25E52000 Market Entry Strategies for Entrepreneurial Business

Size: px
Start display at page:

Download "25E52000 Market Entry Strategies for Entrepreneurial Business"

Transcription

1 25E52000 Market Entry Strategies for Entrepreneurial Business Introduction to the Course Introduction CONTENT, SCHEDULE AND TIPS & TRICKS 1

2 Learning Objectives Economics-driven strategic analysis to evaluate markets for successful entry and sustainable competitive advantage Market and competitive analysis Strategic positioning and dynamics Examples of Questions We Will Study What components of a product or service should be produced in-house and which ones should be bought from outside suppliers? What economic forces influence industry profits? How would competitors respond to a strategic choice such as a price cut, or a new entrant? What strategic positioning cost, differentiation or focus creates a sustainable competitive advantage under what circumstances? 2

3 The Five-Forces Framework Study Material Textbook Besanko, David, Dranove, David, Shanley, Mark, & Schaefer, Mark (2013). Economics of Strategy. 6 th Edition International Student Version. Wiley. Cases Four cases will be available in MyCourses after the first lecture. It is essential to read the case prior to the class where it is discussed! 3

4 Timetable Class Participation and Format Participation is not mandatory but recommended Format First class is an introduction Classes 2-6 follow the format Case discussion Lecture If you attend classes, please Do so regularly Read the case in advance Think about the case assignment questions in advance Be prepared to discuss the case in class Sit in the front rows when in class Reading the textbook chapter before class is optional 4

5 How to Complete the Course There are points up for grabs: 50 or more are needed to pass Individual assignment: 0-50 points Short reports of words on three cases: Slavic Treasures, Research in Motion, and The Londoner Focus on application of theory on the questions presented in the syllabus Submit all three case reports as a single PDF document by 18 December Group assignment: 0-50 points 1-3 students per group; 4000 words Full analysis of market and competitive environment including strategy recommendations for sustainable competitive advantage Flybaboo case or own business idea Apply the whole breadth of material covered in the course see the list of questions in the syllabus for a guideline One student per group submits the report as a PDF document by 18 December Class participation: 0-10 points Questions Preferably post questions to the News forum in MyCourses so that other students benefit from them too Alternatively the lecturer Before posting or sending s remember to check the syllabus! 5

6 25E52000 Market Entry Strategies for Entrepreneurial Business Lecture 1 Horizontal Boundaries of the Firm: Economies of Scale and Scope Based on Chapter 2 in Besanko et al. (2013). Economics of Strategy. Sixth Edition. Wiley. Learning Objectives Understand factors that create cost advantages This is essential knowledge for the rest of the course Principal concepts Fixed, variable, average and marginal costs Economies of scale Economies of scope Learning curve Minimum efficient scale (MES) 6

7 Horizontal Boundaries of the Firm How big a market does the firm serve? What quantities are produced? How many different products/services are produced? Horizontal Boundaries of the Firm In some industries a few large corporations dominate the market e.g. airframe manufacturing (Boeing, Airbus) In others small firms are typical e.g. website design, architecture Many industries are characterised by a mix of small and large firms e.g. beer, computer software, restaurants 7

8 Which Factors Define Horizontal Boundaries? Economies of scale When a firm produces more, the average cost of a unit of production decreases Economies of scope Producing different products/services in the same firm leads to cost savings Learning curve Cost advantage emerges from cumulative knowledge and skills Types of Costs Fixed costs (FC) Do not vary with quantity produced e.g. administrative expenses, R&D, rents Semi-fixed costs vary with intervals of quantity Variable costs (VC) Vary with production quantity e.g. raw materials, direct labour costs, commissions Total cost (TC) TC(Q) = FC + VC(Q) 8

9 Example: Jane s microbrewery Fixed costs (FC) Rent (per month): 800 Brewing equipment (5 years lifetime, per month): 200 One employee s salary: 3000 Monthly FC = = 4000 Variable costs (VC) Ingredients and packaging per case of beer: 5 Assume Jane can produce 1000 cases of beer per month Monthly VC(1000): 5*1000 = 5000 Total cost (TC) TC(Q) = FC + VC(Q) = ( 5*1000) = 9000 Types of Costs Average cost (AC) How a firm s average cost per unit produced varies at different levels of output AC(Q) = TC(Q)/Q Marginal cost (MC) How production quantity affects total cost Additional cost caused by producing one more unit of output MC( Q) = [TC(Q+ Q) TC(Q)] / Q 9

10 Example: Jane s microbrewery Jane can produce 1000 cases of beer per month FC = 4000 VC(Q) = 5Q TC(1000) = ( 5*1000) = 9000 Average cost of a case (AC) AC(Q) = TC(Q)/Q AC(1000) = 9000/1000 = 9 What if Jane could produce an additional 500 cases per month by increasing her own work effort (=same FC)? TC (1500) = ( 5*1500) = 11,500 AC(1500) = 11,500/1500 = 7.67 Example: Jane s microbrewery What is the marginal cost of those additional 500 cases of beer? MC( Q) = [TC(Q+ Q) TC(Q)] / Q TC(Q+ Q) = TC(1500) = 11,500 TC(Q) = 9000 MC(500) = ( 11, ) / 500 = 5 Each additional unit produced in the range of 1000 to 1500 costs Jane 5 Why is MC= 5? What if Jane had to hire an additional employee for the additional 500 cases? FC = = 7000 TC(1500) = ( 5*1500) = 14,500 AC(1500) = 14,500 / 1500 = 9.67 MC(500) = ( 14, ) / 500 = 11 10

11 Economies of Scale When the marginal cost is less than average cost (MC < AC), there are economies of scale Average cost declines with increasing output If average cost increases with output (MC > AC) we have diseconomies of scale Average cost increases with increasing output Constant returns to scale (MC = AC) Increasing output neither increases nor decreases average cost Example: Jane s microbrewery Jane realised economies of scale in the original scenario where FC = 4000 VC = 5(Q) Q = 1000 AC(1000) = 9 MC(1000) = 5 MC < AC By increasing her work effort, she also realised economies of scale when producing an additional 500 cases of beer AC(1500) = 7.67 MC(500) = 5 MC < AC But if she had to hire an additional employee for the 500 cases, she would incur diseconomies of scale AC(1500) = 9.67 MC(500) = 11 MC > AC 11

12 U-Shaped Cost Curve Average cost declines as fixed costs are spread over larger volumes Average cost eventually starts increasing as capacity constraints kick in This curve implies that small and large firms are in a cost disadvantage L-Shaped Cost Curve In reality, cost curves are closer to being L-shaped than U-shaped Large firms are rarely at a cost disadvantage relative to smaller firms A minimum efficient scale (MES) beyond which average costs are identical across firms 12

13 L-Shaped Cost Curve In reality, cost curves are closer to being L-shaped in the long run even if they can be U- shaped in the short run Large firms are rarely at a cost disadvantage relative to smaller firms A minimum efficient scale (MES) beyond which average costs are identical across firms In order to be efficient in a given market, the firm has to reach the size where Q=MES. Economies of Scope It is cheaper for one firm to produce both X and Y than for two different firms to specialize in X and Y each TC(Q X, Q Y ) < TC(Q X, 0) + TC(0, Q Y ) Example Emma produces beer and cider Jane produces only beer Martin produces only cider If Emma can produce both beer and cider more cheaply than Jane and Martin only beer or cider, Emma enjoys economies of scope Emma could realise cost advatage for example by Leveraging her beverage production knowledge for both beer and cider Using the same production facilities Purchasing e.g. bottles in larger volumes Using the same distribution channels Advertising both products in the same media 13

14 Some Sources of Economies of Scale/Scope Spreading of fixed costs Saving on inventories The cube-square rule Advertising R&D Purchasing power Umbrella branding Diseconomies of Scale Beyond a certain size, bigger may not always be better Some sources of such diseconomies Increasing labour costs Spreading specialized resources too thin Bureaucracy: incentive and coordination effects 14

15 QUIZ TIME! The Learning Curve Learning economies are distinct from economies of scale & scope Economies of scale and scope are based on rate of output at a certain time Learning economies depend on cumulative output (know-how, experience) Learning leads to lower costs, higher quality and more effective pricing and marketing Complex labour intensive processes can offer learning economies without economies of scale or scope 15

16 The Learning Curve Learning benefits can be expressed with the slope of the learning curve The slope of a process is the relative size of the average cost when cumulative output doubles A slope of 0.8 indicates that the average cost will decline by 20% when the cumulative output doubles Learning flattens out over time and the slope eventually becomes 1.0 Example: Learning Strategy Manufacturer of computer memory chips Current situation The firm s cumulative production to date is 10,000 chips MC = 2.50 The firm believes that its AC will reduce to 2 once they have manufactured 20,000 chips; AC will not decrease further than that The firm has orders for 200,000 chips 16

17 Example: Learning Strategy The firm receives an opportunity to fill an immediate additional order of 10,000 chips What is the lowest price the firm can accept? Generally, accept if P > MC So accept of P > 2.50? But - 2,50 is not the real MC even if it holds for the next 10,000 units AC decreases by 20% from 2.50 to 2 when the firm produces the next 10,000 units The slope of the learning curve between 10,000 and 20,000 units is 0.8 No further learning economies after 20,000 units The additional order would therefore realise the possible learning economy Example: Learning Strategy Scenario 1: the firm rejects the additional order The first 10,000 chips cost 2.50 each The remaining 190,000 costs 2 each TC(200,000) = Scenario 2: the firm accepts the additional order TC of the additional order ( 2.50*10,000) = Original order of 200,000 chips at AC= 2 = So TC of 210,000 chips is 425,000 The real cost of the additional order is because it generates a saving of 5,000 for the original order The firm should accept the additional order if P > 2 Because the real MC of producing additional 10,000 units is 2 17

Chapter 1 Basic Microeconomic Principles

Chapter 1 Basic Microeconomic Principles Chapter 1 Basic Microeconomic Principles Prof. Jepsen ECO 610 Lecture 1 December 3, 2012 copyright John Wiley and Sons Outline Course outline Economics review (Chapter 1) Costs Demand Profit maximization

More information

Costs in the Short Run: NOTE: Costs depend upon output!! Fixed Costs (FC) costs which do not change when a business changes its quantity of output.

Costs in the Short Run: NOTE: Costs depend upon output!! Fixed Costs (FC) costs which do not change when a business changes its quantity of output. Costs in the Short Run: NOTE: Costs depend upon output!! Fixed Costs (FC) costs which do not change when a business changes its quantity of output. Variable Costs (VC) costs which do change when a business

More information

Production and Cost Analysis I

Production and Cost Analysis I CHAPTER 12 Production and Cost Analysis I Production is not the application of tools to materials, but logic to work. Peter Drucker McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All

More information

Chapter 11 Technology, Production, and Costs

Chapter 11 Technology, Production, and Costs Economics 6 th edition 1 Chapter 11 Technology, Production, and Costs Modified by Yulin Hou For Principles of Microeconomics Florida International University Fall 2017 Technology: An Economic Definition

More information

THE COSTS OF PRODUCTION PART II

THE COSTS OF PRODUCTION PART II THE COSTS OF PRODUCTION PART II It is one of the greatest economic errors to put any limitation on production... We have not the power to produce more than there is the potential to consume. - Louis D.

More information

Review Notes for Chapter Optimal decision making by anyone Engage in an activity up to the point where the marginal benefit= marginal cost

Review Notes for Chapter Optimal decision making by anyone Engage in an activity up to the point where the marginal benefit= marginal cost Review Notes for Chapter 5 1. Optimal decision making by anyone Engage in an activity up to the point where the marginal benefit= marginal cost Sunk costs are costs which must be borne regardless of future

More information

Module 55 Firm Costs. What you will learn in this Module:

Module 55 Firm Costs. What you will learn in this Module: What you will learn in this Module: The various types of cost a firm faces, including fixed cost, variable cost, and total cost How a firm s costs generate marginal cost curves and average cost curves

More information

Quiz #3 Week 03/22/2009 to 03/28/2009

Quiz #3 Week 03/22/2009 to 03/28/2009 Quiz #3 Week 03/22/2009 to 03/28/2009 You have 30 minutes to answer the following 15 multiple choice questions. Record your answers in the bubble sheet. Your grade in this quiz will count for 1% of your

More information

= AFC + AVC = (FC + VC)

= AFC + AVC = (FC + VC) Chapter 13-14: Marginal Product, Costs, Revenue, and Profit Production Function The relationship between the quantity of inputs (workers) and quantity of outputs Total product (TP) is the total amount

More information

Chapter 4 Production, Costs, and Profit.notebook. February 03, Chapter 4: Production, Costs, and Profits Pages

Chapter 4 Production, Costs, and Profit.notebook. February 03, Chapter 4: Production, Costs, and Profits Pages Chapter 4: Production, Costs, and Profits Pages 91 112 business an enterprise that brings individual, financial resources, and economic resources together to produce a good or service for economic gain

More information

Going Back To School. Meet Sam

Going Back To School. Meet Sam Going Back To School Meet Sam Graduating Class of 12 Not a single callback for an interview Decision to go back to school Joined millions of students Why? The Costs of Production Chapter 9 Explicit Costs

More information

Chapter 11. Microeconomics. Technology, Production, and Costs. Modified by: Yun Wang Florida International University Spring 2018

Chapter 11. Microeconomics. Technology, Production, and Costs. Modified by: Yun Wang Florida International University Spring 2018 Microeconomics Modified by: Yun Wang Florida International University Spring 2018 1 Chapter 11 Technology, Production, and Costs Chapter Outline 11.1 Technology: An Economic Definition 11.2 The Short Run

More information

Production and Cost Analysis I

Production and Cost Analysis I CHAPTER 12 Production and Cost Analysis I Production is not the application of tools to materials, but logic to work. Peter Drucker McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All

More information

The Production and Cost

The Production and Cost The Production and Cost The Role of the Firm l The firm is an economic institution that transforms factors of production into consumer goods. It l Organizes factors of production. l Produces goods and

More information

ECON 1101 Microeconomics Notes. Table of Contents

ECON 1101 Microeconomics Notes. Table of Contents ECON 1101 Microeconomics Notes Table of Contents Comparative Advantage and the Reason for Trade... 2 Perfectly Competitive Markets... 3 Demand... 6 Special Lecture... Error! Bookmark not defined. Demand

More information

Production and Costs. Bibliography: Mankiw and Taylor, Ch. 6.

Production and Costs. Bibliography: Mankiw and Taylor, Ch. 6. Production and Costs Bibliography: Mankiw and Taylor, Ch. 6. The Importance of Cost in Managerial Decisions Containing costs is a key issue in managerial decisionmaking Firms seek to reduce the number

More information

Short Run Costs. The Costs of Production. Fixed Costs, Variable Costs, and Total Costs. Fixed Costs, Variable Costs, and Total Costs

Short Run Costs. The Costs of Production. Fixed Costs, Variable Costs, and Total Costs. Fixed Costs, Variable Costs, and Total Costs The Costs of Production Short Run Costs Part 2 There are many different types of costs. Invariably, firms believe costs are too high and try to lower them. Fixed Costs, Variable Costs, and Total Costs

More information

Pledge (sign) I did not copy another student s answers

Pledge (sign) I did not copy another student s answers Economics 4020 Dr. Rupp Test #1 Fri. Sept 23 rd, 2011 20 Multiple Choice questions (2.5 points each) Pledge (sign) I did not copy another student s answers 1. The profit maximization rule for a firm is

More information

Costs: Introduction. Costs 26/09/2017. Managerial Problem. Solution Approach. Take-away

Costs: Introduction. Costs 26/09/2017. Managerial Problem. Solution Approach. Take-away Costs Costs: Introduction Managerial Problem Technology choice at home versus abroad: In western countries, firms use relatively capital-intensive technology. Will that same technology be cost minimizing

More information

3. Definition of constant returns to scale: the property whereby long-run average total cost stays the same as the quantity of output changes.

3. Definition of constant returns to scale: the property whereby long-run average total cost stays the same as the quantity of output changes. 250 Chapter 13/The s of Production 3. Definition of constant returns to scale: the property whereby long-run average total cost stays the same as the quantity of output changes. 4. FYI: Lessons from a

More information

THE UNIVERSITY OF WESTERN ONTARIO. E. Rivers ECONOMICS 1021B-001 March 18, 2012 MIDTERM #2. 2. Check that your examination contains 50 questions.

THE UNIVERSITY OF WESTERN ONTARIO. E. Rivers ECONOMICS 1021B-001 March 18, 2012 MIDTERM #2. 2. Check that your examination contains 50 questions. NAME THE UNIVERSITY OF WESTERN ONTARIO LONDON CANADA E. Rivers ECONOMICS 1021B-001 March 18, 2012 MIDTERM #2 INSTRUCTIONS: 1. You will have 2 hours to complete the exam. 2. Check that your examination

More information

Competitive and Corporate Strategy

Competitive and Corporate Strategy Competitive and Corporate Strategy What is Strategy? Professor Nicolaj Siggelkow Different Types of Strategies Seven (7) different types of strategies as described by Henry Mintzberg (Strategy Safari)

More information

Notes on Chapter 10 OUTPUT AND COSTS

Notes on Chapter 10 OUTPUT AND COSTS Notes on Chapter 10 OUTPUT AND COSTS PRODUCTION TIMEFRAME There are many decisions made by the firm. Some decisions are major decisions that are hard to reverse without a big loss while other decisions

More information

Profit. Total Revenue The amount a firm receives for the sale of its output. Total Cost The market value of the inputs a firm uses in production.

Profit. Total Revenue The amount a firm receives for the sale of its output. Total Cost The market value of the inputs a firm uses in production. Profit Total Revenue The amount a firm receives for the sale of its output. Total Cost The market value of the inputs a firm uses in production. Profit is the firm s total revenue minus its total cost.

More information

Microeconomics (Cost, Ch 7)

Microeconomics (Cost, Ch 7) Microeconomics (Cost, Ch 7) Lectures 10-11-12 Feb 09/13/16, 2017 7.1 MEASURING COST: WHICH COSTS MATTER? Economic Cost versus Accounting Cost Opportunity Cost accounting cost Actual expenses plus depreciation

More information

ExamLearn.ie. Costs of Production

ExamLearn.ie. Costs of Production ExamLearn.ie Costs of Production Costs of Production Fixed Costs = Costs that don't change as you increase output in the short, e.g. Rent Variable Costs = Costs that change as your output increases e.g.

More information

b. The marginal opportunity cost of an executive s flight is the price the company could have earned from leasing the jet to someone else.

b. The marginal opportunity cost of an executive s flight is the price the company could have earned from leasing the jet to someone else. Chapter 6 Costs SOLUTIONS TO END-OF-CHAPTER QUESTIONS THE NATURE OF COSTS 1.1 The ships that return to Asia are half or completely empty; therefore, the cost of having more merchandise in them is almost

More information

Demand curve - using Game Results How much customers will buy at a given price Downward sloping - more demand at lower prices

Demand curve - using Game Results How much customers will buy at a given price Downward sloping - more demand at lower prices 31 October Bige Kahraman Class Notes First half of course (Michaelmas) is Microeconomics, second half (Hilary) is Macroeconomics Focusing on profit maximization & price formation Looking at industry level

More information

The Cost of Production

The Cost of Production C H A P T E R 7 The Cost of Production Prepared by: Fernando & Yvonn Quijano CHAPTER 7 OUTLINE 7.1 Measuring Cost: Which Costs Matter? 7.2 Cost in the Short Run 7.3 Cost in the Long Run 7.4 Long-Run versus

More information

Contents EXPLORING ECONOMICS

Contents EXPLORING ECONOMICS Contents About the authors I-5 Preface to second edition I-7 Chapter-heads I-9 Syllabus : Choice Based Credit System (CBCS) I-19 1 EXPLORING ECONOMICS 1.1 Why study economics? 1 1.2 Meaning of economics

More information

Perfectly Competitive Markets

Perfectly Competitive Markets Characteristics: Fragmented: Many small firms, none of which have market power Undifferentiated Products: Products that consumers perceive as being identical. Perfect Pricing Information: Consumers have

More information

Mr Sydney Armstrong ECN 1100 Introduction to Microeconomics Lecture Note (6) The costs of Production Economic Costs

Mr Sydney Armstrong ECN 1100 Introduction to Microeconomics Lecture Note (6) The costs of Production Economic Costs Mr Sydney Armstrong ECN 1100 Introduction to Microeconomics Lecture Note (6) The costs of Production Economic Costs Costs exist because resources are scarce, productive and have alternative uses. When

More information

In the last session we introduced the firm behaviour and the concept of profit maximisation. In this session we will build on the concepts discussed

In the last session we introduced the firm behaviour and the concept of profit maximisation. In this session we will build on the concepts discussed In the last session we introduced the firm behaviour and the concept of profit maximisation. In this session we will build on the concepts discussed previously by examining cost structure, which is a key

More information

c) Will the monopolist described in (b) earn positive, negative, or zero economic profits? Explain your answer.

c) Will the monopolist described in (b) earn positive, negative, or zero economic profits? Explain your answer. Economics 101 Summer 2015 Answers to Homework #4b Due Tuesday June 16, 2015 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on

More information

Handout 1: Monopolistic Competition and International Trade

Handout 1: Monopolistic Competition and International Trade Handout 1: Monopolistic Competition and International Trade Introduction to monopolistic competition There are two differences between our previous models (Ricardian, SF and H-O) and models with monopolistic

More information

CHAPTER-3 COST. (c) Average variable cost. (d) Opportunity costs. 1. Marginal cost is the cost:

CHAPTER-3 COST. (c) Average variable cost. (d) Opportunity costs. 1. Marginal cost is the cost: CHAPTER-3 COST (c) Average variable cost (d) Opportunity costs 1. Marginal cost is the cost: (a) Of the last unit production (b) Of the Marginal unit (c) Of the marginal efficient unit (d) Of the average

More information

Decision Time Frames Pearson Education

Decision Time Frames Pearson Education 11 OUTPUT AND COSTS Decision Time Frames The firm makes many decisions to achieve its main objective: profit maximization. Some decisions are critical to the survival of the firm. Some decisions are irreversible

More information

Syllabus item: 42 Weight: 3

Syllabus item: 42 Weight: 3 1.5 Theory of the firm and its market structures - Production and costs Syllabus item: 42 Weight: 3 Definition: Total product (TP): The total output that a firm produces, using its fixed and variable factors

More information

Chapter 6: Sellers and Incentives

Chapter 6: Sellers and Incentives Chapter 6: Sellers and Incentives Modified by Chapter Outline 6. 6. 6. 6. 6. 6. 1. Sellers in a Perfectly Competitive Market 2. The Seller's Problem 3. From Seller's Problem to Supply Curve 4. Producer

More information

Economic Profit. Accounting. Profit. Explicit. Costs. Implicit costs (including a normal profit) Accounting. costs (explicit costs only) T O T A L

Economic Profit. Accounting. Profit. Explicit. Costs. Implicit costs (including a normal profit) Accounting. costs (explicit costs only) T O T A L Profits Least expensive source of money for expanding business operations ost firms attempt to maximize profit Ultimately must break-even cover their costs of production Profits act as an incentive and

More information

WHAT IS A COMPETITIVE MARKET?

WHAT IS A COMPETITIVE MARKET? Chapter 14. Firms in Competitive Markets WHAT IS A COMPETITIVE MARKET? A perfectly competitive market has the following characteristics: There are many buyers and sellers in the market. small relative

More information

Short-Run Costs and Output Decisions

Short-Run Costs and Output Decisions Chapter 8 Short-Run Costs and Prepared by: Fernando & Yvonn Quijano 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair Short-Run Costs and 8 Chapter Outline Costs in the

More information

CHAPTER 8: THE COSTS OF PRODUCTION

CHAPTER 8: THE COSTS OF PRODUCTION CHAPTER 8: THE COSTS OF PRODUCTION Introduction Now that we have examined consumer behavior in more detail, it is time to look at the decision making of the firm. Costs of production are important to determine

More information

Week One What is economics? Chapter 1

Week One What is economics? Chapter 1 Week One What is economics? Chapter 1 Economics: is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives

More information

The Theory and Estimation of Cost. Chapter 7. Managerial Economics: Economic Tools for Today s Decision Makers, 5/e By Paul Keat and Philip Young

The Theory and Estimation of Cost. Chapter 7. Managerial Economics: Economic Tools for Today s Decision Makers, 5/e By Paul Keat and Philip Young The Theory and Estimation of Cost Chapter 7 Managerial Economics: Economic Tools for Today s Decision Makers, 5/e By Paul Keat and Philip Young The Theory and Estimation of Cost The Importance of Cost

More information

AP Krugman Economics Section 10 Problem Solutions. AP Krugman Microeconomics Section 4 Problem Solutions

AP Krugman Economics Section 10 Problem Solutions. AP Krugman Microeconomics Section 4 Problem Solutions AP Krugman Economics Section 10 Problem Solutions AP Krugman Microeconomics Section 4 Problem Solutions 1. a. Hiro s accounting profit is: $100,000 (total revenue) -$55,000 (travel and other expenses)

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Sample Test 3 Ch 10-13 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A cost incurred in the production of a good or service and for which

More information

Industry Analysis. Economics of Strategy. Chapter 10. Besanko, Dranove, Shanley and Schaefer, 3 rd Edition. Slide show prepared by

Industry Analysis. Economics of Strategy. Chapter 10. Besanko, Dranove, Shanley and Schaefer, 3 rd Edition. Slide show prepared by Economics of Strategy Besanko, Dranove, Shanley and Schaefer, 3 rd Edition Chapter 10 Industry Analysis Slide show prepared by Richard PonArul California State University, Chico John Wiley & Sons, Inc.

More information

To do today: short-run production (only labor variable) To increase output with a fixed plant, a firm must increase the quantity of labor it uses.

To do today: short-run production (only labor variable) To increase output with a fixed plant, a firm must increase the quantity of labor it uses. To do today: short-run production (only labor variable) To increase output with a fixed plant, a firm must increase the quantity of labor it uses. Short-run production: only labor variable To increase

More information

HOMEWORK ECON SFU

HOMEWORK ECON SFU HOMEWORK 1998-2 ECON 103 - SFU the law of diminishing returns have on short-run costs? Be specific. (e) âwhen... And when marginal product is diminishing, marginal cost is rising.â Illustrate and... ECON

More information

COST OF PRODUCTION & THEORY OF THE FIRM

COST OF PRODUCTION & THEORY OF THE FIRM MICROECONOMICS: UNIT III COST OF PRODUCTION & THEORY OF THE FIRM One of the concepts mentioned in both Units I and II was and its components, total cost and total revenue. In this unit, costs and revenue

More information

The Firm s Objective. A Firm s Total Revenue and Total Cost. The economic goal of the firm is to maximize profits. A Firm s Profit

The Firm s Objective. A Firm s Total Revenue and Total Cost. The economic goal of the firm is to maximize profits. A Firm s Profit The s of Production Chapter 13 Copyright 2001 by Harcourt, Inc. The s of Production The Law of Supply: Firms are willing to produce and sell a greater quantity of a good when the price of the good is high.

More information

Classnotes for chapter 13

Classnotes for chapter 13 Classnotes for chapter 13 Chapter 13: Very important Focuses on firms production and costs Examines firm behavior in more detail (previously we simply looked at the supply curve to understand firm behavior)

More information

Lecture 10. The costs of production

Lecture 10. The costs of production Lecture 10 The costs of production By the end of this lecture, you should understand: what items are included in a firm s costs of production the link between a firm s production process and its total

More information

INTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY (CFP) ECO105: ECONOMICS 1 FINAL EXAMINATION: JANUARY 2006 SESSION

INTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY (CFP) ECO105: ECONOMICS 1 FINAL EXAMINATION: JANUARY 2006 SESSION ECO105 (F) / Page 1 of 12 Section A INTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY (CFP) ECO105: ECONOMICS 1 FINAL EXAMINATION: JANUARY 2006 SESSION Instructions: This section consists

More information

Week 5: The Costs of Production. 31 st March 2014

Week 5: The Costs of Production. 31 st March 2014 Week 5: The Costs of Production 31 st March 2014 WHAT ARE COSTS?! According to the Law of Supply:! Firms are willing to produce and sell a greater quantity of a good when the price of the good is high.!

More information

Economics 101 Fall 2017 Answers to Homework 5 Due:12/12/17

Economics 101 Fall 2017 Answers to Homework 5 Due:12/12/17 Economics 101 Fall 2017 Answers to Homework 5 Due:12/12/17 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name, and section number on top of the homework

More information

Unit 5. Producer theory: revenues and costs

Unit 5. Producer theory: revenues and costs Unit 5. Producer theory: revenues and costs Learning objectives to understand the concept of the short-run production function, describing the relationship between the quantity of inputs and the quantity

More information

Chapter What can the marginal product of labour be defined as? a. change in profit change in labour b. change in output change in labour

Chapter What can the marginal product of labour be defined as? a. change in profit change in labour b. change in output change in labour Chapter 13 1. What is the amount of money that a firm receives from the sale of its output called? a. total gross profit b. total net profit c. total revenue d. net revenue 2. Susan used to work as a telemarketer,

More information

Practice Questions- Chapter 6

Practice Questions- Chapter 6 Practice Questions- Chapter 6 Harvey quit his job where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he

More information

Lesson-28. Perfect Competition. Economists in general recognize four major types of market structures (plus a larger number of subtypes):

Lesson-28. Perfect Competition. Economists in general recognize four major types of market structures (plus a larger number of subtypes): Lesson-28 Perfect Competition Economists in general recognize four major types of market structures (plus a larger number of subtypes): Perfect Competition Monopoly Oligopoly Monopolistic competition Market

More information

FIRMS IN COMPETITIVE MARKETS

FIRMS IN COMPETITIVE MARKETS 14 FIRMS IN COMPETITIVE MARKETS WHAT S NEW IN THE FOURTH EDITION: The rules for profit maximization are written more clearly. LEARNING OBJECTIVES: By the end of this chapter, students should understand:

More information

Contents. Concepts of Revenue I-13. About the authors I-5 Preface I-7 Syllabus I-9 Chapter-heads I-11

Contents. Concepts of Revenue I-13. About the authors I-5 Preface I-7 Syllabus I-9 Chapter-heads I-11 Contents About the authors I-5 Preface I-7 Syllabus I-9 Chapter-heads I-11 1 Concepts of Revenue 1.1 Introduction 1 1.2 Concepts of Revenue 2 1.3 Revenue curves under perfect competition 3 1.4 Revenue

More information

Microeconomics: Principles, Applications, and Tools

Microeconomics: Principles, Applications, and Tools Microeconomics: Principles, Applications, and Tools NINTH EDITION Chapter 8 Production Technology and Cost Learning Objectives 8.1 Define economic cost and economic profit. 8.2 Draw the short-run marginal-cost

More information

iv. The monopolist will receive economic profits as long as price is greater than the average total cost

iv. The monopolist will receive economic profits as long as price is greater than the average total cost Chapter 15: Monopoly (Lecture Outline) -------------------------------------------------------------------------------------------------------------------------- Monopolies have no close competitors and,

More information

Economics 101 Section 5

Economics 101 Section 5 Economics 101 Section 5 Lecture #17 March 23, 2004 Chapter 7 -The Firms long-run decisions -The Principal-Agent problem Chapter 8 -Perfect Competition - Competition in the Short-Run Lecture Outline Recap

More information

Lecture 11. Firms in competitive markets

Lecture 11. Firms in competitive markets Lecture 11 Firms in competitive markets By the end of this lecture, you should understand: what characteristics make a market competitive how competitive firms decide how much output to produce how competitive

More information

Chapter 7 Producers in the Short Run

Chapter 7 Producers in the Short Run Chapter 7 Producers in the Short Run 7.1 What are Firms? Organisation of Firms 1) Single proprietorship Has one owner who is personally responsible for the firm s actions and debts 2) Ordinary partnership

More information

Chapter 13. Microeconomics. Monopolistic Competition: The Competitive Model in a More Realistic Setting

Chapter 13. Microeconomics. Monopolistic Competition: The Competitive Model in a More Realistic Setting Microeconomics Modified by: Yun Wang Florida International University Spring, 2018 1 Chapter 13 Monopolistic Competition: The Competitive Model in a More Realistic Setting Chapter Outline 13.1 Demand and

More information

Edexcel (A) Economics A-level

Edexcel (A) Economics A-level Edexcel (A) Economics A-level Theme 3: Business Behaviour & the Labour Market 3.3 Revenue Costs and Profits 3.3.2 Costs Notes Formulae to calculate types of costs Total cost: This is how much it costs

More information

Introduction to Industrial Organization Professor: Caixia Shen Fall 2014 Lecture Note 1

Introduction to Industrial Organization Professor: Caixia Shen Fall 2014 Lecture Note 1 Part 1: Introduction to this course Introduction to Industrial Organization Professor: Caixia Shen Fall 2014 Lecture Note 1 1. What is Industrial Organization? Industrial organization is concerned with

More information

CONTENT TOPIC 3: SUPPLY, PRODUCTION AND COST. The Supply Process. The Role of the Firm 10/10/2016

CONTENT TOPIC 3: SUPPLY, PRODUCTION AND COST. The Supply Process. The Role of the Firm 10/10/2016 CONTENT TOPIC 3: SUPPLY, PRODUCTION AND COST - The factors of production - Combining factors of production: The law of returns - Costs of production: Short & Long Run - Deciding whether to produce in the

More information

Supply in a Competitive Market

Supply in a Competitive Market Supply in a Competitive Market 8 Introduction 8 Chapter Outline 8.1 Market Structures and Perfect Competition in the Short Run 8.2 Profit Maximization in a Perfectly Competitive Market 8.3 Perfect Competition

More information

The Costs of Production

The Costs of Production The Costs of Production PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 What are Costs? Total revenue = amount a firm receives for the sale of its output Total cost = market

More information

Principles of. Economics. Week 6. Firm in Competitive & Monopoly market. 7 th April 2014

Principles of. Economics. Week 6. Firm in Competitive & Monopoly market. 7 th April 2014 Principles of Economics Week 6 Firm in Competitive & Monopoly market 7 th April 2014 In this week, look for the answers to these questions:!what is a perfectly competitive market?!what is marginal revenue?

More information

Where are we? Second midterm on November 19. Review questions on th course web site. Today: chapter on perfect competition

Where are we? Second midterm on November 19. Review questions on th course web site. Today: chapter on perfect competition Where are we? Second midterm on November 19 Review questions on th course web site. Today: chapter on perfect competition Topic for the second paper: Pick a chapter in Ariely after Chapter 4 and compare

More information

8 Perfect Competition

8 Perfect Competition 8 Perfect Competition CHAPTER 8 PERFECT COMPETITION 167 Figure 8.1 Depending upon the competition and prices offered, a wheat farmer may choose to grow a different crop. (Credit: modification of work by

More information

Econ8500_Imperfect_Competition

Econ8500_Imperfect_Competition Name: Class: Date: ID: A Econ8500_Imperfect_Competition Multiple Choice Identify the choice that best completes the statement or answers the question. 1. In the quasi-competitive model a. firms believe

More information

The "competition" in monopolistically competitive markets is most likely a result of having many sellers in the market.

The competition in monopolistically competitive markets is most likely a result of having many sellers in the market. Chapter 16 Monopolistic Competition TRUE/FALSE 1. The "competition" in monopolistically competitive markets is most likely a result of having many sellers in the market. ANS: T 2. The "monopoly" in monopolistically

More information

****** 1. How is the demand for an input dependent upon the demand for an output? 2. Given a wage, how does a firm decide how many people to hire?

****** 1. How is the demand for an input dependent upon the demand for an output? 2. Given a wage, how does a firm decide how many people to hire? 1 Chapter 4- Income distribution and factor pricing Syllabus-Input markets: demand for inputs; labour markets, land markets, profit maximisation condition in input markets, input demand curves, distribution

More information

EconS Endogenous Market Size

EconS Endogenous Market Size EconS 425 - Endogenous Market Size Eric Dunaway Washington State University eric.dunaway@wsu.edu Industrial Organization Eric Dunaway (WSU) EconS 425 Industrial Organization 1 / 35 Introduction Let s contrinue

More information

Microeconomics I PEPM U6101. Summer 2015 Syllabus

Microeconomics I PEPM U6101. Summer 2015 Syllabus Lectures: TR 11:00am-12:50pm, room TBA Instructor: Emanuele Gerratana Office: IAB 1309A Telephone: 212-854 8506 Email: eg198@columbia.edu Office Hours: Thursdays: 1:00pm-2:00pm Microeconomics I PEPM U6101.

More information

Module 5: Production and costs

Module 5: Production and costs Module 5: Production and costs 5.2.1: Demonstration - production of tennis balls Production of anything is essentially a three step process: Inputs are combined Production process Output is produced Activity

More information

Q K L MPL APL FC VC TC AFC AVC ATC MC $ $ $40 $ $550 $10

Q K L MPL APL FC VC TC AFC AVC ATC MC $ $ $40 $ $550 $10 Economics 101 Spring 2018 Answers to Homework #5 Due Thursday, May 3, 2018 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name, and section number on

More information

Edexcel (B) Economics A-level

Edexcel (B) Economics A-level Edexcel (B) Economics A-level Theme 4: Making Markets Work 4.1 Competition and Market Power 4.1.1 Spectrum of competition Notes Characteristics of monopoly, oligopoly, imperfect and perfect competition

More information

Supply and demand are the two words that economists use most often.

Supply and demand are the two words that economists use most often. Chapter 13. The Costs of Production The Market Forces of Supply and Demand Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies

More information

5 FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY

5 FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY 5 FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY The s of Production 1 Copyright 2004 South-Western The Market Forces of Supply and Demand Supply and demand are the two words that economists use most often.

More information

MICROECONOMICS - CLUTCH CH MONOPOLISTIC COMPETITION.

MICROECONOMICS - CLUTCH CH MONOPOLISTIC COMPETITION. !! www.clutchprep.com CONCEPT: CHARACTERISTICS OF MONOPOLISTIC COMPETITION A market is in monopolistic competition when: Nature of Good: The goods for sale are, but not identical - Products are said to

More information

2010 Pearson Education Canada

2010 Pearson Education Canada What Is Perfect Competition? Perfect competition is an industry in which Many firms sell identical products to many buyers. There are no restrictions to entry into the industry. Established firms have

More information

Production and Cost. This Is What You Need to Know. Explain the difference between accounting and economic costs and how they affect the determination

Production and Cost. This Is What You Need to Know. Explain the difference between accounting and economic costs and how they affect the determination Chiang_3E_CT_Micro_CH07_Layout 1 3/20/14 2:29 PM Page 175 7 Production and Cost Production and Cost Are Behind Decisions About Supply Having looked in the last chapter at what lies behind demand curves

More information

The economics of competitive markets Rolands Irklis

The economics of competitive markets Rolands Irklis The economics of competitive markets Rolands Irklis www. erranet.org Presentation outline 1. Introduction and motivation 2. Consumer s demand 3. Producer costs and supply decisions 4. Market equilibrium

More information

COSTS IN THE LONG RUN. Krzysztof Kołodziejczyk, PhD

COSTS IN THE LONG RUN. Krzysztof Kołodziejczyk, PhD COSTS IN THE LONG RUN Krzysztof Kołodziejczyk, PhD Agenda 1. Only variable costs 2. Looking for economies of scale 3. The minimum efficient scale (MES) Costs keywords What are the types of costs in the

More information

541: Economics for Public Administration Lecture 8 Short-Run Costs & Supply

541: Economics for Public Administration Lecture 8 Short-Run Costs & Supply I. Introduction 541: Economics for Public Administration Lecture 8 Short-Run s & Supply We have presented how a business finds the least cost way of providing a given level of public good or service. In

More information

BPE_MIC1 Microeconomics 1 Fall Semester 2011

BPE_MIC1 Microeconomics 1 Fall Semester 2011 Masaryk University - Brno Department of Economics Faculty of Economics and Administration BPE_MIC1 Microeconomics 1 Fall Semester 2011 Final Exam - 05.12.2011, 9:00-10:30 a.m. Test B Guidelines and Rules:

More information

a. Sells a product differentiated from that of its competitors d. produces at the minimum of average total cost in the long run

a. Sells a product differentiated from that of its competitors d. produces at the minimum of average total cost in the long run I. From Seminar Slides: 3, 4, 5, 6. 3. For each of the following characteristics, say whether it describes a perfectly competitive firm (PC), a monopolistically competitive firm (MC), both, or neither.

More information

Basic Micro: Demand. To see how much demand changes with changes price we are interested in the slope of the demand curve, i.e dq

Basic Micro: Demand. To see how much demand changes with changes price we are interested in the slope of the demand curve, i.e dq Basic Micro: Demand A demand curve is a relationship between the quantity of a desired item and the willingness to pay (WTP). One feature of a demand curve that we ll be particularly interested in is the

More information

START UP: STREET CLEANING AROUND THE WORLD

START UP: STREET CLEANING AROUND THE WORLD CHAPTER 8 Production and Cost START UP: STREET CLEANING AROUND THE WORLD It is dawn in Shanghai, China. Already thousands of Chinese are out cleaning the city s streets. They are using brooms. On the other

More information

P2 Performance Management

P2 Performance Management DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO Performance Pillar P2 Performance Management 20 November 2013 Wednesday Afternoon Session Instructions to candidates You are allowed three hours

More information

1 of 14 5/1/2014 4:56 PM

1 of 14 5/1/2014 4:56 PM 1 of 14 5/1/2014 4:56 PM Any point on the budget constraint Gives the consumer the highest level of utility. Represent a combination of two goods that are affordable. Represents combinations of two goods

More information

CASE FAIR OSTER PEARSON 2012 Pearson Education, Inc. Publishing as Prentice Hall

CASE FAIR OSTER PEARSON 2012 Pearson Education, Inc. Publishing as Prentice Hall PART II The Market System: Choices Made by Households and Firms PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N CASE FAIR OSTER PEARSON 2012 Pearson Education, Inc. Publishing as Prentice Hall

More information