BUSSPP 0020 Lecture 5 Outline of Last Lecture I II III IV Goals Stakeholders Review same as last lecture Accounting Profit Economic Profit Beginning Chapter 2 Transactions Markets Outline of Current Lecture I What do we mean by stability II Price Theory III Regulatory Mechanisms IV Central Thesis Current Lecture I What do we mean by stability A Stable with regard to 1 Price a pretty straightforward 2 Availability a Product is vailable in the market when you want it 3 Attribute a Has the quality features you expect B Reasons to follow II Price Theory A 3 ideas 1 descriptions of idealized theoretical markets 2 Various kinds of informational assumptions about buyers and sellers 3 Motivational assumptions a parties assumed to be self motivated These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute B Descriptive 1 Perfect Competition a number and size of buyers many tiny i each individual buyer has very very little effect on total demand b number and size of sellers many tiny c number of products 1 d No entry cost e Product price is LOW 2 Oligopoly a number and size of buyers many tiny b number and size of sellers few large c number of products 1 d Medium entry cost e Product price is slightly larger than perfect competition 3 Monopolistic competition a many tiny buyers per segment b number of sellers 1 per segment c number of products 1 per segment d Large entry cost e High price 4 Monopoly a many tiny b 1 seller c 1 product d Huge entry cost C Informational Assumptions 1 Buyers a What information do we assume all buyers have Public Info i All sellers ii Price being asked by all sellers b Private information i Budget constraint how much you COULD pay ii Preferences not revealed entirely sometimes unknown personal protection 2 Sellers a Assuming all sellers know Public info i All sellers ii Price being asked by all sellers b Private information i Cost function ii Profit preferences may or may not be max profit Target profit revenue NI usually lower than actually expected c Public Private Info referred to as Symmetric Complete or Full information 3 Motivational Assumptions a Buyers sellers are self interested b Sellers seek for an advantage i buyers budget constraints and preferences c Strategy make the system not symmetric i Lie cheat steal i e illegal measures ii Data mining sellers iii Mass comparison buyers d using advantages over and over again on either side distorts price III Regulatory Mechanisms anything other than price theory that adds or imposes on stability in the market A Types 1 International a Hard binding legal consequences if broken b VERY high cost to develop c Ease of exploitation need remedy redress 2 Contract a Legal consequences if broken b Real cost exists to develop i Assuming a contract between trusting parties costs less than non trusting parties 3 Interpersonal trust a No legal consequences if broken b zero out of pocket cost to establish B Who pays for these contracts 1 Buyer a Increases buyer s price i Part of price is not part of economic value it s for the regulatory measures ii And as price goes up demand goes down 2 Seller a Expenses increase i profit goes down ii As profit goes down supply goes down 3 General Public a Taxes go up 4 Some combination of the 3 C So everyone wants protection but no one wants to pay for it IV Central Thesis A Assumption of a firm selling in perfect competition 1 Product is exactly the same 2 Little or no control over price 3 Zero long term profit value 4 No control over market as demand fluctuates B So why in the world are we in business Avoiding or escaping perfect competition 1 Differentiate your product a putting cost up front long enough to do so and make profit b moves toward monopolistic competition 2 Enhance process a productivity improvement i make an investment to reduce the average cost of the product b moves toward oligopoly or monopoly 3 Change business model complicated a Ex university making on tuition vs other measures
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