Economics: Market Influences on Business Strategies Flashcards Preview

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Flashcards in Economics: Market Influences on Business Strategies Deck (58):
1

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

2

4 Major cost functions

1) Average Fixed Cost
2) Average Variable Cost
3) Average Total Cost
4) Marginal Cost

3

Average Fixed Cost

Fixed Cost/ Quantity

4

Average Variable Cost

Variable Cost/ Quantity

5

Average Total Cost

Total Cost/ Quantity

6

marginal Cost

Change in total Cost/ Total Quantity
-Depend soleley on variable costs
-Fixed Costs fo not influence marginal costs

7

Strategies under Monopoly

Under a monopoly, strategic plans will likely ignore market share and focus on profitability from production levels that maximize profit

8

Monopoly -Features

-A single firm with a unique product
-No sub products, Demand is inelastic
-Easy to enter industry

9

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.

10

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

11

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)

12

Supply

Fundamental law of supply states that price and quantity supplied are positively related

13

Quantity Supplied

Is determined by price

14

Change in Quantity Supplied

Movement along the supply curve (Change in Price)

15

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

16

Market Equilibrium

Market Clearing price

17

Changes in Equlibrium

If supply or demand shifts then equilibrium changes too

18

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

19

Price elasticity of demand

%Change in Quantity demanded/ % Change in price

20

Price In-elasticity

Absolute price elasticity of demand is less than 1

21

Price elasticity of Supply

measures the change in quantity supplied

22

Formula for the Price Elasticity of Supply

% Change in Quantity Supplied/ % Change in Price

23

Cross Elasticity

The percentage change in the quantity demanaded (or supplied) of one good caused by the price change of another good.

24

If coefficient is 0

The goods are unrelated

25

If there is a negative coefficient then

the goods are complements

26

If there is a positive coefficient then

the goods are subs

27

Income elasticity of demand

the percentage change in quantity demanded for a product for a given percentage change in income

28

Formula for Income elasticity of demand

% Change in number of units of X demanded/ % Change in Income

29

Positive Income Elasticity

= A normal Good

30

Negative Income Elasticity

= An inferior good

31

Production Measures

Used by companies to measure optimal production levels based on available inputs

32

Total Product

= Total Amount of output produced

33

Marginal Product

Change In Total Product/ Change in Labor

34

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

35

Strategies under Perfect Competition

-Maintain the market share
-Respond to market prices

36

Monopolistic Competition

Many sellers compete to sell a differentiated product in a market into which the entry of new sellers is possible

37

Monopolistic Competition
Assumptions and Market Conditions

a) Numerous firms with differentiated Products
b) Few barriers to entry

38

Strategies under Monopolistic Competition

-maintain the market share
-focus on diferentiaion
-spend money on advertising

39

Strategies under Oligopoly

-focus on market share
-call for proper amount of advertising to ensure product differentiation

40

Monopoly

represents concentration of supply in the hands of a single firm.

41

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

42

Strategies under Monopoly

-They will likely ignore market share
bc there is no competion.
They are going to focus on profitability

43

Factors that influence Strategy -Internal Factors
(Strengths and weaknesses)

a) Innovation of product lines
b) Competence of management

44

Factors that influence Strategy-External Factors

a) Competitive Environment of the industry
b) Competitive Environment of the Firm

45

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

46

Competitive advantage

determined by the value the firm offers to its customers minus the cost of creating that value

47

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

48

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.

49

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

50

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

51

Cost leadership strategies fails

when companies focus too much on cutting cost. This can undermine the quality of the product

52

Differentiation strategies work well

When customers are able to see value in a product, when the product appeals to different people for different reasons

53

Differentiation strategies fails

When the cost of differentiation product exceeds the benefit

54

Best Cost Strategies

High quality product at a reasonable prices

55

When Best cost strategies work well

When generic products are not acceptable to the varied needs and preferences of the buyers.

56

When Best cost strategies fail

when firms try to be too much of both things

57

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

58

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