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slides_class4 - Managerial Economics Class 4 1. 2. 3. 4....

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Managerial Economics – Class 4 1. Market Structure 2. The Firm, Economic Profit and Opportunity Costs 3. Costs and Cost Curves 4. Profit Maximization (Part I) 1
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Market Structure No two industries are the same. Industries differ along important dimensions, including: 1. The number of firms in the industry 2. The `concentration’ in the industry (e.g., ratio of sales of biggest 4 companies to total industry sales) 3. Pricing structure in the industry (markup over cost, etc.) 4. Merger and acquisition activity 5. Production technology (capital versus labor intensive) 6. Advertising expenditures 7. 8. ….and so on Importantly, profits appear to differ among industries and within industries over time…what is driving these differences?
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Market Structure Some Basic Forces (Organized by Porter) 1. Industry Rivalry (Smith, 1776) 2. Barriers to Entry (Smith, 1776) 3. Substitutes and Complements (Fisher, 1907) 4. Market Power of Suppliers (Edgeworth, 1890s) 5. Market Power of Buyers (Edgeworth, 1890s) These factors jointly help determine the level, growth rate, and sustainability of industry profit. In many cases, as an industry moves through its lifecycle, the nature of forces affecting the industry changes – leading to changes in profitability.
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Market Structure How should we handle industry heterogeneity in economic modeling? Ignore heterogeneity and model every industry as competitive? This is not a palatable approach. Many industries clearly violate the key assumptions behind the competitive market model. Build a separate model for every industry? Also not a palatable approach. While industries differ, they also share much in common. Middle ground: Economists have adopted a small ‘menu’ of key models: Perfect Competition Monopoly Monopolistic Competition Oligopoly Firms with “market power” “Competitive Firms”
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Market Structure Perfectly competitive industry - many firms operate and individual firms are considered to be price takers. Such firms are called ( perfectly) competitive firms . Example : market for shares of McDonald’s common stock Suppose you own 1000 shares of McDonald’s stock and the market price is $64/share Can you sell your 1000 shares for $67/share? Can you sell your 1000 shares for $60/share? Would you want to? What if you owned 300,000 shares? In PC markets individual firms must do business at the “market price” or not at all.
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A perfectly competitive firm faces a constant inverse demand function it can sell as much or as little as it wants at the market price but nothing at any other price. Price
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slides_class4 - Managerial Economics Class 4 1. 2. 3. 4....

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