Current focus: sellers' goal and market environment.
Sellers' Goal: Profit Maximization
Profit (Ļ): Total Revenue (TR) - Total Cost (TC).
Total Revenue (TR):
Simple view: P (price per unit) * Q (quantity sold).
Revenue can be influenced by factors like taxes and subsidies.
Total Cost (TC):
Depends on quantity (Q).
Includes costs of raw materials, manufacturing, or purchasing goods.
Profit Maximization:
Aim: Maximize Ļ with respect to Q (quantity).
Distinction: Small Ļ (maximized profit) vs. Capital Ļ (any profit).
Revenue and Cost Components
Revenue:
Controlled by the firm (quantity sold).
Pricing can be influenced by market conditions and competitors.
Cost (C):
Includes raw material costs and technology efficiency.
Technology is a black box that converts inputs into outputs, influencing cost.
Wealth Creation by Sellers
Wealth Creation: Moving an asset from low-value to high-value use.
Example: Departmental store (Marvin) selling rental income business to create wealth.
Wealth creation occurs when assets are used more efficiently or in higher-value ways.
Willingness to Supply
Supply Curve: Typically upward sloping (P vs Q).
Incentivization:
Higher effort required for additional units increases the cost per unit.
Higher prices encourage more supply.
Market Environment
Types of Market Structures:
Monopoly: One seller, many buyers; seller controls prices.
Monopsony: One buyer, many sellers; buyer controls prices.
Oligopoly: Few sellers; strategic pricing based on competition.
Perfect Competition: Many sellers and buyers; price equals marginal cost.
Pricing Techniques
An outcome of negotiation between buyer and seller.
Two aspects:
Size of the Pie: Total value created (reservation price vs. marginal cost).
Division of the Pie: Negotiating Surplus division.
Various Pricing Strategies
Fixed Pricing: Take it or leave it strategy.
Auctions: Extract maximum surplus from buyers through competitive bidding.
Price Discrimination: Selling identical products at different prices to different people. Examples include hardcover vs. softcover books and airline pricing.
Example and Decision Making
Example: Deciding between attending concerts by Sonu Nigam and Shaan.
Decision Factors:
Net benefit (surplus) from each option.
Consider actual and perceived costs and benefits.
Decide based on which option maximizes net surplus.
Conclusion
Buyers and sellers are both decision makers aiming to maximize their benefits.
Key difference: Buyer's happiness is subjective, whereas seller's profit is measurable and comparable.