Lecture 13

Microeconomics for Business

Decisions
Review

Why study economics?

Single or double major
Professional economists (pub/priv)
Corporate management and entrepreneurship.

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-2

Micro economics program

Year one: Markets, profit and government
Year two: Firm organisation and strategy
Year 3: Investment, entrepreneurship and
innovation

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-3

Year One: Markets

Markets for G/S and resources

Firms revenue and costs
Profits and output/employment scale
Market competition and profit performance
Market structure and welfare/efficiency
Market failure

But How can a firm out perform the market?

We started the conversation with the RBT and
internal market environment.

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-4

Year two: The strategic Firm

Agency problems and contracting

Advanced Pricing
input combination decisions
Strategic decisions regarding the competition
Internal systems (organisational architecture)
Task allocation
reward structure
Performance evaluation
Governance
Decisions on vertical integration/outsourcing

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-5

Year 3: Wealth Creation

Market investment, firms, property, shares

The role of the entrepreneur and risk
Business start ups and finance
Entrepreneurial team and intellectual capital
Product and production design and innovation
Alliances, networks,
Clusters and productivity/innovation
Knowledge management
Innovation and policy

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-6

Final Exam
Final exam
Two hours
8 questions each worth 12.5 marks
Each question has sub questions. Ie 2a,b,c,d,e,etc
Each question has equal value so distribute your
time evenly. Ie 15min per question.
Take a non/prog calculator.
The exam is mainly based around the work from
week 6 to 12 with the exception of supply and
demand that is used in other lecture topics
including week 12.

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-7

Final Exam
Questions 1-6 compulsory
Questions 7, 8 are a choice between to options. Ie
Pick 7 option A or 7 option B etc.

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-8

Revision notes
Review lecture, tut, workshop notes and text chapter for the
following topics that form the priority topic areas for the
exam.
Supply and demand
Production and costs
Economic Profit
Market structure theory
Market structure application to firm performance, ext env.
Int firm environment Resource based theory, read article
Market structure welfare and government policy
Factor markets.
Market failure and the environment.
Theory applications to government policy
Copyright 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-9

Background: Supply and Demand

-

Understand the factors that shift the supply and demand

curve
Be able to determine the impact on P & Q from a change in
one of the factors of supply or demand.
This means:
events such as a change in income tax for consumers;
or an increase in production costs for the supplier;
Change in the price of another product; or
a government policy such as the first home buyers
grant or the taxation of a product or on land value.
SS/DD used in the market failure topic (externalities)

Calculations and graphing

Students should remember equations associated with production, costs
and profit.
For Example:
Marginal Cost,
Marginal Product, average product
Marginal Revenue,
as well as ATC, AVC, AFC

MC=MR (scale of output or quantity)

MRP=MRC (employment)

Firms in an industry
Costs of production lect 6

What is the link between production and costs?

From the law of diminishing returns; to the U shaped average (ATC) and
marginal cost (MC) curves.

Difference between the short run and the long run in production (all
factors can change)

Long run cost curves, and their relationship to economies of scale and
diseconomies (management problems) of scale

Difference between economic and accounting profit, opportunity cost

Market Structures Theory

- Characteristics of the 4 market structures
- Drawing the market structures profit
diagrams
- Showing movements between the short run
and the long run.
- Explaining the adjustment and
understanding the impact of Barriers to
entry.

Market Structures Firm/Perf

- The relationship between market structure,
conduct and performance (traditional
approach) S/C/P
- Porter: 5 forces. (competition among
suppliers, buyers, substitutability, new
entrants, existing rivals)
- The importance of barriers to entry to long
run profits
- This describes the external market env for
a firm that impacts performance.

Part One (continued): The relationship b/w market structure

and market power

No. of firms/
degree of
competition

Hig
h

Low

Mkt
power/
barriers to
entry

Perfect
competition

Monopolisti
c
competition

Market structure

Oligopol
y

Monopoly

Revenue and Costs ($)

The profit maximisation rule is when

Marginal Cost = Marginal Revenue
In this case the firm
earns POSITIVE
economic profit and
this will attract new
entrants
Pmax

Profit = TR - TC
TR = P x Q
MC

TC = ATC x Q
ATC

Profit

ATC

MR
Qmax

D
Quantity

But with Barriers to Entry

Profit = TR - TC

Revenue and Costs ($)

TR = P x Q
MC
Pmax

ATC

r
e
i
r
r
Profit
a
B to
y
r
t
n
E
MR
Qmax

TC = ATC x Q
ATC

D
Quantity

Perfect Competition
What are the characteristics of this market structure?
Draw the profit diagram with the interaction between the
market )downward sloping demand) and the firm (horizontal
demand)
Understand the transition from short run to long run zero
economic profits with new firms
Importance of no barriers to entry or market power
Achieving allocative and productive efficiency

Monopolistic Competition

Characteristics of this market and how it differs from PC

Draw the diagram for a MC firm, including sloping demand curve

The importance of non price competition, including product

differentiation and advertising

Advertising and the impact on profit diagram

adjustment to long run equilibrium

Alocative and productive efficiency,

Excess capacity and product choice

Oligopoly
-

Market power and barriers to entry

Characteristics of oligopoly
The kinked demand curve model
Logic behind the kink
Show profit with the kinked demand curve and
constant costs (from tutorials).
Moderate price changes and price inflexibility
Cartels, their purpose, process, sustainability

Monopoly
- Barriers to entry and market power
- Are monopolies good or bad?
- Alocative and productive efficiency
- Dynamic efficiency (leads to innovation to reduce
costs)
- Regulation: use average cost pricing
- Important workshop comparing Monopoly to PC,
dynamic efficiency
- Price discrimination why it adds to profit
- Conditions for price discrimination to work
- Natural monopoly

Beating the market

Ex: KFC in monopolistic competition
Should they earn zero LR economic profits
Internal Organisation/ systems frees up time for
other strategies.
Therefore: firm performance relates to the market
structure (ext environment) and internal
organisation (internal environment)

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-22

Resource based theory

-

The RBT of a firms competitive advantage can

be compared to the
Structure/Conduct/Performance approach
Porter and the five forces
Resources combined to achieve capabilities
What three capabilities improve performance?
(arch/rep/inn)
Isolating mechanisms:
Barriers to imitation (CA and TK)
first mover advantage
Read the SCA article at the week 10 lect link.

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-23

Factor markets and payments

-

What is Marginal Revenue Product?

Explain equation MRP = MP*MR
The employment decision, MRP=MRC
Illustrate efficient employment level with a diagram for
the labor market MRP = Wage, factors that change the
level of employment, wage, productivity, price
Change in product mix
What are the factor payments?
Why interest rates may vary between different types of
loans, risk factors, interest increases with risk
Interest and investment relationship,

Land and Entrepreneurship

Land as a unique factor of production
Define economic rent
Henry George and boom busts in the property
market.
Why does George recommend a land value tax?,
show in the SS/DD diagram
Why is the entrepreneur unique (combining
factors, non routine tasks, taking risks, innovation)
The entrepreneur finds gaps in the market.
Useful in an uncertain world.

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-25

The environment
- What are externalities? (Also named spillovers)
- Give examples of Positive and negative externalities
- Graph externalities with supply and demand curves
- Tools for addressing negative pollution externalities
- Litigation verses a pollution tax.
- Illustrated how to address a positive externality with
subsidies
- The differences between public and private goods. Quasi
public goods and cost-benefit analysis, difficulty in
measuring benefits that may be in the future and depend on
subjective value.
- Public access goods
- Understand how a tradable pollution permit system would
work. Also known as an Emissions trading system.

Application of theory

government policy on taxation

Privatisation
Using supper for property investment
Subsidies to markets such as health, property
Competition policy and regulating monopolies
Price floors min wage, farming, ceiling - rent
Iron or prices and over prodn.
Firm strategies, pricing, prodn scale, marketing
Gov barriers to entry such as licensing, patients
etc

Copyright 2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Microeconomics 8e, by Jackson & McIver
By Muni Perumal, University of Canberra, Australia

8-27