managerialeconomics 2013 folded
TRANSCRIPT
-
7/24/2019 ManagerialEconomics 2013 Folded
1/56
University of Siegen
Managerial Economics
PD Dr. Hagen Bobzin
University of Siegen
Spring 2013
http://www.hagen-bobzin.de/vorlesungen/index.html
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 1/111
Contents
EconomicsThe Economic Problem
Market Economy
Managerial Economics
Demand Analysis
Preferences
Constraints
Utility Maximization
Consumer Behavior
Supply Analysis
Production Theory
Cost Theory
Profit Maximization
Behavior of Firms
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 2/111
-
7/24/2019 ManagerialEconomics 2013 Folded
2/56
Contents
Market Analysis
Market Equilibrium
Market Structure
Economic Policy
Strategic Behavior of Firms
Interaction with Customers
Interaction with Competitors
Interaction with the Government
Risk and Uncertainty
Investment Behavior
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 3/111
References
Dobbs, I. M. (2000), Managerial Economics: Firms, Markets, and
Business Decisions, Oxford : University Press.
Froeb, L. M., McCann, B. (2010), Managerial Economics: A Problem
Solving Approach, 2nd ed., Cincinnati, OH : South-Western.
Hirschey, M. (2009), Fundamentals of Managerial Economics, 9. ed.,
Cincinnati : South-Western.
Jones, T. (2004), Business Economics and Managerial Decision Making,
Chichester : John Wiley.
Varian, H. R. (2005), Intermediate Microeconomics, 7. ed., New York :
Norton.
Webster, T. J. (2003), Managerial Economics: Theory and Practice,
Amsterdam : Academic Press.
Wilkinson, N. (2005), Managerial Economics: A Problem-Solving
Approach, Cambridge : Cambridge University.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 4/111
-
7/24/2019 ManagerialEconomics 2013 Folded
3/56
1Economics1.1The Economic Problem
Economics
The Economic Problem
Market Economy
Managerial Economics
Demand Analysis
Preferences
Constraints
Utility Maximization
Consumer Behavior
Supply Analysis
Production Theory
Cost Theory
Profit Maximization
Behavior of Firms
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 5/111
1Economics1.1The Economic Problem
The economic problemis a quantitative conflict:
scarce resources including environment (factors of production) =
scarcityof goods (commodities and services)
Scarcity contradicts unlimited needs!
This trade-off requires decision making:
alternative usage of scarce resources = opportunity cost(give up
benefits of alternatives)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 6/111
-
7/24/2019 ManagerialEconomics 2013 Folded
4/56
1Economics1.1The Economic Problem
Economic Agents
Decision Makers(Economic Agents)
households/consumers firms/producers state/government/ society
economic
plans: consumption
: savings: supply of labor
: demand forresources
: investment: supply of goods
: materialinfrastructure
: set, control,enforce rules
: supply of moneytargets utility maximization profit maximization : serving collective
needs: income
redistribution: operational money
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 7/111
1Economics1.2Market Economy
Market Price Mechanism
In amarket economyall actors (players),
: households or consumers,
: firms or producers, and
: the government,
form their individual economic plans on the basis of selfish interests.
The division of labor requires that the actors interact on markets:
: factor markets,
: goods markets.
The coordination of economic plans is made by the market price
mechanism.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 8/111
-
7/24/2019 ManagerialEconomics 2013 Folded
5/56
1Economics1.2Market Economy
Circular Flows of Income
: factor markets
: goods markets
households firms
factor services
consumption goods and services
production goods
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 9/111
1Economics1.3Managerial Economics
Managerial Economics
Managerial Economics
: Application of economic methods in the managerial decision
process: Quantitative methods (numerical analysis, statistical estimation)
: Firms point of view (e.g., game theory)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 10/111
-
7/24/2019 ManagerialEconomics 2013 Folded
6/56
1Economics1.3Managerial Economics
Managerial Economics
Firms are major economic institutions in market economies.
Common characteristics:
: Owners (e.g., shareholders)
: Managers (executing and organizing units)
: Pool of resources (inputs): labor incl. skills and competences: physical capital, and: financial capital
: Organizational structure
(cf. new institutional economics: governance structure)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 11/111
1Economics1.3Managerial Economics
Managerial Economics
Owners, managers and workers may have different objectives
: profit vs. revenue maximization (Baumol, 1959), see p. 56.: short vs. long run targets: difficulties in performance assessment (principal agent problems,
moral hazard etc.)
Examples:: corporations including share holders and managers: wage bargaining between labor unions and management
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 12/111
-
7/24/2019 ManagerialEconomics 2013 Folded
7/56
1Economics1.3Managerial Economics
Managerial Economics
Overall assessment of firms by markets:
: factor cost: value of resources used up: revenue: value of generated goods (commodities and services): profit revenue cost: decision regarding firms via markets
: pofit 0: stay at the market, go on with activities: pofit < 0: leave the market
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 13/111
2Demand Analysis
Demand Analysis
EconomicsThe Economic Problem
Market Economy
Managerial Economics
Demand Analysis
Preferences
Constraints
Utility Maximization
Consumer Behavior
Supply Analysis
Production Theory
Cost Theory
Profit Maximization
Behavior of Firms
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 14/111
-
7/24/2019 ManagerialEconomics 2013 Folded
8/56
2Demand Analysis2.1Preferences
Objective.
Explain how consumers make choices (consumer behavior)
People perceive a lack of many things and they have the desire to
correct this situation wantsand needsHouseholds consume baskets of commodities and services (goods) to
satisfy their needs.
Preferencesof a person explain how the person assesses alternative
consumption bundles(x1,x2).
Example: (x1,x2) (x1,x2
)means that(x1,x2)is not worse than
(x1
,x2
).
The well-being induced by consumption is calledutility.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 15/111
2Demand Analysis2.1Preferences
Utility Function
Theutility function u(x1,x2)is a mathematical tool indicating the utility
level or degree of satisfaction resulting from the consumption bundle
(x1,x2).
Remark: It can be shown that a continuous utility function exists if the
preferences hold good the following conditions:
1. Reflexivity: x
xfor all x
2. Completeness: [x x orx x] for everyx= x
3. Transitivity: [x x and x x] = x x
4. Continuity: All sets {x| x x} are closed.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 16/111
-
7/24/2019 ManagerialEconomics 2013 Folded
9/56
2Demand Analysis2.1Preferences
Utility Function
Graphical representation of a utility function U= u(x1,x2)and of
indifference curves; anindifference curvedescribes all consumption
bundels yielding the same utility level (similar to contour lines of a hill).
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 17/111
2Demand Analysis2.1Preferences
Marginal Utility
Holdingx2 fixed (here x 2andx2 ) and varying x1, we gain other cuts ofthe graph of the utility function.
marginal utilityofx1 = u(x1,x
2)
x1
U
x1(x2 fixed)
1. Gossens Law: the increments of utility decrease (or diminishing
marginal utility)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 18/111
-
7/24/2019 ManagerialEconomics 2013 Folded
10/56
2Demand Analysis2.1Preferences
Marginal Utility
Consuming more of both commodities, i.e. (x1, x2), indicates that
the utility level is increased byU. In reality, however, we cannot
measureUnumerically, but we knowU> 0.
Rule of thumb: the more we consume, the better we feel, the higherthe utility level is.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 19/111
2Demand Analysis2.1Preferences
Marginal Utility
Analyticsregarding the utility function U=u(x1,x2):
ComputeUwhen varying x1 and x2by discrete amountsx1and
x2, respectively.
Thetotal diffentialrefers to infinitesimally small changes:
dU= u
x1dx1+
u
x2dx2
Movements along an indifference curve require dU= 0as the utilitylevel is constant! Such movements describe a substitution process (give
dx2to get dx1).
dx1 =u/x2
u/x1dx2
The fraction of marginal utilities is calledmarginal rate of substitution.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 20/111
-
7/24/2019 ManagerialEconomics 2013 Folded
11/56
2Demand Analysis2.1Preferences
Opportunity Cost
Themarginal rate of substitution (MRS) dx2/dx1denotes the
(negative) slope of an indifference curve at some point.
x1
x2
P
Q
RS
U= u(x1,x2)= konst.
xa2x1 > xb2x1
> xc2x1
x1x1x1
xa2
xb2
xc2
The graph indicatesdiminishing MRS: the relative scarcity ofx2
increases with each additional unit x1 ( P Q R S).The forced waiver ofx2 for additional units ofx1 is calledopportunity
cost.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 21/111
2Demand Analysis2.1Preferences
Total Differential
Mathematical Results
: utility function: U=u(x1,x2)
: marginal utilities: u(x1,x2)
x1and
u(x1,x2)
x2
: total differential: dU= u
x1
dx1+ u
x2
dx2
: indifference curve: U= const. or dU=0
: marginal rate of substitution: MRS =dx2
dx1=
u/x2
u/x1
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 22/111
-
7/24/2019 ManagerialEconomics 2013 Folded
12/56
2Demand Analysis2.2Constraints
Budget Constraint
Household would like to climb on top of the utility mountain, but in
reality they cannot go as far as they want to.
What situations are feasible?: restricted amount of money/income (budget constraint)
y p1x1+ p2x2 (income expenditure)
: time constraint (e.g., working/leisure time per day)
: family, mobility etc.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 23/111
2Demand Analysis2.2Constraints
Budget Constraint
Budget line
y= p1x1+ p2x2 x2 = y
p2
p1
p2x1
Parametric variations (effects on the budget line)
x1
x2p1
x1
x2p2
x1
x2y
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 24/111
-
7/24/2019 ManagerialEconomics 2013 Folded
13/56
2Demand Analysis2.3Utility Maximization
Utility Maximization(no technical analytics here)
Find the most preferred situation (commodity bundle (x1, x2)) among
all feasible actions determined by a given budget!
maxx1,x2
{u(x1,x2)| y p1x1+ p2x2, x1 0,x2 0}
x1
x2
x2
x1
U
Theoptimum consumption bundle( x1, x2)(demand)depends besides
preferences on the commodity prices p1, p2 and the income y.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 25/111
2Demand Analysis2.4Consumer Behavior
Varying the parameters (p1,p2,y) of the utility maximization problem
forces the houshold to adjust its consumption according to the new
situation and its preferences.
Thebehavior of householdscan now be described by (Marshallian)
demand functions
xD1 (p1, p2,y) and x
D2 (p1, p2,y).
In what follows we practice aceteris paribus analysis, that is we vary
one parameter (e.g., p1) while holding the others (i.e. p2and y) fixed.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 26/111
-
7/24/2019 ManagerialEconomics 2013 Folded
14/56
2Demand Analysis2.4Consumer Behavior
Price Consumption Curves
price consumption curve (PCC): p2 = x1,x2 ?
All geometric points of household optima when varying one price.
: p2 = x2 (usual case)
p2 = x2 possible (Giffen good)
: p2 = (x2 = ) x1 (substitutes)p2 = (x2 = ) x1 (complements)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 27/111
2Demand Analysis2.4Consumer Behavior
Demand Curve
graphical derivation of ademand curve xD1 (p1, p2,y)
x1
x2
p1 > p1 > p
1
p1
p1
p1
y
p1
y
p1
y
p1
x1
p1
Law of demand:
p1 = xD1
(almost always)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 28/111
-
7/24/2019 ManagerialEconomics 2013 Folded
15/56
2Demand Analysis2.4Consumer Behavior
Income Consumption Curves
Income consumption curve (ICC): y = x2 ?
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 29/111
2Demand Analysis2.4Consumer Behavior
Income Consumption Curves
Criticism of indifference curve analysis
: No explaination how preferences are formed or changed.
: Consumers frequently do not behave rationally but they use rules
of thumb or follow their instincts.
: Consumers do not make marginal calculations explicitly. One may
argue, however, that the results are reasonable approximations.
: Consumers are not sufficiently well informed to make rational
choices between products (cost of information).: A hierarchy of needs with some goods being more important than
others is difficult to implement (lexicographic ordering).
: Utility functions may not be independent and one consumers
utility may be influenced by the actions of another (cf. income
distribution below, external effects).
: Refinements of theory not presented here.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 30/111
-
7/24/2019 ManagerialEconomics 2013 Folded
16/56
2Demand Analysis2.4Consumer Behavior
Aggregation
Individual demand functionsfor every householdh = 1,,H
xDjh = xDjh (p1,,pj,, pn,yh )
Market demand functionsfor every good jare derived byaggregation:
xDj = xDj1(p1,,pn,y1)+ +x
DjH(p1,, pn,yH)
Caveat:
The market demand functions depend on the distribution of income
among households. We ignore this problem here and note simply
xDj = xDj (p1,, pn )
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 31/111
2Demand Analysis2.4Consumer Behavior
Aggregation
Graphical aggregationof the demand for commodity jregarding twohouseholds.
Note: Only the first households demand is positive above the upper
dashed line.
Note: Ifpj = xDjh for all households, we obtain the law of
demandfor the whole market; pj = xDj .
Note: different results for price discimination, see p. 83.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 32/111
-
7/24/2019 ManagerialEconomics 2013 Folded
17/56
2Demand Analysis2.4Consumer Behavior
Elasticities
: Elasticitiesdenote the relative (or percentage) change of a variable
y(effect) in response to the relative change of an independent
variable x (reason)
xy =
y/y
x/x
dy
dx
x
y =
rel. change ofy
rel. change ofx
: own price elasticityx1p1 = dx1
dp1
p1
x1
: cross price elasticityx1p2 = dx1
dp2
p2
x1
: income elasticityx1y = dx1
dy
y
x1
As firms do not know the preferences of their customers, they have toobserve their behavior (revealed preferences) and to forecast their
reaction by estimated elasticities refer to market demand functions.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 33/111
2Demand Analysis2.4Consumer Behavior
Elasticities
Example: a linear price-demand function p= a bx
price elasticityxp = dx
dp
p
x=1
a
bx
x
p
xp =0
totally price inelastic
x
p
xp =
totally price elastic
x
p
ab
a2b
xp =
xp = 1
xp =0
The steeper the line, the more comfortable for the firms.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 34/111
-
7/24/2019 ManagerialEconomics 2013 Folded
18/56
2Demand Analysis2.4Consumer Behavior
Other Decision Problems
Choice between leisure F/labor time Land consumption x
maxx, F
{u(x,F)|wL px, L + F=16}
Thedemand for leisure timecorresponds to thesupply of labor.Both functions, the supply of labor and the demand for consumption,
depend on the factor prices (here the wage rate w) and commodity
prices (here p).
Choice between present consumption c1 and savings s1 (or future
consumptionc2)
maxc1,c2
{u(c1, c2)| y1 = c1+ s1, y2+ (1 + r)s1 =c2}
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 35/111
2Demand Analysis2.4Consumer Behavior
Remarks on Managerial Economics
: Firms need to know the preferences of their customers and to
adapt to these preferences best possible.: demand estimation (quantitative methods, statistical estimation): promotion / advertisement (take influence on preferences): price discrimination (spatial separation of markets, separation of
consumer groups, see p. 83): differentiated commodities (similar goods with different
combinations of characteristics (houses, cars ...) hedonistic
prices, cf. Lancaster (1966)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 36/111
-
7/24/2019 ManagerialEconomics 2013 Folded
19/56
3Supply Analysis
Supply Analysis
Economics
The Economic Problem
Market Economy
Managerial Economics
Demand Analysis
Preferences
Constraints
Utility Maximization
Consumer Behavior
Supply Analysis
Production Theory
Cost Theory
Profit Maximization
Behavior of Firms
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 37/111
3Supply Analysis3.1Production Theory
Supply Analysis
Firms transformfactors of production
: labor, land (original factors) and capital (derived factor): more precisely, v1,, vm
intooutputs
: consumption goods, investment goods: commodities and services
: x1,,xn
As long as the economy values the outputs higher than the
corresponding inputs (both at market prices), the transformation
process is rewarded aprofit. Otherwise the respective firms make a
lossand they have to leave the market.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 38/111
-
7/24/2019 ManagerialEconomics 2013 Folded
20/56
3Supply Analysis3.1Production Theory
Production Process
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 39/111
3Supply Analysis3.1Production Theory
Production Function
Production plansdenote technically feasible input output combinations.
(v1, v2,x) = (2inputs, 1output)
Technically efficientproduction plans denote actions without any waste
neither of inputs nor of outputs.
Theproduction function
f(v1, v2)= x
denotes themaximumoutput x given the inputs (v1, v2)and, almost
always, theminimuminputs needed to produce x. The problem of
technical efficiency is solved, e.g., by engineers.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 40/111
-
7/24/2019 ManagerialEconomics 2013 Folded
21/56
3Supply Analysis3.1Production Theory
Production Function
Isoquantsdenote all input combinations (v1, v2)providing the same
(maximum) outputx.
Cobb-Douglas production function x= av1
v
2
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 41/111
3Supply Analysis3.1Production Theory
Production Function
Linear limitational production function
x= min
v1
a1,
v2
a2
production process
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 42/111
-
7/24/2019 ManagerialEconomics 2013 Folded
22/56
3Supply Analysis3.1Production Theory
Production Function
a production function representing thelaw of returns( next page)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 43/111
3Supply Analysis3.1Production Theory
Law of returns
Thelaw of returnsrefers usually to just one variable input, sayv2,
while all other inputs are fixed, herev1.
x = f(v1, v2)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 44/111
-
7/24/2019 ManagerialEconomics 2013 Folded
23/56
3Supply Analysis3.1Production Theory
Law of returns
above: partial variationof inputs
now: total variationof inputs (walk along a production process)
The analysis ofreturns to scalevaries all inputs by the same factor.
f(v1, v2)= x>1= f(v1, v2) x
increasing returns to scale
constant returns to scale
decreasing returns to scale
Example: constant returns to scale say that doubling all inputs (= 2)
also doubles the output.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 45/111
3Supply Analysis3.1Production Theory
(back to partial variations of inputs)
Theaverage productivityx/v1 denotes the output per unit of input v1.
v1
x
x= x(v1, v2)
v1
x
x
v1
=tan
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 46/111
-
7/24/2019 ManagerialEconomics 2013 Folded
24/56
3Supply Analysis3.1Production Theory
Themarginal productivityof an input v1denotes the additional output
dxwith respect to the last additional (infinitesimally small) unit ofv1,
e.g., dv1.
v1
x
x= f(v1, v2)
v1
xdv1
v1
x dx dx= f(v1, v2)
v1 tan
dv1
x
v1
dx
dv1=
f(v1, v2)
v1
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 47/111
3Supply Analysis3.1Production Theory
law of returns
x= f(v1, v2)
average productivityx
v1
marginal productivityf(v1, v2)
v1
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 48/111
-
7/24/2019 ManagerialEconomics 2013 Folded
25/56
3Supply Analysis3.2Cost Theory
Cost Function
Production cost= used quantities of inputs(v1, v2)times their given
factor prices (q1, q2)
q1v1+ q2v2
Cost function= minimumcost to produce a given output x at given
factor pricesq1,q2with respect to the known production technology.
c(q1, q2,x) minv1,v2
{q1v1+ q2v2|x = f(v1, v2)}
Variables of the minimization problem: inputsv1,v2Parameters: factor pricesq1,q2, outputx
Technical efficiency guaranteed by the production function.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 49/111
3Supply Analysis3.2Cost Theory
Cost Functions in the Short Run
Production function x = f(v1, v2)with a fixed input ( short run)
Cost function
c(q1, q2,x)= minv1
q1v1+ q2v2| x = f(v1, v2)
= q1f
1(x, v2) + q2v2
= cv(x) + cF
v1
x capacity limit
q1 = 1/2 +cF flip
q1v1
x
c F x
c(x)
cFcapacitylimit
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 50/111
-
7/24/2019 ManagerialEconomics 2013 Folded
26/56
3Supply Analysis3.2Cost Theory
Cost Functions in the Short Run
cost functionc(x)= cv(x) + cF
average costc(x)
x =tan
marginal costdc(x)
dx =c(x)
average variable cost
cv(x)/x= tan
average fixed costq2v2
x
= cF
x... to be continued on p. 59.
x
c
cF
x
c
x, c c
(x)
c/xcv/x
cF/x
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 51/111
3Supply Analysis3.2Cost Theory
Cost Functions in the Long Run
Production function x = f(v1, v2)with all inputs variable ( long run)
The cost function
c(q1, q2,x)= min
v1,v2 q1v1+ q2v2|x= f(v1, v2)denotes the minimum factor cost for a given output x(and given factor
pricesq1,q2).
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 52/111
-
7/24/2019 ManagerialEconomics 2013 Folded
27/56
3Supply Analysis3.2Cost Theory
Constrained Programming
Mathematical solution (constrained programming)
Lagrangean function
L(v1, v2, ) = q1v1+ q2v2+ x f(v1, v2)Necessary optimum conditions
L
v1=q1
f(v1, v2)
v1=0
L
v2=q2
f(v1, v2)
v2=0
L
= x f(v1, v2)= 0
This is a system of 3 equations with 3 variables.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 53/111
3Supply Analysis3.2Cost Theory
Marginal Rate of Substitution (MRS)
Remember: The slope of an isoquant x = f(v1, v2)= constant can be
calculated by the total differential.
dx= 0 = f(v1, v2)
v1dv1+
f(v1, v2)
v2dv2
dv2
dv1=
f/v1
f/v2
v1
v2
x= f(v1, v2)= const.
v1 v1
=dv1
v2
v2
dv2
marginal rate of technical
substitution (MRS)
MRS=dv2
dv1
v2
v1
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 54/111
-
7/24/2019 ManagerialEconomics 2013 Folded
28/56
3Supply Analysis3.2Cost Theory
Minimum Cost Combination (MCC)
Graphical determination of aminimum cost combination (v1, v2)for
the production of a given amountx.
: red isoquant given: x= f(v1, v2)= const.: iso-cost line: ciso =q1v1+ q2v2
: cost minimum (green line): minimum cost combination (v1, v2)
v1
v2
x= f(v1, v2)
v2
v1
ciso
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 55/111
3Supply Analysis3.3Profit Maximization
Remark:
Economist analyze almost alwaysprofit maximizationas the relevant
problem. Complex problem: profit maximization necessarily requires
cost minimization.
But many firms persue some sort ofrevenue maximization(Baumol,
1959)
: Compatible if all costs are fixed or if the revenues grow faster
than production cost.
: Revenue is easier to measure (profit is a residual); managers
prefer short-term goals.
: A revenue target is easier to use when motivating staff.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 56/111
-
7/24/2019 ManagerialEconomics 2013 Folded
29/56
3Supply Analysis3.3Profit Maximization
The Problem in General
Profit Maximization
Find the most preferred production plan(v1, v2,x)among all
technically feasible actions!
profit revenue cost
maximumprofit
(q1, q2, p) maxv1,v2,x
{px q1v1 q2v2| x = f(v1, v2)}
(q1, q2, p)= maxx
px c(q1, q2,x)
(q1, q2, p)= maxv1,v2
p f(v1, v2) q1v1 q2v2
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 57/111
3Supply Analysis3.3Profit Maximization
Short Run Analysis
Profit maximizing output x( supply) in the short run
(x)= px c(x) != max
= ( x)= 0 p= c ( x) (price = marginal cost)
und ( x) 0
x
c(x)= cv(x) + cF
x
r= px
x
c, r, rc
x
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 58/111
-
7/24/2019 ManagerialEconomics 2013 Folded
30/56
3Supply Analysis3.3Profit Maximization
Short Run Analysis
All curves have been derived on p. 51.
p
p
x
c
x,
c
x
c
x
c/x
cv/x
cF/x
profit
lossfirms optimum (break even point)
firms minimum (production barrier)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 59/111
3Supply Analysis3.4Behavior of Firms
Supply Functions
Supply functionsfor the outputs stem from profit maximization
maxx
r(p,x) c(q1, q2,x) = r(p,x)
x = p=
c(q1, q2,x)
x
Different notation if we drop given factor pricesq1andq2
maxx
px c(x) = p= dr(x)
dx=
dc(x)
dx
M R r (x)= c (x) MC
Solving themarginal cost pricing rule p= c (x)forxyields the
supply function
x= xS(p) (or more precisely = xS(q1, q2,p))
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 60/111
-
7/24/2019 ManagerialEconomics 2013 Folded
31/56
3Supply Analysis3.4Behavior of Firms
Law of Supply
By plausibility (no mathematical proof here)
p = profit per unit = x= xS(p)
If each firm behaves this way, market supply does the same
(aggregation).
Thelaw of supplystates that if the price of a commodity increases, the
market supply increases, too.
x
p xS
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 61/111
3Supply Analysis3.4Behavior of Firms
Demand Functions
Demand functionsfor inputs stem from profit maximization
maxv1,v2
p f(v1, v2) q1v1 q2v2 = pf(v1, v2)
v1=q1
and pf(v1, v2)
v2=q2
Factors are paid according to theirmonetary marginal productivity.
Solving forv1andv2is more difficult than before (a system of 2equations for 2 inputsv1,v2). The result denotes the demand functions
v1 =vD1 (q1, q2, p ) and v2 = v
D2(q1, q2, p)
The demand for inputs is directly connected to the supply of outputs via
the production function!
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 62/111
-
7/24/2019 ManagerialEconomics 2013 Folded
32/56
3Supply Analysis3.4Behavior of Firms
Demand Functions
Graphical determination of factor demand (cf. page 48)
v1
x
law of returns x = f(v1, v2)
v1
f
v1
q1
v1
f
v1
p f
v1with p> 1
factor demand viaq1= p f
v1
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 63/111
3Supply Analysis3.4Behavior of Firms
Parametric Variations
Parametric variations(reactions by plausibility)
p = x (law of supply) = v1 , v2
q1 = profit per unit = x = v1 , v2
The usual reaction (q1 , v1 ) is called thelaw of demand.
Caveat:
q1 (e.g., wage rate),v2 (e.g., capital stock) also plausible
(substitution of factors of production)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 64/111
-
7/24/2019 ManagerialEconomics 2013 Folded
33/56
3Supply Analysis3.4Behavior of Firms
Elasticities
elasticity of the demand forv1with respect to the price p
vD1
(q1, q2,p)
p
p
v1
v1/v1
p/p
effect
reason
own price elasticity
vD1(q1, q2, p)
q1
q1
v1
v1/v1
q1/q1
cross price elasticity
vD1
(q1, q2, p)
q2
q2
v1
v1/v1
q2/q2
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 65/111
3Supply Analysis3.4Behavior of Firms
Long Run Analysis
Up until now fixed inputs possible (e.g., physical capital stock)
short runanalysis
c(q1, q2,x; v2)= maxv1
{q1v1+ q2v2| x = f(v1, v2)}
In thelong runall inputs are variable! ( optimal sizev2of an
enterprise)
c(q1, q2,x)= maxv1,v2
{q1v1+ q2v2| x = f(v1, v2)}
The long run cost functionc(q1, q2,x)is the envelope of all short run
cost functionsc(q1, q2,x; v2)(mathematical proof dropped).
Graphics in Schumann (1999, pp. 183 ff.)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 66/111
-
7/24/2019 ManagerialEconomics 2013 Folded
34/56
3Supply Analysis3.4Behavior of Firms
Denote short run cost functions
c(s) c(q1, q2,x; v2 (s))
wherev2(s) is a given physical capital stock (firms size) with fixed costs
c(s)
F
=q2v2(s)
x
c
c(1)F
c(1)
c(2)F
c(2)
c(3)F
c(3) c
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 67/111
3Supply Analysis3.4Behavior of Firms
production function x = av21
(v2 v1)(b v2)
v1
xlaw of returnsv250
v1
xvariation of the capital stock
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 68/111
-
7/24/2019 ManagerialEconomics 2013 Folded
35/56
3Supply Analysis3.4Behavior of Firms
v1
xlaw of returnsv250
x
cxcost function for v250
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 69/111
3Supply Analysis3.4Behavior of Firms
x
cxcost functions for variation of v2
x
cxlong run cost functionred envelope
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 70/111
-
7/24/2019 ManagerialEconomics 2013 Folded
36/56
3Supply Analysis3.4Behavior of Firms
graphical presentation of
: average cost curves (short and long run)
: marginal cost curves (short and long run)
: optimum choice ofv2and xgiven a market price p
: supply curve in the long run (increasing part of the marginal cost
curve starting in the minimum of the long run average cost curve)
: adjustment of capital stocks (fixed in the short run) by investments
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 71/111
4Market Analysis
Market Analysis
Market Equilibrium
Market Structure
Economic Policy
Strategic Behavior of Firms
Interaction with Customers
Interaction with Competitors
Interaction with the Government
Risk and Uncertainty
Investment Behavior
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 72/111
-
7/24/2019 ManagerialEconomics 2013 Folded
37/56
4Market Analysis4.1Market Equilibrium
Price Formation
Price formation on markets: On all goods markets (j= 1,, n)
and on all factor markets (i= 1,, m) an equilibrium price (supply =
demand) is to be determined simultaneously.
1. individual demand and supply curves (all agents behave as pricetakers, i.e. market prices are seen as given)
2. aggregation of individual behavior (generates market demand and
market supply curves)
3. price formation (price adjustment until some equilibrium is found)
xD > xS = p and vice versa
4. go back to step 1. with new market price
These processes are to be repeated permanently (new commodities,
new market agents, technical progress, inflation, etc.).
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 73/111
4Market Analysis4.1Market Equilibrium
price formationxS > xD p
xS < xD p
market demand
p xD
market supply
pxS
individual demand individual supply
aggregation aggregation
new price p new price p
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 74/111
-
7/24/2019 ManagerialEconomics 2013 Folded
38/56
4Market Analysis4.1Market Equilibrium
Market equilibrium: situation where market demand and market
supply match (coordination by market prices)
: demand xDj = xDj (p1,,pj,, pn )
: supplyxS
j = xS
j (p1,
, pj,
, pn ): equilibrium xDj = x
Sj = x
j , equilibrium price p
j
xj
pjxSjx
Dj
pj
xj
excess supply, pj
excess demand, pj
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 75/111
4Market Analysis4.1Market Equilibrium
Comparative Statics
Variations of parameters
: parameters here p1,, pn without pj
: changes in preferences, technical progress
: variations of the number of households and firms
: shocks external to the market (taxes, earth quakes, etc.)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 76/111
-
7/24/2019 ManagerialEconomics 2013 Folded
39/56
4Market Analysis4.2Market Structure
Market structure: Classification of markets by von Stackelberg
supply sidenumber
of agents one few many
one bilateralmonopoly
constraineddemand
monopoly
demandmonopoly
(monopson)
few
constrained
supply
monopoly
bilateral
oligopoly
demand
oligopoly
many supply
monopoly
supply
oligopoly polypoly
demandside
: market structure and market power are closely related
: firms try to get rid of competition and to gain market power: differentiated commodities (a monopoly with close substitutes)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 77/111
4Market Analysis4.2Market Structure
Perfect Competition
Idea: In thepolypoly, buyers and sellers are so numerous that nobody
has the power to influence market prices. Thisreference caseis
referred to as perfect competition provided a list of prerequisites
constitutes anideal situationwithout any market power:
: no barriers to entry (or exit): homogeneous goods (perfectly divisible, equal quality,...)
: complete information (about prices and quality): no preferences with respect to time, location, or persons: unlimited ability to react to changes in a timely manner
If one of these conditions fails to hold true as almost always in reality
there are starting points of market power, which can be expected to
be abused.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 78/111
-
7/24/2019 ManagerialEconomics 2013 Folded
40/56
4Market Analysis4.3Economic Policy
Economic Policy
The government has to fix, to control, and to enforce rules valid for
the market system (fair play, shelter the society including households
and firms from an abuse of market power).Example: control of mergers and acquisitions, anti-trust law
Other government interventions are to be taken into account (e.g.,
taxes, rules, laws, price floors or ceilings, social legislation etc.)
Summary: The economic constitution is the outcome of interactions
between households (weakest group), firms (frequently organized as
powerful lobbies), and the government.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 79/111
5Strategic Behavior of Firms
Strategic Behavior of Firms
Market Analysis
Market Equilibrium
Market Structure
Economic Policy
Strategic Behavior of Firms
Interaction with Customers
Interaction with Competitors
Interaction with the Government
Risk and Uncertainty
Investment Behavior
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 80/111
-
7/24/2019 ManagerialEconomics 2013 Folded
41/56
-
7/24/2019 ManagerialEconomics 2013 Folded
42/56
5Strategic Behavior of Firms5.1Interaction with Customers
Price Discrimination
Price discrimination
two groups of consumers (e.g., two regions) with different demand
functions
maxx1,x2
p1(x1)x1+ p2(x2)x2 c(x1+ x2)
optimum conditions withx = x1+ x2
p1(x1)x1+ p1(x1)= c(x) (note: dx/dx1 =1)
p2(x2)x2+ p2(x2)= c(x) (note: dx/dx2 =1)
therefore
p1(x1)
1 +
1
x1p1
= p2(x2)
1 +
1
x2p2
The group with the more inelastic demand is charged the higher price.
p1 > p2 0 > x1p1 > x2p2
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 83/111
5Strategic Behavior of Firms5.1Interaction with Customers
Price Discrimination
example for linear demand curves (cf. p. 32)
x1
p1
x2
p2
x= x1+ x2
p c(x)
Cp0p
1
p2
Problem: the groups must be distinguishable from each other.
Otherwise members of the first group can argue to belong to the
second group.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 84/111
-
7/24/2019 ManagerialEconomics 2013 Folded
43/56
5Strategic Behavior of Firms5.1Interaction with Customers
Price Discrimination
Examples of price discrimination
: Children, old people, students etc. pay less than normal.: Cheaper hotel rooms on weekends.: Cheaper flight tickets if a weekend is included in the trip
(holidaymakers vs. businessmen): Different prices in the home country and foreign countries (avoid
re-importation)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 85/111
5Strategic Behavior of Firms5.1Interaction with Customers
Strategies to Gain Market Power
Strategies of firms to establish a niche with monopoly power up to
some degree:
: differentiated commodities (get rid of homogeneous commodities
and competitors providing the same good): promotion, advertisement (try to reshape the preferences of
customers, the steeper the demand curve the better): consumers tend to stick to commodities (are willing to pay a
higher price) due to cost of information;
avoid market transparency and hide information (fish food: price
per liter rather than price per kilogram, small and large balls in
different colors, best hiding strategy: price per 743 ml for big
multi-colored balls): lazy consumers implicitly accept the market power of firms,
however, only up to a certain degree (do not lose them)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 86/111
-
7/24/2019 ManagerialEconomics 2013 Folded
44/56
5Strategic Behavior of Firms5.2Interaction with Competitors
Differentiated commodities indicate already that firms do not only
interact with their customers but also with competitors.
: Game theory, especially, gives a vast literature on the behavior of
interacting competitors (product strategies, pricing strategies,
threat strategies, etc.): Monopolies: monopolist (incumbent) vs. potential competitors: Duopolies: autonomous or heteronomous/conjectural behavior
setting either prices or quantities: Oligopolies: monopolistic competition with differentiated
commodities: Cartels (e.g., cooperating duopolists or collusion): ... many more scenarios
Problem of legal authorities: what is fair and what is a provable (!)abuse of market power?
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 87/111
5Strategic Behavior of Firms5.2Interaction with Competitors
Cournot-Nash solution in aduopoly
: two firms producing one commodity (x= x1+ x2) with individual
cost functionsc1(x1)and c2(x2): a common price-demand-curve p= p(x1+ x2): individual profit functions; both assume that the output of the
competitor is given.
1(x1)= p(x1+ x2)x1 c1(x1)
2(x2)= p(x1+ x2)x2 c2(x2)
: Thereaction curvesdenote the best (i.e. profit maximizing)
answer of each duopolist given the output of his opponent.
x2 x1and x1 x2: TheCournot-Nash solutiondenotes an intersection point of the
two reaction curves. Such a point represents a reciprocally best
answers to the opponents strategy. x1 = x1 x2 = x2
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 88/111
-
7/24/2019 ManagerialEconomics 2013 Folded
45/56
5Strategic Behavior of Firms5.2Interaction with Competitors
Analytical solution
Necessary optimum conditions
1(x1)= p (x1+ x2)x1+ p(x1+ x2) c
1(x1)= 0
2(x2)= p (x1+ x2)x2+ p(x1+ x2) c2(x2)= 0
These are the two reaction curves; renaming gives
x1 = R1(x2) (optimum answer of the 1st duopolist to x2)
x2 = R2(x1) (optimum answer of the 2nd duopolist to x1)
Any intersection point with x1 = R1( x2)and x2 = R2( x1)denotes a
mutually best answer.
None of the two duopolists will change its behavior.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 89/111
5Strategic Behavior of Firms5.2Interaction with Competitors
: price demand function: p(x1+ x2)= a b(x1+ x2): cost function firm j: cj(xj )= cxj with (j= 1, 2): profit function firm j: j =[a b(x1+ x2)]xj cx jwith
(j= 1, 2)
2 4 6 8 10 12 14 x1
2
4
6
8
10
12
14
x2
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 90/111
-
7/24/2019 ManagerialEconomics 2013 Folded
46/56
5Strategic Behavior of Firms5.2Interaction with Competitors
2 4 6 8 10 12 14 x1
2
4
6
8
10
12
14
x2isoprofit curves of firm 1
2 4 6 8 10 12 14 x1
2
4
6
8
10
12
14
x2isoprofit curves of firm 2
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 91/111
5Strategic Behavior of Firms5.2Interaction with Competitors
2 4 6 8 10 12 14 x1
2
4
6
8
10
12
14
x2CournotNash solution
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 92/111
-
7/24/2019 ManagerialEconomics 2013 Folded
47/56
5Strategic Behavior of Firms5.2Interaction with Competitors
Asymmetric solution of von Stackelberg
: Same duopoly as before, but:: One of the duopolists can act independently of the other.
: The duopolists in the dependent position takes the output x1ofhis opponent as given. Reaction curve: x2 = R2(x1)
: New asymmetric solution:
The 1st independent duopolist computes the reaction function
x2 = R2(x1)of his competitor and maximizes with this additional
information his own profit:
1(x1)= p
x1+ R2(x1)
x1 c1(x1) max
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 93/111
5Strategic Behavior of Firms5.2Interaction with Competitors
: firm 1 in the independent position (leader): firm 2 in the dependent position (follower)
2 4 6 8 10 12 14 x1
2
4
6
8
10
12
14
x2
von Stackelberg solution
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 94/111
-
7/24/2019 ManagerialEconomics 2013 Folded
48/56
5Strategic Behavior of Firms5.2Interaction with Competitors
Collusion (symmetric cartel solution)
2 4 6 8 10 12 14 x1
2
4
6
8
10
12
14
x2cartel solution
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 95/111
5Strategic Behavior of Firms5.2Interaction with Competitors
Problems with reaction functions:
: Is there a unique intersection point? (no, one, more than one
intersection points): Does some intersection point represent a stable solution?
Adjustment processes to the intersection point?: How does the independent duopolist know the reaction curve of
his opponent?: Is the independent position always profitable (first mover
advantage)?: What information do legal authorities need to shelter the society
from an abuse of market power?
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 96/111
-
7/24/2019 ManagerialEconomics 2013 Folded
49/56
5Strategic Behavior of Firms5.3Interaction with the Government
Regulation
: The government has to fix rules for the market systems
(regarding, e.g., fair trade).
: Governments need many information about: the behavior of market participants (consumer preferences),: production techniques and/or cost functions,: competitive strategies (market power),: consequences of new rules (who wins, who loses): and many more.
: Many safeguarding actions of the government do not show the
results wanted. They have direct and indirect effects (no market,
but policy failure)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 97/111
5Strategic Behavior of Firms5.3Interaction with the Government
Regulation in a monopoly
example: supply monopoly (compare Cournots solution with
as-if-competition)
x
c, r
r, p
p(x)r (x)
c/x
c (x)
r = c
x
p Cournots solution (r = c
)
as-if-competition (p = c )
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 98/111
-
7/24/2019 ManagerialEconomics 2013 Folded
50/56
5Strategic Behavior of Firms5.3Interaction with the Government
Result: In the Cournot solution, the monopolist sells a smaller amount
at a higher price compared to the solution with as-if-competition.
Possible solution: Regulation by government (enforce the marginal
cost pricing rule)
Problem: If average cost per unit exceeds the marginal cost price, the
firm operates at a loss. In the long run it would have to leave the
market.
Other possible solution: allow prices to exceed marginal cost, but
the firm has to operate at zero (or reasonable) profit.
Other problem: hidden information, dynamic investment behavior of
firms, cross subsidies (e.g., letter and parcel services), etc.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 99/111
5Strategic Behavior of Firms5.3Interaction with the Government
lobbyingof members of parliament
example: protectionism by a tariff
: firms profit (higher prices and profits per unit at home): households lose (cheaper imports no longer available): governments tend to play that game due to customs revenues
Caveat: The strategy is usually performed under the pretence to
protect jobs, but the economy as a whole suffers a net loss in welfare.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 100/111
-
7/24/2019 ManagerialEconomics 2013 Folded
51/56
5Strategic Behavior of Firms5.4Risk and Uncertainty
Risk and Uncertainty, cf. Frank Knight (1921)
: Riskis the kind of randomness that can be modeled by
quantitative methods (e.g., mortality rates, casino gambling,
equipment failure rates).A set ofprobabilitiesassigned to a set ofpossibilities.
: a priori probabilities (by logic; e.g., rolling any number on a die): objective orstatisticalprobabilities (by empirical evaluation): subjective orpersonalprobabilities (by individual estimates): Possibilities denote outcomes, states or values (alternatives).
: Uncertaintyis immeasurable, not possible to calculate.
(unknown possibilities and/or unknown probabilities)
No insurance without risk (rather than uncertainty).
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 101/111
5Strategic Behavior of Firms5.4Risk and Uncertainty
Some sources of risk (examples)
: changing market demand (tastes, income, expectations on the
future): changing supply consitions (factor prices, competitors): inventions, innovations: macroeconomic risks (business cycle, inflation, exchange rates): political changes (regulation, tax system, environmental
protection)
Some sources of uncertainty
: irrational behavior of agents (customers, competitors), e.g., panic: processes after some desaster, e.g., earth quake or maximum
credible accident (MCA) in an atomic power plant
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 102/111
-
7/24/2019 ManagerialEconomics 2013 Folded
52/56
5Strategic Behavior of Firms5.5Investment Behavior
Investment Behavior
dynamic aspects of managerial decision making
: short run: fixed capital stock, given capacities, fixed cost: long run: adjustment of the capital stock by investments
Kt+1 = Kt+ Int where I
nt = I
gt Dt
: under certainty: optimal firms size indicated by someKAny investment with a positive NPV is advantageous.
Find the investment with the highest NPV.: at risk: revised decision making concerning risk
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 103/111
5Strategic Behavior of Firms5.5Investment Behavior
Net Present Value (NPV)
: timeline (t=0,1,2,3): sequence of net investments (I0,I1,I2): sequence of revenues (r1, r2, r3): sequence of operating costs (c1, c2, c3)
N PV= I0+ 1
1 + i(r1c1I1)+
1
(1 + i)2(r2c2I2)+
1
(1 + i)3(r3c3)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 104/111
-
7/24/2019 ManagerialEconomics 2013 Folded
53/56
5Strategic Behavior of Firms5.5Investment Behavior
Decision Tree Analysis
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 105/111
5Strategic Behavior of Firms5.5Investment Behavior
Exercise
Demand analysis:
Households maximize their utilityu(x1,x2)with respect to a given budget y.
(x1and x2denote commodities).
(a) What is the technical budget constraint and what does it express? Depict
the budget constraint graphically and show the effects if one of the prices
inceases and if the budget increases! 6 points
(b) How are the terms indifference curve, income consumption curve and
normal good defined? 4.5 points(c) What does a demand function express and what determines the demand?
If the behavior of consumers is based on their preferences, what might be
useful from a managerial point of view? 9.5 points
Total: 20 points
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 106/111
-
7/24/2019 ManagerialEconomics 2013 Folded
54/56
5Strategic Behavior of Firms5.5Investment Behavior
Exercise
Supply analysis:
The figure describes the cost situation of a firm whose production function
corresponds to the law of returns.
p
p
p
x
p
. . . to be continued.University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 107/111
5Strategic Behavior of Firms5.5Investment Behavior
Exercise
(a) Identify the curves and explain them! 6 points
(b) What necessary and sufficient conditions of profit maximization are
relevant for the firm with respect to perfect competition? What are the
optimum choices of the firm if the prices p, p or p are given? What
do we know about the profit? 8 points
(c) How are the terms firms optimum and firms minimum defined?
Denote the short-term and long-term supply curve of the firm. 6 points
Total: 20 points
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 108/111
-
7/24/2019 ManagerialEconomics 2013 Folded
55/56
5Strategic Behavior of Firms5.5Investment Behavior
Exercise
Perfect Competition
: How is perfect competition defined?: Why is perfect competition frequently used a reference case in
economics?: Why do managers try to get rid of perfect competition?: Give examples how firms try to gain market power by destroying
preconditions of perfect competition.
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 109/111
5Strategic Behavior of Firms5.5Investment Behavior
Exercise
Consider a monopoly with a linear price demand function
p(x)= a bx and a cost function c(x)= kx2 (a, b, kare constants).
: Compute Cournots solution.: Visualize Cournots solution in a corresponding graph.: Indicate the difference between Cournots solution and perfect
competition.: Explain how advertisement could improve Cournots solution.
(too long for 20 minutes)
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 110/111
-
7/24/2019 ManagerialEconomics 2013 Folded
56/56
5Strategic Behavior of Firms5.5Investment Behavior
Exercise
Suppose that there are two firms competing on a market by means of
quantities.
: Explain the concept of reaction curves.: How is the Cournot-Nash solution defined? How is the
Cournot-Nash solution related to reaction curves?: In an asymmetric setting as used by von Stackelberg how does the
leader profit?: What characterizes the cartell solution?
University of Siegen, April 2013 PD Dr. Hagen Bobzin, Managerial Economics 111/111