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Lecture Slides Rui Baptista

Microeconomics and Corporate Analysis Microeconomic Foundations for the Analisys of Market Structure. Lecture Slides Rui Baptista. Consumer Theory Budget Constraint Showing Increase in Income. Consumer Theory Budget Constraint Showing Increase in Price. Consumer Theory: Indifference Curves.

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Lecture Slides Rui Baptista

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  1. Microeconomics and Corporate AnalysisMicroeconomic Foundations for the Analisys of Market Structure Lecture Slides Rui Baptista

  2. Consumer TheoryBudget Constraint Showing Increase in Income

  3. Consumer TheoryBudget Constraint Showing Increase in Price

  4. Consumer Theory:Indifference Curves

  5. Consumer TheoryOptimal Choice

  6. Consumer TheoryThe Consumer Problem Max U(Q1, Q2) subject to P1.Q1 + P2.Q2 = M leads to the First Order Conditions: MU1 / MU2 = MRS = P1 / P2 P1.Q1 + P2.Q2 = M thus deriving: Q1 = Q1 (M, P1, P2) - P1 = Q1(P1) Q2 = Q2 (M, P1, P2) - P2 = Q2(P2) Inverse Demand Funcions

  7. Technology and CostsInternal Efficiency Min C = w.L + r.K subject to Q = Q(L, K) Leads to: C = C(Q, w, r) = C(Q) Average Cost: AC = C(Q) / Q Marginal Cost MC = dC(Q) / dQ Short Run: CSR = r.K + w.L(Q) = FC + VC(Q) ACSR = FC / Q + VC(Q) / Q MCSR = dVC(Q) / dQ

  8. Technology and CostsFixed and Variable costs

  9. Technology and CostsShort Run Average Costs

  10. Technology and CostsLong Run Average Costs

  11. Technology and CostsMarginal Costs and Firm Supply

  12. Perfect CompetitionShort Run Market Equilibrium S MC i D AC i S’ P P’ Q Q Q Q’ Qi’ Qi (Market) (Firm i)

  13. MonopolyMarket Equilibrium

  14. Welfare Loss from Monopoly

  15. Oligopoly:Reaction Curves and Isoprofit Lines

  16. Oligopoly:Stackelberg Equilibrium

  17. Oligopoly:Cournot Equilibrium

  18. Oligopoly:Quantity Games Stackelberg Equilibrium Follower’s Problem: Max P2 = P(Q1+Q2).Q2 -C2(Q2) yielding the Reaction Function: Q2 = f2(Q1) Leader’s Problem: Max P1 = P(Q1 + f2(Q2)).Q1 - C1(Q1) Equilibrium: dQ2 / dQ1 = df2 / dQ1 Cournot Equilibrium Max P1 = P (Q1 + Q2).Q1 - C1(Q1) yields Q1 = f1(Q2) Max P2 = P (Q2 + Q1).Q2 - C2(Q2) yields Q2 = f2(Q1) Equilibrium: f1(Q2) = f2(Q1)

  19. Oligopoly:Collusion Cartel’s Problem: Max P(Q1+Q2).(Q1+Q2) - C1(Q1) - C2(Q2) yielding: MR = P + (dP / dQ).Q = MC1 = MC2 with Q = Q1 + Q2 and: dP1 / dQ1 = P + (dP / dQ).Q1 - MC1 = - (dP / dQ).Q2 > 0 dP2 / dQ2 = P + (dP / dQ).Q2 - MC2 = - (dP / dQ).Q1 > 0 (incentive to break the agreement)

  20. Corporate AnalysisFirm Behaviour and the Determinants of Market Structure Lecture Slides Rui Baptista

  21. Performance • Efficiency in Production • Efficiency in Resource Allocation • Productivity and Quality • Technological Progress • Macroeconomic Stability and Employment • Equity

  22. Basic Conditions • Technology • Accessibility of Raw Materials • Product Characteristics • Price elasticity and Substitutes • Life-Cycle • Seasonality of Demand

  23. Market Structure • Concentration • Cost Structures • Barriers to Entry • Vertical Integration • Diversification • Product Differentiation

  24. Firm Conduct • Pricing Competition (Rivalry vs. Collusion) • Product Strategy and Advertising • Research and Innovation • Investment in Production Capacity

  25. Public Policy • Taxes and Subsidies • Trade Policy • Regulation and Price controls • Anti-Trust Laws • Public Ownership

  26. Basic Conditions Determining Market Concentration • Economies of Scale • Indivisibilities • Learning Economies • Product Life-Cycle

  27. Firm Strategies Leading to Concentration • Rivalry and Co-operation • R&D Strategies • Product Differentiation Strategies • Barriers to Entry Strategies

  28. Government Strategies Leading to Concentration • Trade Policy - Promoting Competitiveness • Development Policy - Protecting Infant Industries • Patents and Technology Policy • Regulation of Natural Monopolies

  29. Market structure and the Intensity of Price Competition

  30. Primary Activities Inbound Logistics Manufacturing Activity Outbound Logistics Marketing and Sales Customer Service Support Activities Procurement Technology Development Human Resources Management Infrastructure Activities Vertical Integration: The Value Chain

  31. Determinants of Vertical Integration • Localised Economies of Scale • Efficiency and Innovation • Agency and Influence Costs • Transaction Costs: • Co-ordination • Information • Market Imperfections

  32. Determinants of Product Diversification • Economies of Scope • Scale Economies and Market Size • Capital-Raising Economies • Pricing Strategies • Departmental Inefficiencies • Agency and Influence Costs • Managerial Diseconomies

  33. Sources of Scale Economies • Technological Indivisibilities • Increases in the Productivity of Variable Inputs • The Need for Inventories • Physical Properties of the Processing Units • Marketing, Purchasing and R&D Costs • Experience and Learning Economies

  34. Structural Conditions Facilitating Oligopolistic Co-ordination • Environment and Business Attitudes • Market Concentration • Conditions Affecting the Speed of Detection and Reaction • Asymmetries between Firms • Multimarket Contact

  35. Behavioural Conditions Facilitating Oligopolistic Co-ordination • The Nature of The Adopted Strategies • Price Leadership Practices • Advance Public Announcements • Most Favoured Customer Clauses • Uniform Delivered Prices

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