Market Structure and Competition

Market Structures
• Type of market structure influences how a firm behaves:
–Pricing
–Supply
–Barriers to Entry
–Efficiency
–Competition

Degree of competition in the industry
• High levels of competition-- Perfect Competition
• Limited Competition-- Monopoly
• Degrees of competition in between

Determinants of market structure
– Freedom of entry and exit
–Nature of the product-- homogenous (identical), differentiated?
–Control over supply/output
–Control over price
–Barriers to entry

Perfect Competition:
– Free entry and exit to industry
– Homogenous product-- identical, so no consumer preference
– Large number of buyers and sellers-- no individual seller can influence price
– Sellers are price takers-- have to accept the market price
– Perfect information available to buyers and sellers

Examples of perfect competition:
–Financial markets-- stock exchange, currency markets, bond markets?
–Agriculture?
• To what extent?

The Price Elasticity of Supply

The price elasticity of supply is a measure of the extent to which the quantity supplied of a good changes when the price of the good changes and all other influences on sellers’ plans remain the same.
A. Elastic and Inelastic Supply
1. The price elasticity of supply falls into three categories:
a. Elastic supply—when the percentage change in the quantity supplied exceeds the percentage change in price.
b. Unit elastic supply—when the percentage change in the quantity supplied equals the percentage change in price.
c. Inelastic supply—when the percentage change in the quantity supplied is less than the percentage change in price.
2. There are two extreme cases of price elasticity of supply:
a. Perfectly elastic supply—when the quantity supplied changes by a very large percentage in response to an almost zero percentage change in price
b. Perfectly inelastic supply—when the quantity supplied remains constant as the price changes.
B. Influences on the Price Elasticity of Supply
1. Production possibilities
a. How rapidly the cost of increasing production rises and the time elapsed since the price change influence the elasticity of supply. The more rapidly the production cost rises and the less time elapsed since a price change, the more inelastic the supply.
2. Storage possibilities
a. Storable goods have a more elastic supply than goods that cannot be stored.

The Price Elasticity of Demand

The price elasticity of demand is a measure of the extent to which the quantity demanded of a good changes when the price of the good changes and all other influences on buyers’ plans remain the same.

A. Percentage Change in Price

1. The midpoint method uses the average of the initial price and new price in the denominator when calculating a percentage change. Because the average price is the same between two prices regardless of whether the price falls or rises, the percentage change in price calculated by the midpoint method is the same for a price rise and a price fall. 

a. Using the midpoint formula, the percentage change in price equals

B. Percentage Change in Quantity Demanded

Use the midpoint method when calculating the percentage change in quantity.

1. Minus Sign

Because a change in price causes an opposite change in quantity demanded, for the price elasticity of demand we focus on the magnitude of the change by using the absolute value.

C. Elastic and Inelastic Demand

The price elasticity of demand falls into three categories:

1. Elastic demand—when the percentage change in the quantity demanded exceeds the percentage change in price (which means the elasticity is greater than 1).

2. Unit elastic demand—when the percentage change in the quantity demanded equals the percentage change in price (which means the elasticity equals 1).

3. Inelastic demand—when the percentage change in the quantity demanded is less than the percentage change in price (which means the elasticity is less than 1).

4. There are two extreme cases:

a. Perfectly elastic demand—when the quantity demanded changes by a very large percentage in response to an almost zero percentage change in price.

b. Perfectly inelastic demand—when the quantity demanded remains constant as the price changes

Tools and Technique of Decision Making

Steps in decision making:

• Establish objectives

• Specify the decision problem

• Identify the alternatives

• Evaluate alternatives

• Select the best alternatives

• Implement the decision

• Monitor the performance

Basic economic tools in managerial economics for decision making:

Economic theory offers a variety of concepts and analytical tools which can be of considerable assistance to the managers in his decision making practice. These tools are helpful for managers in solving their business related problems. These tools are taken as guide in making decision.

Following are the basic economic tools for decision making:

1) Opportunity cost

2) Incremental principle

3) Principle of the time perspective

4) Discounting principle

5) Equi-marginal principle

1) Opportunity cost principle:

By the opportunity cost of a decision is meant the sacrifice of alternatives required by that decision.

For e.g. 

a) The opportunity cost of the funds employed in one’s own business is the interest that could be earned on those funds if they have been employed in other ventures. 

b) The opportunity cost of using a machine to produce one product is the earnings forgone which would have been possible from other products.

c) The opportunity cost of holding Rs. 1000as cash in hand for one year is the 10% rate of interest, which would have been earned had the money been kept as fixed deposit in bank.

Its clear now that opportunity cost requires ascertainment of sacrifices. If a decision involves no sacrifices, its opportunity cost is nil.

For decision making opportunity costs are the only relevant costs.

2) Incremental principle:

It is related to the marginal cost and marginal revenues, for economic theory. Incremental concept involves estimating the impact of decision alternatives on costs and revenue, emphasizing the changes in total cost and total revenue resulting from changes in prices, products, procedures, investments or whatever may be at stake in the decisions.

The two basic components of incremental reasoning are

1) Incremental cost

2) Incremental Revenue

The incremental principle may be stated as under :

“ A decision is obviously a profitable one if –

a) it increases revenue more than costs

b) it decreases some costs to a greater extent than it increases others

c) it increases some revenues more than it decreases others and

d) it reduces cost more than revenues”

3) Principle of Time Perspective

Managerial economists are also concerned with the short run and the long run effects of decisions on revenues as well as costs. The very important problem in decision making is to maintain the right balance between the long run and short run considerations.

For example,(illustration)

Suppose there is a firm with a temporary idle capacity. An order for 5000 units comes to management’s attention. The customer is willing to pay Rs 4/- unit or Rs.20000/- for the whole lot but not more. The short run incremental cost(ignoring the fixed cost) is only Rs.3/-. There fore the contribution to overhead and profit is Rs.1/- per unit (Rs.5000/- for the lot)

Managerial Decisions - Decision analysis

Managerial economic is concerned with decision making at the firm level.
Decision making problems faced by business firms:
• To identify the alternative courses of action of achieving given objectives.
• To select the course of action that achieves the objectives in the economically most efficient way.
• To implement the selected course of action in a right way to achieve the business objectives.

The prime function of management is Decision making and forward planning. Forward planning goes hand in hand with decision making. Forward planning means establishing plans for the future

The sources of Economic problem

Resource sand scarcity:

This is the main source of the economic problem. we have limited resources and the means to satisfy those resources are very limited.

Here the resources of the society consists not only of the free gifts of the nature such as land, forests and minerals, but also of human capacity both mental and physical and of all sorts of man-made aids to further production, such as tools, machinery, building etc.

These resources can be divided into three main groups:

1. All those free gifts of nature, such as land, forests, minerals, etc. are commonly called as natural resources and known to economists as LAND.

2. All human resources, mental and physical, both inherited and acquired, which economists call LABOUR.

3. All those man-made aids to further production, such as tools, machinery, plants and equipments, including everything man-made which is not consumed for its own sake but is used in the process of making other goods and services, and which is known to economists as CAPITAL.

Economics help us in economizing our means. It helps us in understanding the problem and making the right decision so that its helpful for the organization for its further planning.

BASICS OF MANAGERIAL ECONOMICS

What do you mean by decision making?

Well decision making is not something which is related to managers only or which is related to corporate world, but it is something which is related to everybody’s life. Whether a person is working or non working, irrespective of his/her field decision making is important to everyone.

You need to make decision irrespective of the work you are doing. As a student also you have to take so many decisions.

Suppose at a particular point of time you want to go for a movie, and at the same point of you want to go for shopping then what you will do.

You can’t do two things at the same point of time. You have to decide what to first and what to do next.

Therefore decision making can be called as choosing the right option from the given one.

To decide is to choose. Whether to do this or to do that is what decision making.

Meaning of decision making

Decision making is the most important function of business managers. Decision making is the central objective of Managerial Economics.

Decision making may be defined as the process of selecting the suitable action from among several alternative courses of action.

The problem of decision making arises whenever a number of alternatives are available.

Such as :

What should be the price of the product?

What should be the size of the plant to be installed?

How many workers should be employed?

What kind of training should be imparted to them?

What is the optimal level of inventories of finished products, raw material, spare parts, etc.?