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00_Oheads - 1 Introduction Lecture Notes Economics and...

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Unformatted text preview: 1 Introduction Lecture Notes Economics and Corporate Finance Some relevant economic concepts • Consumers are the drivers of a market economy: * Business maxim: “The customer always comes first.” * Efficiency reflects values of consumers • Supply and demand: i. “Affordability” or income effects versus substitution effects * the former are bounded; the latter can be arbitrarily large * arbitrage as a special case of perfect substitutes * substitutes are the key to competition ii. Incentives as a substitution effect * labor versus leisure trade-off – work increases with wages if substitution effects dominate * saving versus consumption – saving increases with rates of re- turn if substitution effects dominate iii. Ownership and incentives * relating income to performance gives consumers influence 2 iv. Equilibrating price movements * prices are determined by both supply and demand v. Prices as “signals” on marginal benefits and marginal costs * rates of return on investments are also signals vi. Incentives to reveal and conceal information * markets can be viewed as a decentralized system to produce and reveal relevant information * contrast allocation within firms versus market allocation * separation of owners and managers in a firm – importance of asymmetries of information • Competition as a dynamic process: i. Excess profits attract entrants, although it may be difficult to determine if profits are excessive ex-ante ii. Is an opportunity “too good to be true”? iii. What happens when businesses cannot fail? • Sources of barriers to entry: i. New or differentiated products (particularly if there are pat- ents, copyrights, or R&D expenses) 3 ii. New production technologies iii. New uses for existing resources – such as land re-zoningiii....
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This note was uploaded on 12/20/2011 for the course ECON 448 taught by Professor Bejan during the Spring '06 term at Rice.

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00_Oheads - 1 Introduction Lecture Notes Economics and...

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