Lecture unit 01 Flashcards
What are the four broad classes of issues a firm must confront to successfully formulate and implement strategy?
- Boundaries of the firm
- Market and competitive analysis
- Internal organization
- Positioning and dynamics.
What are the 3 different directions of the boundaries of a firm?
- Horizontal product market coverage (how much of the product market the firm serves)
- Vertical: activities performed itselfs vs. outsourced (purchases from market specialty firms)
- Corporate: the set of distinct businesses the firm competes in
What do the firm´s boundaries define?
The firm´s boundaries define what the firm does
What must firms understand to formulate and execute successful strategies?
The nature of the markets in which they compete
The nature of industry structure.
- This is essential to understand why firms follow certain strategies.
- It helps in formulating strategies for competing in an industry
What does positioning and dynamics refer to in a firm’s strategy?
- Positioning: concerns resources + capabilities for cost or differentiation advantages that a firm might have
- Dynamics: how the firm accumulates resources and capabilities, and how it adjusts over time to changing circumstances
What is positiining and dynamics the shorthand?
Positioning and dynamics are shorthand for how and on what basis a firm competes
What controls does a firm’s management have, and what do they lack control over?
Control Over: Functions like finance, marketing, and production.
No Direct Control Over: Profits or market share
What determines if a firm’s decisions translate into markers of business success, and what are the key economic principles of a firm?
Determining Factors: Economic relationships.
Economic principles include:
- Costs: fixed vs. variable costs, average vs. marginal costs,
- demand, price, revenue, and
- the profit maximization condition (MR=MC) (price and output)
What is accounting cost?
- Accounting costs are based on the accrual principles
- They rely on historical costs
–>Accounting cost become useful in measuring the past performance of firms
What defines the economic cost of a resource, and why are opportunity costs important?
- Economic cost of a resource is its value in the best foregone use (opportunity cost)
- Good economic decisions consider opportunity costs
–>ignoring opportunity costs may overstate the profitability of a firm
What distinguishes accounting profits from economic profits?
- Accounting profit = Sales - Accounting costs
- Economic profit = Sales - Economic costs (including opportunity costs)
Econ. profit = acc. profit - (eco. cot - acc cost)
What are the characteristics of the demand curve for most products? (monopolistic price-demand function)
- Non-negative: at all prices
- continuous: to each amount of sales there exists a price
- differentiable: well-defined slope,
- negative slope indicating price increases lead to demand decreases.
What are the exceptions when a downward sloping deamd curve not exist?
Generally, exists for most products
Exceptions are when:
- price signals quality
- price implies prestige
What does the demand cure report?
- the quantity bought at various prices and
- the highest price the market will bear for a given output.
What are violations of the characteristics of the price-demand function? How are the goods. Alles and what is the example with cafe
- Giffen-good: cafeteria price increase example
- p=3 –> 4 x cafe + McDon.
- p=4 –>5x cafe, since now the budget does not allow to get McDon as well,
–>However, the student ends up buying lunch five times in the cafeteria, using up the entire budget of €20 (5 x €4 = €20)
- Price as an indicator of quality
What is a giffen good?
A Giffen good is a type of inferior good for which
- an increase in its price leads to an increase in quantity demanded, contrary to the typical law of demand
What is elasticity?
= is the sensitivity of the demand to changes in price, adverting, promotions, products reviews
Under what conditions can demand be elastic?
elastic: < -1 –>elastic when:
- the product is undifferentiated
- it is a large fraction of total expenditure from the customer (high wallet share)
- Is an input for final goods, or
- when there are readily available substitutes
When is demand inelastic?
Inelastic: 0 > e > -1:
- When product complexity makes comparison difficult
- Information on substitutes is scarce
- Cost isn’t fully borne by market price, or
- switching costs are high
- Products is jointly used with other products to which the customer is comitted
How are pricing and output decisions determined for maximizing profits?
Profits are maximized when marginal revenue (MR) equals marginal costs (MC), applicable in perfect competition and monopoly contexts.
What does inelastic and elastic demand mean?
- elastic demand: the quantity changes significantly if price changes
- Inelastic demand: the quantity changes only slighly or not at all
is demand elasticity the same for brand and industry level?
Demand is elastic at the brand level even when it may be inelastic at the industry level
What determines whether industry level or brand level elasticity is relevant?
Industry Level Elasticity:
- Relevant if rivals match price changes by a firm
Brand Level Elasticity:
- Relevant if rivals do not match price changes.
