100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
logo-home
Previously searched by you
Previously searched by you
logo
Managerial Economics Summary - TEW & Trading Engineer - 16/20 First Seat $8.85   Add to cart
Quickly navigate to
Preview
  2.  
  3. Katholieke Universiteit Leuven (KU Leuven)
  4.  
  5. Toegepaste Economische Wetenschappen
  6.  
  7. Managerial Economics

Summary

Managerial Economics Summary - TEW & Trading Engineer - 16/20 First Seat

4 reviews
 245 views  14 purchases
  • Course
  • Managerial Economics
  • Institution
  • Katholieke Universiteit Leuven (KU Leuven)
  • Book
  • Industrial Organization

This summary includes all curriculum from the Managerial Economics lessons, taught to the second-year students of Trade Engineer and Applied Economics (TEW) by Mattia Nardotto and Christophe Crombez. I scored a 16/20 in my first seat with this summary. This summary is based on lessons notes, comple...

[Show more]

Preview 6 out of 37  pages

Document information

  • Yes
  • August 22, 2021
  • 37
  • 2020/2021
  • Summary

Subjects

  • managerial economics
  • industrial organisation
  • managerial economics tew
  • christophe crombez
  • mattia nardotto
  • managerial economics samenvatting
  • industrial organisation samenvatting
  • managerial economics handelsingenieur

Connected book

book image

Book Title:

Author(s):

  • Edition:
  • ISBN:
  • Edition:

More summaries for

  • Industrial Organizational Psychology
  • Managerial Economics Samenvatting - Handelsingenieur & TEW - 16/20 eerste zit
  • Samenvatting Managerial Economics TEW KUL
All for this textbook (4)

Written for

  • Katholieke Universiteit Leuven (KU Leuven)
  • Toegepaste Economische Wetenschappen
  • Managerial Economics
All documents for this subject (6)

4  reviews

review-writer-avatar

By: juliehuisman2004 • 3 weeks ago

review-writer-avatar

By: matissekemp • 2 year ago

review-writer-avatar

By: Udikkevettemoeder • 2 year ago

review-writer-avatar

By: chloevanoekel • 1 year ago

Seller

avatar-seller
simkuhn

Reviews received

Content preview

MANAGERIAL‌‌ECONOMICS‌ ‌
Simon‌‌Kuhn‌‌ ‌
‌
LECTURE‌‌1:‌‌FOUNDATIONS‌ ‌
PART‌‌ONE‌ ‌
‌
WHAT‌‌IS‌‌INDUSTRIAL‌‌ORGANISATION?‌‌ ‌
Industrial‌‌Organisation‌‌i‌s‌‌a‌‌branch‌‌of‌‌economics‌‌that‌‌is‌‌concerned‌‌with‌‌the‌‌study‌‌of‌i‌mperfect‌‌
competition‌.‌‌We‌‌will‌‌look‌‌at‌‌ways‌‌for‌‌a‌‌company‌‌to‌‌escape‌‌perfect‌‌competition.‌ ‌
⇒ ‌‌through‌m ‌ arket‌‌power‌:‌ ‌
- innovation‌ ‌
- advertisement‌ ‌
- product‌‌differentiation‌ ‌
- price‌‌discrimination‌ ‌
In‌‌this‌‌course,‌‌we‌‌will‌‌use‌‌managerial‌‌economics‌‌to‌‌answer‌‌practical‌‌questions‌‌on‌‌these‌‌topics.‌ ‌
‌
HOW‌‌WE‌‌STUDY‌‌INDUSTRIAL‌‌ORGANISATION‌ ‌
We‌‌will‌‌make‌‌use‌‌of:‌ ‌
- fundamental‌‌economic‌‌principles‌‌(e.g.‌‌rational‌‌agents,‌‌optimality,...)‌ ‌
- game‌‌theory‌‌because‌‌of‌‌high‌i‌nterdependence‌b ‌ etween‌‌firms‌‌ ‌
- abstract‌‌modeling‌ ‌
‌
THE‌‌PROBLEM‌‌OF‌‌THE‌‌MANAGER‌ ‌
The‌‌Small‌‌Business‌‌Administration‌‌gives‌‌some‌‌basic‌‌guidelines‌‌on‌‌how‌‌to‌‌structure‌‌a‌‌business‌‌plan:‌ ‌
- executive‌‌summary‌‌‌→‌‌the‌‌unique‌‌selling‌‌point,‌‌what‌‌differentiates‌‌the‌‌business‌‌from‌‌others‌ ‌
- company‌‌description‌‌‌→‌‌which‌‌products‌‌and‌‌services,‌‌product‌‌differentiation,...‌ ‌
- market‌‌analysis‌‌‌→‌‌economies‌‌of‌‌scale,‌‌market‌‌concentration,‌‌sunk‌‌costs,...‌ ‌
- service‌‌or‌‌product‌‌line‌→ ‌ ‌‌explain‌‌production‌‌processes,‌‌R&D,‌‌innovation,...‌ ‌
- marketing‌‌and‌‌sales‌→ ‌ ‌‌describe‌‌the‌‌marketing‌‌strategy,‌‌price‌‌discrimination,...‌ ‌
- financial‌‌plan‌‌and‌‌funding‌‌ ‌
‌
All‌‌of‌‌these‌‌elements‌‌have‌‌to‌‌do‌‌with‌‌concepts‌‌studied‌‌in‌‌Managerial‌‌Economics‌.‌ ‌
→‌‌we‌‌will‌‌look‌‌at‌‌the‌‌economics‌‌behind‌‌these‌‌concepts‌‌within‌‌(im)perfect‌‌competition‌‌ ‌
‌in‌‌order‌‌to‌‌use‌‌them‌‌for‌‌more‌‌practical‌‌applications‌‌(e.g.‌‌a‌‌business‌‌plan)‌ ‌
‌
MARKET‌‌DEMAND‌ ‌
In‌‌Managerial‌‌Economics,‌‌we‌‌will‌‌mainly‌‌focus‌‌on‌‌firm‌‌profit-maximizing‌‌behavior‌‌and‌‌a‌‌resultant‌‌market‌‌
outcome‌‌that‌‌such‌‌behavior‌‌implies.‌ ‌
‌
Market‌‌Demand‌‌Curve‌‌d ‌ escribes‌‌the‌‌relationship‌‌between‌‌how‌‌much‌‌money‌‌(aggregated)‌‌consumers‌‌
are‌‌willing‌‌to‌‌pay‌‌per‌‌unit‌‌of‌‌the‌‌good‌‌and‌‌the‌‌quantity‌‌(aggregated)‌‌of‌‌the‌‌goods‌‌consumed.‌ ‌
→‌‌depends‌‌on:‌ ‌
- price‌ ‌
- income‌ ‌
- expectations‌‌of‌‌price‌‌movement...‌ ‌
-⇒ ‌‌Quantity = f (price, income, marketing, ...) ‌
‌
However,‌‌we‌‌will‌‌express‌‌a‌‌simplified‌‌demand‌‌curve‌‌in‌‌terms‌‌of‌‌the‌‌price:‌
1. Q = a bP ‌ −
- a‌‌=‌‌quantity‌‌demanded‌‌when‌‌price‌‌is‌‌very‌‌small‌ ‌
- a/b‌‌=‌‌the‌‌maximum‌‌willingness‌‌to‌‌pay‌ ‌
⇒‌‌this‌‌equation‌‌is‌‌used‌‌when‌‌firms‌‌have‌‌a‌f‌ ixed‌‌quantity‌‌‌but‌‌can‌‌easily‌‌
change‌‌the‌‌price‌‌(e.g.‌‌bakkery)‌‌=‌p ‌ rice-focused‌ ‌
‌
−
2. P = A B Q (‌ i‌nverse‌)‌ ‌
- A‌‌=‌‌the‌‌maximum‌‌willingness‌‌to‌‌pay‌ ‌
- A/B‌‌=‌‌quantity‌‌demanded‌‌when‌‌price‌‌is‌‌very‌‌small‌ ‌
⇒‌‌this‌‌equation‌‌is‌‌used‌‌when‌‌firms‌‌have‌‌a‌v‌ ariable‌‌quantity‌‌‌(in‌‌extremely‌‌
concentrated‌‌markets‌‌e.g.‌‌oil,‌‌gold,...)‌‌=‌q ‌ uantity-focused‌ ‌
‌

,We‌‌need‌‌to‌‌ask‌‌ourselves‌‌whether‌‌a‌‌linear‌‌market‌‌demand‌‌curve‌‌is‌‌even‌‌realistic?‌ ‌
- it‌‌has‌‌a‌f‌ unctional‌‌form‌‌ ‌
→‌‌closer‌‌to‌‌an‌‌estimation,‌‌yet‌‌fairly‌‌accurate‌‌a‌‌local‌‌level‌ ‌
‌
- it‌‌does‌‌no‌‌take‌‌into‌‌account‌‌the‌t‌ ime‌f‌actor‌ ‌
a. short‌‌run:‌‌no‌‌possibility‌‌to‌‌change‌‌production‌‌facilities‌ ‌
b. long‌‌run:‌‌firm‌‌can‌‌change‌‌its‌‌production‌‌facilities‌‌to‌‌meet‌‌demand‌ ‌
→‌‌but‌‌market‌‌demand‌‌curve‌‌does‌‌not‌‌make‌‌the‌‌distinction,‌‌though‌‌markets‌‌change‌‌constantly‌ ‌
‌
- demand‌‌is‌‌a‌‌function‌‌of‌m ‌ any‌‌aspects‌ ‌
→‌‌income‌‌(cfr.‌‌Engel‌‌Law),‌‌Giffen‌‌goods,‌‌preferences,...‌ ‌
‌
Yet,‌‌despite‌‌its‌‌limitations,‌‌we‌‌will‌‌continue‌‌to‌‌use‌‌the‌‌simple‌‌(inverse)‌‌linear‌‌demand.‌ ‌
→‌‌we‌‌need‌‌to‌‌emphasise‌‌competition,‌‌not‌‌the‌‌demand‌‌curve‌ ‌
→‌‌easy‌‌way‌‌to‌‌find‌‌the‌‌equilibrium‌‌in‌‌any‌‌market‌‌situation‌ ‌
‌
FIRM'S‌‌DEMAND‌ ‌
The‌F ‌ irm's‌‌Demand‌‌g ‌ ives‌‌a‌‌company‌‌an‌‌idea‌‌how‌‌much‌‌they‌‌can‌‌sell,‌‌given‌‌the‌‌price‌‌they‌‌ask:‌ ‌
a. if‌‌there‌‌is‌‌only‌o ⇒
‌ ne‌f‌irm‌‌ ‌‌the‌‌firm's‌‌demand‌‌is‌‌equal‌‌to‌‌the‌‌market‌‌demand‌ ‌
b. if‌‌there‌‌are‌m ⇒
‌ ultiple‌f‌irms‌‌ ‌‌the‌‌firm's‌‌demand‌‌depends‌‌on‌‌other‌‌firms:‌ ‌
⇒
‌‌QJ = f (P J , P K , income, marketing J , marketing K , ....) ‌
‌
Firms‌‌have‌‌an‌‌explicit‌‌(e.g.‌‌through‌‌quantitative‌‌market‌‌analysis)‌‌or‌‌implicit‌‌(e.g.‌‌gut-feeling)‌‌of‌‌the‌‌
⇒
market‌‌demand,‌‌and‌‌they‌‌try‌‌to‌‌increase‌‌their‌‌firm's‌‌demand‌‌ ‌‌they‌‌need‌‌Managerial‌‌Economics.‌ ‌
→‌‌a‌‌good‌‌understanding‌‌of‌‌the‌‌firm's‌‌demand‌‌is‌‌necessary:‌‌indeed,‌‌we‌‌cannot‌‌start‌‌producing‌‌before‌ ‌
‌we‌‌know‌‌what‌‌we‌‌can‌‌sell.‌ ‌
‌
PRICE‌‌ELASTICITY‌‌OF‌‌DEMAND‌‌ ‌
Elasticity:‌‌ ‌

⇒‌‌ε = ×
Δq
q Δq p Δq Δp
Δp = Δp q
‌‌with‌‌ q = percentage change in q ‌and‌‌ p = percentage change in p ‌
p

‌
- if‌‌|ε| = 1 ⇒‌‌if‌‌price‌‌reduces/increases,‌‌the‌‌quantity‌‌will‌‌reduce/increase‌‌by‌‌the‌‌same‌‌amount‌ ‌
- if‌‌|ε| < 1 ⇒‌‌increasing‌‌price‌‌increases‌‌revenues:‌d‌ emand‌‌is‌‌inelastic‌ ‌
- if‌‌|ε| > 1 ⇒‌‌increasing‌‌price‌‌reduces‌‌revenues:‌d‌ emand‌‌is‌‌elastic‌ ‌
‌
Given‌‌a‌‌demand‌‌curve,‌‌you‌‌would‌‌need‌‌to‌‌find:‌ ‌
Δq dq
- Δp = dp =‌‌the‌‌first‌‌derivative‌‌of‌‌the‌‌Q(p)‌‌function‌ ‌

- p/q =‌‌just‌‌fill‌‌in‌ ‌
‌
‌
Cross-elasticity:‌ ‌

⇒‌‌ε ×
Δq 1
q1 Δq 1 p2
1,2 = Δp2 = Δp2 q1
‌
p2

‌
- if‌‌|| ε1,2 || > 0 ⇒‌s‌ ubstitute‌‌‌goods‌ ‌
- if‌‌|| ε1,2 || < 0 ⇒‌c‌ omplement‌‌‌goods‌ ‌
‌
‌
‌
‌
‌
‌
‌
‌
‌
‌
‌

,PERFECT‌‌COMPETITION‌ ‌
In‌‌perfect‌‌competition,‌‌firms‌‌and‌‌consumers‌‌are‌p ‌ rice-takers‌ ‌
→‌‌there‌‌is‌‌no‌‌market‌‌power,‌‌no‌‌possibility‌‌to‌‌alter‌‌the‌‌price‌ ‌
→‌‌a‌‌firm‌‌can‌‌sell‌‌as‌‌much‌‌or‌‌as‌‌little‌‌as‌‌it‌‌wants‌‌at‌‌the‌‌ruling‌‌market‌‌price‌ ‌
→‌‌the‌‌demand‌‌curve‌‌for‌‌an‌‌individual‌‌firm‌‌is‌‌therefore‌‌a‌‌horizontal‌‌line‌ ‌
‌
Every‌‌player‌‌in‌‌perfect‌‌competition‌‌will,‌‌as‌‌is‌‌normal,‌‌choose‌‌an‌‌output‌‌level‌‌
that‌‌maximises‌‌their‌‌individual‌‌profit.‌ ‌
→‌‌MC‌‌=‌‌MR‌‌and‌‌because‌‌each‌‌product‌‌is‌‌sold‌‌at‌‌the‌‌market‌‌price,‌‌ ‌
M
‌ R‌‌=‌‌P‌‌=‌‌MC‌:‌‌price‌‌therefore‌‌equals‌‌marginal‌‌costs‌‌in‌‌perfect‌‌competition‌ ‌
→‌‌for‌‌every‌‌individual‌‌company,‌‌the‌‌optimal‌‌output‌‌level‌‌q‌‌will‌‌be‌‌summed‌ ‌
‌and‌‌this‌‌gives‌‌us‌‌the‌‌aggregate‌‌output‌‌level‌‌Q‌ ‌
‌
The‌‌market‌‌demand‌‌curve‌‌still‌‌has‌‌a‌‌negative‌‌slope:‌ ‌
→‌‌if‌‌the‌‌entire‌‌market‌‌output‌‌or‌‌price‌‌changes,‌‌the‌‌effect‌‌is‌‌still‌‌noticeable‌‌in‌ ‌
‌the‌‌demand‌‌curve‌ ‌
‌
(graphs‌‌are‌‌for‌o ‌ ne‌‌‌individual‌‌company‌‌left‌‌and‌‌for‌‌the‌e
‌ ntire‌‌‌market‌‌right)‌ ‌
‌
MONOPOLY‌ ‌
If‌‌there‌‌is‌‌only‌‌one‌‌firm‌‌in‌‌the‌‌market,‌‌its‌‌firm's‌‌demand‌‌curve‌‌would‌‌be‌‌identical‌‌to‌‌the‌‌market‌‌demand.‌ ‌
→‌‌it‌‌could‌‌singlehandedly‌‌influence‌‌the‌‌price‌‌as‌‌it‌‌can‌‌singlehandedly‌‌choose‌‌the‌‌supply‌ ‌
‌
As‌‌a‌‌monopolist‌‌has‌‌the‌‌opportunity‌‌to‌‌choose‌‌the‌‌quantity‌‌/‌‌price‌‌as‌‌he‌‌pleases,‌‌he‌‌is‌‌also‌‌
faced‌‌with‌‌a‌‌production‌‌dilemma:‌ ‌
−
→‌‌producing‌‌ΔQ = Q2 Q1 more‌‌units‌‌increases‌‌revenue‌‌with‌‌G‌ ‌
→‌b −
‌ ut‌‌‌decreased‌‌price‌‌with‌‌ΔP = P 1 P 2 and‌‌thus‌‌revenue‌‌with‌‌L‌ ‌
What‌‌choice‌‌should‌‌the‌‌monopolist‌‌make‌‌if‌‌he‌‌wants‌‌to‌‌maximize‌‌profits?‌ ‌
‌
Like‌‌any‌‌other‌‌firm,‌‌we‌‌need‌‌to‌‌keep‌‌the‌‌optimality‌‌condition‌‌in‌‌mind:‌‌MR‌‌=‌‌MC.‌ ‌
So,‌‌what‌‌is‌‌MR?‌ ‌
× × −
→‌‌T R = q uantity price = Q (A B Q) = AQ B 2 Q ‌ −
⇒ dT R(Q)
‌‌M R = dQ = A 2BQ ‌ −
The‌‌MR-curve‌‌of‌‌a‌‌monopolist‌‌has‌‌the‌‌same‌‌intercept‌‌as‌‌its‌‌demand‌‌curve,‌‌but‌‌twice‌‌the‌‌
slope.‌‌This‌‌means‌‌that‌‌the‌‌MR-curve‌‌will‌‌always‌‌lie‌‌beneath‌‌the‌‌demand‌‌curve.‌ ‌
‌
The‌‌main‌‌difference‌‌between‌‌a‌‌monopolist‌‌and‌‌a‌‌firm‌‌in‌‌perfect‌‌competition‌‌is‌‌that‌ ‌
the‌‌MR‌‌is‌n ‌ ot‌‌equal‌a ‌ nd‌a‌ lways‌‌less‌t‌han‌‌the‌‌actual‌‌market‌‌price.‌‌ ‌
‌
Following‌‌the‌‌optimality‌‌rule,‌‌MC=MR,‌‌the‌‌monopolist‌‌will‌‌product‌‌QM units‌‌ ‌
but‌‌will‌‌sell‌‌them‌‌at‌‌a‌‌clearing‌‌price‌‌of‌‌P M ‌
×
→‌‌the‌‌total‌‌revenue‌‌QM P M ‌is‌‌greater‌‌than‌‌the‌‌total‌‌costs‌‌AC(Q) QM ‌ ×
and‌‌thus‌‌the‌‌monopolist‌‌attains‌‌an‌e ‌ conomic‌‌profit‌.‌ ‌
‌
It‌‌is‌‌therefore‌‌interesting,‌‌for‌‌any‌‌firm,‌‌to‌‌try‌‌and‌‌achieve‌‌a‌‌certain‌‌level‌‌of‌‌market‌‌power.‌ ‌
In‌‌a‌‌perfect‌‌competition,‌‌economic‌‌profit‌‌is‌‌by‌‌no‌‌means‌‌possible‌u ‌ nless‌‌‌in‌‌the‌‌short‌‌run.‌ ‌




‌
‌
‌
‌
‌
‌
‌
‌
‌
‌
‌

,PART‌‌TWO‌ ‌
‌
In‌‌this‌‌course,‌‌we‌‌adapt‌‌a‌n ‌ eoclassical‌‌approach‌‌‌in‌‌which‌‌a‌‌firm‌‌is‌‌solely‌‌envisioned‌‌as‌‌a‌‌production‌‌
unit:‌‌the‌‌firm‌‌transforms‌‌inputs‌‌into‌‌outputs:‌ ‌
→‌g ‌ oal‌:‌‌maximize‌‌profits‌‌and‌‌hence‌‌minimize‌‌the‌‌production‌‌costs‌‌ ‌
‌
COST‌‌RELATIONSHIPS‌ ‌
A‌‌firm‌‌is‌‌characterised‌‌by‌‌a‌p ‌ roduction‌‌function‌‌‌for‌‌a‌‌single‌‌product‌‌q.‌‌This‌‌function‌‌specifies‌‌the‌‌quantity‌‌
q‌‌that‌‌the‌‌firm‌‌produced‌‌from‌‌using‌‌k‌‌different‌‌inputs:‌‌q = f (x1 , x2 , ..., xk ) ‌
‌
The‌‌relationship‌‌between‌‌the‌‌output‌‌choice‌‌(production‌‌function)‌‌and‌‌the‌‌production‌‌costs‌‌is‌‌expressed‌‌
using‌‌the‌c‌ ost‌‌function‌:‌‌C (q) + F ‌.‌‌As‌‌we‌‌are‌‌looking‌‌to‌‌maximize‌‌profits,‌‌we‌‌will‌‌solve:‌ ‌
k
M inimize ∑ wi xi ‌s.t. f (x1 , x2 , ..., xk ) = Q ‌‌with‌‌Q‌‌=‌‌the‌‌chosen‌‌production‌‌level‌ ‌
i=1
solving‌‌this‌‌linear‌‌problem‌‌for‌a
‌ ll‌‌‌quantity‌‌levels,‌‌results‌‌in‌‌the‌‌optimal‌‌cost‌‌function‌ ‌
where‌‌costs‌‌are‌‌minimized.‌ ‌
‌
There‌‌are‌‌4‌‌categories‌‌of‌‌costs:‌ ‌
1. Fixed‌‌costs‌:‌‌a‌‌given‌‌amount‌‌of‌‌expenditure‌‌that‌‌the‌‌firm‌‌must‌‌incur‌e ‌ ach‌‌p
‌ eriod‌‌‌and‌‌that‌‌is‌‌
unrelated‌‌‌to‌‌how‌‌much‌‌output‌‌the‌‌firm‌‌produces.‌ ‌
‌
2. Average‌‌costs‌:‌‌the‌‌total‌‌costs‌‌divided‌‌by‌‌output:‌ ‌
- Average F ixed Costs : F /Q ‌
- Average V ariable Costs : C(Q)/Q ‌
‌
3. Marginal‌‌costs‌:‌‌the‌‌addition‌‌to‌‌total‌‌costs‌‌that‌‌is‌‌incurred‌‌in‌‌increasing‌‌output‌‌by‌‌one‌‌unit‌ ‌
→‌‌M arginal Costs : dC(Q)/dQ ‌
‌
4. Sunk‌‌costs‌:‌‌costs‌‌that‌‌are‌‌also‌u ‌ nrelated‌‌‌to‌‌the‌‌output,‌‌but‌‌that‌‌are‌‌spent‌‌before‌‌measuring‌‌the‌‌
total‌‌costs‌‌(e.g.‌‌licences,‌‌research‌‌expenditures,...)‌‌and‌‌are‌‌also‌u ‌ nrecoverable‌‌‌if‌‌the‌‌firm‌‌
decides‌‌to‌‌exit‌‌the‌‌market.‌ ‌
‌
COST‌‌VARIABLES‌‌AND‌‌OUTPUT‌‌DECISIONS‌‌ ‌
Profit‌‌maximization‌‌over‌‌any‌‌period‌‌of‌‌time‌‌requires‌‌that‌‌the‌‌produced‌‌where‌M ‌ C‌‌=‌‌MR‌.‌ ‌
But‌‌‌it‌‌is‌‌important‌‌to‌‌note‌‌that‌‌this‌‌is‌‌only‌‌applicable‌i‌f‌‌the‌‌company‌‌produces‌.‌ ‌
‌
A‌‌company‌‌can‌‌produce‌‌in‌‌its‌‌equilibrium‌‌but‌‌the‌‌total‌‌revenue‌‌could‌‌be‌‌smaller‌‌than‌‌the‌‌
total‌‌costs.‌‌This‌‌happens‌‌when‌‌the‌‌equilibrium‌‌is‌‌under‌‌the‌‌AVC-curve.‌ ‌
→‌‌in‌‌this‌‌case,‌‌the‌‌firm‌‌would‌‌not‌‌produce‌‌and‌‌leave‌‌the‌‌market‌‌=‌s‌ hut-down‌‌decision‌ ‌
‌
In‌‌short,‌‌output‌‌decisions‌‌are‌‌based‌‌on:‌ ‌
1. Marginal‌‌Costs‌ ‌
→‌‌to‌‌decide‌h ‌ ow‌‌much‌‌‌to‌‌produce:‌‌MC‌‌=‌‌MR‌ ‌
2. Average‌‌Costs‌ ‌
→‌‌to‌‌decide‌‌if‌‌the‌‌firm‌‌will‌‌even‌‌produce‌‌in‌‌the‌l‌ong‌‌run‌ ‌
(losses‌‌in‌‌the‌‌SR‌‌are‌‌tolerated,‌n ‌ ot‌‌‌in‌‌the‌‌long‌‌run)‌ ‌
3. Average‌‌Variable‌‌Costs‌‌ ‌
→‌‌to‌‌decide‌‌if‌‌the‌‌firm‌‌will‌‌even‌‌produce‌‌in‌‌the‌s ‌ hort‌‌run‌ ‌
(price‌‌<‌‌AC‌‌can‌‌be‌‌tolerated,‌‌price‌‌<‌‌AVC‌n ‌ ot‌‌‌because‌‌then‌‌every‌‌unit‌‌is‌‌a‌‌loss)‌ ‌

‌
ECONOMIES‌‌OF‌‌SCALE‌‌ ‌
The‌‌state‌‌of‌‌affairs‌‌in‌‌which‌‌average‌‌costs‌‌fall‌‌as‌‌output‌‌increases,‌‌meaning‌‌that‌‌the‌‌cost‌‌per‌‌unit‌‌of‌‌
output‌‌declines‌‌as‌‌the‌‌scale‌‌of‌‌operations‌‌rises.‌ ‌
⇒
→‌f‌alling‌‌AC-curve‌‌ ‌ ‌MC‌‌<‌‌AC‌ ‌
‌
AC(Q)
We‌‌define‌‌S = M C(Q) ‌
- ⇒
if‌‌S‌‌>‌‌1‌‌ ‌‌economies‌‌of‌‌scale‌ ‌
- ⇒
if‌‌S‌‌=‌‌1‌‌ ‌m‌ inimum‌‌efficient‌‌scale‌‌
- ⇒
if‌‌S‌‌<‌‌1‌‌ ‌‌diseconomies‌‌of‌‌scale‌ ‌

,We‌‌conclude‌‌that‌‌the‌‌greater‌‌the‌‌extent‌‌of‌‌economies‌‌of‌‌scale,‌‌the‌‌larger‌‌the‌‌output‌‌at‌‌which‌‌the‌‌average‌‌
cost‌‌is‌‌minimized,‌‌the‌‌fewer‌‌firms‌‌that‌‌can‌‌operate‌‌efficiently‌‌in‌‌the‌‌market‌ ‌
⇒ ‌l‌arger‌‌economies‌‌of‌‌scale‌‌for‌‌a‌‌few‌‌firms‌‌will‌‌result‌‌in‌‌concentrated‌‌markets‌ ‌
‌
Now,‌‌what‌‌causes‌‌economies‌‌of‌‌scale?‌ ‌
- underlying‌‌technology‌ ‌
⇒
- greater‌‌scale‌‌of‌‌operations‌‌ ‌‌specialization‌‌and‌‌division‌‌of‌‌labor‌ ‌
- economies‌‌on‌‌inventory,‌‌repair,...‌ ‌
- capacity‌‌related‌‌solutions‌‌(e.g.‌‌volume‌‌of‌‌container‌‌that‌‌increases‌‌exponentially)‌ ‌
‌
ECONOMIES‌‌OF‌‌SCOPE‌ ‌
The‌‌state‌‌of‌‌affairs‌‌in‌‌which‌‌it‌‌is‌‌less‌‌costly‌‌to‌‌produce‌‌a‌‌set‌‌of‌‌goods‌‌in‌‌one‌‌firm‌‌than‌‌it‌‌is‌‌to‌‌produce‌‌that‌‌
set‌‌in‌‌two‌‌or‌‌more‌‌firms.‌ ‌
‌
We‌‌define‌‌S C =
−
C(q 1 , 0) + F 1 + C(0, q 2 ) + F [C(q 1 , q 2 ) + F ]
‌
C(q 1 , q 2 ) + F

- ⇒
if‌‌S‌‌>‌‌0‌‌ ‌‌economies‌‌of‌‌scope‌ ‌
- ⇒
if‌‌S‌‌=‌‌0‌‌ ‌‌critical‌‌point,‌‌indifference‌ ‌
- ⇒
if‌‌S‌‌<‌‌0‌‌ ‌‌no‌‌economies‌‌of‌‌scope‌ ‌
‌
The‌‌concept‌‌of‌‌economies‌‌of‌‌scope‌‌is‌‌an‌‌important‌‌one,‌‌as‌‌it‌‌provides‌‌the‌‌central‌‌technological‌‌reason‌‌
for‌‌the‌‌existence‌‌of‌‌multiproduct‌‌firms.‌‌There‌‌are‌‌two‌‌causes‌‌for‌‌economies‌‌of‌‌scope:‌ ‌
1. Shared‌‌inputs‌ ‌
→‌‌e.g.‌‌shared‌‌R&D,‌‌equipment‌‌that‌‌can‌‌be‌‌used‌‌for‌‌multiple‌‌products,...‌ ‌
‌
2. Cost‌‌complementarities‌‌ ‌
→‌‌producing‌‌one‌‌good‌‌reduces‌‌the‌‌cost‌‌of‌‌another‌ ‌
‌
MARKET‌‌STRUCTURE‌‌ ‌
The‌M ‌ arket‌‌Structure‌‌i‌s‌‌defined‌‌as‌‌the‌‌amount‌‌and‌‌size‌‌of‌‌firms‌‌within‌‌that‌‌market‌‌+‌‌other‌‌factors.‌ ‌
How‌‌to‌‌measure‌‌the‌‌market‌‌structure?‌‌ ‌
- summary‌‌measures‌‌(e.g.‌‌number‌‌of‌‌firms,‌‌market‌‌share‌‌of‌‌each‌‌firm,...)‌ ‌
- concentration‌‌curve‌ ‌
- concentration‌‌ratios‌‌(e.g.‌‌C Rn )‌ ‌
- Herfindahl-Hirschman‌‌Index‌‌(HII)‌ ‌
‌
Summary‌‌measures‌ ‌
‌
Most‌‌of‌‌the‌‌times‌‌fairly‌i‌n‌accurate‌‌as‌‌is‌‌hard‌‌to‌‌list‌‌all‌‌competitors‌‌within‌‌one‌‌
market.‌ ‌
‌
‌
‌
Concentration‌‌Curve‌‌ ‌
‌
How‌‌large‌‌are‌‌the‌‌largest‌‌firms?‌‌→‌‌cfr.‌‌steepness‌‌of‌‌curve‌ ‌
How‌‌quickly‌‌do‌‌we‌‌reach‌‌100%?‌ ‌
…‌ ‌
‌
‌
‌
‌
Concentration‌‌Ratios‌ ‌
e.g.‌‌C R4 =‌‌ratio‌‌that‌‌tells‌‌you‌‌how‌‌much‌‌market‌‌share‌‌the‌‌4‌‌largest‌‌firms‌‌in‌‌a‌‌market‌‌have‌‌combined.‌ ‌
‌
Herfindahl-Hirschman‌‌Index‌‌(HHI)‌ ‌
N
H HI = ∑ si2 ‌‌=‌‌sum‌‌of‌s
‌ quared‌m
‌ arket‌‌shares‌‌of‌‌each‌‌company.‌ ‌
i=1
‌

, MARKET‌‌DEFINITION‌ ‌
We‌‌understand‌‌that‌‌it‌‌is‌‌impossible‌‌to‌‌calculate‌‌metrics‌‌on‌‌the‌‌market‌‌structure,‌‌if‌‌we‌‌have‌‌no‌‌clear‌‌
definition‌‌of‌‌the‌‌market‌‌we‌‌are‌‌studying.‌‌But‌‌defining‌‌a‌‌market‌‌is‌‌no‌‌easy‌‌thing‌‌to‌‌do:‌ ‌
‌
1. define‌‌by‌‌substitutability‌‌in‌p ‌ roduction‌ ‌
→‌‌standard‌‌approach,‌‌based‌‌on‌‌industry‌‌codes‌‌ ‌
→‌‌but‌‌limitations‌ ‌
‌
2. define‌‌by‌‌substitutability‌‌in‌c ‌ onsumption‌‌ ‌
→‌‌=‌d ‌ emand‌‌substitutability‌‌ ‌
→‌‌based‌‌on‌‌cross-price‌‌elasticity‌‌ ‌
‌
We‌‌should‌‌also‌‌ask‌‌ourselves:‌w ‌ hat‌‌drives‌‌potential‌‌market‌‌concentration?‌‌ ‌
a. economies‌‌of‌‌scale‌‌/‌‌economies‌‌of‌‌scope‌ ‌
→‌‌larger‌‌firms‌‌become‌‌more‌‌efficient,‌‌concentration‌‌rises‌ ‌
‌
b. network‌‌externalities‌ ‌
→‌‌concentrated,‌‌even‌‌though‌‌there‌‌could‌‌be‌‌no‌‌economies‌‌of‌‌scale‌‌/‌‌scope‌ ‌
‌
c. government‌‌and‌‌antitrust‌‌policy‌ ‌
→‌‌by‌‌limiting‌‌entry,‌‌patent‌‌system,‌‌blocking‌‌of‌‌mergers,...‌ ‌
‌
‌
PART‌‌THREE‌ ‌
‌
THE‌‌CONCEPT‌‌OF‌‌DISCOUNTING‌ ‌
Both‌‌the‌‌competition‌‌and‌‌monopoly‌‌models‌‌are‌‌somewhat‌‌vague‌‌with‌‌respect‌‌to‌‌time.‌ ‌
As‌‌we‌‌know‌‌money‌‌has‌‌a‌‌time‌‌value,‌‌the‌‌meaning‌‌of‌‌profit‌‌or‌‌break-even‌‌is‌‌less‌‌clear.‌ ‌
→‌‌we‌‌need‌‌a‌‌way‌‌to‌‌convert‌‌tomorrow's‌‌money‌‌into‌‌today's‌‌money‌ ‌
⇒ ‌‌we‌‌will‌‌make‌‌use‌‌of‌‌discounting‌‌and‌‌Net‌‌Present‌‌Value‌ ‌
‌
(Net)‌‌Present‌‌Value‌‌is‌‌directly‌‌relevant‌‌to‌‌profit‌‌maximization:‌ ‌
- for‌o ‌ ne-period‌p ‌ roblems,‌‌we‌‌just‌‌continue‌‌to‌‌use‌‌the‌M‌ R‌‌=‌‌MC‌‌‌optimality‌‌constraint‌ ‌
‌
- for‌m ‌ ultiperiod‌p ‌ roblems,‌‌we‌‌need‌‌to‌‌make‌‌sure‌‌that‌‌the‌‌present‌‌value‌‌of‌‌future‌‌income‌‌streams‌‌
must‌‌at‌‌least‌‌cover‌‌the‌‌present‌‌value‌‌of‌‌the‌‌expenses‌‌in‌‌establishing‌‌the‌‌project:‌P ‌ V‌‌-‌‌I‌‌>‌‌0‌‌ ‌
‌
EFFICIENCY‌‌AND‌‌SURPLUS‌ ‌
Why‌‌are‌‌monopolies‌‌often‌‌blocked?‌‌ ‌
→‌r‌ eason‌:‌‌monopolies‌‌are‌i‌n‌efficient.‌ ‌
‌
Efficiency‌:‌a ‌ ‌‌market‌‌outcome‌‌is‌‌efficient‌‌when‌‌it‌‌is‌‌impossible‌‌to‌‌find‌‌a‌‌small‌‌change‌‌in‌‌the‌‌allocation‌‌of‌‌
capital,‌‌labor,‌‌goods‌‌or‌‌services‌‌that‌‌would‌‌improve‌‌the‌‌well-being‌‌of‌‌individuals‌‌without‌‌hurting‌‌others.‌‌ ‌
→‌‌an‌‌analysis‌‌of‌‌surpluses‌‌will‌‌give‌‌us‌‌an‌‌idea‌‌of‌‌why‌‌a‌‌monopoly‌‌is‌‌inefficient‌‌and‌‌thus‌‌unwanted‌ ‌
‌
PERFECT‌‌COMPETITION‌ ‌
Efficiency‌‌is‌‌basically‌‌a‌‌measure‌‌of‌‌well-being.‌ ‌
a. Consumer‌‌surplus‌:‌t‌he‌‌difference‌‌between‌‌the‌‌maximum‌‌amount‌‌a‌‌consumer‌‌is‌‌
⇒
willing‌‌to‌‌pay,‌‌and‌‌the‌‌amount‌‌actually‌‌paid‌‌ ‌C ‌ S‌‌‌(aggregated)‌ ‌
‌
b. Producer‌‌surplus‌:‌t‌he‌‌difference‌‌between‌‌the‌‌amount‌‌a‌‌producer‌‌receives‌‌from‌‌a‌‌
⇒
sale‌‌and‌‌the‌‌amount‌‌that‌‌the‌‌sale‌‌cost‌‌him‌‌ ‌P ‌ S‌‌‌(aggregated)‌ ‌
‌
In‌‌this‌‌diagram‌‌(perfect‌‌competition),‌‌we‌‌can‌‌see‌‌that‌‌both‌‌surpluses‌‌are‌‌maximized.‌ ‌
→‌‌the‌‌competitive‌‌equilibrium‌‌is‌e ‌ fficient‌‌‌and‌‌welfare‌‌is‌‌maximized‌



‌
‌

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller simkuhn. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for $8.85. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

82871 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 14 years now

Start selling
$8.85  14x  sold
  • (4)
  Add to cart