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Part I: The Nature of Managerial Economics
How Much Is That Doggie in the Window? Setting Prices through Markets A popular children’s song asks, how much is that doggie in the window? The song’s chorus goes: How much is that doggie in the window? The one with the waggley tail. How much is that doggie in the window? I do hope that doggie’s for sale. The last line of the lyrics — “I do hope that doggie’s for sale” — is too vague. To an economist (see, economists can even ruin a children’s song), the question is not whether the doggie is for sale. Of course, it’s for sale. The question is how much does it cost. If the price is very low, customers are more likely to buy the dog, but the store does not make much profit; it may even lose money. If the doggie is too expensive, nobody will buy it. So the question is what price will lead to someone buying the doggie while the store owner makes some profit. This apparent conflict between customers wanting low prices and sellers wanting high prices is resolved in the market — or through supply and demand.
Demanding Lower Prices The relationship between how much customers must pay for an item and how much customers buy is called demand. More precisely, demand shows the relationship between a good’s price and the quantity of the good customers purchase, holding everything else constant. Wow! Holding everything else constant, even the dog’s waggley tail? Not quite, but holding things like income, customer preferences, and the price of other goods — say cats — constant. (Are cats a good?) So quite simply, demand tells you how much customers purchase at each possible price.
