[Music] in the last video we talked about buyers buyers are interested in maximizing their level of Happiness maximizing their utility in this video we are going to talk about sellers what are they interested in we will also talk about environment the environment in which buyers and sellers operate so let us talk about sellers first the aim of seller is profit maximization what do we mean by profit maximization first let us understand profit the sellers are in business of selling stuff in the market when they sell stuff they earn some some Revenue so profit is denoted by pi this is a Greek letter Pi and this is equal to total revenue minus total cost total revenue what do we mean by total revenue the total earning that Farms have of course here we are taking a very simple view as we progress we will realize or in some examples we will see that the revenue gets affected by many things like taxes subsidies right now we are ignoring we are thinking of firm as something that takes different inputs and converts it into outputs and selling of these outputs will give Revenue so Revenue will have two component price per unit and the quantity sold so P multiplied by Q will give you total revenue and of course to produce something you need to manufacture it if you are not manufacturing it you are buying it from somewhere and selling it so you are incurring a cost to get these outputs that you are going to sell in the market so what is the cost cost would depend on quantity okay so this is total cost and the difference of these two gives you the profit and mind you this is any profit as you change Q your profit will change but you are interested in maximizing this profit so we can say that maximize PQ minus C of Q with respect to Q as you change Q your profit will change and you are interested in getting the max maximum of this pi and this is denoted by small Pi mind you remember this that a small Pi indicates maximized profit while Capital Pi indicates any profit so we can say now simply the aim of a firm is to obtain as much profit as possible or in other word aim is profit maximization we have already seen that Revenue has two components price and quantity quantity is completely in control of the firm how much to sell in the market that would depend on the firm price we will see is much more complex sometime this firm or seller can decide how much should be the price technically all the time seller can decide but think about a situation when someone is selling identical product at 50 rupees can you sell it at 60 rupees you cannot no one will buy from you so there is constraint on your pricing decision we are going to learn about different business environment different Market environment that puts constraint on your pricing decision in the next slide right let us get back to cost what do we mean by cost we already saw that cost here is indicated by a function of quantity so to produce something you need raw material and raw material is costly you need to buy if you have a firm if you are just a distributor it means you are buying some product from somewhere and selling it in secondary Market in that case your cost cost is going to be the amount that you pay to buy your supplies so raw material I using it in broader sense the next term is technology what do we mean by technology that like for example if you are converting fuel to energy it depends how efficient of an engine you have so it depends on the technology your cost also depends on technology here we have this Indian Institute of Technology here meaning of technology is Engineering in economics we are talking about engineering but slightly in a different way for us technology is a black box what does this black box do it takes inputs and input can be input one input two and so on these can be raw material it can be your supply that you are buying from somewhere input two can be Transportation so it depends what kind of problem you have and then you are getting some output so this black box which takes input different inputs and convert them into some sort of output is called technology for us and we can represent it mathematically we can say that Y is equal to f of x where Y is the output X is input we can if we have more than one input we can write it like this F X1 X2 X3 and so on okay so this F is representing that technology so technology has an impact on cost okay okay now we have some idea about sellers aim let us try to present it in a better way basically the aim of a seller is to create wealth to enrich himself to for whatever reason how does this wealth get created the wealth creation has a very simple formula wealth gets created when you move and asset from its a low value use to high value use like for example a car these days cost let's say 10 lakh Rupees do you think the if you price all the component the total would be 10 lakhs I bet you that it's going to be much less than 10 lakhs then why does it cost 10 lakhs because separately they don't have that kind of value Associated car as a together has has much higher value so then different components are getting moved into high value uses when workers are you know same workers you can hire to work on a mundane job and a very intricate job when you take higher level of work from them then you are moving their work from low value use to high value use and that's what all businesses that's what all sellers do let me take an example of a seller you know seller we are using in a very broad way uh so this seller is the owners of marn marn was a departmental store operating on West Coast in the USA Marvin has a thriving business owner of Marin decided to sell this the chain of departmental stores to a a a private Equity Consortium the private Equity Consortium came to the conclusion that the profit of Marin is coming from the rental income so what they did they separated the departmental store business from the rental income what do we mean by this that departmental store were located on a particular land and this own this land was also owned by the same company so this private equity company Consortium private Equity Consortium sold the rental part to another company and that other company started charging the actual market rate to the departmental store immediately what was observed that marvn which was a thriving business started making loss my point is here that even this destructive thing is basically is moving asset to a high value use I want you to pause the video and think about it for a minute and during discussion we will come back to this and I will talk about how this separating the rental business from departmental store business is moving asset to high value uses that created wealth let us come to a seller's willingness to Supply so you want to sell something selling something is costly to you sometime it's costly in terms of getting the raw material sometime it is costly in terms of Transportation cost sometime it's costly in terms of doing the hard work so you need to incentivize you need to get something in Li of selling that product in the market and it so happens typically that as you want to sell more your level of effort for to sell one unit more goes up let us I'm not saying of course when you sell more total cost is going to be higher I'm not talking about that I'm talking about the additional cost that you incur to sell one more item like for example you have a mango tree and you want to sell mangoes from this particular tree some of the mangoes are on the low-lying branches they are very easy to get so the incentive that you need is less you can very easily pluck those mango and so you don't need a very high incentive but if you want to sell more perhaps you have to climb mango perhaps you have to get a big stick to get those mangoes from higher branches so you need higher incentive okay to sell one additional unit and that is typically what that's the reason that your willingness to supply goes up as prices in the market goes up I'm not saying always it's true sometime to produce one unit let's say to produce one unit you are a you you own a generator and you supply electricity in your locality then whether you want to supply one unit of electricity or 10 units of electricity your cost is going to be the same in fact as you supply more on per unit term your cost May decrease but there is going to be a point that it would start increasing that is the important part that we will observe in future so I can say that supply that we have here for a seller or from several seller is an upward sloping curve this is p and this is Q what does it mean that if price is below let's say below this level then no one is willing to supply any of these items and as price goes up sellers are willing to supply more and more units so two reasons one that like we had talked about in on buyer side something similar happens here first it is upward sloping because to supply more you need to be given higher incentive why do you need to be given higher incentive because it becomes costlier to supply one more unit second reason is that if price is higher let's say your neighbor you know who is doing something else may try to you you may hire him to get these mangoes and to sell it in the market so other people can sift their business and one example I want to give you there was a news article sometime back when Uber was launched in Delhi many Delhi University students they became driver and started driving car just because the compensation was so lucrative price was so higher that not only D drivers were willing to work extra hours people from other professions or also became driver and that is the reason that we get supply curve as upward sloping curve all these things will again be covered in much more detail I'm just trying to give you the basic flavor that we will see in this particular module next is environment environment is very very important environment is what decide prices in the the market so let us go back to the apartment owner I had uh slide that gives you price and quantity we had a graph drawn last time and we had seen it is stepwise graph I'm not interested in the graph anymore what I am interested in is revenue in the last video we talked about that apartment owner would like to rent all five Apartments that's not a nice aim to have the better aim is to earn as much as profit as possible we can assume that as apartments are already made so the apartment complex owner is not going to incur any extra cost so what the apartment owner is interested is in is maximizing Revenue so if price happens to be above 70 its total revenue is going to be zero if it is between 65 and 70 so price is between 65 and 70 total revenue is going to be between 65 and 70 if price is between 60 and 65 total revenue because you will have to multiply this p with two so if it is you know it's going to be between 120 and 130 you see the total revenue is increasing ing as price is coming down here it's going to be between 165 to 180 still increasing then it's going to be between 160 to 220 and then it is going to be 175 to 200 now if you follow this side or you can follow this side we see some similar pattern that here from 70 it's going up to 130 then 180 then 220 then 200 so what we see here that in the beginning your total revenue is increasing and later on it starts decreasing it is not necessary that it would decrease further it may increase sometime it may decrease because we are following a stepwise function if we had a linear function like this you know then we will see that it is first increasing and then decreasing we can take as example that let us say that demand function is 30 minus p and last time we had talked about that we have to include the choke price that if p is greater than 30 then no quantity would be bought so Q is basically Max of 30 minus P comma 0 and if we multiply it with respect to with P so to get the total revenue P multiply by Q so we are basically in range of price between 0 to 30 we are going to get P multiplied by 30 minus P if p is between 0 to 30 and then it becomes zero so if we draw the graph it's going to look it's going to look something like this okay because it is quadratic equ equation you get here 30p minus p² you can draw it here you have total revenue here you have P so maximum you are going to get when p is equal to 15 in particular case so what we see it's going up then it's coming down so in this particular case apartment owner is able to decide how much is going to be the price and the example that we had seen with Q is equal to 30 minus P apartment owner will decide that P is going to be 15 because it would maximize its Revenue the point here is that apartment complex owner is able to decide the price on its own think about a different scenario where you have only one buyer and he is interested in renting all the apartment there are no other buyers so he would be able to negotiate a much better price from the apartment complex owner so monopsony is basically one buyer and many Sellers and Monopoly is one seller and many buyers here Monopoly has all the power in the market here in monopsony the buyer has all the power oligo poly is an example where there are two comp apartment complex owner okay so each one of them have to think about what other is going to charge for their apartment so this we will study once we understand what how do we solve games and the last one is perhaps the theoretical one where the competition is so intense there are so many sellers there are so many apartment complex owner these buyers can go to anyone what would happen each apartment complex owner will try to lower the price little bit to capture the market to capture to get all the buyer and all apartment complex owner will have have this incentive to lower the price so they will keep on lowering and if it is really intense competition which we call perfect competition in economics the price will fall to the level of marginal cost what is marginal cost cost to produce one more unit so each owner each seller would think that by lowering the price we will be able to capture bigger market so they will keep on lowering but once the hit the marginal cost they cannot go any lower further because going lower means making loss because one additional unit will cost you something and you are able to get lower than that from the market Market that's not advisable so ultimately in this theoretical concept the prices will become equal to marginal cost when we do simple pricing we will get into this perfect competition little bit just to understand that what does it mean let us talk about pricing technique okay we talked about the environment these techniques are used in different ways in different envir M so pricing is basically an outcome of a negotiation between a buyer and seller there are basically two aspects of pricing the first one is size size of the pi what do we mean by the size of the pi think about the buyer is interested in buying because buyer reservation price is greater than the market price of that product and why seller is willing to sell because seller's cost of that item so that's additional cost for that item so I can say marginal cost is less than the price so if transaction happens between a buyer and a seller then for the society a value is created which is equal to reservation price minus marginal cost this is the value that gets generated in the transaction so this is the one aspect the second why negotiation is taking place how to divide this Pi of course buyer would want to get bigger as big as possible seller would also like to want like to get as big as possible of this p and that's why a negotiation is taking place between them when you go to bajar with sub walas when you purchase sub subg Wala says 20 rupees per kg you say 15 rupees per kg I will pay what does it mean so of course sell seller sub Wala has a price let us say let us imagine that it is 5 rupees and you are willing to pay in your mind at list you would of course not tell it to sub Wala you you would have bought this sub if the cost was up to 25 rupees it means your reservation price is 25 rupees so this if you two come together and transaction takes place then this surplus of 20 Rupees is generated that is total Surplus now the negotiation is taking place to divide these 20 rupees between the two so when seller proposes that pay me 20 rupees what he is saying that you can take 25 minus 25 rupees of surplus that is consumer surplus and I should get 20us 5 that is 15 rupees of surplus we can call it producers Surplus when you say that no no I will pay only 15 rupees what you mean to say no I don't want 5 rupees I would go for 10 Rupees and you keep 10 Rupees so this is the way this negotiation works of course you as a buyer do not have access to the information that how much is the cost for the seller and the seller doesn't have information that how much is your reservation price but this negotiation is taking place the other situation is sometime you go to the market and you say that someone has written fixed price you cannot negotiate there also I say a negotiation is taking place seller is using a particular strategy we can call it take it or leave it a strategy seller has already decided it Surplus and then whatever is left is for you many times we see that an auction takes place to decide that who is going to get how much of surplus what happens in the case of auction the seller doesn't know that who is willing to pay the maximum price so seller conducts an auction to figure out who has the maximum valuation who is willing to pay maximum and how much I can extract from that person because in auction if someone says that I would pay up to 10,000 rupees then you can negotiate in only other way by going up you cannot say now I'm going to pay only 9,000 rupees you can say I will pay 11,000 rupees or 12,000 rupees and so on so it's a nice way for seller to extract most Surplus from you but again we will see sometime it can be conducted sometime it cannot be conducted we will look at the condition when we discuss the auction similarly another technique is price discrimination when same product different copies of same product are sold to different people at different prices mind you sometime it is illegal so sellers do it in a very smart way they will like for a book they will come up with a hard bound immediate mediately and soft cover much later so you want to read that book immediately you would like to purchase the hard cover and pay the higher price if you are willing to wait you are patient enough you are willing to wait your value is perhaps lower for the book or perhaps you have less money you would wait purchase that book later on then you are going to get soft cover so of course seller can say that these two are different product hardbound has better quality a paper is hardbound which is costly but the take is that the cost involved in better quality of paper or hardbound cannot justify the difference between these two prices similarly think of Airline if you purchase a ticket a month in advance you pay much less and if you purchase just before the travel day then you have to pay much higher this is another way ear lines are doing price discrimination because Airlines know that Leisure traveler would purchase tickets in advance and business Travelers would purchase at the last moment so they try to extract as much of surplus from different consumers so this is another technique of pricing we will get into details of all these techniques later on right now I want to close this video with an example so let us take a look at this problem and I will give you a general way to think about you know it doesn't matter whether you it's a buyer or a seller basically it's a decision maker if you think about it each buyer is a decision maker and each seller is a decision maker so if you have a decision maker who can do either X1 X2 X3 X4 or xn okay and doing this will get some money or some benefit so we can say the the benefit is bxi that's coming from XI and doing XI also involves a cost so cxi okay and the difference is the gain to the decision maker so what decision maker will try to do decision maker will try to maximize you know how much of net benefit he or she can get so he will try to maximize with respect to I if it is a buyer it's about buying decision if it is a seller benefit is coming from total revenue and cost is coming from total cost so mathematically it doesn't matter much that whether we are talking about buyer or seller and of course there is one difference that you should keep in mind I will emphasize it later on also that buyer's happiness cannot be measured in monetary term all the time of course it can be converted into monetary term but happiness my happiness is my happiness it cannot be compared with your happiness but a seller's profit can be compared with other sellers profit so that's a difference we will this is a a important difference and we will talk about it later but as of now let us try to do this decision making problem so here is a story yesterday you were unexpectedly given a free ticket to Sony n Nigam consult scheduled for the day after tomorrow the market price for this ticket is 7,500 but the most you could sell it for it only 5,000 rupees so someone gave you a free ticket and if you want to sell it if you don't want to use this ticket you can sell it in the market not black or anything we are not getting into that but maximum that you can get by selling is 5,000 rupees today you discover that sya goosal will be giving a concert the same evening and ticket for the Sha goosal concert are still available at 7500 rupees had you known before receiving your sunu Nigam ticket yesterday that sya goosal would be coming you definitely would have bought a ticket to see her and not Sonu Nigam the question is you have to decide whether it is true or false that it follows from the story that you should attend sosal concert and not Sonu nigam's concert so let us look at it how can we solve so I already told you about alternative X1 and X2 so here options are Sonu Nigam and sya goosal these are the two options which option one should you choose that maximizes you can think of it as a buyer that option which would maximize the Surplus that option should be chosen so what we can say that how much is the net Surplus to the consumer to the buyer that benefit from Sonu Nigam Minus cost of Sonu Nigam and similarly we can say from Sha goosal benefit from Sha goosal watching the concert of sag goosal Minus cost of sag goosal what is given that if you didn't had this free ticket that was given to you you would have selected s goosal and not sunun Nigam so what it means that this is larger than the first one so we can say that net benefit this is benefit this is cost so this is net benefit from sosal is greater than the net benefit from watching Sonu Nigam and cost in both cases are given in both cases because if you are not given the ticket it doesn't matter how much you can sell it for in both cases if you had to buy ticket you had to pay 7500 rupees so what we get here is in both cases this is the expression and it's clearly that you are getting more net benefit from sagos so you can cancel this 7500 because it's on the both side and it's very very clear to you that benefit from sya goosal is more than benefit from Sonu Nigam so should you go for sosal no it's not clear yet because now you have a free ticket so you can think in two different ways if you want to watch sya goosal how much you have to spend from your pocket you can sell Sonu nigam's ticket in 5,000 rupees and purchase sosal ticket in 7500 rupees but your actual cost is only 2500 rupees you cannot watch both they both are performing at the same time so now we have this benefit from s goal is B of SG Minus cost is 7500 how much is cost for what in son Nigam ticket now because you have free ticket so cost is zero so here your net gain is zero and we have to compare you should go for the one that gives you higher net benefit or higher net Surplus but we cannot decide we know that BSG is greater than BSN but we don't know whether the difference is worth 2500 rupees or not so if if I go back to the question we can say that it's not clear whether you would attend sya goal's concert or Sonu nigam's concert you would attend s goal's concert if your perceived benefit is for more than 2500 rupees what do mean do I mean by perceived benefit this we Economist have habit of converting everything in monetary terms so let me give you a story that will help you and and then we can come back to this that you are traveling in a train somehow you lost your ticket the tit comes and ask you for your ticket you are not able to produce it so Titi says that either you pay 5,000 rupees fine or you will have to go to the jail for a month now of course you can decide one way or the other but now I want you to do a thought experiment let us assume that you are willing to pay 5,000 rupees rather than going to jail for a month let us say instead of it was 5,000 it's 6,000 7,000 8,000 50,000 a lakh 5 lakhs perhaps you will reach a limit where you would think that going to jail is perhaps a better option for you where at the point where that happens that point will give you the value that you have negative value that you have from going to jail so everything gets converted into monetary term that's the Habit we economists have it's not always right or ethical we will not get into it but this is workable most of the time so this is what I mean when I say that if your perceived benefit is for more than 2500 rupees uh the perceived benefit from watching sosal concert is more than 2500 rupees than watching Sonu nigam's concert then you would go to sagal's concert otherwise you would stick to Sonu nigam's concert next week we will start simple pricing thank you