Chapter 8

Lecture 13

Microeconomics for Business Decisions Review 1Why study economics? Single or double major Professional economists (pub/priv)Corporate management and entrepreneurship.

8-2Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaMicro economics program Year one: Markets, profit and government

Year two: Firm organisation and strategy

Year 3: Investment, entrepreneurship and innovation

8-3Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaYear One: Markets Markets for G/S and resourcesFirms revenue and costsProfits and output/employment scaleMarket competition and profit performanceMarket structure and welfare/efficiency Market failure

But How can a firm out perform the market?We started the conversation with the RBT and internal market environment. 8-4Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaYear two: The strategic FirmAgency problems and contractingAdvanced Pricinginput combination decisionsStrategic decisions regarding the competitionInternal systems (organisational architecture)Task allocationreward structurePerformance evaluation GovernanceDecisions on vertical integration/outsourcing 8-5Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaYear 3: Wealth Creation Market investment, firms, property, sharesThe role of the entrepreneur and riskBusiness start ups and financeEntrepreneurial team and intellectual capital Product and production design and innovationAlliances, networks, Clusters and productivity/innovation Knowledge management Innovation and policy8-6Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaFinal ExamFinal examTwo hours 8 questions each worth 12.5 marksEach question has sub questions. Ie 2a,b,c,d,e,etcEach question has equal value so distribute your time evenly. Ie 15min per question. Take a non/prog calculator. The exam is mainly based around the work from week 6 to 12 with the exception of supply and demand that is used in other lecture topics including week 12. 8-7Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaFinal ExamQuestions 1-6 compulsory

Questions 7, 8 are a choice between to options. Ie Pick 7 option A or 7 option B etc.

8-8Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaRevision notesReview lecture, tut, workshop notes and text chapter for the following topics that form the priority topic areas for the exam. Supply and demandProduction and costsEconomic ProfitMarket structure theoryMarket structure application to firm performance, ext env.Int firm environment Resource based theory, read article Market structure welfare and government policy Factor markets.Market failure and the environment.Theory applications to government policy

8-9Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaBackground: Supply and Demand Understand the factors that shift the supply and demand curveBe able to determine the impact on P & Q from a change in one of the factors of supply or demand.

This means:events such as a change in income tax for consumers; or an increase in production costs for the supplier; Change in the price of another product; or a government policy such as the first home buyers grant or the taxation of a product or on land value.- SS/DD used in the market failure topic (externalities)

Calculations and graphingStudents should remember equations associated with production, costs and profit.

For Example: Marginal Cost, Marginal Product, average product Marginal Revenue, as well as ATC, AVC, AFC

MC=MR (scale of output or quantity)

MRP=MRC (employment)11Firms in an industryCosts of production lect 6

What is the link between production and costs?

From the law of diminishing returns; to the U shaped average (ATC) and marginal cost (MC) curves.

Difference between the short run and the long run in production (all factors can change)

Long run cost curves, and their relationship to economies of scale and diseconomies (management problems) of scale

Difference between economic and accounting profit, opportunity costMarket Structures Theory - Characteristics of the 4 market structuresDrawing the market structures profit diagrams

Showing movements between the short run and the long run. Explaining the adjustment and understanding the impact of Barriers to entry.

Market Structures Firm/Perf - The relationship between market structure, conduct and performance (traditional approach) S/C/P- Porter: 5 forces. (competition among suppliers, buyers, substitutability, new entrants, existing rivals) The importance of barriers to entry to long run profitsThis describes the external market env for a firm that impacts performance.

Part One (continued): The relationship b/w market structure and market powerMkt power/ barriers to entryHighPerfect competition MonopolyNo. of firms/ degree of competitionLowMonopolistic competitionOligopolyMarket structureProfitMCATCDMRQuantityRevenue and Costs ($)QmaxPmaxTR = P x QATCTC = ATC x QProfit = TR - TC

In this case the firm earns POSITIVE economic profit and this will attract new entrants

The profit maximisation rule is when Marginal Cost = Marginal RevenueProfitMCATCDMRQuantityRevenue and Costs ($)QmaxPmaxTR = P x QATCTC = ATC x QProfit = TR - TC

But with Barriers to Entry Barrier to Entry

Perfect Competition What are the characteristics of this market structure?Draw the profit diagram with the interaction between the market )downward sloping demand) and the firm (horizontal demand)Understand the transition from short run to long run zero economic profits with new firmsImportance of no barriers to entry or market powerAchieving allocative and productive efficiency18Monopolistic Competition Characteristics of this market and how it differs from PC

Draw the diagram for a MC firm, including sloping demand curve

The importance of non price competition, including product differentiation and advertising

Advertising and the impact on profit diagram

adjustment to long run equilibrium

Alocative and productive efficiency,

Excess capacity and product choice

19Oligopoly Market power and barriers to entryCharacteristics of oligopoly The kinked demand curve modelLogic behind the kinkShow profit with the kinked demand curve and constant costs (from tutorials). Moderate price changes and price inflexibility Cartels, their purpose, process, sustainability 20Monopoly - Barriers to entry and market powerAre monopolies good or bad? Alocative and productive efficiencyDynamic efficiency (leads to innovation to reduce costs)Regulation: use average cost pricing Important workshop comparing Monopoly to PC, dynamic efficiencyPrice discrimination why it adds to profitConditions for price discrimination to workNatural monopoly21Beating the marketEx: KFC in monopolistic competition

Should they earn zero LR economic profits

Internal Organisation/ systems frees up time for other strategies.

Therefore: firm performance relates to the market structure (ext environment) and internal organisation (internal environment) 8-22Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaResource based theoryThe RBT of a firms competitive advantage can be compared to the Structure/Conduct/Performance approach Porter and the five forcesResources combined to achieve capabilities What three capabilities improve performance? (arch/rep/inn)Isolating mechanisms: Barriers to imitation (CA and TK)first mover advantage Read the SCA article at the week 10 lect link.

8-23Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaFactor markets and payments What is Marginal Revenue Product?Explain equation MRP = MP*MRThe employment decision, MRP=MRCIllustrate efficient employment level with a diagram for the labor market MRP = Wage, factors that change the level of employment, wage, productivity, priceChange in product mix What are the factor payments?Why interest rates may vary between different types of loans, risk factors, interest increases with riskInterest and investment relationship,

24Land and Entrepreneurship Land as a unique factor of productionDefine economic rentHenry George and boom busts in the property market. Why does George recommend a land value tax?, show in the SS/DD diagramWhy is the entrepreneur unique (combining factors, non routine tasks, taking risks, innovation)The entrepreneur finds gaps in the market. Useful in an uncertain world. 8-25Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, AustraliaThe environment - What are externalities? (Also named spillovers)Give examples of Positive and negative externalitiesGraph externalities with supply and demand curvesTools for addressing negative pollution externalitiesLitigation verses a pollution tax. Illustrated how to address a positive externality with subsidiesThe differences between public and private goods. Quasi public goods and cost-benefit analysis, difficulty in measuring benefits that may be in the future and depend on subjective value.Public access goods Understand how a tradable pollution permit system would work. Also known as an Emissions trading system. 26Application of theorygovernment policy on taxationPrivatisationUsing supper for property investment Subsidies to markets such as health, propertyCompetition policy and regulating monopoliesPrice floors min wage, farming, ceiling - rentIron or prices and over prodn. Firm strategies, pricing, prodn scale, marketingGov barriers to entry such as licensing, patientsetc 8-27Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia