • Amount consumers willing and able to purchase at a given price • The value reflects the “maximum willingness to pay” for each additional unit of volume (see above) • Yields a Schedule or curve – quantitative, not ethereal • Individual vs Market 5-11

  12. Individual Demand Of Course: D=MB Demand Can Increase or Decrease P 6 5 4 3 2 1 0 Individual Demand Increase in Demand P Qd $5 4 3 2 1 10 20 35 55 80 Price (per bushel) D2 D1 Decrease in Demand D3 Q 2 4 6 8 10 12 14 16 18 Quantity Demanded (bushels per week) 5-12

  13. Individual Demand Demand Can Increase or Decrease P 6 5 4 3 2 1 0 Change in Demand Individual Demand P Qd Change in Quantity Demanded $5 4 3 2 1 10 20 35 55 80 Price (per bushel) D2 D1 Decrease in Demand D3 Q 2 4 6 8 10 12 14 16 18 Quantity Demanded (bushels per week) 5-13

  14. A Graphical Nuance • Typical economic supply and demand graphs have 2 dependent variables – P + Q • This is not your typical graph where the horizontal axis refelcts an “independent” variable and the vertical axis reflects a “dependent” variable, i.e., a “cause and effect” relationship. • P+Q are both “effects” behavior 5-14

  15. Market vs Individual Demand? • We start with discussing the decision-making of the individual consumer. • This establishes the behavioral paradigm • In reality, the range of choices for an individual are pretty narrow/lumpy (e.g., cars, houses, or bags of oranges!). • Focus becomes “market demand” • the collective demand of all consumers for a product or service. • We infer this from historic price/consumption behavior 5-15

  16. What causes demand to shift? • Number of buyers • Income • Price/quality/value of substitutes • Price/quality/value of complements • Price of unrelated goods (?) • Taste • Drives satiation • Impacts perceptions of opportunity cost • Remember Demand is all about the Consumer: what value do they see in the product/service. • How can your business/industry influence demand? 5-16

  17. Oct 8 article on Auto sales • What factors were listed as reasons for recent upticks in auto sales/demand? • Which cause demand to shift? • Which cause “movement along the demand curve?” 5-17

  18. Shape/slope of demand • Note, the shape is measuring the responsiveness of perceived value to changes in quantity consumed • Inversely, the shape reflects the responsiveness of quantity to changes in price • What economists call “price elasticity” of demand Percentage Change in Quantity Demanded of Product X EdX= Percentage Change in Price of Product X 5-18

  19. Price Elasticity of Demand Examples? Extreme cases • Perfectly inelastic demand • Perfectly elastic demand • Unitary Elasticity D p p p D D Q Q Q 5-19

  20. What influences slope of demand • Substitutability • More substitutes, more elastic demand • Proportion of income • Price relative to income • Luxuries versus necessities • Luxuries are more elastic • Time • More elastic in the long run 5-20

  21. Sample Elasticities See also: http://www.ers.usda.gov/data-products/commodity-and-food-elasticities.aspx 5-21

  22. Cross price elasticity of demand • Elasticity > 0, substitutes • Elastciity < 0, complements Percentage Change in Quantity Demanded of Product X EdXY= Percentage Change in Price of Product Y 5-22

  23. 2011 study by American Public Transportation Asoc. • How would you characterize the elasticty of demand for gasoline for commuters? • How different were the short run and long run elasticities? • What would account for this difference? • Using gasoline price was a proxy for the price of self commute, how would you characterize the cross elasticty of demand for mass transit? • How did this vary with time? • How did it vary with gasoline price? 5-23

  24. . 5-24

  25. Estimating Demand – a bootstrap approach • Warning: do not simply regress Q = f(P) • Why not? • You can roughly approximate a demand curve for your industry by using current quantity and price and published elasticities: 5-25

  26. Estimating Demand – a bootstrap approach 5-26

  27. Key take away: Demand • Consumer demand reflects perceived value • Demand shifters are those things that influence perceived value • Price is not a demand shifter; demand shifters are “independent” variables, P+Q are both dependent variables. 5-27

  28. Law of Supply • Other things equal, as price rises the quantity supplied rises • Corollary: as quantities produced increase, incremental production cost per unit rise. • WHY? 5-28

  29. Supply to an Economist • The marginal cost of producing the next unit of output • Assume supplier will supply as long as the price is sufficient to cover that incremental cost, thus • Amount suppliers are willing and able to supply at a given price • Other things equal • Yields a Schedule or curve – quantitative • Individual vs • Market 5-29

  30. Individual Supply Let’s talk opportunity cost. Example f – soccer balls vs volley balls – incremental cost of producing volleyballs must recognize what? P 6 5 4 3 2 1 0 Individual Supply S1 P Qs $5 4 3 2 1 60 50 35 20 5 Price (per bushel) Q 10 20 30 40 50 60 70 Quantity Supplied (bushels per week) 5-30

  31. Individual Supply Supply Can Increase or Decrease P 6 5 4 3 2 1 0 S3 Individual Supply S1 S2 P Qs $5 4 3 2 1 60 50 35 20 5 Price (per bushel) Q 10 20 30 40 50 60 70 Quantity Supplied (bushels per week) 5-31

  32. Individual Supply Supply Can Increase or Decrease P 6 5 4 3 2 1 0 S3 Individual Supply S1 Change in Quantity Supplied S2 P Qs $5 4 3 2 1 60 50 35 20 5 Price (per bushel) Change in Supply Q 10 20 30 40 50 60 70 Quantity Supplied (bushels per week) 5-32

  33. Market vs Individual Supply? • In contrast to individual consumers, it is often important to understand the economic supplies of individual firms: • Your firm • Concentrated Industries • From a price and market perspective the focus becomes “market supply” • the collective supply of all firms. • We infer this from historic price/production behavior 5-29

  34. What causes supply to shift? • Number of sellers • Anything that shifts marginal costs: • Resource prices • Technology • Taxes and subsidies • Prices of other goods (opportunity costs) • Producer expectations 5-34

  35. Shape/slope of supply • Note, the shape is measuring the responsiveness of cost to changes in quantity supplied • Inversely, the shape reflects the responsiveness of quantity supplied to changes in price • What economists call “price elasticity” of demand Percentage Change in Quantity Supplied of Product X EsX= Percentage Change in Price of Product X 5-35

  36. Price Elasticity of Supply Examples? Extreme cases • Perfectly inelastic supply • Perfectly elastic supply • Unitary Elasticity S p p p S S Q Q Q 5-36

  37. What influences slope of supply • Shape of curve for inputs • Diminishing returns • Time • Market period • Perfectly inelastic supply • Short run • Fixed plant size • Long run • Adjustable plant size • Supply more elastic • More elastic in the long run 5-37

  38. January 2012 Article on End of Elastic Oil • How did they characterize the overall elasticity of supply for oil? • How did they say it differed between the OPEC countries and the US? Why • Is the elasticity of oil greater in the long run or the short run? Why? • Did the article contend that the short-run elasticty of supply is getting “more or less” elastic through time? Why? • Dies this contradict the preceding point? • Diminishing returns • Time • Market period • Perfectly inelastic supply • Short run • Fixed plant size • Long run • Adjustable plant size • Supply more elastic • More elastic in the long run 5-38

  39. Cross Price elasticity of supply • Elasticity > 0, production complements ….. Examples? • Elasticity < 0, production competitors …. Examples? Percentage Change in Quantity Supplied of Product X EsXY= Percentage Change in Price of Product Y 5-39

  40. Law of Diminishing Returns • Fixed technology • Add variable resource to fixed resource • Marginal product will decline • Beyond some point • The faster the rate of decline, the steeper the marginal cost/supply curve They Need a Heavier Donkey... 5-40

  41. (3) Marginal Product (MP), Change in (2)/ Change in (1) (3) Average Product (AP), (2)/(1) (1) Units of the Variable Resource (Labor) (2) Total Product (TP) ] ] ] ] ] ] ] ] Law of Diminishing Returns - 10.00 12.50 15.00 15.00 14.00 12.50 10.71 8.75 0 10 25 45 60 70 75 75 70 0 1 2 3 4 5 6 7 8 10 15 20 15 10 5 0 -5 Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns 5-41

  42. Law of Diminishing Returns 30 Total Product, TP 20 10 0 20 Marginal Product, MP 10 1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 TP Increasing Marginal Returns Negative Marginal Returns Diminishing Marginal Returns AP 5-42 MP

  43. Average Product and Marginal Product Cost (Dollars) Graphical Relationships Production Curves AP MP Quantity of Labor MC AVC Cost Curves Quantity of Output 5-43

  44. . 5-44

  45. Costs and decisions • Average fixed cost • Understand effect of scale on “leveraging” costs • Average variable cost • Key controllable cost on a day-to-day basis; key to shut down economics • Produce as long as P > AVC • Average total cost • Standard for “cost accounting” • Marginal cost = Supply • Key to determining profit maximizing output levels • Competitive firm Produce to where P=MC 5-45

  46. Estimating Supply – a cost curve approach • Use an engineering build up, treating each increment of supply available in the market as a “marginal supply” • This may be turning a plant on or off, opening /closing a new supply reserve, etc. • Examples from the web: • http://www.mckinseyquarterly.com/Strategy/Strategic_Thinking/Enduring_ideas_The_industry_cost_curve_2343 • http://www.minecost.com/curves.htm 5-46

  47. Articles posted • “GM Plant makes Volt Electric Car More Efficient?” • Which way is the supply function shifting? • What are the reasons for this supply shift? • What would be the economic explanation? • When the second shift is added, what does the ability to spread fixed costs over more units of production mean for the supply function? • “P&G Cuts Jobs” • What costs did P&G cut? • Would these be components of MC? AVC? AFC? • Does this change sort-run supply? 5-47

  48. Key take away: Supply • Supply reflects the marginal cost of production • Any market or policy changes that influence marginal costs will shift supply. 5-48

  49. Putting D&S together What happens if you instill quotas, price ceilings, or floors? 5-49

  50. Key take away: Market Equilibrium • The meeting of the minds that balances price and quantity • Avoids surplus and shortage • Uses price for Rationing • Leads to Efficient allocation • Productive efficiency • Allocative efficiency among consumers and producers 5-50

More Related