Economics: Market Influences on Business Strategies Flashcards
Oligopoly market conditions are characterized by:
Few firms in the market
Significant barriers to entry Differentiated products Fixed (or semi fixed) prices Kinked demand curves
4 Major cost functions
1) Average Fixed Cost
2) Average Variable Cost
3) Average Total Cost
4) Marginal Cost
Average Fixed Cost
Fixed Cost/ Quantity
Average Variable Cost
Variable Cost/ Quantity
Average Total Cost
Total Cost/ Quantity
marginal Cost
Change in total Cost/ Total Quantity
- Depend soleley on variable costs
- Fixed Costs fo not influence marginal costs
Strategies under Monopoly
Under a monopoly, strategic plans will likely ignore market share and focus on profitability from production levels that maximize profit
Monopoly -Features
- A single firm with a unique product
- No sub products, Demand is inelastic
- Easy to enter industry
Change in Demand
is a 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
states that the price of a product (or service) and the quantity demanded of that product or serv are inversely related
Factors that shift demand curve
WRITEN
a) Changes in Wealth (Direct)
b) Changes in the price of related goods (subs or comp)
c) Changes in Consumer Income(Direct )
d) Changes in Consumer Tastes or Preferences for a product (Direct)
e) Changes in Consumer Expectations
f) Changes in the Number of Buyers Served by the market (Direct)
Supply
Fundamental law of supply states that price and quantity supplied are positively related
Quantity Supplied
Is determined by price
Change in Quantity Supplied
Movement along the supply curve (Change in Price)
Factors that Shift Supply Curve
ECOST
Changes in
- The price expectations of the supply form
- Production Costs (If minimum wage increases then supply decreases.
- The price or Demand for other goods
- Changes in Subsidies or Taxes
- Changes in Production Technology
Market Equilibrium
Market Clearing price
Changes in Equlibrium
If supply or demand shifts then equilibrium changes too
Elasticity of Demand and Supply
it is a measure of how sensitive the demand for, or the supply of, a product is to change a price
Price elasticity of demand
%Change in Quantity demanded/ % Change in price
Price In-elasticity
Absolute price elasticity of demand is less than 1
Price elasticity of Supply
measures the change in quantity supplied
Formula for the Price Elasticity of Supply
% Change in Quantity Supplied/ % Change in Price
Cross Elasticity
The percentage change in the quantity demanaded (or supplied) of one good caused by the price change of another good.
If coefficient is 0
The goods are unrelated
If there is a negative coefficient then
the goods are complements
If there is a positive coefficient then
the goods are subs
Income elasticity of demand
the percentage change in quantity demanded for a product for a given percentage change in income
Formula for Income elasticity of demand
% Change in number of units of X demanded/ % Change in Income
Positive Income Elasticity
= A normal Good
Negative Income Elasticity
= An inferior good
Production Measures
Used by companies to measure optimal production levels based on available inputs
Total Product
= Total Amount of output produced
Marginal Product
Change In Total Product/ Change in Labor
Perfect Pure Competition
a)Large number of suppliers and customers acting independently
b) No barriers to entry
c) Very little production differentiation
d) Price is set by the market
e) Firms control only the quantity produced
f) Demand is perfectly elastic
g) Because there are no barriers to entry, the entry and exit of new firms ensures that economic profits are zero
therefore firms earn a normal rate of return
Strategies under Perfect Competition
- Maintain the market share
- Respond to market prices
Monopolistic Competition
Many sellers compete to sell a differentiated product in a market into which the entry of new sellers is possible
Monopolistic Competition
Assumptions and Market Conditions
a) Numerous firms with differentiated Products
b) Few barriers to entry
Strategies under Monopolistic Competition
- maintain the market share
- focus on diferentiaion
- spend money on advertising
Strategies under Oligopoly
- focus on market share
- call for proper amount of advertising to ensure product differentiation
Monopoly
represents concentration of supply in the hands of a single firm.
Assumptions and market characteristics of Monopoly
A single firm with a uniue product with no subs in the market.
Price setters
-Other firms cannot come in
Strategies under Monopoly
-They will likely ignore market share
bc there is no competion.
They are going to focus on profitability
Factors that influence Strategy -Internal Factors
Strengths and weaknesses
a) Innovation of product lines
b) Competence of management
Factors that influence Strategy-External Factors
a) Competitive Environment of the industry
b) Competitive Environment of the Firm
actors that influence Strategy-External Factors
b) Competitive Environment of the Firm
Porter’s 5 forces
1) barriers to entry
2) Market Competitiveness
3) Existence of Subst. products
4) Bargaining power of the customers
5) Bargaining power of the suppliers
Competitive advantage
determined by the value the firm offers to its customers minus the cost of creating that value
Cost Leadership Advantage
- Lower costs
- firm has been able to produce and sell its product less than its rivals.
a) build Market Share
b) Match the price of rivals
Differentiation Advantage
“Better” Product
Perceives the firm’s product to be superior in some way to those of its rivals. Therefore, they are willing to pay a higher price for its uniqueness
a) Build Market Share
b) Increase the price.
5 Basic Typed of Competitive Strategies
1) Cost leadership focused on a broad range of buyers
2) Cost leadership focused on a narrow range of buyers
3) Differentiation focused on a broad range of buyers
4) Differentiation focused on a narrow range of buyers
5) Best cost provider= Cost leadership + Differentiation
Cost leadership strategies work well
when buyers have large amounts of bargaining power and are able to switch between competitive products without incurring significant cost
Cost leadership strategies fails
when companies focus too much on cutting cost. This can undermine the quality of the product
Differentiation strategies work well
When customers are able to see value in a product, when the product appeals to different people for different reasons
Differentiation strategies fails
When the cost of differentiation product exceeds the benefit
Best Cost Strategies
High quality product at a reasonable prices
When Best cost strategies work well
When generic products are not acceptable to the varied needs and preferences of the buyers.
When Best cost strategies fail
when firms try to be too much of both things
Value Chain Analysis
Managers must determine the flow of activities undertaken by the organization to produce a service or product and critique the value added to the customer by each link in the value chain.
It assesses the ability of the firm to obtain a competitive advantage
Approach of Value Chain Analysis
1) Internal Cost Analysis -sources of profits and costs of the internal activities
2) Internal Differentiation Analysis
-create value through differentiation.
When the customer perceives that the firm’s product is superior to those of its rivals.
3) Vertical Linkage Analysis
Where value can be created external to the firm’s operations
