COMM1100 Business Decision Making

Decision making
Lecturer:
Professor Andreas Ortmann

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COMM1100 Business Decision Making
Foundations of Business Decisions Decision Making Processes
Decisions Related to Stakeholders

1 2 3 4 5 6 7 8 9 10 11

10 11
Intro to Decision Surplus
making,
Stakeholders Employee Stakeholder
Business Decision measure & Legal rights of Competitor
Supply & welfare, and & Supplier Decisions
Making stakeholders Relations The role of Regarding Manages
Stakeholders Demand market power Customer Flexibility Relations
in decision Decisions government in
and & imperfect Relations Week Decisions Complexity in
making business
CR competition Decisions Business Decision
Making
ASSESSMENTS

Quiz 1: Case study Quiz 2: Final

10% analysis: 20% 10% exam
50%

Participation: Participation: Participation: Participation: Participation: Participation: Participation: Participation:

10% (in total) 10% (in total) 10% (in total) 10% (in total) 10% (in total) 10% (in total) 10% (in total) 10% (in total)
Individual core learning this week:
• The market context of business decisions
• Using models to understand context
• Opportunity cost and related concepts such as
absolute and 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
 Plan for today
• Opportunity cost and related concepts such as
absolute and comparative advantage and the
incentives for specialization in more detail
• Using models to understand context (extension on
ICL material)
• Market analysis
• The consumer side: demand
• The producer side: competitive supply
• How they interact to give rise to market equilibrium

• A brief intro to Smarthinking | Feedback on Written Work

From the comment sets
From the comment sets
From the comment sets
From the comment sets
 Key Concepts: Firms
• Firms = Economic organizations in which private owners of capital
goods hire and direct labour to produce goods and services for sale
on markets to make a profit.
• A striking characteristic of firms is how quickly they can be born, expand, contract, and die.
• Other forms of economic organization coexist with firms in a
capitalist economic system, but they are not firms:
• Family or individual production (they do not hire others)
• Nonprofit organizations (they do not seek to make profit or sell
their output on a market)
• Cooperatives (labour is not hired, work is done by members)
• Government bodies (they do not seek profit; capital goods are not
privately owned)
 Key Concepts: Private Property & Markets
Private property = something is private property if the person
possessing it has the right to exclude others from it, to benefit
from the use of it, and to exchange it with others.
• Capital goods = the durable and costly non-labour inputs used
in production (machinery, buildings) not including some
essential inputs, e.g. air, water, knowledge that are used in
production at zero cost to the user
Markets = a way that people exchange goods and services by
means of directly reciprocated transfers (unlike gifts), voluntarily
entered into for mutual benefit (unlike theft, taxation), that is
often impersonal (unlike transfers among friends, family)
 Absolute/Comparative advantage

• Who has absolute advantage?

• Who has comparative advantage?

• How could that be illustrated?

 Absolute/Comparative advantage

• Who has absolute advantage?

• Who has comparative advantage?

• How could that be illustrated?

 Absolute/Comparative advantage

Note that if you were to draw a “production frontier” in apples –

wheat space, then Greta’s production frontier would be located
above Carlos’s. Greta has an absolute advantage in the
production of both crops.
 Absolute/Comparative advantage

• Who has absolute advantage?

• Who has comparative advantage?

• How could that be illustrated?

 Comparative advantage

• Greta has a comparative advantage in wheat

• (She has the lowest opp cost/is least disadvantaged in producing wheat: 10 tonnes of wheat cost her? Him?)

• Carlos has a comparative advantage in apples

• (He has the lowest opp cost/is least disadvantaged in producing apples: 250 apples cost him? Her?)

• The different opportunity costs/comparative advantages

are reflected in the slope of the “production frontiers”
• (not their position in apple – wheat space)
 Comparative advantage
• All producers can benefit by specializing and trading goods,
even when this means that one producer specializes in a good
that another could produce at lower cost.

• Markets contribute to increasing the productivity of labour by

allowing people to specialize.
Comparative advantage (Core Econ example)
 The gains from specialization
• Specialization increases productivity of labour because we
become better at producing things when we each focus on a
limited range of activities. Me and the car mechanic.
• learning by doing
• taking advantage of natural differences in skill and talent
• economies of scale

• People (and in effect countries) can only specialize if they

have a way to acquire the other goods they need. In a
capitalist society, this is done via markets.
 How good a model?
To create an effective model we need to distinguish between

• the essential features of the economy that are relevant to

the question we want to answer, which should be included in
the model
• unimportant details that can be ignored

Models necessarily omit many details. This is their feature,

not a bug.
Recall the globe and google map examples in the ICL materials.
 Building models
1. Capture the elements of the economy that we think matter for our
question
2. Describe how agents act
3. Describe how agents interact with each other and the elements
of the model
4. Determine the outcomes of these actions (an equilibrium)
5. Study what happens when conditions change

• Equilibrium of a model = situation that is self-perpetuating.

Something of interest does not change unless an external force is
introduced that alters the model's description of the situation.
 What is a good 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 useful: We can use it to find ways to improve how the

economy works
 What is a good model?
• It is clear: it helps us better understand something important
=> Here the idea of comparative advantage and specialization!
• It predicts accurately: its predictions are consistent with
evidence
=> Here who specializes in what!
• It improves communication: it helps us to understand what
we agree (and disagree) about

• It is useful: We can use it to find ways to improve how the

economy works
 On with the show: decision-making in markets!
• Consumer demand => Market demand
• Firm supply => Market supply in competitive markets,
entry and exit
• Competitive market equilibrium

• The following slides draw heavily on the ICL materials for this
week. In a sense they are a review of what we cover in the
ICL. If you have trouble following, then you should take it as a
signal that you did not study the ICL materials well enough!
Consumer demand (Joe’s for slices of banana bread)
Market demand (Joe’s and Sara’s … )
The responsiveness of market demand
The responsiveness of market demand
“Movement on” vs “shift of” market demand
• To discuss elasticity of a demand
curve we analyze how we move on
it.
• To discuss shifts of a demand curve
we look at shift parameters such as
“income”, “cross-price effects”, or
“preferences”, etc. See ICL
materials …
• Top graph shows normal good
• Bottom graph shows inferior good
Firm supply (Jasmine’s for slices of banana bread)
Firm supply
Market supply (Jasmine’s and Rafael’s … )
“Movement on” vs “shift of” market supply
• To discuss shifts of a supply curve
we look at shift parameters such as
“technology”, “input prices”, or
“seller’s expectation”, etc. See ICL
materials …
• Top graph shows downward shift
• Bottom graph shows upward shift

• To discuss elasticity of a supply

curve we analyze how we move on
it. (following slides)
The responsiveness of market supply
The responsiveness of market supply
The responsiveness of market supply, continued
The responsiveness of market supply, continued
Entry and exit, on the firm level
Exit and entry, on the firm level
Equilibrium, on the firm level
How to determine market equilibrium?
• Pick a price above the
intersection of D and S =>
Excess-Supply pushes price
down
• Pick a price below the
intersection of D and S =>
Excess-Demand pushes price up
How to determine market equilibrium? There you are!
 What happens if something changes?
• What happens if, for example, demand shifts out?
• What happens if it shifts in?
• What happens if, for example, supply shifts down?
• What happens if it shifts up?
• What happens if demand shifts out and supply shift down?
• What happens if demand shifts out and supply shifts up?

• Convince yourself by drawing graphs on which you shift D & S!

Tutorials this week
• You will get more hands-on practice using the
market analysis tools from this week:

• Decision Making
• Equilibrium Analysis
• Practice opportunity cost and comparative
advantage.
Next week
We focus on

• Market power and imperfect competition

• Surplus measure and welfare
Thank you!

If you have any questions about

this lecture, please post it on
Moodle.

The lecture recording will be made

available in Moodle.

Moodle course site:

https://moodle.telt.unsw.edu.au/course/view.php?id=60102

Course email:
COMM1100@unsw.edu.au