Economics Problems - Market Structures and Pricing Decisions Applied Problems
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Week4Overview.docxWeek 4 Overview - Market Structure & Price Discrimination
Chapter 7: Market Structure and Price Determination
Chapter 8: Pricing Decisions in Practice
These chapters are probably the most relevant chapters because they tie in with how businesses all four market structure firms operate today and how they price. Good luck on your Week 4 assignment too. Dr. Steve
PS Last term, I had a few students who had a difficult time understanding Marginal Product and Marginal Costs. Maybe watching this video will help. You may have to cut and paste it into the browser to get it to work.
https://www.bing.com/videos/search?q=marginal%20product%20and%20marginal%20cost&qs=n&form=QBVR&sp=-1&pq=marginal%20product%20and%20marginal%20cost&sc=4-34&sk=&cvid=FF64EAD000EE40E887998C3E4AC78D4F
Students, if you will remember from Week 3; Production and Costs seem to work together as you will shortly discover. Many of the concepts during that week were theory. Taking into consideration Marginal Physical Product and Marginal Cost is what we learned last week. However when I was in business I used a lot of these ideas in planning and designing my production area to make it more efficient. The text got you into Isoquant and Isocost curves and long and short run expansion paths too. That way you were able to review costs from a theory perspective. Even though in practice you won't use these two theories they are there to help you recognize the theories that back up all of our economic models, even the ones you may use in finance.
What to expect in doing this weeks assignment for problems 1 and 2. Doing problem 1 you will have to learn how to find the profit of a firm. You will first be examining the marginal revenue and marginal costs and later finding profits from subtracting Total Costs from Total Revenues. You will also discover the ideas quantity to be produced at that level. In problem 2 you will be examining the demand curves of two businesses and then setting MR=MC to find both the ideal price and quantities of those business and also what are the expected elasticity of both businesses and knowing this facts, which business would be preferred.
The discussions will also examine these two ideas to prepare you to work on these problems.
Here are your chapters for Week 4:
1. Chapter 7: Market Structure and Price Determination
I would like to introduce you to Market Structure which there is 4 different business structures. The one that Adam Smith discussed was Perfect Competition. Smith preferred this type of business using his discussion on consumer sovereignty because firms in Perfect Competition are forced to set P = MC, because they are price takers. In Smith’s era there were two major types of business. It was either small businesses which today are called Mom and Pop, businesses run by families, or Monopolies where the King offered charters. In England, Sir Walter Raleigh was one of the wealthiest monopolists of his time and was granted a charter on all tobacco products sold in England by Queen Elizabeth. Pricing in many ways will be determined on what is the elasticity of a product or service. Firms that have an inelastic demand curve (can skim) or sell necessities like heart valve replacement during bi-pass surgery or cancer treatments, during life and death issues, can almost charge any price and no one will say no. That is why medical costs and pharmaceutical companies are sitting in the cat bird seat and able to charge so much for their services. Many other firms that are small and sell unique products like Levi Straus (Jeans) will use this same strategy too. As you know, Wal Mart makes billions simply by calling itself a low-cost leader to get more customers inside and take them away from the competition. Wal Mart is a super store and uses this type of low-cost leader to increase its profits. Wal Mart has the ability to increase its profits by selling many elastic goods where it can increase revenues and profits by shear customer numbers. This approach is referred to as market penetration.
1. Chapter 8: Pricing Decisions in Practice
How Pricing is Created in all 4 Different Market Structures.
I would like to introduce you to Market Structure which there is 4 different business structures. The one that Adam Smith discussed was Perfect Competition. Smith preferred this type of business using his discussion on consumer sovereignty because firms in Perfect Competition are forced to set P = MC, because they are price takers. In Smith’s era there were two major types of business. It was either small businesses which today are called Mom and Pop, businesses run by families, or Monopolies where the King offered charters. In England, Sir Walter Raleigh was one of the wealthiest monopolists of his time and was granted a charter on all tobacco products sold in England by Queen Elizabeth.
However, we are more sophisticated today and have 4 types rather than two. We still have firms in Perfect Competition. which are few in number. As was discussed earlier Pricing in firms in Perfect Competition was where P = MC. Perfect Competitive firms are said to be price taker firms because firms in Perfect Competition are stuck with the price that consumers are willing to pay. Back in Adam Smith's time there were fewer monopolies and most firms were Perfect Competitive firms. That is why Smith came up with the idea of Consumer Sovereignty where the consumer chose the price. he next three structures are referred to as price markers because all three are able to reduce quantity, to create a scarcity artificially in order to raise price and capture higher profits than firms in perfect competition. We still have a few monopolies too which hasn’t changed much for Sir Walters time, and now we have oligopolies like Coke and Pepsi, who only have a few competitors. Franchises have created a new market since the 1950’s and McDonald’s which are referred to as Monopolistic Competitors. Both Oligopolies and Monopolistic Competitors act like monopolists in a way because they can reduce supply and set MR = MC, but they have to compete other ways to not enter a price war other than price. To compete, these two structures mainly compete among one another through promotion, place, and different product mix. In particular, these firms will mainly use product differentiation to keep the competition from entering. So now you know that there are 4 Market Structures along with how Demand, Marginal Revenue, Marginal Costs and Average Costs are inter-related. Perfect Competitive firms are said to be price takers because the price they receive depends on what consumers are willing to offer them (Consumer Sovereignty). Therefore, remember that the other three firms are said to be price takers. Firms in Perfect Competition are said to make a normal rate a profit which is less than excess profits which are the profits of the other 4 market structure firms.
However, with the other 3, Monopolistic Competition, Oligopoly and Monopolies, price is determined by the firms that decide as I already discussed, to artificially reduce supply to raise price to increase profitability. Because these firms can create scarcity by reducing the quantity by setting MR to MC, they are called price makers. Most price maker firms eexcept the monopoly can through differentiation of one of the 3 P's of marketing, either place, product or promotion a different mix to in fact, create a market and price that is on their own terms. Hence, both firms including monopolies, tht have no competition are claimed to be Price Maker firms where they can set MR = MC and gain excess profits. This is where Galbraith and Robinson's arguments come in for what they call producer sovereignty, where the public must meet the product and price decisions set by firms. However, since we have moved into the global village, many firms that were characterized as being controlling have been eliminated to return us closer to the Perfect Competitive model and Consumer Sovereignty. That is why Friedman wrote the book, "The World is Flat" to emphasize that US firms that were at one time primarily the later 3, have today through globalization, have become more competitive. Good luck and see you in class. Dr Steve Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education. This text is a Constellation™ course digital materials (CDM) title. Market Structure
Managerial Decisions in Perfect Competition firms that are Price Takers
Managerial Decisions for Firms with Market Power and that are Price Makers
Monopolistic Competition
ttps://www.bing.com/videos/search?q=monopolistic+competition&qs=CustomSearch&pq=monopolisti&sc=8-11&cvid=3E5E0AD84356490C8A45B49BF572173C&sp=1&form=QBVR
Strategic Decision Making in Oligopoly Markets
Who's John Nash
Monopoly
Pure or Natural Monopoly ~ Energy Companies
However, I want to thank you students for being in our class up to Week 5. What I have done is added some more videos and an article or two to help you understand some of the relationships between Production Costs, Estimation, and Decisions in Competitive Markets. In fact, one of the videos comes from a professor in London who is teaching economics classes with MBA students like you. In fact, I do believe his concepts will apply very nicely for he has many Managerial Economics topic he will cover which I believe will help you a lot. Having owned several restaurants of my own, I will share a simple breakfast menu method on production. First of all, production is something that all firms do unless they are service entities. Even a sit down restaurant is an excellent example of what production can accomplish. Even if you sit down simply to receive an Egg McMuffin and a coffee, there is a production function necessary to make the breakfast you receive. As McDonald's holds capital constant it then adds laborers into the mix. As it does then production increases but at an expense to the business which we refer to as costs. Once the meal is sold, then subtracting the costs from the revenues tells the McDonald's manager how much profit he made from you and from every customer who entered the door during breakfast. As you know, profit = Revenue (P x Q) - (Variable Costs CxQ - Fixed Costs) or we can look at the gross margin which represents (P - C) if Fixed Costs are smaller to see what sort of income the firm meets through its sales of its inventories over time. Time becomes very important because the fixed costs are still a part of the costs whether or not4 the business operates only at diner or during breakfast, lunch and dinner, all times are contributing to the fixed costs thus making money, having a business open 24/7 makes a lot of sense, rather than closing up the business on Sundays, and only serving lunch and dinner. That is why Subway Sandwich has decided to open its doors for breakfast. One thing that costs firms business is labor costs. We will learn how the addition of each laborer increase production but overtime production, profits and income can enter into a negative income and cash stream if management doesn't examine the costs of each worker that is hired. Well here are some videos and articles that might help. Enjoy! Dr. Steve
60 Second Videos of the Majority of Micro Economic Principles that You Can Come Back and Review the Rest of the Class. Enjoy! Dr. Steve
Allocative Efficient vs. Productive Efficiency
Pricing and Business Pricing Practices
The pricing practices in managerial economics refers to what type of price strategy an industry is having in the market. A pricing strategy followed by an industry depends up on the present market conditions and importantly upon the objectives of an industry
· Profit maximization by setting MR = MC (which was discussed earlier)
· an industry can follow - Nonprofit maximization having object of sales maximization
· limit pricing~ Wal-Mart is an example
· Price Skimming ~ Apple’s Approach
· price discrimination
· peak load pricing
· transfer pricing
· Government Price Controls
