BA 315 Final Study Guide
BA 315 Final Study Guide BA 315
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This 2 page Study Guide was uploaded by Amy Notetaker on Sunday September 6, 2015. The Study Guide belongs to BA 315 at University of Oregon taught by Philip Romero in Winter 2014. Since its upload, it has received 82 views. For similar materials see Economics, Industry and Competitive Analysis in Business at University of Oregon.
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Date Created: 09/06/15
De nitions Commodity Competing with price alone low prices high volume few extra features Differentiated Pose a value proposition higher prices low volume extra features Fixed Costs Costs do not change as production is increased Variable Costs Costs increase as production increases Marginal Cost Cost to produce one more unit Price Number Price Sensitivity Discovery Find price to Below 1 Low price sensitivity price insensitive inelastic 5e OUt Reservation necess1t1es change D is less than change in P Large Change in P small change in Q Price CUt price to sell Between 8 12 Moderate change in D change in P more consumers are Above 1 High price sensitivity highly elastic luxuries D affected price sensitive more by P Consumer Surplus money left on the table that rms cannot collect Segmentation offering more than 1 type of your product at different prices to tease out customers willingness to pay Goal is to catch all of consumer surplus p Id slopedQ Price Sensitivity Price Sensitivity Price of elasticity of demand How responsive quantity is to 1 change in price Graph A is more price sensitive more elastic Small decrease in price results in a large increase in quantity Graph B is less price sensitive more inelastic Large decrease in price results in small increase in quantity ion and supply function What Drives Consumer Price Sensitivity Markets GRAPH A Demand If you sell more the price is cut GRAPH B Supply If you produce more price increases because you use the most efficient resources first and less efficient second GRAPH C Sellers Producers clear market or equilibrium Market Clearance occurs when the number of produced number consumed Price Signal Respond to price signals and discover right price via trial and error price discovery Price discovery is nding a price where the number you sell is the number you want to sell Price Regulations Price Ceilings Ceiling only matters if it is a binding constraint Only relevant if it is lower than original price Shortages get allocated to most privileged because they are least risky I regulations do not work Example rent control in Manhattan Price Floor Example minimum wage Markets work better than regulations when pursuing change Discouraging something I raise prices gas Encourage something I lower price Oversupply I lower costs Undersupply I higher costs Price ceiling I causes shortages Price ooring I causes surplus Consumer Surplus Example Airplane tickets A Most price sensitive customer sets the price Windfall bonus value that you do not need to pay for Surplus value if you are willing to pay 10000 but only pay 500 your surplus value is 9500 Consumers want consumer surplus to be large Firms want consumer surplus to be small Segmentation offering more than 1 type of your product at different prices to tease out customers willingness to pay Goal is to catch all of consumer surplus 1How readily available substitutes 1mm more subs more price sensitive 2How large of an effect on income Long run quotin s monthsyrs nge Short run less in s DaysWeeks 39 39 39 Equations HOW to nd Elamch Savings Income Taxes Consumption yers 1 Find rate of change of A Q Rate Of Change my X new X old my 2 Find rate of change of A P 3 my 3 Divide A Q A P HY Elasticity ny Example P Change Average Total Cost Unit Cost Total Cost Q x P Revenue PointA 50 x 3 150 PointB 100 x l 100 39 Quantl 132 Q x P Revenue Market Share Q Change 1 as possible ibute xed costs over more items to sell company sales industry GRAPH A Monopoly To sell more you must cut the price Monopoly has a downward demand because they charge mor GRAPH B Perfect Competition Perfect competition demand is at because market share is lc Marginal revenue is also at sales Marginal cost Marginal Revenue Stop production before marginal costs outweigh marginal revenue Oligopoly Examples phone services in the US OPEC or Devisers diarr Cartels Members of the oligopoly come together to fix the prices Conspire to create mini monopolies Everyone bene ts because no one competes Illegal in the US Unstable and break up due to cheating Monopolistic Competition Small number of firms that have differentiated themselves so Locked in customers Example video games Conglomerate huge corporation whose activities span variou Capitalism is dynamic and markets can change Degrees of Price Discrimination 1 Can distinguish every person by willingness to pay ideal a 2 Offered different prices and choose which product you are 3 can distinguish between groups based on observable behav Overlapped Graph of ATC Marginal Cost amp Revenue De nitions Diversification bet on several different markets or products Pricing Power charging a higher price than competitors because customers are willing to pay Strategy how firms allocate resources in the firm to create a durable edge over competitors 0 Durable competitive advantage 0 Latest fad is not durable Productivity how many units of input lead to units of output Moat 1 Intangible Assets 0 Copy rights patents 0 Legal monopoly 0 Charge high prices while patent is still good 2 Customer switching costs 0 High costs prevents switching 3 Cost Advantage 0 Many units to spread costs over 4 Network Effect 0 Ex MasterCard Facebook 5 Efficient Scale 0 If you have a dominant market share 0 If your brand name becomes general name Economies of Scale 0 The greater the quantity of a good produced the lower the per unit fixed cost because these costs are shared over a larger number of goods 0 Typically production functions as diminishing returns 0 Some industries have increasing returns high fixed costs low or no variable 0 Huge competitive advantage 0 Can underprice competitors oligopoly or monopoly or can keep prices the same and get large pro ts bigger companies are more profitable 0 Can ood market to dominate product image in minds of consumers The V Curve 0 Right priced low good margins economies of scale 0 Left high prices specialized low margins 0 Bottom not as specialized low prices low margin 0 Valley of death I must ride down then up spend money pro ts with decrease then increase Experience Curve 0 Unit costs decline as production staff gain experience 0 It costs less to retain customers than to get new customers less errors will keep more customers Economies of Scale PROS 0 The greater the quantity of a good produced the lower the per unit fixed cost because these costs are shared over a larger number of goods 0 Typically production functions as diminishing returns Electronic Entertainment Pharmaceuticals internet based companies utilities 0 Some industries have increasing returns high fixed costs low or no variable 0 Huge competitive advantage 0 Can underprice competitors oligopoly or monopoly or can keep prices the same and get large pro ts bigger companies are more profitable 0 Can ood market to dominate product image in minds of consumers CONS 0 Achieving Scale takes lots of money and time 0 Stimulating Demand 0 Producing in volume 0 Ex Dot coms high fixed costs low almost 0 variable costs 0 Prices seem arbitrary because have to cover a sliver of fixed costs 0 ATCgtMR Example 80 experience curve or a cost reduction by 20 0 Unit cost 1 plane 100K 0 UC 2quotquot plane 80K 80 x 100 I m L m M M 0 EX Tax cigarettes because smokers will cause high medical fees 0 Positive buying something that can cause others to benefit ex Getting an education 0 I To increase positive externalities subsidize goods pay for part of overall cost Free Rider Problem 0 Positive encourage public goods with positive externalities 0 I Can lead to market failure where the market is not producing enough public good 0 Negative not paying a true social fee of pollution a factory can create pollution but not pay 0 I Producing too much negative and not enough positive Market failure under or over production people pursuing their interests not social good Tax incidence Who pays Price insensitive side that suffers Bigger Dead Weight Loss What makes an industry competitive Number of firms in an industry present or future Barriers to exit and entry Number of significant customers and suppliers Degree of differentiationbranding possible Typical margins 5 forces Buyer power How easy is it for buyers to drive prices down Supplier power How easy is it for suppliers to raise prices Availability of substitutes Are substitutes easy to nd Threat of new entrants How strong are your barriers to entry Expensive Need experience Behavior of direct competitors What is the number and capability of competitors Do they offer equally as good products Porters 3 strategies Cost leadership Differentiation Focus Dogs low market share and low market growth problems They tend to absorb cash rather than generate it and are developing in a slow growing industry Sell Cash Cows high market share in low growing market These units usually generate cash in excess but opportunities or new investments are limited due to the low growing market The aim is to milk them as long as possible Question Mark low market share in a high growing market These are products or units that grow rapidly and consume a high amount of resources but generate low cash because of the low market share They have the potential to grow market share and generate income thus turning into stars or cash cows when market growth slows but there is also the possibility of them degrading into dogs with little return and wasted inlnrmnn AnnluIn Hrng I v n39Flllhl n Antinln Hillardlany Han rm nlnl lIA An inlnrmnn GDP Consumption Investment Government Trade Exports Imports 0 Measure of economic wealth 0 Value of all goods and services 0 GDP all people per capita 0 Healthy economy is when GDP increases faster than population growth so per capita is rising Why do recessions happen 0 Bad luck external event leads to shortages or surpluses 0 Ex Weather affecting farming 0 Prices crash prices are bid high then prices crash 0 Ex Housing bubbles Keynesian Economics Wealth Effect 0 More money you have the more you spend 0 Bubble bursts I spend less 0 To replace demand government taxes more and spends more 2 Keynesian Stimuli Fiscal or Monetary Fiscal I consumption 0 Raise government spending or lower taxes leads to increased consumption 0 Criticisms of scal stimulus 0 Too temporary 0 Too many give always to democratic constituents 0 Concentrated pain in private sector making recovery less sustainable 0 Skewed towards preserving consumption not stimulating investment 0 Sharp contrast between us and China s stimulus MPC consumption MPS saving MPC MPS 10 90 10 10 1 1 MPC Ex 100Mx 10 1 9 Total GDP initial Stimulus Total GDP initial stimulus x Multiplier You get the largest multiplier effect by targeting highest consumers 0 Highest consumers are poor 0 Highest savers are rich Monetary Policy Fed raises or lowers money supply 0 More money more transactions making it cheaper interest drops Monetary is quicker to implement but may take a long time to see effects Cap amp Trade 0 Tokens to buy rights 0 Limited amount of tokens cap 0 Free market regulates the trade of tokens and what needs to be cut How do you know if you are stimulating Fiscal and Monetary Monetary Print currency and buy bonds from banks Interest rates 0 Change declining rates 0 Absolute or real interest rate is adjusted for in ation 0 Ex 15 in ation 10 raise 5 purchasing power 0 EX Nominal mortgage 4 in ation rate is 15 real interest rate 25 Negative real interest rate is stimulating Positive real interest rate is restrictive Fiscal Deficit spending more than coming in Surplus spending less than coming in Deficit is more common Boom Company prices rise in ation Macroeconomics How gov t play the role to smooth things out stimulus overused Large Scale Broad Trends agrigatecombinedtotal all demandall supply GDP Gross Domestic Product Value of all oodsservices in a countries economy A really healthy economy GDP A faster than population Four Sectors Consumption Investment
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