Thursday 30 December 2010
Tuesday 28 December 2010
Unit 3: Barriers to Entry & Brand Loyalty
There are lots of excellent reports coming out at the moment focusing on the strategic issues facing businesses as they prepare for the new year. I was interested to pick up on one part of a report from MORI which highlights the variation in levels of customer loyalty in different consumer markets.
A chart from this report is highlighted below and it generates some interesting comparisons that students might analyse as they consider the relative importance of customer loyalty as a barrier to entry:
Why?
*Hotels are listed at the bottom of the table, yet they are active in promoting use of customer loyalty schemes?
* To what extent does high customer loyalty present an insurmountable barrier to entry for a new entrant wanting to build a viable scale in a new market?
* Is the best way to overcome entrenched customer loyalty to enter a market through acquisition?
The above are just some of the questions you should think about when discussing the competiton strategies of firms.
A chart from this report is highlighted below and it generates some interesting comparisons that students might analyse as they consider the relative importance of customer loyalty as a barrier to entry:
According to the data, sectors such as grocery retailing and financial services enjoy much higher consumer
loyalty than hotels, department stores or clothing retailers.
*Hotels are listed at the bottom of the table, yet they are active in promoting use of customer loyalty schemes?
* To what extent does high customer loyalty present an insurmountable barrier to entry for a new entrant wanting to build a viable scale in a new market?
* Is the best way to overcome entrenched customer loyalty to enter a market through acquisition?
The above are just some of the questions you should think about when discussing the competiton strategies of firms.
Friday 24 December 2010
Unit 1: An excellent exam technique to help solve market failure!
A handy mnemonic to help remember different the four different ways that the government could intervene when faced with market failure is:
'LETS' intervene
Legislate - Banning stuff, age limits, restrictions on use etc
Educate - advertise duscuss in school etc
Tax - indirect (both specific and ad valorem)
Subsidise - spend money encouraging producion of merit goods (see article below)
You all should remember this for the exam, it will really help you solve problem of market failure....and remember, you must evaluate each policy!!! Look at the article below and think about the questions asked. (the post on China and congestion is also an interesting topic)
Government to Sunsidise Electric Cars
Click here to see short video describing one way of reducing the negative externalities produced by cars. The government is planning to spend £43 million to subsidise specific models of electric cars. This will reduce the cost by around £5,000 per car.
Do you think this is the best way of reducing pollution caused by cars?
Can you think of any other ways?
Remember, 'LETS' intervene (have you forgotten it already Freddie!!!!)
'LETS' intervene
Legislate - Banning stuff, age limits, restrictions on use etc
Educate - advertise duscuss in school etc
Tax - indirect (both specific and ad valorem)
Subsidise - spend money encouraging producion of merit goods (see article below)
You all should remember this for the exam, it will really help you solve problem of market failure....and remember, you must evaluate each policy!!! Look at the article below and think about the questions asked. (the post on China and congestion is also an interesting topic)
Government to Sunsidise Electric Cars
Do you think this is the best way of reducing pollution caused by cars?
Can you think of any other ways?
Remember, 'LETS' intervene (have you forgotten it already Freddie!!!!)
Unit 1: Market Failure: Unique solution to congestion in China
This article highlights that there are many ways to solve the problem of car use other than by taxing cars. Possible questions to think about are;
1. What is the main reason for the increase in congestion in China? (Use a S & D diagram, discuss income elasticity etc)
2. How will this policy effect the supply/demand for cars in China?
3. How effective will it be?
4. How effective will the other methods discussed be in reducing car use?
New cars in Beijing cut by two-thirds to battle traffic
New rules have taken effect in China that restrict car purchases in an effort to combat serious traffic problems in the capital, Beijing.
The city authorities will allow only 240,000 vehicles to be registered for 2011 - one third of this year's total.
Car buyers have been swamping dealers in anticipation of the new rules, which will still leave about five million cars on the road in the capital. Traffic and air pollution in Beijing is among the worst in the world.
Beijing officials are trying to balance the desire of a growing middle class to have the convenience and status of car ownership, with a huge congestion problem. Officials said the new rules would not solve the full extent of the city's problems, only slow the down the rate at which they are worsening.
"It will be difficult to dramatically improve the traffic situation in a short time," said Liu Xiaoming, deputy director of the Beijing Traffic Management Bureau.
"But it can slow down the pace of worsening traffic congestion."
Car registrations will be allocated by a license plate lottery system from Friday.
Under the new rules, government departments will not be allowed to increase the size of their fleets for five years. About 750,000 new cars appeared on Beijing's streets this year, raising the total of registered vehicles for the city 4.8m. China overtook the US as the world's biggest car and van market in 2009, with 13.6 million vehicles sold within the country.
Other solutions are being discussed.
The authorities have delayed the imposition of a congestion charge - a fee for cars to enter specified zones - saying the idea needed more study.
In anticipation of the new ruling, 30,000 new vehicles were registered in the past week, at least three times the normal rate, Xinhua state news agency reported. (this could be an example of Govt failure...the policy causing a huge 'spike' in demand)
"I heard that they were going to change the policy, so I wanted to buy a car before the year was over," one buyer named Mr Yang told the BBC.
"We rushed to buy a car, because I need it for work. But it will be really inconvenient for me to drive a car when the streets become so congested," he said.
Residents say that Beijing's roads sometimes resemble car parks; a record 140 traffic jams were recorded on one evening in September.
A spectacular 120km (75-mile) long traffic jam formed on the Beijing to Tibet route in early September, only a week after another 100km (62-mile) jam had been cleared in the same area.
There remains a high level of scepticism about how well the new measures will work however.
"I think we should learn from other countries and make the parking fees even higher, that is certainly a method. And these cars, we can't just allow the number of cars to grow. We must control them," said Beijing resident Wu Ning Juan.
1. What is the main reason for the increase in congestion in China? (Use a S & D diagram, discuss income elasticity etc)
2. How will this policy effect the supply/demand for cars in China?
3. How effective will it be?
4. How effective will the other methods discussed be in reducing car use?
New rules have taken effect in China that restrict car purchases in an effort to combat serious traffic problems in the capital, Beijing.
The city authorities will allow only 240,000 vehicles to be registered for 2011 - one third of this year's total.
Car buyers have been swamping dealers in anticipation of the new rules, which will still leave about five million cars on the road in the capital. Traffic and air pollution in Beijing is among the worst in the world.
Beijing officials are trying to balance the desire of a growing middle class to have the convenience and status of car ownership, with a huge congestion problem. Officials said the new rules would not solve the full extent of the city's problems, only slow the down the rate at which they are worsening.
"It will be difficult to dramatically improve the traffic situation in a short time," said Liu Xiaoming, deputy director of the Beijing Traffic Management Bureau.
"But it can slow down the pace of worsening traffic congestion."
Car registrations will be allocated by a license plate lottery system from Friday.
Under the new rules, government departments will not be allowed to increase the size of their fleets for five years. About 750,000 new cars appeared on Beijing's streets this year, raising the total of registered vehicles for the city 4.8m. China overtook the US as the world's biggest car and van market in 2009, with 13.6 million vehicles sold within the country.
Other solutions are being discussed.
The authorities have delayed the imposition of a congestion charge - a fee for cars to enter specified zones - saying the idea needed more study.
In anticipation of the new ruling, 30,000 new vehicles were registered in the past week, at least three times the normal rate, Xinhua state news agency reported. (this could be an example of Govt failure...the policy causing a huge 'spike' in demand)
"I heard that they were going to change the policy, so I wanted to buy a car before the year was over," one buyer named Mr Yang told the BBC.
"We rushed to buy a car, because I need it for work. But it will be really inconvenient for me to drive a car when the streets become so congested," he said.
Residents say that Beijing's roads sometimes resemble car parks; a record 140 traffic jams were recorded on one evening in September.
A spectacular 120km (75-mile) long traffic jam formed on the Beijing to Tibet route in early September, only a week after another 100km (62-mile) jam had been cleared in the same area.
There remains a high level of scepticism about how well the new measures will work however.
"I think we should learn from other countries and make the parking fees even higher, that is certainly a method. And these cars, we can't just allow the number of cars to grow. We must control them," said Beijing resident Wu Ning Juan.
Thursday 23 December 2010
Unit 1: Buffer Stock Schemes: an evaluation
Buffer Stocks - Georgia e mailed me about Buffer Stock schemes, here is a brief summary, with evaluation.
The prices of agricultural products such as wheat, tea and coffee tend to fluctuate more than the prices of manufactured products and services. This is largely due to the volatility in the market supply of agricultural products coupled with the fact that demand and supply are price inelastic.
One way to smooth out the fluctuations in prices is for the government to operate price support schemes through the use of buffer stocks. But many of them have had a chequered history.
Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low.
The problems with buffer stock schemes
In theory buffer stock schemes should be profit making, since they buy up stocks of the product when the price is low and sell them onto the market when the price is high. However, they do not often work well in practice. Clearly, perishable items cannot be stored for long periods of time and can therefore be immediately ruled out of buffer stock schemes.
Setting up a buffer stock scheme also requires a significant amount of start up capital, since money is needed to buy up the product when prices are low. There are also high administrative and storage costs to be considered.
The success of a buffer stock scheme however ultimately depends on the ability of those managing a scheme to correctly estimate the average price of the product over a period of time. This estimate is the scheme’s target price and obviously determines the maximum and minimum price boundaries.
But if the target price is significantly above the correct average price then the organization will find itself buying more produce than it is selling and it will eventually run out of money. The price of the product will then crash as the excess stocks built up by the organization are dumped onto the market.
Conversely if the target price is too low then the organization will often find the price rising above the boundary, it will end up selling more than it is buying and will eventually run out of stocks
The European Union Common Agricultural Policy has come under sustained attack for many years and there have been several attempts to reform the system.
The prices of agricultural products such as wheat, tea and coffee tend to fluctuate more than the prices of manufactured products and services. This is largely due to the volatility in the market supply of agricultural products coupled with the fact that demand and supply are price inelastic.
One way to smooth out the fluctuations in prices is for the government to operate price support schemes through the use of buffer stocks. But many of them have had a chequered history.
Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low.
The problems with buffer stock schemes
In theory buffer stock schemes should be profit making, since they buy up stocks of the product when the price is low and sell them onto the market when the price is high. However, they do not often work well in practice. Clearly, perishable items cannot be stored for long periods of time and can therefore be immediately ruled out of buffer stock schemes.
Setting up a buffer stock scheme also requires a significant amount of start up capital, since money is needed to buy up the product when prices are low. There are also high administrative and storage costs to be considered.
The success of a buffer stock scheme however ultimately depends on the ability of those managing a scheme to correctly estimate the average price of the product over a period of time. This estimate is the scheme’s target price and obviously determines the maximum and minimum price boundaries.
But if the target price is significantly above the correct average price then the organization will find itself buying more produce than it is selling and it will eventually run out of money. The price of the product will then crash as the excess stocks built up by the organization are dumped onto the market.
Conversely if the target price is too low then the organization will often find the price rising above the boundary, it will end up selling more than it is buying and will eventually run out of stocks
The European Union Common Agricultural Policy has come under sustained attack for many years and there have been several attempts to reform the system.
Unit 4: Money and Zimbabwe
This is just wrong!
Click here to witness desperate times in Zimbabwe. The article illustrates what can happen when people lose total confidence in their currency. The image below is a Barter Exchage Rate List placed outside a hospital where “where patients barter goods from their farms for medical treatment.”
Click here to witness desperate times in Zimbabwe. The article illustrates what can happen when people lose total confidence in their currency. The image below is a Barter Exchage Rate List placed outside a hospital where “where patients barter goods from their farms for medical treatment.”
Monday 20 December 2010
Unit 1: Market Failure and xmas shopping!!!!
Economists stole Christmas!
Every year around this time economics students and teachers alike begin looking forward to the long Christmas holiday right around the corner. Two or three weeks of yuletide cheer, mistletoe, snow men, caroling, food, family and… dead weight loss. That’s right, what’d you think this post would be about, the efficiency of Christmas? Come on… Economics is the DISMAL science!
The tradition of giving Christmas presents has long fallen under the scope of economic researchers who seek to understand more about the rational, or as it turns out, irrational behavior of individuals in society. From an economic standpoint, many of the things that Christmas traditionalists believe are bad, are actually good, while the traditions many believe are good are in fact quite bad from an economist’s viewpoint.
Basically, economists are grinches. So prepare to be grinchified…
Are you the kind of person who thinks doing all your Christmas shopping online is cold, impersonal, and against the holiday spirit? Well, Stephen Dubner, co-author of Freakonomics, argues that shopping online is far more efficient than spending days roaming the malls and shopping centers searching for the right gift for your loved ones. Says Dubner about “clicking and gifting” (i.e. shopping online):
'See here’s the thing: I like the sound of clicking and gifting, that sounds efficient to me. That’s what we need to bring to the holidays, is more efficiency, less emotion. Let’s get rid of that'.
Economists’ disdain for Christmas shopping is not limited to criticizing the inefficiency of spending hours shopping for gifts, in fact the tradition of giving gifts itself is considered economically irrational and inefficient.
Sure, you say, it’s the thought that counts. Well, that’s just stupid. A gift giver can think all he wants about what a friend or a loved one may want for Christmas, and end up buying the thing they think the other person wants. But when it comes down to it, each of us only really knows what one person in this world wants, and that is ourselves, that’s right, as I am sure you realised, it's all about ME!
So basically, any gift you can buy for someone else will bring them less benefit than a purchase they themselves make; so WHY BOTHER? What it comes down to is self-interest in the end. When we buy a gift for another person, it is ultimately for our own benefit, which as we will see soon, most often exceeds the benefit of the receiver of the gift.
This is what’s known as the dead weight loss of Christmas. From an economic standpoint, Christmas is not “the most wonderful time of the year”, rather it’s “the most inefficient time of the year” (not so catchy as a song lyric, I’m afraid). Dead weight loss is like when,
…my partner’s great-grandma buys me a sweater at $85 and to me it’s worth like $1.50. Because I don’t like it… so that’s $83.50 deadweight loss…
And the holidays are jam-packed with that kind of waste.
We’ve all been there, as both the gift giver and the unfortunate receiver of a gift we don’t like or even want. In fact, this phenomenon can be graphed using the basic diagram you all need to learn: the marginal benefit, marginal cost diagram.
Look at the graph below and see if you can figure out what it shows, then scroll down and read the explanation.
What the graph above shows is that the act of giving gifts brings benefits to the gift giver that are not enjoyed by the gift’s receiver. From the ultimate consumer’s standpoint (i.e. from the perspective of the gift receivers), many of the gifts received for Christmas will be valued far less than the amount of money, time and energy that went into choosing and buying them by the gift giver.
In other words, the marginal cost of shopping for and buying Christmas presents exceeds the marginal benefit of those who receive them, hence, the market for Christmas gifts fails since the behavior of private individuals results in a level of Christmas shopping that exceeds the socially optimal efficient level, at which the marginal benefit of the give receivers intersects the marginal cost of gift production. Resources are over-allocated towards Christmas present shopping because it is simply impossible for gift givers to know the precise preferences of those for whom they shop.
That $85 sweater, for instance, may have only been “worth” $1.50 to the poor fellow who received it. The dead weight loss, therefore, is the resources that went towards producing and purchasing a sweater for someone who doesn’t even like it, and all the other possible ways those resources and that money could have been allocated.
Have I ruined your Christmas yet? Well, fear not, there is an economically efficient way to approach the Christmas season and to maintain the beloved tradition of gift giving! That’s right, even the Grinch economists have a solution to this wasteful problem! And it is so simple… it is… CASH! Cash is the ultimate gift, perfect in every way. No time whatsoever is wasted in the process of deciding what to give someone. Simply put your debit card in the ATM machine and your entire season of shopping is done!
Cash is the perfect gift to receive too. There is no chance you will be unsatisfied with what you ultimately “get” for Christmas. Cash can be spent on the goods from which the receiver himself enjoys the greatest marginal utility per dollar he spends. The dead weight loss above is completely eliminated when cash is given instead of other presents. The marginal benefit of the giver and the marginal benefit of the receiver are the same since the giver can rest assured that the receiver will spend it on something that provides him with the greatest possible benefit.
So there is a happy ending to this story after all! Maybe someday when economic education has truly succeeded we can once and for all do away with the wastefulness and inefficiency of Christmases past and form new traditions rooted in the efficiency of cash gifts. So, students of economics, if you want to make your loved ones happy this Christmas, you now know what to do. In the process, you’ll help make the world just a little bit more efficient!
Wherever you lot are, hope you have a great xmas, see you all in gthe new year......rememember, do some work!!!!!!
Mr B
Every year around this time economics students and teachers alike begin looking forward to the long Christmas holiday right around the corner. Two or three weeks of yuletide cheer, mistletoe, snow men, caroling, food, family and… dead weight loss. That’s right, what’d you think this post would be about, the efficiency of Christmas? Come on… Economics is the DISMAL science!
The tradition of giving Christmas presents has long fallen under the scope of economic researchers who seek to understand more about the rational, or as it turns out, irrational behavior of individuals in society. From an economic standpoint, many of the things that Christmas traditionalists believe are bad, are actually good, while the traditions many believe are good are in fact quite bad from an economist’s viewpoint.
Basically, economists are grinches. So prepare to be grinchified…
Are you the kind of person who thinks doing all your Christmas shopping online is cold, impersonal, and against the holiday spirit? Well, Stephen Dubner, co-author of Freakonomics, argues that shopping online is far more efficient than spending days roaming the malls and shopping centers searching for the right gift for your loved ones. Says Dubner about “clicking and gifting” (i.e. shopping online):
'See here’s the thing: I like the sound of clicking and gifting, that sounds efficient to me. That’s what we need to bring to the holidays, is more efficiency, less emotion. Let’s get rid of that'.
Economists’ disdain for Christmas shopping is not limited to criticizing the inefficiency of spending hours shopping for gifts, in fact the tradition of giving gifts itself is considered economically irrational and inefficient.
Sure, you say, it’s the thought that counts. Well, that’s just stupid. A gift giver can think all he wants about what a friend or a loved one may want for Christmas, and end up buying the thing they think the other person wants. But when it comes down to it, each of us only really knows what one person in this world wants, and that is ourselves, that’s right, as I am sure you realised, it's all about ME!
So basically, any gift you can buy for someone else will bring them less benefit than a purchase they themselves make; so WHY BOTHER? What it comes down to is self-interest in the end. When we buy a gift for another person, it is ultimately for our own benefit, which as we will see soon, most often exceeds the benefit of the receiver of the gift.
This is what’s known as the dead weight loss of Christmas. From an economic standpoint, Christmas is not “the most wonderful time of the year”, rather it’s “the most inefficient time of the year” (not so catchy as a song lyric, I’m afraid). Dead weight loss is like when,
…my partner’s great-grandma buys me a sweater at $85 and to me it’s worth like $1.50. Because I don’t like it… so that’s $83.50 deadweight loss…
And the holidays are jam-packed with that kind of waste.
We’ve all been there, as both the gift giver and the unfortunate receiver of a gift we don’t like or even want. In fact, this phenomenon can be graphed using the basic diagram you all need to learn: the marginal benefit, marginal cost diagram.
Look at the graph below and see if you can figure out what it shows, then scroll down and read the explanation.
What the graph above shows is that the act of giving gifts brings benefits to the gift giver that are not enjoyed by the gift’s receiver. From the ultimate consumer’s standpoint (i.e. from the perspective of the gift receivers), many of the gifts received for Christmas will be valued far less than the amount of money, time and energy that went into choosing and buying them by the gift giver.
In other words, the marginal cost of shopping for and buying Christmas presents exceeds the marginal benefit of those who receive them, hence, the market for Christmas gifts fails since the behavior of private individuals results in a level of Christmas shopping that exceeds the socially optimal efficient level, at which the marginal benefit of the give receivers intersects the marginal cost of gift production. Resources are over-allocated towards Christmas present shopping because it is simply impossible for gift givers to know the precise preferences of those for whom they shop.
That $85 sweater, for instance, may have only been “worth” $1.50 to the poor fellow who received it. The dead weight loss, therefore, is the resources that went towards producing and purchasing a sweater for someone who doesn’t even like it, and all the other possible ways those resources and that money could have been allocated.
Have I ruined your Christmas yet? Well, fear not, there is an economically efficient way to approach the Christmas season and to maintain the beloved tradition of gift giving! That’s right, even the Grinch economists have a solution to this wasteful problem! And it is so simple… it is… CASH! Cash is the ultimate gift, perfect in every way. No time whatsoever is wasted in the process of deciding what to give someone. Simply put your debit card in the ATM machine and your entire season of shopping is done!
Cash is the perfect gift to receive too. There is no chance you will be unsatisfied with what you ultimately “get” for Christmas. Cash can be spent on the goods from which the receiver himself enjoys the greatest marginal utility per dollar he spends. The dead weight loss above is completely eliminated when cash is given instead of other presents. The marginal benefit of the giver and the marginal benefit of the receiver are the same since the giver can rest assured that the receiver will spend it on something that provides him with the greatest possible benefit.
So there is a happy ending to this story after all! Maybe someday when economic education has truly succeeded we can once and for all do away with the wastefulness and inefficiency of Christmases past and form new traditions rooted in the efficiency of cash gifts. So, students of economics, if you want to make your loved ones happy this Christmas, you now know what to do. In the process, you’ll help make the world just a little bit more efficient!
Wherever you lot are, hope you have a great xmas, see you all in gthe new year......rememember, do some work!!!!!!
Mr B
Wednesday 15 December 2010
Unit 1: External Benefits & Govt Subsidies
UK drivers who decide to buy specific models of electric cars will now be eligible for grants of up to £5,000 in a government subsidy scheme. The £43m initiative starts on 1 January 2011 and could help cut the price by as much as 25%. See the news click here.
Monday 13 December 2010
Unit 3: Business Objectives
Do all firms seek to maximise profits?
Students should understand that the models that comprise the traditional theory of the firm are based upon the assumption that firms aim to maximise profits. They need to understand the usual profit maximising rule (MC=MR). They should also understand the satisficing principle and know that firms have a variety of other possible objectives.
The conventional theory of the firm is built upon the assumption that businesses seek to maximise profits from producing an output and then selling it in product markets. Profits are maximised when marginal revenue equals marginal cost (MR=MC). The price, output and profits for a firm operating in an imperfectly competitive market (e.g. a monopoly) are shown in the diagram opposite;
In an exam you might be asked to consider and analyse how changes in revenues and costs might affect the profit maximising price and output. It might be worth drawing onto the diagram above to show the effects of a rise in demand and / or a fall in production costs. It is important to question the assumption that profit maximisation is the dominant objective in the day to day decisions of businesses in real world markets be they competitive or oligopolistic / monopolistic.
Why might firms depart from profit maximisation?
•Imperfect information about a firm’s demand and cost conditions – a business may not have enough information to accurately calculate marginal revenue and marginal costs. Often, pricing decisions are taken on the basis of “estimated demand conditions”. A business that is new to a market is unlikely to know the price elasticity of demand for a new product or the reactions of rivals to a change in price
•Alternative objectives of the managers of a business – managers, employees and shareholders within a large and complex business organisation may each have different objectives as stakeholders in a business enterprise. Much work for example in the new behavioural theories of the firm suggests that managers operating with some autonomy from the shareholders, might pursue strategies that depart from pure profit maximisation
For the exam you need to be aware of different objectives and also understand how this might affect the conduct and behaviour of a business operating in a market. Here are four different objectives:
•Satisficing:
Satisficing behaviour involves the owners setting minimum acceptable levels of achievement in terms of business revenue and profit e.g. a target rate of growth of sales, or an acceptable rate of return on capital (a measure of profitability)
•Sales Revenue Maximisation :
Baumol argued that annual salaries and other perks might be more closely correlated with total sales revenue rather than profits. Revenue is maximised when marginal revenue (MR) = zero
•Managerial Satisfaction :
An alternative view was put forward by Williamson, who developed the concept of managerial satisfaction (or utility) achieved for example by success in raising a firm’s sales revenue, market share or meeting an output growth target
•Constrained Sales Revenue Maximisation -
Shareholders of a business may introduce a constraint on the decisions of managers. For example hey may introduce a minimum profit constraint designed to underpin the valuation of their shares and maintain a dividend.
No business is exactly the same – but there are plenty of reasons to believe that in the short-term a business may not be setting price at what it perceives to be a profit maximising level. In summary:
•Firm’s must consider the reactions of rival businesses to their decisions (especially in an oligopoly)
•Managers in a business will have freedom in setting price to suit local demand and competition
•How can multi-product firms hope to have enough information to profit maximise in every market?
•The strategies of a business evolve over time – profitability is important but so too might be the aim of surviving in a business during a recession, or an attempt to achieve market dominance by under-cutting rival firms for a time period, accepting that this will eat into profits in the short term
•Shareholders rarely have the day to day control of what managers are doing and the stock market is an imperfect instrument of controlling corporate performance
In our second diagram we show how a change in objectives (from profit maximisation to revenue maximisation) affects the price and output of a business. Think about how this affects economic efficiency and welfare (e.g. the balance between consumer and producer surplus).
Students should understand that the models that comprise the traditional theory of the firm are based upon the assumption that firms aim to maximise profits. They need to understand the usual profit maximising rule (MC=MR). They should also understand the satisficing principle and know that firms have a variety of other possible objectives.
The conventional theory of the firm is built upon the assumption that businesses seek to maximise profits from producing an output and then selling it in product markets. Profits are maximised when marginal revenue equals marginal cost (MR=MC). The price, output and profits for a firm operating in an imperfectly competitive market (e.g. a monopoly) are shown in the diagram opposite;In an exam you might be asked to consider and analyse how changes in revenues and costs might affect the profit maximising price and output. It might be worth drawing onto the diagram above to show the effects of a rise in demand and / or a fall in production costs. It is important to question the assumption that profit maximisation is the dominant objective in the day to day decisions of businesses in real world markets be they competitive or oligopolistic / monopolistic.
Why might firms depart from profit maximisation?
•Imperfect information about a firm’s demand and cost conditions – a business may not have enough information to accurately calculate marginal revenue and marginal costs. Often, pricing decisions are taken on the basis of “estimated demand conditions”. A business that is new to a market is unlikely to know the price elasticity of demand for a new product or the reactions of rivals to a change in price
•Alternative objectives of the managers of a business – managers, employees and shareholders within a large and complex business organisation may each have different objectives as stakeholders in a business enterprise. Much work for example in the new behavioural theories of the firm suggests that managers operating with some autonomy from the shareholders, might pursue strategies that depart from pure profit maximisation
For the exam you need to be aware of different objectives and also understand how this might affect the conduct and behaviour of a business operating in a market. Here are four different objectives:
•Satisficing:
Satisficing behaviour involves the owners setting minimum acceptable levels of achievement in terms of business revenue and profit e.g. a target rate of growth of sales, or an acceptable rate of return on capital (a measure of profitability)
•Sales Revenue Maximisation :
Baumol argued that annual salaries and other perks might be more closely correlated with total sales revenue rather than profits. Revenue is maximised when marginal revenue (MR) = zero
•Managerial Satisfaction :
An alternative view was put forward by Williamson, who developed the concept of managerial satisfaction (or utility) achieved for example by success in raising a firm’s sales revenue, market share or meeting an output growth target
•Constrained Sales Revenue Maximisation -
Shareholders of a business may introduce a constraint on the decisions of managers. For example hey may introduce a minimum profit constraint designed to underpin the valuation of their shares and maintain a dividend.
No business is exactly the same – but there are plenty of reasons to believe that in the short-term a business may not be setting price at what it perceives to be a profit maximising level. In summary:
•Firm’s must consider the reactions of rival businesses to their decisions (especially in an oligopoly)
•Managers in a business will have freedom in setting price to suit local demand and competition
•How can multi-product firms hope to have enough information to profit maximise in every market?
•The strategies of a business evolve over time – profitability is important but so too might be the aim of surviving in a business during a recession, or an attempt to achieve market dominance by under-cutting rival firms for a time period, accepting that this will eat into profits in the short term
•Shareholders rarely have the day to day control of what managers are doing and the stock market is an imperfect instrument of controlling corporate performance
In our second diagram we show how a change in objectives (from profit maximisation to revenue maximisation) affects the price and output of a business. Think about how this affects economic efficiency and welfare (e.g. the balance between consumer and producer surplus).
Thursday 9 December 2010
Unit 1: Agriculture and price volatility.
Unit 1 questions often focus on price volatility in world markets. See below for an example;
“The value of banana exports for developing countries depends critically on the world price of bananas. The price is volatile in the short term, yet there are distinct trends in price over the medium term.”
Banana prices have been volatile in recent years and this is due to a mix of demand and supply-side factors
Demand causes include:
1. Cyclical demand (i.e. high income elasticity of demand) Many commodities are used in producing other goods and services
2. Peak/off-peak demand differences and seasonal changes in demand
3. Speculative demand from investors who treat commodities as financial assets
4. Low price elasticity of demand (Ped) – e.g. when there are few close substitutes and where the raw material is essential in providing other products
Supply causes include:
1. Unstable conditions of market supply including uncertain yields in farming because of volatile climate. This leads to changes in actual versus planned supply and thus changes in stock levels
2. Artificial limits on supply e.g. Export quotas / bans introduced by a government
3. Low price elasticity of supply e.g. due to limited capacity or a low level of stocks. Fresh fruits are expensive to store and refrigerate and may deteriorate if held as part of a buffer stock scheme
Here are some links for further reading on this topic:
Revision Presentation on Price Volatility
Price Volatility Chart (Bananas)
“The value of banana exports for developing countries depends critically on the world price of bananas. The price is volatile in the short term, yet there are distinct trends in price over the medium term.”
Banana prices have been volatile in recent years and this is due to a mix of demand and supply-side factors
Demand causes include:
1. Cyclical demand (i.e. high income elasticity of demand) Many commodities are used in producing other goods and services
2. Peak/off-peak demand differences and seasonal changes in demand
3. Speculative demand from investors who treat commodities as financial assets
4. Low price elasticity of demand (Ped) – e.g. when there are few close substitutes and where the raw material is essential in providing other products
Supply causes include:
1. Unstable conditions of market supply including uncertain yields in farming because of volatile climate. This leads to changes in actual versus planned supply and thus changes in stock levels
2. Artificial limits on supply e.g. Export quotas / bans introduced by a government
3. Low price elasticity of supply e.g. due to limited capacity or a low level of stocks. Fresh fruits are expensive to store and refrigerate and may deteriorate if held as part of a buffer stock scheme
Here are some links for further reading on this topic:
Revision Presentation on Price Volatility
Price Volatility Chart (Bananas)
Wednesday 8 December 2010
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Friday 3 December 2010
Unit 1: Excellent Elasticity piece on xmas trees and bad weather!
The bad weather is not just affecting my ability to have fun in UK this week.......
There are lots of aspects of economics this story in from the Independent on Wednesday 1st December. The final section of the report into the effects of the early snow falls is about Christmas tree shortages, and links to this BBC story about Nordmann fir trees, and the two together contain several references to the A level syllabus:
Questions you should be able to answer.....
1. The suppliers are affected by poor weather conditions which mean that they cannot supply the goods to market - with the aid of a diagram explain what happens to market equilibrium and why.
2. Consumers in the UK have become very fond of convenient, attractive and non-needle-dropping Nordmann fir trees - with the aid of a diagram explain likely price elasticity of demand, what happens market equilibrium, and why.
3. The EU withdraws a subsidy previously paid to producers in Denmark - with the aid of a diagram explain what happens to market equilibrium and why.
4. How can these reports be used to illustrate the rationing function of price?
5. Distinguish between the likely short-run and long-run effects on the market.
There are lots of aspects of economics this story in from the Independent on Wednesday 1st December. The final section of the report into the effects of the early snow falls is about Christmas tree shortages, and links to this BBC story about Nordmann fir trees, and the two together contain several references to the A level syllabus:
Questions you should be able to answer.....
1. The suppliers are affected by poor weather conditions which mean that they cannot supply the goods to market - with the aid of a diagram explain what happens to market equilibrium and why.
2. Consumers in the UK have become very fond of convenient, attractive and non-needle-dropping Nordmann fir trees - with the aid of a diagram explain likely price elasticity of demand, what happens market equilibrium, and why.
3. The EU withdraws a subsidy previously paid to producers in Denmark - with the aid of a diagram explain what happens to market equilibrium and why.
4. How can these reports be used to illustrate the rationing function of price?
5. Distinguish between the likely short-run and long-run effects on the market.
Unit 3: Efficiency and when to use it in exams.
What are the main types of efficiency and when should I use them in the exams? Below is an excellent piece on how ...
If you are stretching for a high grade at AS and/or A2 you will need to use efficiency concepts in your exam answers – so these notes should be useful!
Economic efficiency is about making the best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time. Download this two page revision note - covering some of the issues for AS and A2 exams.
Revision note:
If you are stretching for a high grade at AS and/or A2 you will need to use efficiency concepts in your exam answers – so these notes should be useful!
Economic efficiency is about making the best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time. Download this two page revision note - covering some of the issues for AS and A2 exams.
Revision note:
Revision Efficiency: types & exam uses
View more documents from mattbentley34.
Thursday 2 December 2010
Unit 2: Recession (amusing Vid)
Read on for a brilliant and amusing video explaining what a recession actually is…
When I introduce the concept of economic growth to you lot, I will use this amusing video from down under to introduce the topic!
Enjoy.
Of course, this is made even more ironic by the fact that Australia was one of the few countries to avoid the recession, largely thanks to China’s massive demand for the country’s abundant raw materials.
When I introduce the concept of economic growth to you lot, I will use this amusing video from down under to introduce the topic!
Enjoy.
Of course, this is made even more ironic by the fact that Australia was one of the few countries to avoid the recession, largely thanks to China’s massive demand for the country’s abundant raw materials.
Unit 1: Labour Market Failure
Click here for a revised streamed presentation on market failure in the labour market.
There are many ways in which labour markets can malfunction and these market failures have serious economic and social consequences both at a micro and a macroeconomic level.
The presentation briefly covers
Labour immobility
Discrimination
Disincentives
Monopsony power in the labour market
It also flags up some examples of government intervention.
There are many ways in which labour markets can malfunction and these market failures have serious economic and social consequences both at a micro and a macroeconomic level.
The presentation briefly covers
Labour immobility
Discrimination
Disincentives
Monopsony power in the labour market
It also flags up some examples of government intervention.
Wednesday 1 December 2010
Unit 1: Welfare Loss (deadweight Loss) definition
Hello all from freezing cold, everything at a standstill, airports and roads closed UK...what rubbish country!!!
Anyways, I have had a request for a definition of 'Werlfare Loss' otherwise known as 'Deadweight Loss', so here it is:
Enjoy the perfect Dubai weather this weekend...gggrrrrrrrr!!
Welfare is the benefit to society that the production/consumption of a good brings.
Explanation:
The issue is that the free market does not take into account all the benefits (positive externalities) or the loss (negative externalities) that a product brings to society. You can show this using the market failure diagrams below....
Negative externalities:-
Positive Externalities:-
I cant find one to upload and am in a rush, but you guys know the one, when D (PMB) is lower that D1 (SMB)
Have a good weekend....do some work!!!
Anyways, I have had a request for a definition of 'Werlfare Loss' otherwise known as 'Deadweight Loss', so here it is:
Enjoy the perfect Dubai weather this weekend...gggrrrrrrrr!!
Welfare is the benefit to society that the production/consumption of a good brings.
Explanation:
The issue is that the free market does not take into account all the benefits (positive externalities) or the loss (negative externalities) that a product brings to society. You can show this using the market failure diagrams below....
Negative externalities:-
Positive Externalities:-
I cant find one to upload and am in a rush, but you guys know the one, when D (PMB) is lower that D1 (SMB)
Have a good weekend....do some work!!!
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