Katja’s Danish Bread: Making Some Dough - An Exercise in Price, Demand, Cost, and Capacity

by: Aradhna Krishna

Publication Date: June 1, 2017
Length: 4 pages
Product ID#: 3-638-005

Core Disciplines: Economics, Marketing/Sales

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Teaching Note

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Description

Through this set of six exercises authored by Aradhna Krishna, students gain a deep understanding of the strong connection between price, demand, variable cost, and capacity.  Exercise A is given to students before class, and then Exercises B-F are handed out sequentially during class. Each successive exercise builds up slowly in complexity as more information is added to the problem being considered. Mirroring real life, not all information is presented to students immediately — students must request the information they wish and may or may not get it, just as managers face in the real world. Exercises B-F are separate documents and are included as part of the teaching note so that the instructor can reveal further information and outcomes over time.
In the exercises, students take on the role of Katja, a small business owner intending to increase the profits of her business by maximizing sales while minimizing costs.  Students work with price and demand schedules as well as fixed and variable costs as they make decisions for optimal price and capacity.

Teaching Objectives

After reading and discussing the material, students should:

  • Describe the connection between price, demand, variable cost, and capacity.
  • Define incremental fixed cost.
  • Recognize that fixed costs affect capacity decisions, which then impact prices.