BEC 5 Market influence Flashcards
Demand curve
maximum quantity of a good that consumers are willing and able to purchase at each and every price
Quantity demand
quantity of a good individuals are willing and able to purchase at each and every price
Change in quantity demanded
change in the amount of a good demanded resulting from a change in price
Change in demand
change in the amount of a good demanded resulting from a change in something other than the price of the good
Fundamental law of demand
price of a product and the quantity demanded of that product are inversely related. As the price of the product increases, the quantity demanded decreases.
Quantity demanded is inversely related to price for two reasons
- Substitution effect - consumers tend to purchase less of goods when their price rises in relation to the price of other goods.
- Income effect - prices are lowered with income remaining constant, people will purchase more of all of the lower priced products
Factors that shift demand curves
- Changes in wealth
- Changes in the price of related goods
- Changes in consumer income
- Changes in consumer tastes or preferences for a product
- Changes in consumer expectations
- Changes in the number of buyers served by the market
Supply curve
the maximum quantity of a good sellers are willing and able to produce at each and every price.
Quantity supplied
the amount of a good that producers are wiling and able to produce at each and every price
Change in quantity supplied
a change in the amount producers are willing and able to produce resulting from a change in price
Change in supply
a change in the amount of a good supplied resulting from a change in something other than the price of the good
Factors that shift supply curves
- Changes in price expectations of the supplying firm
- Changes in production costs
- Changes in the price or demand for other goods
- Changes in subsidies or taxes
- Changes in production technology
Market equilibrium
there are no forces acting to change the current price/quantity combination
Changes in equilibrium
a. Effects of a change in demand on equilibrium
b. Effects of a change in supply equilibrium
c. General effects of changes in demand and supply on equilibrium
Market clearing
market will eventually be cleared of all excess supply and demand (no price changes)
Changes and effects
- Change in Demand - 2. Change in Supply - 3. Effect on Equilibrium Quantity - 4. Effect on Equilibrium Price
- Increase - 2. Increase - 3. Increase - 4. ?
- Increase - 2. Decrease - 3. ? - 4. Increase
- Decrease - 2. Decrease - 3. Decrease - 4. ?
- Decrease - 2. Increase - 3. ? - 4. Decrease
Government intervention in market operations
- Price ceilings - established below the equilibrium price which causes shortages to develop. Price ceilings cause prices to be artificially low, creating a greater demand than the supply available
- Price floors - a min price set above the equilibrium price, which causes surpluses to develop. Price floors are min prices established by law, like min wage.
Elasticity of demand and supply
Elasticity is a measure of how sensitive the demand for or the supply of a product is to a change in price
Price elasticity of demand
% change in quantity demanded divided by % change in price
Measuring the price elasticity of demand
- Point method
2. Midpoint method
Point method
measures the price elasticity of demand at a particular point on the demand curve
Price Elasticity of Demand = % change in quantity demand / % change in price
Midpoint method
measures the price elasticity of demand between any two points on the demand curve
E = ((Q2 - Q1) / (Q2 + Q1)) / ((P2 - P1) / (P2 + P1))
Price inelasticity
- demand for a good is price inelastic if the absolute price elasticity of demand is less than 1.0.
- The smaller amt the less elastic
- 0.0 perfect inelastic
Price elasticity
the absolute price elasticity of demand is greater than 1.0
Unit elasticity
- the absolute price elasticity of demand is equal to exactly 1
- % change in the quantity demanded caused by a price change equals % change in price
Factors affecting price elasticity of demand
- product demand is more elastic with more substitutes available but is inelastic if few substitutes are available
- the longer the time period, the more product demand becomes elastic because more choices are available
Price elasticity effects on total revenue
a. Effects of price inelasticity on total revenue - an increase in price results in a decrease in quantity demanded that is proportionally smaller than the increase in price. Revenue will increase
b. Effects of price elasticity on total revenue - an increase in price results in a decrease in quantity demanded that is proportionally larger than the increase in price. Revenue will decrease
c. Effects of unit elasticity on revenue - a change in price will have no effect on total revenue
Price elasticity of demand
Elastic > greater than 1 - Price UP then revenue Down - Price DOWN then Revenue UP
Inelastic < less than 1 - Price UP then Revenue UP - Price DOWN then Revenue DOWN
Unit elastic = equal 1 - Price UP then revenue same - Price DOWN the revenue same
Price Elasticity of Supply
Price elasticity of supply = % change in quantity supplied / % Change in price
Price inelasticity
Supply < 0
absolute price elasticity of supply is less than 1.0
Price elasticity
Supply > 0
absolute price elasticity of supply is greater than 1.0
Unit elasticity
Supply = 1.0
absolute elasticity price of supply is equal to 1.0
Factors affecting price elasticity of supply
- feasibility of customers storing the product will affect the price elasticity of supply
- the time it takes to produce and supply the good will affect the price elasticity of supply
Price Elasticity effects on revenue
Elastic Greater than 1 - Price UP then Revenue Down - Price Down then Revenue UP
Inelastic Less than 1 - Price UP then Revenue UP - Price Down then Revenue Down
Unit Elastic equal 1- Price UP then Revenue the same, Price Down then Revenue the same
Price elasticity of supply
Price elasticity of supply = % change in quantity supplied / % change in price
% Change = (New - Old) / Old
Cross elasticity
% change in the quantity demanded of one good caused by the price change of another good
Cross elasticity of demand / Supply = (% change in number of units of X demanded) / % change in price of Y
Substitute goods: Positive coefficient
if coefficient is positive, the two goods are substitutes
Price of A goes up, so people start buying cheaper B
Complement goods: Negative coefficient
If coefficient is negative, the commodities are complementary
Price of A goes up, people buy less of B too
Income elasticity of demand
measures % change in quantity demanded for a product for a given % change in income
Income elasticity of demand = % change in # of units of X demanded / % change in income
Positive income elasticity
the good is a normal good and its demand is positively related to income (income goes up, demand up like steak or lobster)
Negative income elasticity
the good is an inferior good and its demand is inversely related to income (income goes up, demand is down like canned vegetables)
Production concept
- Total product = total amount of output produced
- Marginal product = change in total product resulting from a one unit increase in the quantity of an input employed.
- Average product = total product divided by the quantity of an input
The short run
a period of time in which some of the inputs used for production are fixed
The long run
a period of time in which all of the inputs used for production are variable
Law of diminishing returns
when more and more units of an input are combined with a fixed amount of other inputs, output increases but at a diminishing rate
Cost of functions
- Average fixed cost
- Average variable cost
- Average total cost
- Marginal cost
Average fixed cost
Total fixed costs / Quantity
Average variable costs
Total variable costs / Quantity
Average total cost
Total fixed + variable costs / Quantity
Marginal cost
- change in total cost associated with a change in output quantity over a period of time
- marginal cost depends on variable costs
- fixed costs do not influence marginal costs
Perfect competition
- many highly competitive firms in industry
- small size of firms
- easy to enter industry
- all firms sell the same commodity product
- firms has control over quantity produced only
- price is set by the market
- form must accept the market price
- perfectly elastic demand (firm sells as much or as little as it wants at the given market price)
- long run profitability - zero economic profit
- strategy - maintaining market share and responsiveness of sales price to maker conditions
Monopolistic competition
- many highly competitive firms
- small size of firms
- easy to enter industry
- firms sell slightly different products that are close substitutes
- firm has control mostly over quantity produced
- price is mostly set by the market
- highly elastic demand but downward sloping (firm can adjust quantity of products sold without affecting the price very much)
- Long run profitability - zero economic profit
- strategies - maintaing market share
- enhanced product differentiation and allocation of resources to adverting, marketing and product research
Oligopoly
- few moderately competitive firms
- large size of firms
- difficult to enter industry because of economies of scale
- firms usually sell differentiated products
- firm has control over both the quantity produced and the price charged
- inelastic demand (firms face a kinked downward sloping demand curve)
- Long run profitability - positive economic profit
- Strategies - maintaing or enhancing market share
- proper spending on adverting
- proper adaptation to price changes and changes in production volume
Monopoly
- one firm and no competition
- 100% of industry
- no entry is possible
- one firm sells only one product
- firm has control over price and quantity
- inelastic demand ( firm faces the entire demand curve for the product, which slopes downward)
- Long run - positive economic profit
- Strategy - ignore market share and focus on profitability form production levels that max profits
Factors of production
- primary resources from which products are made consists of:
land
labor
capital
Complementary inputs
if an increase in the usage of one input results in an increase in the usage of the other input
Substitute inputs
an increase in the usage of one inputs results in a decrease in the usage of the other input
Derived demand
demand for factors of production is directly related to the demand for the goods and services those inputs produce
Demand for inputs depends on demand for outputs
if the demand for a firm’s output increases, the demand for in inputs used to produce that output will also increase
Labor market
workers sell their services to employers in labor markets, where workers independently offer skills of a given quality to employers who compete for the workers services
Labor demand and supply under monopoly
- only one employer in a market
- lower wages
- lower levels of employment
Effect on unionized workers
- workers gain market power
Effect on non unionized workers
- employment falls in the unionized sector, displaced workers may seek employment in the nonunion sector
Minimum wage laws
- increase the wages of low skilled labor
- if the min wage is set above the equilibrium wage, will result in unemployment
Factors that influence strategy
- Internal factos (Strength and weaknesses)
- innovation of product lines
- competence of management
- core competencies
- influence of high level managers
- marketing effectiveness
- effectiveness of communication etc - External factors
a. Factors that affect the overall industry and competitive environment of the industry: economy regulations and laws, demographics, technological advances, social values, political issues
b. Factors that affect the competitive environment of the firm: barriers to market entry, market competitiveness, existence of substitute products, bargaining power of customers and suppliers
Forces that affect the competitive environment and profitability of firm
- Barriers to entry
a. Types of barriers to entry
b. When new companies will attempt to enter - Market competitiveness
a. Ability of rival firms to respond to change
b. Advertising of rival firms
c. Research and development of rival firms
d. Alliances of rival firms and suppliers
e. Increase in competition - Existence of substitute products
- Bargaining power of the customer
a. Larger volume of a firm’s business
b. Availability of information
c. Buyer’s low cost of switching products
d. High number of alternate suppliers - Bargaining power of the suppliers
a. Firm is unable to change suppliers
b. Reputation of supplier and demand for its goods
Competitive Advantage in General
The overall competitive advantage of a firm is determined by the value the firm offers to its customers minus the cost of creating that value.
Cost leadership advantage
- Build market share
2. Match the price of rivals
Differentiation advantage
a. Build market share
b. Increase price
Basic types of competitive strategies
- Cost leadership focused on a broad range of buyers
- Cost leadership focused on a narrow range of buyers
- Differentiation focused on a broad range of buyers
- Differentiation focused on a narrow range of buyers
- Best cost provider
Cost leadership strategies
selling products for less than any other participant in the marketplace
Differentiation strategies
creating the perception that their product is better or has a unique quality that differentiates it from competing products
Best cost strategies
the cost leadership strategy with the differentiation strategy to give customers higher value for their purchase price
Focus/Niche strategies
focus on a selected small group of customers, the niche has a large enough demand to create a profit for the firm and provided the firm has the proper resources to adequately serve the needs of the niche group
Value chain analysis
strategic tool that assists a from in determining how important its value is with respect to the market in which the firm operates
Approach of value chain analysis
- Internal costs analysis
- Internal differentiation analysis
- Vertical linkage analysis
Steps in value chain analysis
- Identify value activities
- Identify cost drivers associated with each activity
- Develop a competitive advantage by reducing cost or adding value
a. Identify competitive advantage
b. Identify opportunity for added value
c. Identify opportunity for reduced cost
Factors impacting global competitive advantage
- Conditions of the factors of production
- Conditions of domestic demand
- Related and supporting industries
- Firm strategy, structure and rivalry
Supply chain management
a firm and the entire supply chain are able to predict the expected demand of consumers for a product and then plan accordingly to meet that demand
SCOR Supply Chain Operations Reference model
a generic model for supply chain analysts, SCOR model assists a firm in mapping out its true supply chain and then configuring it to best fir the needs of the firm and consists of four key management processes.
SCOR Supply Chain Operations Reference model steps
- Plan
- Source
- Make
- Deliver
Natural monopoly
economic and technical conditions permit only one efficient supplier
Entry barrier
large capital requirements are the basic example of barriers to entry.
Monopolistic competition
- numerous firms with differentiated products
- ease of entry - few barriers
- firms exact some influence over price and market
- non price competition is frequent and critical
Oligopoly market conditions
- few firms in the market
- significant barriers to entry
- differentiated products
- fixed prices
- kinked demand curves
Kinked demand curve
- the demand curve for an individual oligopolist is kinked sharply downward.
- firms will match any price reduction so they do not lose market share but will not match any price increase of an individual firm
- firms raising their prices beyond equilibrium will lose clients and demand drops off sharply
Pure competition strategic plans
maintaining the market share and being responsive to market conditions related to sales price
Monopolistic competition strategic plans
- maintaining the market share
- enhanced product differentiation
- allocation of resources to advertising, product research etc
Monopoly strategic plans
- ignore market share
- focus on profitability from production levels that will max profits
Oligopoly strategic plans
- focus on maintaining market share
- call for the proper amount of advertising to ensure product differentiation
- adoption to price changes or required changes in production volume
Vertical linkage
understanding the activities of the suppliers and buyers of the product and determining where value can be created external to the firm’s operations.
Economies of scale
- a production process gets larger, the process becomes more efficient and productivity increases
- the theory of diminishing returns is the opposite of economies of scale in that it holds that, as more product is produced, the factory gets less productivity out of its workforce and machinery
- factors contributing to economies of scale include:
- labor specialization
- managerial specialization
- utilization of by products
- efficient use of capital equipment
- volume discount purchasing
In order to sell at the rate of output in markets controlled by monopolists, price is set where
Marginal revenue = Marginal cost
No matter which model is representative of the industry in which the firm operates, the firm will max profits by pro ducting at Marginal revenue = Marginal costs
Natural monopoly
economic and technical conditions permit only one efficient supplier
Fundamental law of demand
the price of a product and the quantity demanded of that product have an inverse relationship
Factors that shift demand curves
Changes in:
- wealth
- prices
- consumer income
- consumer tastes or preferences
- consumer expectation
- number of buyers
Fundamental law of supply
price and quantity supplied are positively related, the higher the price receive for a good, the more quantity sellers are willing to produce
Factors that shift supply curves
Changes in:
- price expectations of supplying firm
- production costs
- the demand for other goods
- subsidies or taxes
- technology
Shift right in the demand curve
increase in demand, causing an increase in price and market clearing quantity
Shift left in the demand curve
decrease in demand, causing a decrease in price and market clearing quantity
Shift right in the supply curve
increase in supply, causing a decrease in price and increase in market clearing
Shift left in the supply curve
decrease in supply, causing an increase in price and a decrease in market clearing
Market clearing quantity
equilibrium quantity
Changes that firms needs to adapt to
Changes in:
- technology
- competition
- crisis situation
- regulatory laws
- customer preferences
Competitive strategies of pure competition
- a large number of suppliers and customers acting independently
- very little product differentiation
- no barriers to entry
- firms are price takers
- strategies include maintaining market share and responsiveness to sales prices
Monopoly
- a single firm with a unique product
- significant barriers to entry
- the ability of the firm to set output and prices
- no substitute products
- strategies include ignoring market share and focusing on profitability from production levels that maximize profits
Monopolistic competition
- numerous firms
- few barriers to entry
- the ability of firms to exert some influence over the price and market
- signifiant non price competition in the market
- zero economic profits in the long run
- strategic plans include maintaining the market share and a plan for enhanced product differentiation
Oligopoly
- few firms with differentiated products
- significant barriers to entry
- strongly interdependent firms (fixed proces)
- kinked demand curve - firms match price cuts but ignore price increases
- strategic plans focus on market share and call for the proper amount of advertising and ways to adapt to price and volume changes
Price elasticity of demand
the percentage change in the quantity demanded divided by the percentage change in price
Price elasticity of supply
The percentage change in the quantity supplied divided by the percentage change in price
Inelasticity of demand or supply
the absolute value of the elasticity calculation is < 1.0
Elasticity of demand or supply
the absolute value of the elasticity calculation is > 1.0
Unit elasticity of demand or supply
the absolute value of the elasticity calculation is exactly 1.0
Price ceilings
a price established below the equilibrium price, prices are artificially low, and more quantity is demanded than supply is available (market shortage)
Price floors
a price is established above the equilibrium price, prices are artificially high, and less quantity is demanded than is available (market surplus)
Rationing
a limit is placed on the availability of goods, demand is reduced, and price is lowered for a given supply (black markets could emerge)
External forces that affect the competitive environment and profitability of a firm
- barriers to market entry
- market competitiveness
- existence of substitutes
- bargaining power of the customers
- bargaining power of the suppliers
Basic competitive strategies
- cost leadership focused on abroad range of buyers
- cost leadership focused on a narrow range of buyers
- differentiation focused on a broad range of buyers
- differentiation focused on a narrow range of buyers
- best cost provider
Cost leadership
lowest overall costs
Differentiation
unique features that create loyalty/value
Best cost
low cost leader among rivals and unique features
Key management processes of SCM
- plan
- source
- make
- deliver
