Lecturer:
Aleksandra (Sasha) Balyanova
Decision making in markets
COMM1100 Business Decision Making
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10
Decision
Making in
Markets
Imperfect
Competition,
Economic
Surplus, and
Social Welfare
Legal Rights of
Stakeholders
in Decision
Making
Consumer
Relations
Decisions
Employee
& Supplier
Relations
Decisions
Stakeholder
Decisions Regarding
Managers
Complexity in
Business Decision
Making
11
Introduction to
Business Decision
Making
Stakeholders
and CR
11
A
SS
ES
SM
EN
TS
COMM1100 Business Decision Making
Quiz 1:
15%
Case study
analysis: 25%
Final
exam
50%
2 8
Decisions Related to Stakeholders
10
Decision Making Processes
5
Foundations of Business Decisions
Competitor
Relations
Decisions
6 731
Participation:
10% (in total)
Participation:
10% (in total)
Participation:
10% (in total)
Participation:
10% (in total)
Participation:
10% (in total)
Participation:
10% (in total)
Participation:
10% (in total)
Participation:
10% (in total)
Decision
Interactions
with
Government &
Broader
Society
9
Flexibility
Week
4
• The market context of business decisions
• Using models to understand context
• Comparative advantage and the incentives for
specialization
• Market analysis
• The consumer side: Demand
• The producer side: Competitive supply
• How they interact to give rise to a market equilibrium.
Individual core learning this week:
• Models of decision making
• Comparative advantage, opportunity cost and
specialisation
• Competitive markets
Plan for today:
Modelling decisions
What is a model?
A model is a simplified representation of reality.
What is a useful model?
• It is clear: it helps us better understand something important.
• It predicts accurately: its predictions are consistent with
evidence.
• It improves communication: it helps us to understand what
we agree (and disagree) about.
• It is helpful: We can use it to find ways to improve things.
Different models will be useful for different questions!
Different models will be useful for different questions!
Why do we have markets?
Comparative advantage and specialisation
• In the week 2 ICL, our model of comparative advantage showed us that:
• Not everyone necessarily has an absolute advantage in producing something
• Generally, everyone has a comparative advantage!
• Having comparative advantage in making something means having the lowest
opportunity cost of production
Comparative advantage and specialisation
• Total production (of everything) can
increase if everyone specialises in
what they have a comparative
advantage in.
• So why do we have markets? Why
trade for goods rather than
making everything ourselves?
• One reason is that we are
specialising – rather than make all
our clothing, food, housing etc.
ourselves, we specialize in doing one
thing and buy the rest from others
Modelling decision-making in competitive markets
Demand and supply in competitive markets
• Markets are composed of two types of decision-makers: buyers and
sellers
• The notion of opportunity cost will be vital for understanding the
decision-making of buyers and sellers
• In a competitive market, each buyer and seller is a price-taker, meaning
each decision-maker cannot influence the price through their decision
Individual demand
• Consumers have a reservation
price for each unit – a maximum
price they would pay
• This reservation price is
informed by opportunity costs
• E.g. spending $4 on a coffee
means foregoing $4 worth of the
next best thing you could have
bought!
Individual demand
• For each unit, consumers compare
their reservation price (the
marginal benefit) for that unit with
the price charged (the marginal
cost)
• If benefit > cost, buy the unit
• This is the cost-benefit principle
you saw in week 1 ICL
Individual supply
• Sellers have a reservation price
for each unit – a minimum price
they would accept
• This reservation price is
informed by opportunity costs
• If it costs $4 to make an extra unit
(including opportunity costs!), the
seller must receive at least $4 to
make him willing to make that unit
Individual supply
• For each unit, sellers compare
their reservation price (the
marginal cost) for that unit with the
price charged (the marginal
benefit)
• If benefit > cost, sell the unit
• This is the cost-benefit principle
you saw in week 1 ICL
(Perfectly competitive) market equilibrium
• Market demand is the horizontal
sum of individual consumer
demands
• Market supply is the horizontal
sum of individual seller supplies
• You’ll get practice adding up
individual demands and individual
supplies in this week’s tutorial
(Perfectly competitive) market equilibrium
• The equilibrium price is the
price at which quantity
demanded = quantity supplied
• Above this price, excess
supply puts a downward
pressure on price
• Below this price, excess
demand puts an upward
pressure on price
∗
∗
Using the competitive market model
The used textbook market
Consider a market for secondhand copies of a textbook for a
(hypothetical) first-year course in Business Decision Making.


?
Who are the consumers?
• Students who are planning to take the Business Decision Making
course
• Demand is downward sloping: if the book gets too expensive,
students may try to do without it/use another book/change their
study plans
• Do you think demand is elastic or inelastic?
Demand elasticity
• Elasticity is on a continuum, from 0 (perfectly inelastic) to negative
infinity (perfectly elastic)
• Demand is likely to be relatively inelastic – going without a textbook
that is required for the coursework or changing study plans is quite
costly. But it depends!
Who are the suppliers?
• Second-hand books, so suppliers are former students of the
Business Decision Making course
• Supply is upward sloping: if prices go down, owners of the book
may prefer to hold onto it as a reference for future coursework (or
in the hope of selling it in the future)
• Do you think supply is elastic or inelastic?
Supply elasticity
• Elasticity is on a continuum, from 0 (perfectly inelastic) to negative
infinity (perfectly elastic)
• Supply is likely to be relatively elastic – there is no production
involved, so no delays/lags in scaling up or down supply. But it
depends!
Elasticity
• You’ll get more practice calculating and interpreting demand and
supply elasticity in this week and next week’s (week 2 and 3)
tutorials.
The used textbook market
• Let’s suppose that in
the original equilibrium,
500 copies are sold at
a price of $100
The used textbook market
1. Surprise! The site where
nearly all used textbooks are
advertised announces a new
$10 fee per listing, to be paid
by the seller.
• What happens in this market?
The used textbook market
• Sellers now have an added
$10 marginal cost for every
unit sold.
• Whatever their reservation
price was before, it rises by
$10
• Price ↑, quantity ↓
The used textbook market
2. Surprise! The uni
announces the course
won’t be offered next
term.
• What happens in this
market?
The used textbook market
• Demand falls – fewer
students need the book this
term
• Price ↓, quantity ↓
The used textbook market
3. Surprise! One of the Forbes
“30 under 30” gives an
interview saying he learned
everything he knows from
How to Make Business
Decisions.
• What happens in this
market?
The used textbook market
• Demand rises – more people
are taking the course or just
trying to buy the book to obtain
the secrets to wealth/success
• Supply falls – former students
are more interested in holding
onto the book for the same
reason demanders want it!
• Price ↑, quantity ?
Tutorials this week
You will get more hands-on practice using the market analysis
tools from this week:
• Decision Making and the cost-benefit principle
• Opportunity cost and comparative advantage
• Demand and supply, interpreting and calculating elasticities,
equilibrium analysis
Next week in lecture:
We answer the following questions:
• How “good” is the competitive market at generating an
outcome that we, as a society, like? (We focus on one
measure of “good”: economic surplus)
• What if the market isn’t perfectly competitive – what if
suppliers have market power?
Moodle course site:
https://moodle.telt.unsw.edu.au/course/view.php?id=60102
Course email:
COMM1100@unsw.edu.au
If you have any questions about this
lecture, please post them on Moodle.
The lecture recording of the online
lecture will be made available in your
Moodle course site.
Thank you for
attending