Perfect competition and perfect monopoly

Monopolistic competition and oligopoly

perspective

Reference object

analyzing tool

language

Tools: The most important tools Marginal Analysis Methods/Graphics; Demand Methods

Ideas

Classical Economics: Profit-Maximizing Decisions

Managerial economics: two major constraints, time/space limitations

Resource optimization under goal constraints

Goal optimization under resource constraints

Understand common sense

Return to common sense

use common sense

The truth is often simple

Use simplicity to control complexity: looking at the essence through phenomena is the underlying logic

Simplicity is the basic law of economic operation

Optimal decision making

Breakdown of goals

Resource allocation must be rhythmic

can be falsified

can be confirmed

There are several basic principles that are generally recognized

Rent caps reduce the quantity and quality of available housing

Tariffs and import quotas generally reduce overall economic welfare

Flexible and floating exchange rates provide an efficient international monetary agreement (Price is a signal that guides the flow of resources)

Fiscal policies (such as tax cuts and increased government spending) have an important stimulating effect on an economy below full employment

If you want to balance the government budget, it should be done during the economic cycle rather than every year (spending money in the fourth quarter)

Cash transfers increase recipient welfare more than equivalent in-kind transfers

Large government budget deficits have adverse effects on the economy

Minimum wage increases unemployment among young and unskilled workers

The government should rebuild the welfare system based on the idea of ​​"negative income tax"

Emissions taxes and tradable pollution permits are better methods of controlling pollution than imposing pollution classes

Participants: Government, individuals and enterprises

Resources: labor, capital and natural resources

Market: product market and factor market

in conclusion: 1. The cycle cannot be broken; 2. Material cycle and value cycle should match each other; 3. The value cycle can be sustainable without the material cycle to a certain extent (corporate investment, bonds, futures and stocks, etc.), but this state will not last long; 4. Once the value cycle is far away from the material cycle for a long time, it will easily cause economic bubbles and cause the material to not circulate normally; 5. Choose the right time to achieve cyclic upgrading.

people's rational ignorance or lack of information

The prevalence of maximizing behavior

Organization of production through the price system requires payment of fees, while enterprises can save transaction costs through contracts.

Government intervention in the market only applies to transactions between enterprises, not within enterprises

As the scale increases, internal transaction fees rise, and finally become equal to market transaction fees.

Diminishing returns to management: Due to the limitation of entrepreneurial talent, as the scale of the enterprise expands, the production cost per unit of output will increase.

Vertical boundary (whole industry chain)

Horizontal boundaries (number and types of products or services)

Limitations: time and space limitations

Maximize shareholder equity (narrow sense value)

Value maximization: Make business decisions based on the perspective of industrial chains and industrial clusters

necessity of profit

risk-taking theory of profit

dynamic equilibrium theory

monopoly theory of profit

innovative theory of profit

Marginal Efficiency Theory of Profit

Management looks at problems from the perspective of "control", and control runs through the entire process of management; Managerial economics looks at problems from the perspective of "decision-making", which is the cost and profit of decision-making, which is different from accounting.

Goal-oriented SMART

1. Organizations, departments, positions, resources and management decisions are based on whether they contribute to the goals;

2. The importance of organizations, departments, positions, resources and management decisions depends on their contribution to the goal;

3. The most important responsibility of a manager is to direct resources in a direction that can achieve goals more effectively.

Problem: Insiderization

Reason: Ambiguity of goals and interests

official-oriented thinking

Scrooge Thought

The concept of static wealth

The idea of ​​tangible wealth

Concept y=f(x)

Total value TR, marginal value MR, average value AR

Develop information resources and tap data potential

Establish an indicator system and adjust priorities in a timely manner

Optimal business volume under unconstrained conditions: MR=0, optimal business volume and maximum profit

Under constrained conditions: When the marginal benefits (costs) brought by each additional unit of business volume in various applicable directions are equal, the distribution of business volume can maximize the total benefit (the lowest total cost).

Marginal value of function = first derivative of function

π=-100 400Q-2Q²

Mπ=400-4Q, optimal when Q=100

Same: To judge whether a plan is beneficial to decision-making, it depends on whether the income caused by it is greater than the cost incurred, that is, whether it can increase profits for the decision-maker.

the difference: 1. Marginal analysis method analyzes the impact of slight changes in variables on revenue costs or profits; 2. The incremental analysis method analyzes the impact of a certain decision on revenue, cost, and profit. "A certain decision" can be either a large number of changes or a non-quantitative change.

price

consumer preferences

consumer income

Other product prices

expectations of price changes

The demand for a commodity refers to the quantity of the commodity that consumers are willing and able to purchase at various possible prices within a certain period of time.

Qd=f(Px,T,I,Ps,E) Px-price of goods; T-preference; I-income; Ps-price of other goods; E-expectation of price

Demand curve: Assuming other non-price factors remain unchanged, Qd=f(p)=a-bp

Features

Variety

application

product price

price of input factors

technology

expectations about future prices

number of sellers

Government taxes, subsidies, regulations, etc.

The supply of a commodity refers to the quantity of the commodity that producers are willing and able to offer for sale at various possible prices within a certain period of time.

Qs=f(Px, Ps, C, Pe) Px-market price; Pe-price of production factors; Ps-price of other commodities; C-production technology

Supply curve: Assuming non-price factors remain unchanged, Qs=f(p)=a bP

Features

Variety

application

Supply and demand equilibrium: Under perfect market conditions, the market reaches a state where supply and demand are equal through the interaction of supply and demand;

The price at this time is the equilibrium price, that is to say, the price that can be maintained relative to the forces of demand and supply.

The quantity of supply and demand under equilibrium supply and demand is called equilibrium quantity

Determination of value standards: V factory = revenue/cost V use = function/cost expenses = income V factory*V use=function/cost V=F/C (cost-effective)

F remains unchanged, C decreases, and V increases; F rises, C remains unchanged, and V rises; F drops slightly, C drops sharply, and V rises; F rises sharply, C rises slightly, V rises; F rises, C falls instead, and V rises sharply.

Substitutes: The greater the number of substitutes for a product, the greater the price elasticity of demand

The product's price as a share of revenue: The demand for goods with a relatively higher price means a higher elasticity of demand

Durability of Goods: The price elasticity of demand for durable goods is generally greater than for non-durable goods because, in many cases, relatively cheap substitutes for durable goods are readily available.

Length of time analyzed: Demand elasticity is greater in the long run than in the short run. If the time is long, consumers will have many opportunities to adjust themselves to price changes; furthermore, if the sales price only lasts for a few minutes, consumers' search and adjustment costs will be higher.

The breadth of uses of a commodity: The more widely a commodity is used, the greater the elasticity of its demand.

Ep<-1, demand elasticity, P increases, TR decreases; Ep=-1, unit elasticity, whether P rises or falls, TR remains unchanged; -1<Ep<0, inelastic, P rises, TR rises Ep=0, completely inelastic, P rises, and TR rises in proportion to the rise in price; Ep=∞, perfect elasticity, if P rises, the income will decrease to zero

When marginal revenue is positive, demand is elastic; When marginal revenue is zero, demand is unit elastic; When marginal revenue is negative, demand is inelastic

When the economy is prosperous: income increases, the production of luxury goods increases, and the production of low-end goods decreases

Economic depression: vice versa

The transition period in which society is generally on the rise: a reasonable combination of medium, high and low-end

When two related products are within a company - appropriate product mix and pricing decisions should be made;

When related products are in different companies - appropriate co-opetition decisions should be made

Advertising elasticity measures the responsiveness of sales to changes in advertising expenditures and is calculated as the ratio of the percentage change in sales to the percentage of advertising expenditures

The percentage change in expected future prices caused by the percentage change in current prices; If the elasticity is greater than 1, it means that buyers expect the percentage of future price increases (or decreases) to be greater than the percentage of current price changes.

When two or more factors affecting demand change simultaneously, their combined impact on demand. It is often calculated by separately calculating the changes in demand caused by changes in the two factors and then adding them together.

Fixed input factor: An input factor required in the production process. No matter how much the production volume is in a given period, the number of required input factors remains unchanged, and the cost of the fixed input factor must be incurred.

Variable input factors: input factors used in the production process, the quantity of which changes with the expected production volume.

MP>0, TP increases; MP<0, TP decreases; MP=0, TP reaches maximum

MP>AP, AP increases; MP<AP, AP decreases; MP=AP, AP reaches maximum

"Management" stage

"Management" phase

"Manage conditions" stage

The amount by which total revenue increases by adding one unit of variable input factor

MRPx=△TR/△X=MPx*MRq Marginal product revenue is equal to the marginal product of X multiplied by the marginal revenue due to the increase in output

The amount by which total cost is increased by adding one unit of variable input factor

MEx=△TC/△X

When MRPx=MEx, the input amount of X is optimal

Managers should use more factors of production until the value of the input factor's marginal product equals its price. MR=MC

Isoquants farther from the origin represent greater output.

Any two isoquants do not intersect

Complete replacement

Totally irreplaceable

Not a complete replacement

Isocost curves farther from the origin represent higher costs

Any two isocost curves do not intersect

The slope of the isocost curve is equal to the ratio of the prices of the two factors

Production expansion line: a set of high-efficiency production points (the tangent points of isoquant curves and isocost curves)

Features: Along the expansion line, the marginal rate of technical substitution is equal to the price ratio of factors

TR=PaQa PbQb; if TR remains unchanged, then Qb=TR/Pb-(Pa/Pb)Qa

division of labor

specialization

technology

Management efficiency, etc.

In the monopolistic competition market, there are many companies and small scales. It is difficult to form a price agreement between companies, and even if it is formed, it is difficult to maintain. Therefore, price competition is one of the main contents of competition in the monopolistic competition market.

Quality competition

Competition in various promotional activities

Strategy: A course of action that a player in a game might take.

Profit: the result of strategy implementation

Payoff matrix: the results of all possible strategy combinations in a game

A set of strategies that prevents all game participants from increasing their returns, assuming that the strategies of other players are given.

Limitation: There may be more than one equilibrium in the game

In some cases, the optimal strategy of one firm does not necessarily depend on the choices made by another firm. The strategy of this firm is called the dominant strategy.

When one player has a dominant strategy, the game always has a Nash equilibrium. Because the player adopts that strategy, the other player makes his or her optimal choice accordingly.

game analysis

A strategic plan that has lower returns than some other strategic plans, regardless of how other players play the game

Dominated strategies should always be avoided, thus simplifying the game

Risk-averse decision-making: ensuring the best outcome among the worst possible outcomes, regardless of what other decision-makers do, i.e., finding the maximum outcome from the minimum outcome required

Players always make the same choice. This game is a pure game.

Players randomly mix different strategies and adopt them. This kind of game is a mixed game.

Participants cannot negotiate some form of agreement to constrain each other's behavior

The outcome of the game may be undesirable to all participants

Participants may negotiate and sign agreements with each other, thereby obligating them to implement specific strategies in the game

In this case, the optimal decision of the company is a "tit-for-tat" strategy, that is, each company should imitate the behavior of its competitors in the previous period.

benefit: Simple and not easily misunderstood; Never deceive first, as it will lead to the collapse of cooperation; There will be no room for impunity for cheating; Leniency, allowing for rapid resumption of cooperation

Failure: If the players do not play the game for a certain number of times, the strategy may fail

If one player moves first, he or she usually has an advantage.

Create certain barriers to entry through pricing to limit the entry of other companies

The optimal long-term pricing strategy is a strategy that maximizes the present value of profits

When entry has occurred or is imminent, retaliate with price cuts, and once the threat is gone, raise prices to an appropriate level

Enterprises invest to expand production capacity, forming sunk costs and relatively low costs, preventing new enterprises from entering

Companies build factories dispersedly to saturate the market geographically, or produce many brands or styles to saturate the market in product variety, thereby preventing new companies from entering.

Market entry and exit rules - require market entities to comply with certain regulations and meet certain conditions.

Market competition rules - guidelines to ensure that all market entities can compete on an equal basis

Market transaction rules - the market must be open (except when it involves business secrets), and transactions must be equal (voluntary, equivalent, reciprocal, etc.)

Market concentration - the number and size distribution of manufacturers in the market

The degree of product differentiation - in a market, the difference in quality, brand, etc. between one company's products and another company's products is the ability to affect price.

Conditions for market entry and exit - In the long run, the difficulty for a manufacturer to enter and exit the industry is a key factor in determining the nature of the market.

Growth rate of market demand

Vertical integration (low competition)

Diversification (competition is not fierce, it is fierce only when the degree of homogeneity is high)

The depth of government involvement and corporate systems (not drastic, but deep involvement is not necessarily good)

subtopic

SCP enterprise analysis ideas

Industry demand curve: In any commodity market, the consumer demand for goods produced by the entire industry is called the demand faced by the industry, and the corresponding demand curve is called the industry demand curve, which is equivalent to the market demand curve.

Firm demand curve - The quantity of consumer demand for the goods produced by a single firm in the industry is called the demand faced by the firm.

The market demand curve is downward sloping; the manufacturer's demand curve is a horizontal line starting from the established four-field equilibrium price level.

If the market demand curve or supply curve shifts, a new market equilibrium price will be formed accordingly, and accordingly there will be a horizontal line-shaped manufacturer demand curve starting from the new equilibrium price level.

Total revenue: TR(Q)=P*Q

Average return: AR(Q)=TR(Q)/Q

Marginal revenue: MR(Q)=△TR(Q)/△Q

The marginal revenue value at each level of sales volume is the slope of the corresponding total revenue curve.

The average revenue AR curve, marginal revenue MR curve and demand curve d of a perfectly competitive manufacturer are completely coincident and are represented by a horizontal line d.

The total revenue TR curve of a perfectly competitive manufacturer is a straight line with an upward trend starting from the origin. The slope of the total revenue curve MR=P is unchanged.

AR average revenue > SAC average total cost, the manufacturer gains profit

AR=SAC, the manufacturer’s profit is exactly zero

AVC average variable cost < AR < SAC, the manufacturer loses money, but the loss is less than the fixed cost, and it can still contribute to the fixed cost, so it can continue production

AR=AVC, the manufacturer is losing money and is at the critical point between production and non-production.

AR<AVC, the manufacturer loses money and stops production.

The short-run equilibrium condition of a perfectly competitive firm: MR=SMC=AR=P The manufacturer can obtain maximum profit, make zero profit, and suffer minimum loss;

The optimal output depends on the price determined by the market. The rule is that the firm should increase production until the sales price equals the marginal cost of production.

Whether a manufacturer continues production or not, the key to the decision is the relationship between price and average variable cost

The segment of marginal cost curve SMC above average variable cost AVC represents the enterprise's supply curve and reflects the profit-maximizing output at each price level.

When the price P drops below AVC (that is, below P4), the company will close down in order to minimize losses.

If SAC>P>AVC, the company cannot make normal profits, but the loss is less than closing, so it will choose to continue production.

If P≥SMC (i.e. P5 or higher), the company will at least be able to earn normal (economic) profits? ? ?

Price discrimination means that a company charges two or more prices for the same product from different buyers at the same time, or charges the same price for the same product sold to different buyers when the cost is different.

Conditions for companies to implement price discrimination strategies

Purpose of price discrimination: to obtain consumer surplus and thereby obtain high profits

The price charged by the enterprise is the highest price that consumers are willing to pay to buy the product, eg. auction

Monopoly enterprises divide the purchase volume of goods into two or more levels, and charge different prices to buyers of different levels, eg. quantity discounts, etc.

A monopoly sells the same product in different markets at different prices. In order to maximize total revenue, the marginal revenue of the products sold in each market must be equal and equal to the marginal cost; MR1=MR2=……=MRn=MC

Use this principle to allocate sales volume to each market, and then determine different prices based on the different elasticities of demand in each market.

It must not be the value used for the optimal solution, but the value used for the suboptimal solution

The opportunity cost of a certain commodity per unit of production refers to the maximum income that the producer can obtain by using the same production factors for other production purposes.

Explicit cost - refers to the actual payment of manufacturers to purchase or rent the production factors required in the production factor market.

embedded costs

Normal profit - the normal return on capital provided by the manufacturer to managers, entrepreneurial talents and business owners, is an embedded cost. Normal profits are returns that should not be taken at risk!

Total economic cost - equal to the sum of external costs and embedded costs.

Economic Profit - Profit above normal profit, which is the reward for risk. Economic profit = total revenue - explicit cost - implicit cost

Marginal cost - the change in total cost resulting from a one-unit change in output

Incremental cost - refers to the increase in total cost caused by implementing a management decision

Sunk costs - expenses that have been spent in the past, or expenses that must be spent in the future according to the agreement. These expenses cannot be recovered no matter what choice you make. From the perspective of rational people's decision-making, sunk costs cannot be used as a basis for decision-making.

Meaning - refers to assets that can be used for many years, such as buildings, machines and other various basic facilities, etc.

Economic cost: The economic cost of a long-lived asset in a certain period is equal to the difference between the initial and final market values ​​of the asset.

Enterprise individual cost-the cost of the enterprise to produce a certain commodity

Social cost - the increased cost to society as a result of a company producing a certain product

VC - cost that changes with volume

FC - costs that do not change with changes in output

Production Function

price of factors of production

Short-term time definition: a period in which the input quantity of certain factors cannot be changed in the long term.

Short-term cost function: a function that reflects the relationship between cost and output under the condition that the input scale of certain factors (fixed factors) remains unchanged.

total cost function TC=f(Q)=TFC TVC

average cost

marginal cost

TC=TVC TFC

MC>AC, AC rises MC<AC, AC decreases MC=AC, AC is the smallest The characteristics of the cost curve are determined by the law of diminishing marginal returns.

The increasing marginal revenue stage of the production function corresponds to the decreasing marginal cost stage; the decreasing marginal revenue stage corresponds to the increasing stage of the edge binding machine cost. Corresponding to the maximum value of marginal revenue is the minimum value of marginal cost. Because of this, the MC curve shows a U-shaped characteristic of first falling and then rising.

A function that reflects the relationship between cost and output under the condition that the input scale of various factors can be changed.

Long-term total cost (LTC) - the lowest cost that a firm can achieve by changing the scale of production at various output levels in the long run.

In the long-term planning, manufacturers can choose the combination of input factors that minimizes the cost of producing a certain expected level of output. Using existing production methods and technologies, manufacturers can choose the size of the factory, the type and specification of equipment, labor skills and raw materials, and combine them to form the lowest cost to produce the expected output.

The long-run total cost curve is the envelope of countless short-run total cost curves

subtopic

The U-shaped characteristic of the long-term cost curve is mainly determined by economies of scale and diseconomies of scale in long-term production.

Features

increasing returns to scale

diminishing returns to scale

constant returns to scale

division of labor and specialization

technical factors

Large-scale management: Team-based learning and management will lead to lower unit costs

Large-scale sales, logistics and distribution, etc.

large scale purchasing

large-scale financing

Large-scale scientific research and learning

Reduced management efficiency caused by hierarchical structure

Shielding from market pressure

Distortion of information transmission

Even with factories and equipment of the same size and using the same technology, unit production costs will fall

This is most obvious for complex products and production processes, when humans are able to learn by doing

Become a possible source of first-mover advantage

Average cost learning curve per unit of output: C=aQb Estimation form: logC=loga bLogQ where C is the cost of the Q-th unit of input factor; The coefficient b indicates the size of the learning curve effect, If b=0, then the cost is at a constant level; If b>0, then the cost will increase as the output increases, and the cost will increase as the output increases, which is exactly the opposite of the learning curve utility; If b<0, then the cost decreases with the output, and the learning curve effect causes the cost to decrease with the output.

The meaning of profit contribution - the difference between price and average variable cost (P-AVC), that is, the income from selling 1 unit of product, after compensating for variable costs, represents the contribution to profit.

Assume that the price per unit of output and variable cost AVC remain unchanged; △R Profit = Total Revenue PQ-[Variable Cost (Q*AVC) Fixed Cost and FC] Q=(FC △R)/(P-AVC)

Breakeven point output: The profit is zero, △R=0 Qe=FC/(P-AVC)

Meaning - If fixed costs are relatively larger than variable costs, the company is said to be highly leveraged. Compared with enterprises with high leverage, the change in profits caused by a certain percentage change in output is greater for companies with high leverage than for companies with low leverage. Because for a company with high leverage, the change in total cost is smaller than the change in output. Leverage can also be analyzed using profit elasticity

profit elasticity