Marketing #3

Kinked Demand Curve

The kinked demand curve model shows that oligopolists tend to keep prices stable, and use other means (increased advertising, rebates, and other incentives, etc.) to generate business.

The KDC model comes from analyzing two separate demand curves that the oligopolist faces --- a flat D curve (more elastic) and a steep D curve (more inelastic), and using the relevant portion of each demand curve for potential price increases or decreases.

Consider the idea of "mutual interdependence" among rival firms A, B, and C.  The idea behind this model is that when one of the competing firms (say, Firm A) raises its price, the other firms do NOT follow that action.  Firms B and C intend to increase their own sales and market share by being the lower-priced competition. 

Alternatively, if Firm A lowers its price, then that price decrease will be matched by the other rival firms also with the intent of increasing sales and market share.

[Note:  Show the graph here.]

The "kinked" demand curve gets its name from the fact that for price increases, Firm A's relevant demand curve is "elastic" but for price decreases, the relevant demand curve is "inelastic".  Since TR will fall in either case*, the model concludes that mutually interdependent firms are very likely to keep prices stable.

* Recall that when P rises and demand is elastic, TR will fall and also when P falls and demand is inelastic, TR will also fall.

Marketing #2

Concentration Ratio

One of the characteristics of this model is that of a "high" concentration ratio defined as the percentage market share belonging to the top 4 (top 8, top 20, or top 50) firms in the industry. For example, the CR4 measures the market share of the largest 4 firms in their respective industry, the CR8 measures the market share of the largest 8 firms, and so on .......

The term "high" CR4 is relative (as is the term "few" which measures the number of firms in the industry). In fact, whether an industry is considered "oligopolistic" or not, depends on the combination of two concepts interacting together --- the number of firms in the industry as well as the industry's concentration ratio.

Hypothetically, suppose there are 7 firms in the Chewing Gum Industry (listed in alphabetical order) where the percentage market share of each firm is as follows:

Firm A = 40%
Firm B = 5%
Firm C = 20%
Firm D = 6%
Firm E = 25%
Firm F = 2%
Firm G = 2%

Find the CR4. Find the CR8.

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Answers:  CR4 = 91%, CR8 = 100% and with only 7 firms in the industry (combined with a relatively very high CR4), we can conclude that the Chewing Gum Industry is indeed oligopolistic.

Marketing #1

Long Run Scale of Production

Economies of Scale = Increasing Returns to Scale
Diseconomies of Scale = Decreasing Returns to Scale
Also Constant Returns to Scale --- a very important assumption in economics, in general.

Something to note is that "The Law of Diminishing Marginal Returns" is a short run, not a long run concept, and doesn't apply to the topic of Economies/Diseconomies of Scale.

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Let's assume that a firm doubles its inputs. Instead of L = 1 and K = 1, let's suppose that L = 2 and K = 2. [Note that since all inputs are now "variable", this is a long run, not a short run, situation!]

When inputs (L and K) double, one of three things will potentially happen to output:

Output more than doubles (Q > 2) then AC will fall .... called Economies of Scale
Output less than doubles (Q < 2) then AC will rise ... called Diseconomies of Scale
Output exactly doubles (Q = 2) then AC is constant ... called Constant Returns to Scale

To confirm what happens to AC, first determine why TC rises when inputs double. Remember that AC = TC/Q.

[Note:  Show graph of LRAC here.]

Preparing for the Final!

Christian,
If you have time, and interest, check out the review sheets I left for you at the house with your books; however, if you don't have time to study everything, at least be sure to hit the highlights:


-- scarcity & opportunity cost
-- what factors cause the demand or supply curve to "shift" and the effect on equilibrium price and quantity
-- price ceilings and floors --- persistent shortages or surpluses
-- be able to calculate price elasticity of demand, state whether something is elastic, inelastic, or unit elastic, and determine the effect on total revenue
-- finding MU if given TU
-- determining the optimal purchase
-- Law of Diminishing Marginal Utility
-- short run vs. long run
-- accounting cost (profit) vs. economic cost (profit)
-- what is a production function?  what is a cost function?
-- understand how to determine TC, FC, VC, ATC, AFC, AVC, MC, implicit cost, explicit cost, economic cost, accounting cost, TR, etc.
-- Law of Diminishing (Marginal) Returns
-- economies/diseconomies of scale
-- characteristics of perfect competition (monopoly, oligopoly, etc.)
-- short run (and long run) equilibrium
-- fundamental rule of profit maximization (MR = MC pr P = MC for perfect competition)
-- concentration ratio
-- kinked demand curve
-- Anti-trust Laws
-- negative externalities (MSC > MPC)
-- two characteristics of public goods
-- calculating present value
-- Pareto efficiency, if you got this far


All the best, and love,
mom

Capital, interest, and corporate finance ...

Christian,

This topic should finish up the course --- WOW, last chapter! Just want to say that you did so well this semester as microeconomics is one of those courses that tends to "weed out" the non-serious students, and you worked hard, stayed on task, and got good grades. OK, great grades!

So awesome!

I'll come back to this topic in the next day or two, and until then ...

Love you, and keep studying,
mom

Market Failure --- Government Failure

An aside:

Economists and others can be fully aware of market failures and still be in favor of the market system anyway. Why? Because of government failures, such as lags in identification, decision-making, implementation, etc., not enough information or no incentive to correct the problem, the recognition of unintended consequences, etc., etc., etc.

Market Failure --- Public Goods

Remember the two essential characteristics of pure public goods:


1. non-excludability meaning that no one (not even "non-payers" or what's referred to as "free-riders") can be excluded from consuming the good or service


2. Non-depletability meaning that an additional consumer won't diminish the amount left over for someone else


To be considered a pure public good, both characteristics must hold!


To see the difference between "public" and "private" goods, first consider a private good such as the purchase of a movie ticket. Since non-payers will not be allowed in the theater, non-payers (i.e., free-riders) are excluded from consuming the good; therefore, the non-excludability characteristic does not hold.

Also with private goods, such as a new automobile or a stereo, when someone makes a purchase, there is one less car or stereo left over to sell to someone else; therefore, the non-depletablity characteristic does not hold.


Can you think of a good or service for which only one of the two above characteristics holds? Name any examples that you can think of.

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Now consider public tv and radio, both good examples of public goods. Can anyone be excluded from watching public tv or listening to public radio? Does the non-excludability characteristic hold?

If one more person turns on their radio or tv, is there less product available for others? Does the non-depletability characteristic hold?

Can you name some other examples of public goods? There are several.