Overview of Today’s Class • 15.010 Introduction • 15.010 Class Specifics and Requirements •Markets – Market Definition – How Markets are Modeled • Review Reminder 15.010: Economic Analysis for Business Decisions • Economics is relevant for many questions facing business – What Business Are You In? – Pricing? Product Design? – Relevant Costs of Producing? – New Capacity Investment? Now or Later or Never? – Enter a New Market? – How Do You Compete? – Internal Firm Organization? 115.010: Economic Analysis for Business Decisions • Economic practice involves principles and modeling for specific answers – Mathematical models of economic behavior and interactions, for analysis and prediction – You are not here to become a professional economist • Important specializations of economics – Finance, Marketing, Strategy (market strategy and internal organization) 15.010: Economic Analysis for Business Decisions • Economic Reasoning provides Systematic Approach to Business Decisions – Foundation • Approach business questions assuming that all relevant participants are going to do the best they can. • Interactions governed by economic principles. – 1984, 2004, 2024(?) 215.010 Course Specifics - I • The big picture: a unified course – 15.010 (6 Sloan MBA/MS sections) – 15.011 (1 out-of-course section) • Lectures – Style – Class Participation • Recitations 15.010 Course Specifics - II • Tutorial hours – Purpose – Schedule (start next week; details in first recitation) – Consult any TA • Exam review sessions • Faculty office hours • Handouts in class – All on the server (soon after class) 3Course Requirements - I • Syllabus & Readings • Homework: – Full credit when turned in – Corrected to give you feedback – Suggested approach • TRY EACH YOURSELF, ALONE. See where problems arise • Discuss/clarify • WRITE-UP YOUR OWN SOLUTION – No late homework accepted! – Good advice •Don’t wait! • Don’t try for Nobel Prize in literature and graphics Course Requirements - II • Exams: Midterm, Final • Grades (6000 points total) – Homework (600 total, 100 each) – Exams (1500 midterm, 3000 final) – Class participation (900) • Diverse class & intensive course – Value of experience – Use resources provided • Language issues 4Market Which Sellers? Which Buyers? Sellers Buyers $ $ • But what is a market, really? A Place? A Product or Service? Product Product Price/Terms of Trade 5Market Definition • Key Concept: Demand Substitutability – Products or services in same market if similar in eyes of BUYERS – Existing and Potential Buyers Relevant • Other Primary Concern: Existing and Potential Sellers • Business Question Drives Specifics – Relevant Price Range – Relevant Time Frame Market Definition Current Suppliers Market Current Customers Substitute Products Potential Customers Potential Entrants 6Determinants of Demand Substitutability • Product Differentiation -- Function, Quality, Image Homogeneous Differentiated • Usage Interrelationships – Network Externalities • Information • Institutional Environment – “Rules of the Game” – How Transactions Occur Defining a Market: Some Examples • Bicycles • Drinks in the refresher course • • • • • 7Take Away Points • Economics Provides a Foundation for Business Decisions, in any World • Market Definition is Key to Pricing and Strategy • Demand Substitutability (Buyer's View) drives Market Definition 8Review Reminders • You are expected to know: – Demand and Supply – Market Equilibrium – Elasticities – Consumer and Producer Surplus – Welfare and Efficiency Applications (Quotas, etc.) – Basic Perfect Competition – Basic Monopoly For Next Time • U.K. Credit Card Industry Case: – Study the case – Prepare answers to the questions distributed