BUSSPP 0020 Lecture 5Outline of Last Lecture I. Goals & Stakeholders (Review, same as last lecture)II. Accounting ProfitIII. Economic Profit IV. Beginning Chapter 2 – Transactions & Markets Outline of Current Lecture I. What do we mean by “stability”? II. Price TheoryIII. Regulatory MechanismsIV. Central Thesis Current LectureI. 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 it3. Attribute a. Has the quality/features you expect B. Reasons to follow… II. Price Theory A. 3 ideas 1. descriptions of idealized/theoretical markets2. Various kinds of informational assumptions (about buyers and sellers) 3. Motivational assumptionsa. 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. Descriptive1. Perfect Competitiona. number and size of buyers: many, tinyi. 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 LOW2. Oligopolya. 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. Monopolya. many, tinyb. 1 seller c. 1 product d. Huge entry costC. Informational Assumptions1. Buyersa. 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 protection2. Sellersa. Assuming all sellers know…. (Public info)i. All sellersii. 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 information3. Motivational Assumptionsa. 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 priceIII. 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 measuresii. 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 itIV. 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
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