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Price taker for Managerial Economics Mcom Delhi University

Price taker for Managerial Economics Mcom Delhi University

Price taker for Managerial Economics Mcom Delhi University

Managerial economics is the “application of the economic concepts and economic analysis to the problems of formulating rational managerial decisions”. It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis, correlation and calculus If there is a unifying theme that runs through most of managerial economics, it is the attempt to optimize business decisions given the firm’s objectives and given constraints imposed by scarcity, for example through the use of operations research, mathematical programming, game theory for strategic decisions, and other computational methods.

Managerial decision areas include:

  • assessment of investible funds
  • selecting business area
  • choice of product
  • determining optimum output
  • sales promotion.

Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

  • Risk analysis – various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.
  • Production analysis – microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm’s cost function.
  • Pricing analysis – microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
  • Capital budgeting – Investment theory is used to examine a firm’s capital purchasing decisions.

At universities, the subject is taught primarily to advanced undergraduates and graduate business students. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. In many countries it is possible to read for a degree in Business Economics which often covers managerial economics, financial economics, game theory, business forecasting and industrial economics.

Use following books for M.COM

Price taker for Managerial Economics Mcom Delhi University

A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. All economic participants are considered to be price-takers in a market of perfect competition, or one in which all companies sell an identical product, there are no barriers to entry or exit, every company has a relatively small market share, and all buyers have full information of the market. This holds true for producers and consumers of goods and services and for buyers and sellers in debt and equity markets.

Price taker for Managerial Economics Mcom Delhi University

Price Makers & Price Takers

Quick revise

In pure monopolies the firm is a price maker as they are able to take the markets demand curve as their own. The monopoly firm is able to set the price anywhere on this demand curve.

The ability of the monopoly firm to set price is dependent on price elasticity of the product – if demand is elastic it will limit the firms price setting power.

Price Takers

  • Firms in perfect competition are price takers
  • All businesses have to accept the price that is set by the market
  • Firms are not able to set their own price

Price Makers

  • As pure monopolies rarely exist having one firm as a price maker is unlikely
  • If firms are able to set prices in a market the extent to which they can is influenced by price elasticity for that market, the more inelastic the demand for a product the more a firm can set the price

Factors that Influence the Ability of a Firm to be a Price Maker

Only firms in pure monopolies can be price makers. This means that there must be:

  • Barriers to entry and exit
  • Only one producer / firm in the market
  • Imperfect knowledge

In reality this is seldom the case and pure monopolies rarely exist. Very few markets are dominated by just one firm – it is more likely that they are dominated by a few major firms who are able to act as price makers.

Barriers to entry do exist in many markets however they may be overcome in a number of ways including:

  • Takeovers from outside / inside the industry
  • Growing markets
  • Increased overseas competition
  • Transfers of brand names between sectors of the economy in companies that differentiate their product offerings

Price taker for Managerial Economics Mcom Delhi University

Part A: Firm and Market

Unit I: Demand and The Firm: Consumer Behaviour: Cardinal and ordinal approaches to the derivation

of the demand function. Revealed preference approach. Theory of attributes – Demand for consumer

durables. Firm Theory: Objectives of the firm; Theory of the growth of the firm: Marris and Penrose.

Unit II: Production and Cost: Production: Law of variable proportion. Returns to scale. Production

function: Concept of productivity and technology. Producer’s Equilibrium. Isoquants ridge lines, Isoclines,

Isocost lines.

Cost function: Classification of costs, Short run cost functions, Relationship between return to scale and

return to a factor, Long run cost functions.

Unit III: Market and Pricing: Market forms: AR-MR. Price taker; Monopoly power. Oligopolistic

behavior: Cournot and Stackelberg models. Factor Pricing: Demand and supply of factors of production.

Euler’s theorem.

Part B: Macroeconomic environment

Unit IV: Product and Asset Market Equilibrium: Product Market: Derivation of IS function. Demand

for real cash balances: Tobin’s Portfolio theory. Endogenous money supply and Asset market equilibrium. Derivation of real LM function. Real IS-LM framework.

Unit V: Aggregate Demand and Aggregate Supply: Modern aggregate demand function. Demand

Management. Philips Curve. Aggregate supply and the price level.

Price taker for Managerial Economics Mcom Delhi University

Recommended Mcom Notes

M. Com. (Part-I)

M. Com. (Part-II)

Price taker for Managerial Economics Mcom Delhi University

Use following books for M.COM

Price taker for Managerial Economics Mcom Delhi University

Recommended read:

Part A Firm and Market for Managerial Economics Mcom Delhi University
Unit I Demand and The Firm for Managerial Economics Mcom Delhi University

Isoclines for Managerial Economics Mcom Delhi University

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