Course thesis Firms attempt to avoid or escape perfect competition Why o Undifferentiated product homogeneous generic etc Same product as other companies are selling o Little or no control over price equilibrium price Can change your price but if other companies are lowering their price you must lower your price to start in competition Price in perfect competition equilibrium price Equilibrium price price at which supply demand o Long term economic profit 0 o Short term accounting profit expected value at 0 Expected value statistical average Companies can go over or under 0 but the average is 0 o If demand increases new firms can enter without costs If demand goes up cant obtain any benefits o If demand decreases random chance of me surviving Random chance of firms survival o No competitive advantage How o Product differentiation high rate of failure People will choose your product over a different company s product Black jacket w white stripes make diff colors Making homogenous product and new product raise price and now the company has broken out of perfect competition o Process enhancement high rate of failure Productivity improvement Keep making the homogeneous product but find a less expensive way to produce it Use extra money to improve productivity more pay off debts make differentiated product advertising keep it lower price of homogeneous product gain more customers and force companies out of business o Change business model money spent with no ideas New source of revenue Investment Risky o Costs before benefits o Benefits may not happen no guarantee o Even if benefits happen it may be too little or too late Multiple sources of money o Current revenue o Retained earnings o Debt loans o Equity sell portion of firm angel investors o Sale of assets sell books at end of the term to be able to buy new books for the next term Expected costs statistical way of adding up costs Costs uncertain o Magnitude of costs o When costs happen E Rev time value of money E Costs Time value of money Opportunity costs Costs of capital Taxes E Rev E Costs Make investment Increase economic profit E Rev E Costs Maybe make investment Economic profit 0 no change E Rev E Costs Do not make investment Decrease economic profit Capital budgeting problem standard starting problems Heavily debt focused if in perfect competition Transactions with environment DEF exchanging among parties Parties o Sellers firms individual household Firms sell commercial paper things firms can sell I H sell labor o Buyers firms individual household Firms buy stuff labor etc I H buy products o Third parties specialized sellers Brokers bring buyers and sellers together Paid get a fee commission or both Infrastructure buyers add efficiency Same benefit for lower price Types o Legal or illegal Illegal more risky more costs o Domestic or international International more risky because May not be legal in different countries Different languages Different currency o Market or transfer Market firms and environment Transfer within the firm o Purchase or barter Purchase money and product exchange Barter product and product exchange o Spot or future Spot striking a deal and completing the deal within a close time frame Future striking the deal and completing the deal are separated spread out in time Markets DEF Arena space within which similar transactions occur o Similar things being exchanged o Example labor raw materials finished goods capital real property buildings land intellectual property music patented processes o Arena physical or virtual Physical buildings spaces stores Virtual online or electronic Markets are stable o Price o Attribute o Availability How are markets stable o Price theory supply and demand Descriptive assumptions Set up a set of idealized markets Entrance costs increase as you go up Price goes up influenced by entrance costs and number of sellers Of product 1 Monopoly Of sellers 1 Entrance costs Price 1 seg 1 seg Of buyers Many buyers and very small Many buyers and very small seg Many buyers and very small Many buyers and very small 0 Few sellers and large 8 10 Many sellers and very small Monopolisti c competition Oligopoly 1 Perfect competition 1 Buyers Sellers Information Public Know all sellers Know prices Know all sellers Know prices Public all buyers and sellers know all sellers and what price they are asking Everyone knows this information Private Budget constraint Preferences utility functions Costs of making product Their preferences on profit Keep private preferences because if they are known it could make the person vulnerable or they don t know their preferences Symmetric information neither party has an advantage Motivational self interest o You want an advantage in the market place o Can I get a better deal How Informational seller budget constraint play with price o Target profit asymmetric information give an advantage is Seller what peoples preferences are What preferences are and what their budget Data mining find out preferences and budget Ads online based on previous searches purchases o Want a better deal asymmetric info get advantage Interpersonal trust contract international agreement Anything other than the price theory that keeps the market stable No trust markets stop working Contract agreement among private parties enforceable by law High trust less complex contract vise versa o Contract s complexity depends on trust Interpersonal trust no out of pocket cost Contract real costs o Gives protection follow through with deal Regulatory mechanisms Who pays Buyers increases the price the buyer pays o Demand likely to go down or disappear o Want protection but don t want to pay for it Sellers adds to expenses increase costs o Want protection but don t want to pay General public taxes increase Could be any individual or any combination of the three Greater the costs someone must pay Decrease efficiency and increase costs