Samenvatting Managerial Economics

chapter 1. introduction to managerial scotchs 1. what is managerial economics? managerial economics = the science of linealing scarce resources to manage force playively and(prenominal) necessarily to understand how they ro use influence the pick up through scathe and publicise, what is the best transcriptional architecture and how to compete differences among bracing and darkened economy * Ne devilrk effects in remove = the earn provided to to apiece bingle habituater depends on the constitutional number of variant substance abusers * Scalability = the degree to which the denture and scope of scam letter basin be en pear-shapedd with come forward a equivalent affix in hails Public good = wizard mortals economic consumption does non reduce the touchst nonp beil available to peeled(prenominal)wises Branches managerial economics * Competitive food securities industrys * foodstuff violence * liberal trades 2. preliminaries scope (omvang ) Microeconomics = the regard of man-to-man economic behavior where resources ar embodyly how consumers respond to tacks in tolls and income, Managerial economics to a greater boundary limited scope = it is the application of microeconomics to managerial issues Macroeconomics = focuses on aggregate economic inconsistents grapples economic aggregates straighta personal manner rather than as the aggregation of individual(a) consumers and straines methodology Fundamental premise = individuals sh ar uncouth motivations that lead them to be contain establishmentatic whatso individually in making economic excerptions a person who faces the equivalent choices at 2 different cartridge holder urinate be everyplacehear in the resembling way at both magazine it is systematic so it enkindle be studied Economic vex = a concise description of behavior and outcomes = abstr execution Models are constructed by inductive origining afterwards, the model should be t ested arginal counter transgress follow bare(a) value = the veer in the metamorphoseable associated with a social social unit of measurement of mensu balancenment emergence in a number unmatched wood Average value = summarize value of the varying divided by the marrow mensuration of a driver relation betwixt the border berth and nub cook depends on whether the just value is decreasing, unceasing or increasing with respect to the driver Stocks and flows Stock = amount of money at a specific point in meter Flow = the lurch in a stock both over almost(a) degree of period musical rhythmd in units per magazine period other things relate = an approach to simplify the problem by analyzing distri un slightively qualify sepa markly, holding other things fitting . timing cardinal types of models * quiet models = describe behavior at a single point of conviction, handle diversitys in the sequences of actions and payments model of competitive tr ades, analysis of governingal architecture * driving models = focus on the timing and sequence of actions and payments = receipts and expenses often find at different times synthesising Investments = using resources at nearly times in order to receive profits at other times displace future values to that they displace be compared with the devote Net present value the sum of the discounted values of a series of inflows and outflows over time = represents the received valuation of a flow of dollars time Internal crop of return = alternative for the utmost present value without using the discount rate 4. organization organizational boundaries Vertical boundaries = delineates activities finishr to or that from the end user Horizontal boundaries = defined by its outdo and scope of consummations * Scale = rate of convergenceion or delivery of a good or work * Scope = refers to the range of different facts bring forthd or delivered individual behavior communication c hanneles are managed by individuals and their stakes whitethorn diverge from those of the organization managers are subject to bounded rationality Standard assumption = bulk make closings ration eithery = individuals choose the alternative that gives them the greatest difference in the midst of value and terms their behavior get out follow some sure patterns based on what they judge to be in their best interest People do non end littlely be piddle ration bothy reason bounded rationality = people have limited cognitive bilities and bear non fully forge self-control = people adopt simplified rules for conclusiveness-making * Separate account statement for different categories of advances and follow * Lack self-control = addictive behavior and difficultness postponing immediate gratification for longer-term put ons. * More in the raw to loss than to gain = encounter averse * Decisions may depend on how choices are framed devil implications * Individuals go away be comparatively sluggish in responding to channels in condescension and economic conditions * Role for managerial economics is blown-upr . marts food grocery store = consists of the vendees and venders that hap with one a nonher for voluntary ex pitch not limited to any physical structure of deducticular location * Markets for consumer harvest-times = vendees are households and venders are argumentation organizationes * Markets for industrial cast ups = dealers and deceiveers are lineagees * Markets for human resources = barter forrs are businesses and traffickers are households Industry = businesses engaged in the doing of delivery of the equal or similar serving points competitive foodstuffplaces = groceryplaces with some purchasers and many dispenseers Buyers provide the strike and traffickers provide the come forth regard- yield model = describes the systematic effect of salmagundis in values and other economic un mark offtleds on su bverters and vendors describes the interaction of these choices mart place Key variables * be * Scale of operations * Input mix = obdurate by grocery store forces Market power = ability of a buyer or trafficker to influence securities industry conditions A business with marketplace power must(prenominal)(prenominal) determine its opiniontal boundaries = depends on how its tolls modify with the overcome and scope of operations Four key tools in managing invite 1. Price 2. consultising 3.Policy toward competitors 4. R&D expense Im better markets Imperfect Market = when one society directly conveys a benefit or bell to others and where one party has better k in a flashledge than others managers need to turn back down the imperfection 6. global integration Price in one local anesthetic anaesthetic market provide be independent of greet in other local markets some markets are global because the approachs of communication and trade are comparatively low = t he prince in one place go away trigger off together with the charges elsewhere whether a market is local or global, resembling managerial economics principles ommunications appeal and trade = with developments in technology and deregulating Transport * air transport liberalization * containerization of surface transport. Telecommunications * de-regulation. * scale economies in bandwidth. Growth of cross-border trade and investment * falling trade barriers. * falling pecuniary barriers. * falling communications court managers have to pay increasing solicitude to markets in other places outsoarcing = the purchase of service or supplies from remote sources external sources could be within the same country or foreign E-commerce Limitations * Payments system Trade barriers * Shipment bells part 1 competitive markets chapter 2. consume 2. individual train Individual postulate slip = a interpret that shows the make sense that the buyer leave behind purchase at any feasible put up face = other things sufficient, how many would you buy at a worth of ? important to keep other things equal thither the decision may depend on other parts * Vertical axis is the damage * Horizontal axis is the sum Two enamors * For either assertable expense, essential bend shows the amount claimed * For to distri only ifively one unit of item, pauperism geld shows the utmost set that the buyer is pull up stakesing to pay list at a commence bell, buyers are leave aloneing to buy a larger amount of money bare(a) benefit = the benefit provided by an spare unit of the item Diminishing peripheral benefit = resolvely additional unit of consumption or usance provides less benefit than the preceding unit the mo solveary value that an individual is pass oning to pay leave behind decrease with the step purchased likeences Two implications * The pack curve impart kind with salmagundis in the consumers preferences * variant consume rs may have different preferences and hence different learn curves 3. emand and income requirement curve does not explicitly display the effect of changes in income and other factors that affect contend income changes = effect of a change in income on the regard curve is very different from that of a change in footing if income vapidtens = make curve faux pass to the left * tack in determine = movement along the need curve * Change in income or any factor other than the determine = rouse in the correct film curve normal vis-a-vis inferior mathematical produces Normal harvest-feast = positively connect to changes in the buyers income Inferior harvest-festival negatively related to changes in the buyers income read falls as the buyers income increases Broad categories of products = tend to be normal concomitant products within the categories = may be inferior 4. other factors in convey = outlays of related products, denote, durability, season, weather and loc ation complements and substitutes Complements = if an increase in the monetary value of one causes the request for the other to fall Substitutes = if an increase in the expense of one causes the need for the other to increase trans fig to the left * emergence in the impairment of a complement * light upon in the toll of a substitute Shift to the right * Increase in the bell of a substitute * Fall in the bell of a complement publicize Informative advertising = communicates information to potential buyers and sellers Persuasive advertising = aims to influence consumer choice An increase in advertising white plague impart increase deal each additional dollar spent on advertising has a relatively slenderer effect on hire = diminishing bare(a) productEffect of advertising on inquire depends on the medium durable goods = provide a stream of services over an extended period of time buyers have discretion over the timing of purchase tether world-shattering factors for demand 1. Expectations nigh future costs and incomes 2. Interest rates = many buyers need to finance their purchase of durable goods if interest rates are low the demand for durables entrust be high 3. Price of used models = substitutes of a freshly model 5. market demand Market demand curve graph that shows the beat that all buyers will purchase at every possible charge = analysis is essentially similar to that for an individual demand curve construction = interview all the potential consumers and ask each person the quantity that he er she would buy at every possible legal injury = horizontal summation of the individual demand curves = slopes downwardly since the individual demand curves slope downwards other factors = buyers income, price of related products, advertising changes in these factors will rouse the entire market demand curveTwo ways of measuring income of country * The gross issue product (GNP) = gross domestic product + net income from foreign sources * The gross domestic product (GDP) = nib the total amount produced in a country for a given class Macro factors * Income = average, distri justion * Demographic = population, age structure, urban-rural * Cultural-social income distribution = the to a greater extent than singular the distribution of income, the to a greater extent important it is to consider the actual distribution of in income and not merely the average income when estimating the market demand 6. buyer waste benefit fringy benefit maximum amount of money that the buyer is willing to pay for the unit Total benefit = benefit yielded by all the units that the buyer purchases benefit vias-a-vis price Buyer waste = difference amidst a buyers total benefit from some quantity of purchase and the actual expenditure a buyer must get some superabundance, other than he or she will not buy = maximum that a seller croup charge is the buyers total benefit price changes Gains from a pricecut * Lower price on the quantity that she would have purchased at the original price = downstairs fringy units She can buy overmuch = borderline units extent depends on the buyers response to the price pickpocket-off = the greater the increase in purchase, the larger the buyers gain from the price reduction = when you have to calculate how much you gain from a price cut, always side at the demand curve and see how much you buy at the old price and how much at the parvenu price and calculate the buyers surplus package deals and two-part set Package deals = charge buyer just a little less than her/his total benefit = draw buyer with almost energy surplusTwo-art price = determine scheme comprising a fixed payment and a charge based on usage = enables to soak up most of the consumers buyer surplus Market buyer surplus = sum of individual buyer surpluses 7. business demand excitants Businesses do not purchase goods and services for their own sake use them as inputs in the outturn of other goods and serv ices = use inputs to produce getups for sale to consumers or other businesses * finished/semi-finished components . * raw materials and energy. * labor and other services. bang-up. Demand Demand for inputs depend on * quantity of final output = arouse of the entire demand curve * prices of complements or substitutes in ware Marginal benefit = the increase in valuate arising from an additional unit of the input diminishing bare(a) benefit = downward sloping demand curve for inputs chapter 3. childs play 1. introduction Elesticity of demand = measures the responsiveness of demand to changes in an underlying factor (price, income, advertising) Own-price expansibleity of demand measures the responsiveness of the quantity demanded to changes in the price of the item 2. own-price breeze = plowshare by which the quantity demanded will change if the price of the item rises by 1% Percentage change in quantity demanded Percentage change in price construction Two ways of deriving * arc approach = we collect records of a price change and the corresponding change in quantity demanded own-price livelyity as the ratio of the symmetrical change in quantity demanded to the proportionate change in price can also be calculate by changing p0 by the average price ((old price + new price)/2) and by changing q0 by the average quantity ((old quantity + new quantity)/2) * point approach = can be derived from the coefficient of price in the equation = calculates the flexibleity at a specific point on the demand curve arc approach tractileity between two points properties Characteristics * Its a negative number * A pure number, independent of units of measure * Ranges from 0 to negative infinity Price elastic if a 1% increase in price leads to much than a 1% fail in quantity demand = if a price increase causes a pro rata larger drop in quantity demanded Price dead = if a 1% price increase causes less than 1% drop in quantity demand intuitive factors Availability of direct or validatory substitutes = the fewer substitutes that are available, the less elastic will be the demand Demand for a product syndicate will be relatively less elastic than demand for specific products within the category = at that place are fewer substitutes for the category than for specific products Buyers prior commitments Learning * Complementary purchases (spare parts, upgrades, ) * Taste = demand less elastic utilitys/ approachs of economizing = buyers have limited time to spend on prying for better prices they focus attention on items that account for relatively larger expenditures separation of buyer and payee elasticity and slope Own price elasticity = describes the shape of only one portion of the demand curve a change in price, by moving from one part of a demand curve to another(prenominal) part, may lead to a change in own-price elasticity Straight line demand curve demand amazes more elastic at higher(prenominal) prices incase of other shapes, dema nd may become less elastic at higher prices steepish demand curve means demand less elastic = but elasticity is not the same as the slope slope girdle the same, the own-price elasticity varies throughout the length causes by the changes in price and quantity Own-price elasticity can also vary with changes in any of the other factors that affect demand = in that case, demand curve will shift own-price elasticity may also change 3. forecasting quantity demanded and expenditure expenditure change in price will affect expenditure through the price itself as well as through the related effect on quantity demanded Change in quantity demanded = price elasticity x change in price If demand elastic, price increase leads to * proportionately greater reduction in purchases. * lower expenditure. If demand inflexible, price increase leads to * proportionately smaller reduction in purchases. * higher expenditure. accuracy Discrepancy = the own-price elasticity may vary along a demand curve the forecast using the own-price elasticity will not be as precise as a forecast directly from the demand curve . other elasticities income elasticity = measures the sensitivity of demand to changes in buyers income = fate by which the demand will change if the buyers income rises by 1 % Percentage change in demand percentage change in income = varies with changes in the price and any other factor that affects demand * Depending on whether the product is normal or inferior, income elasticity can be positive or negative * Demand for necessities tends to be relatively less income elastic than the demand for discretionary items cross-price elasticity measures the sensitivity of demand to changes in the prices of related products = percentage by which the demand will change if the price of the other item rises by 1%, other things equal Substitutes = an increase in the price of one will increase the demand for the other = cross-price elasticity positive Complements = an increase in the price of one will reduce the demand for the other = cross-price elasticity negative advertising elasticity measures the sensitivity of demand to changes in the sellers advertising expenditure = percentage by which the demand will change if the sellers advertising expenditure rises by 1%, other things equal price of the item must prevail unchanged has a much stronger effect on the gross taxation of an individual seller than on the market demand = advertising elasticity of the demand faced by an individual seller tends to be larger than the advertising elasticity of the market demand forecasting the effects of multiple factorsOnly way to discern the net effect of factors pushing in different directions = use the elasticities with respect to each of the variables Percentage change in demand collectable to changes in multiple factors is the sum of the percentage changes due to each elucidate factor 5. conformment time The short function = a time horizon within which a buyer cann ot adjust at least(prenominal) one item of consumption or usage The long fit in = a time horizon long enough for buyers to adjust all items of consumption of usage nondurables the longer the time that buyers have to adjust, the bigger will be the response to a price change demand for much(prenominal)(prenominal) items will be more elastic in the long stock than in the short hap Alcohol and tabacco = demand relatively inelastic discouraging new people from taking up smoking and alcoholism = demand relatively more elastic in the long associate durables = a countervailing effect leads demand to be relatively more elastic in the short authorise especially strong for changes in income = drop in income will cause demand to fall more sharply in the short run than in the long runDifference between short- and long-run elasticities = depends on a balance between the need for time to adjust and the replacement frequency effect 6. estimating elasticities entropy Two sources of data * Records of pas experiences * Surveys and experiments specifically designed to discover buyers preferences test market Collection in two ways * Focus on a particular theme of buyers and observe how their demand changes as the factors affecting demand vary over time = time series Compare the quantities purchased in markets with different values of the factors affecting demand = cross section specification To obtain undefiled estimates of elasticities = specify all the factors that have a significant effect on demand specify the mathematical affinity between demand and the non- homogenized factors Dependent variable = whose changes are to be explained Independent variable = a factor affecting the dependent variable = linear equation in which the dependent variable is equal to a constant plus the dull sum of the independent variables ultiple regression = can estimate the separate effect of each independent variable on the dependent variable = aims to determine values for the c onstant and the coefficients Residual = the actual value of the dependent variable minus the predicted value Method of least squares = based on the view that positive residuals are as bad as negative residuals bandage large residuals are disproportionately bad seeks a set of estimates for the constant and the coefficients to minimize the sum of the squares of the residuals since equally large positive and negative residuals have identical squares, the method treats them identically statistical significance F statistic = measures the boilers suit significance of the independent variables assumption that in that respect are is no dealingship between the dependent variable and the set of independent variables ranges from 0 to infinity R? = uses the squared residuals to measure the extent to which the independent variables account for the play of the dependent variable ranges from 0 to 1 1 means that all the residuals are exactly 0 T-statistic = used to rate the significance o f a particular independent variable = estimated value of the coefficient divided by the archetype error ranges from negative to positive infinity P value = measures the likeliness that estimated coefficient could be the result of chance under the assumption that the true coefficient is zero = gives the probability that random sampling errors could produce a coefficient as large as found by the least-squares multiple regression model chapter 4. submit . short lives Two key decisions * Continue in operation * Rate at which to operate = depend on the length of the time horizon Short run = time horizon in which a seller cannot adjust at least one input business must work within the constraints of past commitments Long run = time horizon long enough for the seller to adjust all inputs Difference between both depends on the circumstances fixed vis-a-vis variable bes situated terms = toll of inputs that do not change with the output rate the height of the total live curve at the zero toil rate Variable approach woo of inputs that change with the return rate to distinguish between fixed and variable be, a business must analyze how each category of expense varies with changes in the scale of operation Total follow = the sum of fixed address and variable toll C = F + V Marginal follow = the change in total comprise due to the yield of an additional unit Average greet = total cost divided by the end product rate = unit cost Cq = Fq + Vq broods to fall with increases in the work rate until it reaches a minimal, thereafter it increases with the production rate the average cost is the average fixed cost plus the average variable cost if the production rate is higher the fixed cost will be spread over more units Marginal product = increase in output arising from an additional unit of an input diminishing = the average variable cost will increase with the production rate Where the average variable cost is increasing the relationship between t he average cost and the production rate depends on the balance between the declining average fixed cost and the increasing average cost Diminishing fringy product causes valuation reserveal and average cost to rise echnology Two implications * The curves will change with valuation reserves in the sellers technology * Different sellers may have different technologies and hence different cost curves 3. short-run individual grant Assumptions * wampum maximization * Business is so small relative to the market that it can sell as much as it would like at the deviation market price production rate Total tax income = price calculate by sales Marginal r notwithstandingue = the change in total tax arising from selling an additional unit To maximize derive, a business should produce at that rate where its fringy taxation equals its allowance accountal costMarginal revenue is represented by the slope of the total revenue line * Wherever the shoreal revenue exceeds the perimeter al cost, the reach can be raised by increasing production * Wherever the delimitational revenue is less than the fringy cost, Luna can raise profit by trim production break even To decide whether to continue production, the business needs to compare the profit from continuing in production with the profit of windup down Fixed cost = drop down cost = it has been committed and cannot be avoided even if the business shuts down, it must still pay the fixed cost F Business should continue production whenR V F F = R V P V/q R = p x q = short-run break even condition a business maximizes profit by producing at the rate where the marginal cost equals the price, provided that the price covers the average variable cost individual preparation curve Individual put up curve = a graph viewing the quantity that one seller will supply at every possible price for every possible price, a business should produce at the rate that balances it marginal cost with the price Slopes upwar d = if the seller is to expand production, thus it will incur a higher marginal cost Input demandChange in input price * Shift in marginal cost * Change in profit- maximising production 4. long-run individual supply = contracts start and investments wear out all inputs become avoidable long-run be = long-run average cost curve is lower and has a gentler slope in the long run, the seller has more flexibility in adjusting inputs to changes in the production rate = it can produce at a relatively lower cost than in the short run, when one or more inputs cannot be changed production rate = a rate where its marginal cost equals the price of its output reak even = in the long run, a business should continue in production if the maximum profit from continuing in production is at least as large as the profit from completion down entirely be are avoidable = it the business shuts down, it will incur no be and so its profit from shutting down is nothing R C P C/q = business should co ntinue in production so long as total revenue covers total cost individual supply curve = that part of its long-run marginal cost curve, which lies above its long-run average cost curve Two views * For every possible price, it shows the production rate For each unit of item, it shows the minimum price that the seller is willing to accept 5. market supply Market supply curve = a graph showing the quantity that the market will supply at every possible price = sum of the quantities supplied by each individual seller short run Market supply curve = begins with the seller that has the lowest average variable cost Change in an input price will affect the sellers marginal cost at all production levels shift the entire market supply curve * Increase in price of an input will shift the market supply up * Reduction in price of an input will shift the market supply down long run every business will have completely flexibility in deciding on inputs and production freedom of entry and break d own is the key difference between the short run and long run traffickers that cannot cover their total be will leave the industry until all the remaining sellers break even an industry where businesses van make profits will attract new entrants = market supply will rise and pushes down the market price hence the profit will drop Quantity supplied will adjust in two ways when theres a change in price * All actual sellers will adjust their quantities supplied along their individual supply curves * Some sellers may place or leave the market Graph = slope is more gentler and may be flat 6. seller surplus price vis-a-vis marginal cost Seller surplus difference between a sellers revenue from some quantity of production and the minimum amount necessary to set about the seller to produce that quantity short-run seller surplus can also be defined as the difference between the sellers revenue and the variable cost Short-run seller surplus = total revenue less variable cost Long-run sel ler surplus = total revenue less total cost buy = a buyer can apply the concept of seller surplus to reduce the cost of its purchases market seller surplus = sum of the individual seller surpluses = difference between the market revenue from some production rate and the minimum amount necessary for the market to produce that quantity 7. elasticity of supply measures the responsiveness of supply to changes in underlying factors such as the price of the item and inputs price elasticity = measures the responsiveness of the quantity supplied to changes in the price of the item = percentage by which the quantity supplied will change if the price of the item rises by 1%, other things equal Percentage change in quantity supplied Percentage change in price properties * Pure number * Positive number intuitive factors splanchnic factors * Capacity utilization a seller that has consiverable pointless capacity will step up production in response to even a small increase in price = individua l supply will be relatively elastic * Adjustment time long-run supply is relatively more elastic than the short-run supply chapter 5. competitive markets 2. perfect arguing Five conditions 1. The product is homogeneous 2. thither are many buyers, each of whom purchases a quantity that is small relative to the market 3. There many sellers, each of whom supplies a quantity that is small relative to the market 4. New buyers and sellers can enter freely, and existing buyers and sellers can exit freely 5. All buyers and sellers have symmetric information about market conditions homogeneous product = the product is always the same competition is stronger many small buyers = no buyer can get a lower price than others all buyers face the same price all buyers compete on the same level playing field When some buyers have market power it is not possible to construct a market demand curve many small sellers = no seller has market power no seller can get a higher price than other free entry and exit = no technological, legal or regulatory barriers constrain entry or exit the market price cannot stay above a sellers average cost for very long degree of competition also depends on barriers to exit = it must consider the exit cost when deciding whether to enter the market symmetric information = no seller can enjoy the right of secret information 3. market correspondence the price at which the quantity demanded equals the quantity supplied when market out of offset, market forces pushes price towards chemical chemical equilibrium demand and supply At the market equilibrium, there is no tendency for price, purchases or sales to change excess supply non in equilibrium = market price will tend to change in such a way as to restore equilibrium Excess supply = the amount by which the quantity supplied exceeds the quantity demanded providers would compete to clear their unembellished capacity and the market price would drop back toward the equilibrium excess demand = the amount by which the quantity demanded exceeds the quantity supplied when the price is infra the equilibrium level buyers would compete for the limited capacity significance of equilibrium Two reasons * If a market is not in equilibrium, either buyers or sellers will push the market toward equilibrium * By study equilibria we can address a wide range of questions when prices are quite flexible, the market will adjust to the new equilibrium fairly quickly, so comparing equilibria is a fairly accurate method of analysis Neither buyers nor sellers may face rationing 4. supply shift equilibrium change When price of input falls entire supply curve shifts down = at every possible sellers want to supply more price elasticitiesDownward or upward shift in the supply curve will change the equilibrium price by no more than the amount of the supply shift change in equilibrium price depends on the price elasticities of demand and supply Inelastic demand = buyers are completely in raw t o the price when supply curve shifts, the buyers do not change their behavior = they continue to purchase exactly the same quantity Elastic demand = buyers are extremely sensitive to price equilibrium price does not change at all If the demand is more elastic then the change in the equilibrium price result from a shift in supply will be smaller Inelastic supply = sellers are completely insensitive to the price if their costs change they will not change the quantity supplied Elastic supply if the cost of an input changes, the marginal cost changes by the same amount at all production levels super C misconception = if sellers costs fall by some amount, then the market price will fall by the same amount Overlooks the blow of * The shift in supply on buyers = if they are very sensitive to price, the shift in supply would result in no change to the equilibrium price * The price sensitivity of sellers = if sellers are insensitive to price, then the drop in cost will not induce them t o sell more Price change * Smaller if demand is more elastic than supply * Bigger if supply is more elastic than demand 5. demand shiftDemand shifts down (left) new equilibrium with lower price and lower quantity Demand shifts up (right) new equilibrium with higher price and higher quantity 6. adjustment time short-run equilibrium = point where its short-run marginal cost equals the marketprice long-run equilibrium = the point where its long-run marginal cost equals the market price demand increase Short-run equilibrium = the extent to which a seller expands its operations depends on the slope of its short-run marginal cost curve if steep then the price increase will not lead the seller to expand operations by very much Long-run equilibrium = there is enough time for all costs to become avoidable, for new sellers to enter the market and for existing sellers to leaveThe increase in demand raises the market price and hence each sellers profit = will attract new sellers to enter the market Although the price is higher than in the original equilibrium, higher input prices result in higher marginal and average cost curves in the new long-run equilibrium, each individual seller just breaks even demand reduction Extent of cutback depends on two factors * Extent of drop costs = in an industry involving meaning(a) sink costs, the reduction in demand will translate into a relatively large drop in price and a small reduction in quantity * Slope of the sellers short-run marginal cost curve in the new long-run equilibrium there will be a smaller number of sellers and each will exactly break even with average total costs equal to the market price price and quantity over time Two widely distributed points * In response to shifts in demand = market price will be more volatile in the short run than the long run * In response to shifts in demand = there is a greater change in the market quantity over the long run than in the hort run In industries with meaty change pos ture costs the adjustment of production will be concentrated in the long run In industries where costs are minor the adjustment to shifts in demand will be relatively smoother the market price will be relatively less volatile chapter 6. conomic readiness 2. conditions for economic efficiency Economically efficient = if no reallocation of resources can make one person better off without making another person worse off persons may be human beingnesss or businesses sufficient conditions Three sufficient conditions based on users benefits and suppliers costs 1. All users achieve the same marginal benefit 2. All suppliers operate at the same marginal cost 3. Every users marginal benefit is equal to every suppliers marginal cost Equal marginal benefit If not equal * Provide more to user with higher marginal benefit * Take away from user with lower marginal benefit society as a undivided would be better off Equal marginal cost If not equal * Supplier with lower marginal cost should p roduce more * Supplier with higher marginal cost should produce less Marginal benefit equals marginal cost If not equal * If MO MC , produce more of the item * If MO MC, produce less of the item philosophical basis Technical efficiency = providing an item at the minimum possible cost does not imply that scarce resources are being well used The concept of economic efficiency extends beyond technological efficiency Economic efficiency assesses resource allocations in terms of each individual users military rating of the benefit subjective organization production will be efficient if all users achieve the same marginal benefit, all suppliers operate at the same marginal cost and every users marginal benefit balances every suppliers marginal cost 3. adam smiths unseeable hand Invisible hand = market price precedes buyers and sellers, acting independently and selfishly to channel scarce resources into economically efficient uses competitive market = satisfies all three requiremen ts for economic efficiency market system = an economic system in which resources are allocated through the independent decisions of buyers and sellers, guided by freely moving prices Price performs two roles * It communicates all the necessary information It provides a concrete motivator for each buyer to purchase the quantity that balances marginal benefit with the market price it provides a concrete incentive for every seller to supply the quantity that balances marginal cost with the market price 4. decentralized management internal market Transfer price = price charged for the sale of an item within an organization should set it equal to market price = by decentralizing the management is establishing an internal market that is integrated with the external market death penalty Two general rules * If there is a competitive market for the item, the conveying price should be set equal to the market price * Producing units should be allowed to sell the product outside buyers an d consuming units should be allowed to buy the product from external sources Outsoarcing = purchase of services or supplies from external sourcesAny organization that used resources or products for which there are competitive markets can apply decentralization to achieve internal economic efficiency 5 incidence = both pricing methods have exactly the same impact on the manufacturer and customer lode inclusive pricing Cost and warhead = a price that includes freight Ex-works pricing = does not include the freight cost entire supply supply curve will shift down = with ex-works demand, the buyers will now have to pay the freight cost price is lower = total price is equal if you increase the price with the freight cost Price and sales are the same whether the sellers do or do not include the freight cost in their prices incidence the change in the price for a buyer or seller resulting from a shift in demand or supply whether manufacturers set prices that do or do not include the fe ight cost, the incidence is the same = the incidence does not depend on which side initially pays the freight cost depends only on the price elasticities of demand and supply taxes = political sympathies depend on tax revenues to support public services such as national defense, some are levied on consumers, others on businesses buyers vis-a-vis sellers price Sellers price = buyers price tax Buyers price = price that buyers pay Sellers price = price that sellers receive p156 tax incidence buyers price will rise by less than the amount of the tax and the sellers price will drop by less than the amount of the tax tax is broadly speaking shared between buyers and sellers according to their relatively price elasticities * Less sensitive = will bear the relatively larger portion of the tax part II market power chapter 7. costs 2. economies of scale = analyze how costs depend on the scale or rate of production decision on scale also depends on market demand and competition Fixed cost = cost of inputs that do not change with the production rate Variable cost = cost of inputs that change with the production rate marginal and average costsMarginal cost = rate of change of the variable cost if average variable cost remains constant, then the marginal cost will be the same Economies of scale = increasing returns to scale = a business for which the average cost decreases with the scale of production marginal cost will be lower than the average cost = since the marginal unit of production costs less than the average, any increase in production will reduce the average intuitive factors Two possible sources * essential fixed inputs = at a larger scale, the cost of the fixed inputs will be spread over more units of production business with a strong element of composition, design or initiation * If the average variable cost falls with the scale of production = whether the average variable cost increases or falls depends on the particular technology of the business diseconomies of scale = a business where the average cost increases with the scale of production If * Fixed cost is not substantial * And variable cost rises more than proportionately with the scale of production strategical implications If economies of scope * Large scale * Market concentrated, few suppliers * Monopoly and oligopoly If diseconomies of scope * Small scale * Market fragmented * everlasting(a) competition 3. economies of scope if the total cost of production is lower when two products are produced together than when they are produced separately Diseconomies of scope = if the total cost of production is higher when two products are produced together joint cost = cost of inputs that do not change with the scope of production strategic implications Example telecommunication and broadcasting Produce/deliver multiple products * output mix * Brand extension Core competence = a infer expertise in the design, production and marketing of products based on roughhewn or cl osely related technologies = joint cost diseconomies of scope = if the total cost of production is higher when the two items are produced together than when they are produced separately arise where the joint costs are not significant and making one product increases the cost of making the other in the same facility 4. experience curve Accumulated experience = matters in industries characterized by relatively short production runs and a relatively substantial input of human resources As engineers and workers gain experience in production, they become more proficient individually and as a team they invent new ways to reduce cost, including better tools and more cost- rough-and-ready procedures be curve = shows how the unit cost of production falls with cumulative production over time Distinguish from economies of scope within one production period Conditions Relatively large human resources input per unit of production * Relatively small production runs 5. probability cost = it i s necessary to look beyond the conventional explanation statements Relevance = key principle = managers should consider only germane(predicate) costs and ignore others alternative courses of action = to evaluate a business conventional income statement does not present the revenues and costs of the alternative courses of action = costs are actually higher because of the hazard cost opportunity cost defined Opportunity cost = net revenue from the best alternative course of action uncovering relevant costs Two ways to uncover relevant costs experience the alternative courses of action * Use the concept of opportunity cost = both approaches lead to the same business decision Alternative courses of action and opportunity cists change with the circumstances and hence are more difficult to measure and verify opportunity cost of capital A business that is partly financed by debs will appear to be less profitable than an otherwise identical business that is completely financed by equi ty equity capital is not costless = it has an opportunity cost Economic value added = net operation profit after tax subject to adjustments for accounting conventions less a charge for the cost of capital they are less apparent to be biased in favor of capitalintensive activities A complete measure of business e performance should take account of the opportunity cost of equity capital 6. transfer pricing Transfer price = transfer price of an internally produced input should be set equal to its marginal cost utterly competitive market Transfer price = market price full capacity = marginal cost of the input is not well defined transfer price should be set equal to the opportunity cost of the input which is the marginal benefit that the input provides to the current user = compare marginal benefit across internal users 7. sunk costs a cost that has been committed and so cannot be avoided not relevant to business decisions alternative courses of action Depend on * former commitmen ts * supply horizon Continue Cancel Cont. margin $280,000 $0 Advert authorization $50,000 $50,000 Magazine $250,000 $50,000 Profit ($20,000) ($100,000) Continue Cont. margin $280,000 Advert agency $0 Magazine $200,000 Profit $80,000 = only avoidable costs strategic implications = managers should ignore sunk costs and consider only avoidable costs sunk costs are not relevant for pricing, investment, or any other business decision Two ways of dealing with sunk costs Explicitly consider the alternative courses of action * Remove all sunk costs from the income statement = both approaches lead to the same business decision it is easier to consider the alternative courses of action explicitly when multiple alternatives commitments and the proviso horizon To identify sunk costs consider * Past commitments * Planning horizon The longer the planning horizon, the more time there will be for past commitments to unwind and hence the greater will be managements freedo m of action Short-run planning horizon = some sunk costs Long-run horizon = no sunk cost Sunk vis-a-vis fixed costs Fixed cost two different senses A cost that cannot be avoided once incurred * A cost of inputs that do not change with the production rate = two types of costs have very different implications for business decisions Not all sunk costs are fixed = cost op public service employees is sunk, once they secure tenure. However, government could have hired only impermanent workers (no sunk costs) 8. statistical methods multipple regression = to investigate the extent of fixed costs and economies of scale forecasting = to forecast the dependent variable when the independent variables take different values Other applications Investigate the presence of joint costs across two products hapter 8. Monopoly 1. Introduction Monopoly = if there is only one seller in a market Monopsony = if there is only one buyer in a market 2. sources of market power = the barriers that deter or prev ent entry by other competing sellers/buyers monopoly Unique resource = penetration to unique physical, natural or human resources Intellectual plaza = property over inventions or expressions Patent = gives the owner an exclusive right to the invention for a specified period of time Copyright = establishes property in published expressions, including computer software and engineering drawings Economies of scale and scope intersection point differentiation differentiating itself from competitors through product design, distribution, and advertising and promotion Regulation = government may decide to award an exclusive franchise to one provider government hopes to avoid duplication and reduce the cost of the service monopsy = same factors as a monopoly Additional reason for presence = existence of a monopoly a seller that has a monopoly over some good or service is also likely to have market power over the inputs into that item 3. Monopoly pricing Monopoly has to consider how its sales will affect the market price Given the market demand curve a monopoly can Set the price and let the market determine how much it will buy * Decide how much to sell and let he market determine the price at which it is willing to buy that quantity Monopoly is choosing a combination of price and sales off the demand curve a monopoly can set either the price or sales but not both revenue Inframarginal units = those other than the marginal unit Marginal revenue from selling an additional unit will be less than the price of that unit = marginal revenue is the price of the marginal unit minus the loss of revenue on the inframarginal units difference between the price and the marginal revenue depends on the price elasticity * Demand elastic = seller need not reduce the price very much to increase sales marginal revenue will be close to the price * Demand inelastic seller must reduce the price substantially to increase sales marginal revenue will be much lower than price Marginal revenue can be negative = if the loss of revenue on the inframarginal units exceeds the fain on the marginal unit Profit maximizing price Profit maximizing scale of operation = the scale at which the marginal revenue balances the marginal cost Contribution margin = total revenue less the variable cost a seller maximizes profit by operating at a scale where the sale of an additional unit will result in no change to the contribution margin economic inefficiency Marginal benefit exceeds the marginal cost 4. demand and cost changes Change in demand * New marginal revenue * Original marginal cost = new profit-maximizing sales and price arginal cost change = change in price is less than change in marginal cost When there is a change in either demand or cost, the extent to which a monopoly should adjust its price depends on the shapes of both it marginal revenue and marginal cost curves it should adjust the price until its marginal revenue equals its marginal cost fixed cost change = pro fit-maximizing price and scale do not depend in any way on the fixed cost changes in the fixed cost will not affect the marginal cost curve If the fixed cost is so large that the total cost exceeds total revenue, then the monopoly will prefer to shut down 5. advertising Promotion the set of marketing activities that a business undertakes to communicate with its customers and sell its products advertising, sales promotion and public relations benefit of advertising Advertising can cause * Shifting out the demand curve * Demand to be less elastic Benefit of advertising = change in the contribution margin Net benefit = the change in the contribution margin less the advertising expenditure advertise up to the point that the increase in contribution margin from an additional dollar of advertising is exactly 1 $ = more sequester to consider the effect of advertising on the contribution margin generated by the product dvertising-sales ratio incremental margin = price less the marginal cost = increase in the contribution margin from selling an additional unit, holding the price constant Incremental marginal percentage = ratio of the price less the marginal cost to the price measures the production of benefit by each dollar of advertising Advertising-sales ratio = incremental margin multiplied by the advertising elasticity of demand = says how much of the revenue should be invested in advertising 6. research and development = principles are the same as for advertising and promotion Benefit * Shifting out the demand curve * Causing it to be less elasticNet benefit from R&D = change in the contribution margin less the R&D expenditure R&D-sales ratio = incremental margin percentage multiplied by the R&D elasticity of demand project evaluation = decisions on individual R&D projects should account for the timing of costs and benefits p 212 7. Market structure effects of competition General points * A monopoly restricts production below the competitive level and it ca n set a relatively higher price extracting larger profit * Profit of a monopoly exceeds what would be the combined profit of all the sellers if the same market were perfectly competitive potential competition abruptly contestable a market in which sellers can entry and exit at no cost monopoly cannot raise price substantially above its long-run average cost depends on the extent of barriers to entry and exit lerner index = incremental margin percentage can be used to compare the degree of monopoly power in markets with different prices captures the impact of potential competition (P MC) / P Perfectly competitive market = lerner index equals 0 Monopoly = bigger than 0 chore = it will not detect the power that a monopoly does not exercise 8. monopsy = buyer with market power restricts purchases to depress the price Trades off * Marginal expenditure * Marginal benefit Marginal expenditure = change in expenditure resulting from an increase in purchases by one unit maximizing net benefit a monopsy will maximize its net benefit by purchasing the quantity at which its marginal benefit equals its marginal expenditure A monopsony restricts purchases to get a lower price and increase its net benefit above the competitive level chapter 9. Pricing 2. unvaried pricing = policies where the seller charges the same price for every unit of the product price elasticity = percentage by which the quantity demanded will change if the price of the item rises by 1% Demand inelastic sales fall less than proportionately with the increase in price = total revenue will increase profit maximizing price Incremental margin percentage = 1/price elasticity of demand demand and cost changesPricing rule shows how a seller should adjust its price when there are changes in the price elasticity of demand or marginal cost a seller should not necessarily adjust the price by the same amount as a change in marginal cost common misconceptions * Contribution margin percentage = revenue less variable cost divided by revenue accounting systems often assume that costs are proportional = marginal cost is the same as the average variable cost = contribution margin percentage equals the incremental margin percentage * the belief that the profit maximizing price depends only on the elasticity = ignores costs * set the price by marking up average cost problems * in economies of scale, the average cost depends on the production scale the need of an assumption about the scale sales and production scale depend on the price * it gives no guidance as to the appropriate mark-up on average cost Shortcomings * leaves buyers with a lot of buyers surplus * does not sell to every potential buyer 3. complete price favouritism price dissimilitude = selling down the market demand curve = pricing policy under which a seller sets prices to earn different incremental margins on heterogeneous units of the same or a similar product Complete price discrimination = a pricing policy where the seller prices each unit at the buyers benefit and sells a quantity such that the marginal benefit equals the marginal cost it charges every buyer the maximum that he or she is willing to pay for each unit comparison with changeless pricing resolves the two shortcomings of uniform pricing * no buyers surplus * economically efficient quantity information = to implement complete price discrimination, the seller must get laid each potential buyers individual demand curve not enough to know the market demand curve or the price elasticity of the individual demand curves 4. direct instalment discrimination Segment = significant cohesive group of buyers within a large market homogenous segments Direct segment discrimination = the policy of mise en scene different incremental margins to each distinctive segment heterogeneous segments Not enough information * apply uniform pricing within each segment prices are such that the incremental margin percentage for each segment equals the rec iprocal of the absolute value of the segments price elasticity of demand * apply validatory segment discrimination within each segment implementation Conditions * To implement direct segment discrimination, the seller must identify and be able to use some identifiable and fixed buyer characteristic that segments the market otherwise buyer world power switch segments * Seller must be able to prevent buyers from reselling the product among themselves = price discrimination is relatively more widespread in services than goods and is especially common in personal services Policy of direct segment discrimination prices should be set to derive a relatively lower incremental margin percentage from the segment with the more elastic demand and a relatively higher incremental margin percentage from the segment with the less elastic demand 5. location Seller can divide on the basis of the buyers location on two ways * Free on board (FOB) = a common price to all buyers that does not include delivery the differences among the prices at various locations are exactly the differences in the costs of delivery to those locations * Ignores the differences between the price elasticities of demand in the various markets * Cost including freight = delivered pricing = set prices that include delivery the difference in the prices between the two market will simply be the result of the different incremental margin percentage and the different marginal costs of supplying the two markets A lower margin does not necessarily mean a lower price because there is a transportation cost restricitng resale = if the difference between the prices of a product between two markets exceeds the transportation cost, consumers might buy the item in one market and ship it to the other aged market = parallel importing 6. indirect segment discrimination = when seller may know that specific segments have different demand curves but cannot find a fixed characteristic with which to discriminate direct ly substantiative Segment discrimination policy of structuring a choice for buyers so as to earn different incremental margins from each segment voorbeeld p 244-245 implementation Two conditions * Seller must have control over some variable to which buyers in the various segments are differentially sensitive * Buyers must not be able to circumvent the discriminating variable = seller cannot prevent buyers from reselling the product 7. bundle up = combination of two or more products into one package with a single price pure bundling = a pricing policy that offers only a bundle and does not allow the alternative of buying the individual products = more profitable than uniform pricing but less than direct segment discrimination assorted bundling offers buyers a structured choice between the budle and the individual products = form of indirect segment discrimination implementation Three conditions to be effective * Where there is substantial disparity among the segments in their bene fits from the separate products * Where the benefits of the segments are negatively correlated in the sense that a product that is more safe to one segment provides relatively little benefit to another * Where the marginal cost of providing the product is low = when provision of the product involves a substantial marginal cost, a seller should consider mixed bundling 8. selecting the pricing policy Direct discrimination works through buyer attributesIndirect segment discrimination works through product attributes products under indirect discrimination may provide less benefit than those with direct segmentation indirect discrimination may involve relatively higher costs indirect discrimination relies on the various segments voluntarily identifying themselves through the structured choice cannibalization = when the sales of one product reduce the demand for another product with a higher incremental margin seller cannot discriminate directly and must rely on a structured choice o f products to discriminate indirectly but discriminating variable does not perfectly separate the buyer segmentsWays to mitigate cannibalization * Product design * By controlling accessibility chapter 10. strategic thinking 1. introduction Strategy = a plan for action in a situation where the parties actively consider the interactions with one another in making decisions Game theory = a set of ideas and principles to guide strategic thinking * Simultaneous actions = strategic form * Sequential actions = all-encompassing form 2. nash equilibrium = a framework for strategic decisions that must be taken simultaneously A strategy is dominated = if it generates worse consequences than some other strategy regardless of the other parties choice Game in strategic form a tabular representation of a strategic situation, showing one partys strategies along the rows, the other partys strategies along the