Managerial Economics Essay Sample
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Managerial Economics Essay Sample
a. This particular industry has a constantly increasing cost. There will be an increase in the demand for input factors for one key reason. Every day, new companies will be introduced into this market of remodeling, economic profits being the encouraging factor. Because of this, there will be a bid up on input prices for the companies in the industry of remodeling. “When a market is characterized by a large number of small producers, the demand curve facing the manager of each individual firm is horizontal at the price determined by the intersection of the market demand and supply curves” (Thomas and Maurice, 2011). Inputs, then, will become more costly for an industry which is, once again, constantly increasing-cost. If the remodeling industry were what you would consider a constant-cost industry, there would be no bid up on input prices. Due to this, the costs of production will concurrently increase.
b. At the end of the day, the determining factor in prices is marginal costs. When variable costs and inputs rise, thus will the prices. However, if the marginal costs can be maintained at a minimum, there will not have to be such a marked increase in prices. With the present economy and more companies entering the market in competition, the prices will decrease.
c. Referring to question ‘b’, if the marginal costs can be kept at a reasonable state, the prices will not have to go up as much. This being the case, the company will stand a better chance of having a long-run profit. However, with the rising costs of materials and inputs, the companies will, in the long-run, see a decrease in profits. Increased competition will eliminate economic profit.
This can be accomplished by providing several cases of evidence to the FTC. Just because the market share has increased it does not necessarily mean that the market power has as well. On particular piece of evidence that can be shown to the FTC is in that the elasticity of demand either remained unaffected by this merger or that it increased. Taking this into consideration, if a comparison of price elasticity was done before and after the merger, there would be proof that consumers still had a large amount of substitutes available in the market. Depending on the type of market present, such as a Global Market, it would be relatively simple to prove the wide array of substitutes that were available to the consumers. This particular merger may have been done for what every company is looking for, which is cost savings. One other form of evidence to be provided to the FTC is a statement of costs, which should show costs before and after the merge.
McDonald’s make a poor business decision when they had the consumer purchase the fries as well as the drink in order to receive the promotional price. In this particular economy, if McDonald’s was smart, they would have created a new promotion and merged into it before the competitors had realized what was going on. This would have given McDonald’s a clear advantage. With this particular move, several problems were present in utilizing game theory to predict their profits. With the onslaught of fast-food corporations, McDonald’s has endless rivals in the burger world.
This being the case, just reducing prices of a product will not do anything for their profit maximization. One of the competitors will quickly respond with the “promotion” by having equally lower prices or reduce theirs even more. As explained by Thomas and Maurice, competitors are too large to benefit more from an improvement in general industry conditions than improving their position at the expense of others (Thomas and Maurice, 2011.) Furthermore, it is too easy for consumers to make a choice to go to another fast food restaurant to get the same product at a cheaper price. Another factor is that the reduction in price did not offset the full price of fries and soft drink. Therefore the price reduction of the Big Mac makes no difference in the price the consumer will be paying in the end.
Thomas, C., & Maurice, S. (2011). Managerial Economics; foundations of business analysis and strategy. (10th ed.). New York: McGraw-Hill Irwin.