Microeconomics in Business Practice

Microeconomic models,
When GM wanted to introduce SATURN (a new brand of car) in 1991, they slogged more on
economics than manufacturing. GMs economics staff did a thorough work on predictions and
evaluation of polices. They used economic models to analyze manufacturing costs (GM had spent an
estimated $ 5 billion for SATURN); pricing mechanism, dealer services, and strategy to make the
venture a success.
Microeconomic concepts.
The finest example, where countrys policy makers and attorneys got down even to the basics of
microeconomics, is given for anti-trust suit against Microsoft in USA. In this case, economists scurried
for the definition of market to gauge the size of market of Microsoft.
Demand and supply model.
Demand and supply models are frequently used to analyze the markets such as agriculture, finance,
labor, construction, services, wholesale, and retail.
Demand and supply models are also used to analyze govts intentions (taxes, subsidies, tariffs, price
ceilings, price floors, etc.) and its likely implications on firms.
Indifference curves
It is used to find out which is the costly approach: coupon issued to employees or bonus/dividends. In
developed countries, such as USA, likely impact of taxes on retail buying and internet buying is also
assessed by firms through indifference curves.
Price elasticity of demand
It is highly useful when a firm is thinking of changing its price to maximize sales.
Income elasticity of demand
This concept helps firms to adopt right marketing strategies during recession and growth phases of a
business cycle.
Cross-price elasticity of demand
It helps firms identify the stretch (roughly) of the market of its product on the basis of
substitutes/complementary goods available.
Elasticity of supply
Firms use the concept to gauge the length of their supply period (market, period, short-run, long-run) at
different levels of prices.

Theory of production and cost

Entire business, starting from scratch, depends on theories of production and cost. Exercise done by
GM for SATURN is a burning example of this.
Perfect competition and Monopoly
Many markets can be reasonably described as competitive, such as Agriculture & commodity markets;
stock exchanges; retail and wholesale markets; building construction, etc.
Similarly, market power and sellers concentration is gauged by using the concepts drawn from
monopoly and monopolistic competition.
Even though perfect competition and monopoly are rarely observed the conclusions of these models
are considered as ideal situations and compared with reality.
First-degree or perfect price discrimination
Companies continually seek new methods to achieve near perfect (first degree) price discrimination.
Some vending machines in Japan use wireless modems to adjust their prices according to outside
temperature. In 1999, Coca Cola company started with a vending machine with a computer-chip brain
that can automatically raise drink prices (somehow matching a price which consumers are willing to
pay) in hot weather or lower prices (somehow matching consumers willingness to pay) during offhours to boost sales. Trying to match with willingness to pay is purely an economic concept.
Second-degree price discrimination
Public & private utility (such as electricity and telephone) companies charge different prices for
different blocks of units of sales.
Third-degree price discrimination
Disneyland in southern California rarely misses a chance when it comes to increasing profits
(Disneyland indeed mints money). In 1998, Disney charged most adults $ 38 to enter the park but
charged southern Californians only $ 28. This policy makes sense if visitors from far off places are
willing to pay more than locals and if Disneyland can prevent locals from selling discount tickets
(Disney managed that by checking a purchasers driving license and requiring that the tickets be used
for same day entrance) to non-locals. Imagine a person travelling from east coast wants to visit
Disneyland, so an extra $ 10 to enter makes little percentage difference in the total cost of a visit and
hence doesnt greatly affect that persons decision whether or not to go. In contrast for a local, who has
gone to Disneyland many times and for whom the entrance price is a larger share of the cost of visit, a
slightly higher price might prevent a visit.
Monopolistic Competition and Oligopoly
Appliances
The European market for washing machines, refrigerators, and other appliances has many more firms
than the US market. The 5 largest manufacturers Whirlpool, GE, Electrolux (Frigidaire), Maytag, and
Raytheon make 98% of US appliances sales, whereas the top 10 firms in Europe led by Electrolux,

Bosch-Siemens, and Whirlpool control only 72% of the market. This difference may explain why
Whirlpools American operations enjoy a profit margin (approximating Lerners Index) of 8%, while
its European division earns only 4%. This is what shows how market shares (as well as profit) are less
when a firm operates in monopolistic or oligopolistic market structure. [Note: This is not the latest data
market shares and profit margin might have changed since the time this data was collected. But the message is clear that the empirical
findings corroborate the conclusions given by microeconomics tools/frameworks. ]

Toothbrushes
Firms in oligopolistic market structure survive on heavy differentiation. For example, Oral-B
toothbrushes now have blue bristles that fade to white when its time to replace comes. Oral-B also has
ribbed thumb grips to prevent the brushes from slipping when it is wet. Johnson & Johnsons Youth
Glow model has a luminescent grip; Aquafresh flex features a built-in shock-absorber and special
handle for brushing control. Radius toothbrush offers left-hand grip. For toddlers, some toothbrushes
sing, others rattle, and some even smell like bananas. In 1999, Oral-B introduced cross-action
toothbrush, with bristles angled in opposite direction and a thick handle. We also have rounded and
curved ones to brush the most recalcitrant tooth in our mouth - some are battery operated and come
with names such as Navigator and Massager. What about Price? Well it ranges from Rs. 30 to 395 and
some top-end models even cost Rs 999. Just think how one has to stretch ones imagination to
differentiate ones product.
Petroleum Products
Branded fuel was started by BPCL 4 years back (2002) with the introduction of Speed.
OPEC is a burning example of collusive oligopoly.
Asymmetric information
Asymmetric information is clearly visible in day-to-day life. Markets, where asymmetric information
are rampant, are given below. There are handy economic tools to take care of asymmetric information.

Second-hand commodities market (manufacturing)

Hiring of employees (HR)
Insurance market (service)
Credit card market (financial service)
Brand expansion and noise (marketing)

Thus, there are wide spectrums of fields where microeconomics concepts are used in business
practices or can be used to analyse an economic phenomenon. The list of examples given above is just
indicative, not an exhaustive one.