Read lecture and respond

ECO 518

Unit 4 Lecture This lecture will function as a guide to assist you in studying. It contains questions that you

should be able to answer after you read the chapters. As you read the text book think about the

questions posed below. The answers comprise the main topics and concepts that you should

know and understand after you have finished your readings. There are no quiz or test activities

associated with this lecture content.

Unit Learning Outcomes

Unit 4

ULO 1. Describe the key characteristics of the four basic market types used in economic

analysis; and compare and contrast the degree of price competition among the four

market types. ULO 2. Explain the five forces in Porter's model of competition and explain its effect in pricing

models..

ULO 3. Analyze cartel pricing.

ULO 4. Illustrate price leadership.

Chapter 8

Continue to use the resources provided by the author and the publisher at:

http://wps.prenhall.com/bp_keat_managerial_7/236/60596/15512752.cw/index.html

This chapter presents a view of the pricing and output decisions facing firms in two

extreme situations. In the case of perfect competition, the firm has virtually no power to

set the price and is only able to decide to what extent (if at all) it wants to produce in this

market, given the going market price. In the case of a monopoly, the firm is the entire

market supply. This monopoly of supply gives the firm the power to set any price that it

desires. In certain cases, this monopoly power is regulated by the government. We

demonstrate that firms wanting to maximize their short-run profit (or minimize their

short-run loss) should establish their price and output levels according to the MR = MC

rule. For those firms in perfectly competitive markets, MR is in fact equal to the price

that has already been established for them by the forces of supply and demand. For

these price-taking firms, the only task is to decide what output quantity results in the

matching of the market price (i.e., marginal revenue) and the marginal cost of producing

the last unit of its output. For the monopoly firm, following the MR = MC rule involves

pricing the product at the level whereby the quantity that people purchase is the amount

needed to bring MR in line with MC. We now turn to the cases between the two

extremes of perfect competition and monopoly. For these “imperfect competitors,” the

MR = MC rule is an important part of their pricing decision. However, as we show, the

actions or reactions of their competitors also play a major role in the pricing of their

products.

Chapter 9

This chapter examines the pricing and output decisions faced by firms in monopolistic

competition and oligopoly. Firms in oligopolistic markets have a more challenging task

because of mutual interdependence. However, if oligopoly firms are of sufficient size or

are very effective in differentiating their products, they may not have as much

competition from new market entrants as those firms operating in monopolistic

competition. In both types of markets, nonprice decisions are an important part of the

competitive environment. A critical part of the success of a firm’s operations in

imperfectly competitive markets is the development (as well as implementation) of an

effective business strategy. Therefore, the final sections of this chapter examined the

important elements of business strategy and their linkages to the terms and concepts

covered in managerial economics.

Chapter 10

This chapter is built on the foundation laid in Chapters 8 and 9 by applying the principles

of pricing and output to specific pricing situations, most under conditions of imperfect

competition. Briefly, we learned the following: Cartels are formed to avoid the

uncertainties of a possible reaction by one competitor to price and production actions by

another. The firms in the industry agree on unified pricing and production actions to

maximize profits. However, as history shows, such arrangements are not always stable.

Price leadership exists when one company establishes a price and others follow. Two

types of price leadership were discussed: barometric and dominant. Baumol’s model

describes the actions of a company whose objective is to maximize revenue (rather

than profits) subject to a minimum profit constraint. Price discrimination (or differential

pricing) exists when a product is sold in different markets at different prices. Third-

degree price discrimination is the most common. By charging different prices in

separate markets that have demand curves with different price elasticities, a firm can

increase its profits over what they would be if a uniform price were charged. Cost-plus

pricing appears to be a very common method. However, such pricing does not

necessarily imply that marginal principles and demand curve effects are not taken into

consideration. Multiproduct pricing was examined, because most firms and plants

produce more than one product at the same time. Multiple products produced by one

firm can be complements or substitutes, both on the demand side and the supply side.

Four possible cases were discussed, and it was shown how application of the marginal

principle brings about profit maximization. Several other pricing practices were

summarized. One was transfer pricing, which is used to determine the price of a product

that progresses through several stages of production within a firm.