Nike Analysis

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GYAAN KOSH TERM 1
Learning and Development Council, CAC

Managerial Economics
This document covers the basic concepts of Managerial Economics covered in Term 1. The document only summarizes the main concepts and is not intended to be an instructive material on the subject.

Gyaan Kosh Term 1

MGEC

Learning & Development Council, CAC

Opportunity cost: Taken into account for economic decisions. Opportunity Cost is the “next best” or “alternative” benefit from an investment Sunk costs: Never taken into account for economic decisions. Marginal Analysis: Used for profit maximization (deciding how much to produce) where TR and TC are functions of quantity. To maximize profits we take derivative=0

P r o f it M a x im iz a t io n G r a p h

For profit maximization, marginal revenue should be equal to marginal costs for EACH activity. If MR > MC – increase production If MR < MC – decrease production Demand Curve is the Marginal Benefit curve Consumer Surplus = Net benefit to customers = Willingness to pay – total paid. (Area under the demand curve above the price line) Demand and elasticity Demand shows quantity purchased as a function of price. Managers’ Knowledge of demand is critical because it helps in: • Making production decisions • Defining market structure • Taking strategic and operational decisions

Gyaan Kosh Term 1

MGEC

Learning & Development Council, CAC

Price Elasticity of Demand is measure of responsiveness i.e. % Change in quantity demanded due to a 1% change in Price Demand is more elastic, • Greater the availability of other substitutes • Greater the time frame • Greater the good’s share of the budget • Lower the switching costs Income Elasticity of Demand • Positive: Normal Good • Negative: Inferior Good

Cross Price Elasticity of Demand (change in demand of one good based on change in price of another) • Positive: Substitutes • Negative: Complements

Monopoly pricing strategy If a uniform pricing is set for products the firm stands to lose the consumer surplus by not capturing the full willingness to pay. So in order to capture more consumer surplus, price discrimination can be carried out. Three main types of pricing discrimination 1. First Degree 2. Second Degree (IGNORE) 3. Third Degree - Direct/Indirect Segmentation 1. First degree price discrimination • Sell each buyer at his/her reservation price • Knowledge about each potential buyer’s demand curve (need not be different) • No resale • Charge each customer its reservation price (or, Marginal Benefit) • Example: Car Market of USA (based on auction and willingness to pay) It is quite impractical to find out the willingness to pay of each buyer. 3. Third Degree Price Discrimination Sells same basic product in different forms or with different conditions attached to discriminate among buyers’ groups (or segments) Direct Segmentation – demographics Indirect Segmentation – time (inelastic impatient consumers v. elastic patient consumers), rebates, coupons, location, memberships. Example: Discount to students, Flight tickets for different timings. Requirements • • • Heterogeneous Buyers • No Resale

Gyaan Kosh Term 1

MGEC

Learning & Development Council, CAC

Supply The supply curve is the MC curve above the shutdown point. The shutdown point in case of unavoidable cost is given by the lowest point of average variable cost. And the shutdown point in case of avoidable costs is given by the lowest point of average total cost.

Types of market competition Number of Firms
• Monopoly: One Firm • Competition: Many Firms • Other cases, duopoly

Gyaan Kosh Term 1

MGEC

Learning & Development Council, CAC

Barriers to Entry
• Monopoly – high barriers to new entry • Competition – free entry

Short run (SR)
• Due to frictions, firm can only adjust some inputs for which it occurs variable costs • Other inputs cannot be adjusted, for which it incurs fixed costs

Long run (LR)
• Enough time passes for the firm...
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