Notes, summaries, assignments, exams, and problems for Economy

Chapter 4: Pricing Decisions

Bertrand Paradox

Assumptions

Supply

Market: two firms, A and B, that offer a homogeneous product. There are no limits to firm capacity. Cost: fixed cost = 0, marginal cost = c. Pricing and profits: free setting of prices and the profit for firm A is: π_a = (P_a - c) D_a(P_a, P_b).

Demand

Free consumer choice, fully homogeneous product, and consumers know all prices. The firm that offers the lower price gets all demand.

Nash Equilibrium

The Nash equilibrium under these assumptions is: P_a = P_b = c and π_a = π_b = 0.

Solution of the Bertrand Paradox

The central assumptions of the Bertrand paradox are not always valid. Each deviation from these assumptions can allow firms to realize positive profits. Key deviations include:

• Product

Economic Driving Forces and Game Changers

Understanding Labor Productivity and TFP

• Employment is a major political concern, but labor productivity is also important.
• Labor productivity can be improved by the capital ratio (K/L, machinery to labor ratio), or by rises in Total Factor Productivity (TFP).
• Total Factor Productivity (TFP) is the product of improvements in technological innovation, human capital, and management competencies.

The Golden Age (1944–1970) and Subsequent Slowdown

• The **Golden Age (1944–1970)** saw many technological advances: electricity, the internal combustion engine, running water, communications, chemicals, petroleum, etc. This led to the development of knowledge-intensive branches, such as Information and Communication

Chapter 1: Introduction to Finance

Finance is the study of how and under what terms savings (money) are allocated between lenders and borrowers. Here are some key concepts:

• Real assets: Tangible assets.
• Financial assets: Claims on real assets.
• Flow of savings: Savings flow from households to governments and businesses.
• Financial intermediaries (indirect claims): Invest on behalf of investors (e.g., chartered banks, pension funds, mutual funds).
• Market intermediaries (direct claims): Brokers (e.g., insurance).
• Credit crunch: Financial intermediaries raise loan costs due to an inability to secure financing on reasonable terms.

Crown corporations, like Hydro Quebec, are also major borrowers.

Types of Financial Assets

• Non-marketable financial assets: Invested

Topic 5: Aggregate Planning

Objective

The objective is to meet the forecast demand while minimizing the total cost over the planning period. The planning process determines the quantity and timing of production for the intermediate future.

Requirements for Aggregate Planning

• Measure sales and output
• Forecast demand
• Determine costs
• Schedule decisions for the planning period

Chase Strategy

Match output rates to the demand forecast for each period. Vary workforce levels or vary production rates.

Level Strategy

Daily production is uniform. Use inventory or idle time. Stable production leads to better quality and productivity.

Topic 7: Inventory Management

ABC Analysis

Divides inventory into three classes based on annual dollar volume:

• Class A: High annual dollar

NPV Analysis in Mergers

Typically, a firm uses Net Present Value (NPV) analysis when making acquisitions. The analysis is straightforward with a cash offer, but it becomes more complicated when the consideration is stock.

Friendly vs. Hostile Takeovers

• In a friendly merger, the management of both companies are receptive to the deal.
• In a hostile merger, the acquiring firm attempts to gain control of the target without its management's approval. This can be done through a:
  • Tender offer
  • Proxy fight

Merger and Acquisition Defensive Tactics

Target companies may use several tactics to defend against a hostile takeover:

• Corporate charter amendments:
  • Classified board (i.e., staggered elections for directors)
  • Supermajority voting requirement
• Golden parachutes:

Chapter 10: Competitive Advantage

A firm is said to have a competitive advantage in a market if it earns a higher rate of economic profit compared to the average economic profit in the industry. It is a strategic positioning, the ability to create value and enjoy it over other firms.

Determinants of Profitability

Benefit position relative to competitors and the cost position relative to competitors influence the value created relative to competitors and join with the general industry condition influence the economic profitability. The comparative position of a firm is an important determinant of profit.

Components of Value Creation

Value Created = Firm Profit (or Producer Surplus) + Consumer Surplus = Consumer Benefit - Cost = B - C = CS + PS

Measures

Government Favorability

Local > State > Federal. Government favorability has been on a decline since 2001.

Participation Correlation

• High Participation: Elections with high participation rates, a strong mayor form of government, and elections held concurrently with state and national elections.
• Large Cities: Culturally diverse cities.
• Controversial Topics: Low participation, the opposite of high participation.

Types of Local Governments

Numbers of Local Governments:

• The number of Special Districts has been on the rise.
• The number of School districts has decreased.
• The number of Municipalities, Townships, and Counties has stayed the same.

Functions of Local Governments

• Municipal: Woven throughout the others.
• County governments: Primarily for governing

Major Economic Schools of Thought

Classical Economics

The core belief is that government should not be involved in economics, emphasizing economic freedom and the principle of Laissez Faire, Laissez Passer.

Key tenets:

• People are motivated by rational self-interest.
• The Invisible Hand is a natural force that maintains harmony between individual, selfish decisions and leads to overall prosperity.

This theory was famously explained in The Wealth of Nations by Adam Smith.

Marxian Economics

Based on the work of Karl Marx, this school focuses heavily on the role of labor.

Marx argued that the specialization of labor combined with population growth leads to a decrease in wages. Profit obtained by the owner includes surplus value (labor not paid to the worker)... Continue reading "Foundational Economic Theories and Systems Defined" »

Macroeconomics: Understanding the Big Picture

Macroeconomics can be defined as that branch of economic analysis which studies the behavior of not one particular unit, but of all the units combined together. Like the study of a forest, it studies economic phenomena from the perspective of the entire economy or a particular sector of the economy.

Microeconomics: Focus on Individual Entities

Microeconomics, like the study of a tree, studies economic phenomena from the perspective of individual entities.

Economic Growth: Driving National Prosperity

Economic growth is the increase in the goods and services produced by an economy, typically a nation, over a long period of time. It enables wage and income earners, producers, and even macroeconomic planners... Continue reading "Essential Economic Concepts: Macro and Micro Foundations" »

Market Analysis and Demand Metrics

• Market Size by Value: Total volume of sales × Average market price
• Market Size by Value: (Business sales / % Market share) × 100
• Market Share: (Value of firm A's sales / Value of total market sales) × 100
• Market Growth: (Change in size of market by value / Original size of market by value) × 100
• Price Elasticity of Demand (PED): Percentage change in quantity demanded / Percentage change in price
• Income Elasticity of Demand: Percentage change in quantity demanded of Good A / Percentage change in consumers' real income

Revenue, Costs, and Profitability

• Total Revenue: Average selling price × Quantity sold
• Total Costs: Total fixed costs + Total variable costs
• Average (Unit) Costs: Total costs / Number of items produced
• Profit: