Summary of Economics of Strategy Book

Topics: Costs, Microeconomics, Economics Pages: 6 (1524 words) Published: September 29, 2012
Chapter 1, Basic Microeconomic principles

TC function: Represent the relationship between total cost and output, assuming that the firm produces in the most efficient manner possible given its current technological capabilities.

Semifixed: fixed over certain ranges of output but variable over other ranges

AC(Q): average cost function; describes how the firms average cost function or per unit of output costs vary with the amount of output it produces.  When average costs decreases as output increases, there are economies of scale

Margincal cost: refers to the rate of change of total cost with respect to output the incremental cost of producing exactly one more unit of output. Margincal cost often depeds on the total volume of output.

Short-run average costs: the period of time in which the firm cannot adjust the size of its production facilities. Include fixed and average costs

Long-run average costs: is the lower envelope of the short-run average cost function. It shows the lowest attainable average costs for any particular level of output when the firm can adjust its plant size optimally

Sunk costs: costs which have to be incurred no matter what the decision is and thus cannot be avoided

Avoidable costs: these costs can be avoided if certain choices are made

Total revenue function TR: indicates how the firm’s sales revenues vary as a function of how much product it sells.

Marginal revenue: it represents the rate of change in total revenue that results from the sale of additional units of output.

Revenue destruction effect: while the firm generates revenue on the extra units of output it sells at the lower price, it loses revenue on all the units it would have sold at the higher price.

PCM: the percentage contribution margin, on additional units sold is the ratio of profit per unit to revenue per unit

A supply curve of a perfectly competitive firm is identical to its marginal cost function.  For the market to be in equilibrium, the market price must be such that the quantity demanded equals the quantity supplied by firms in the industry,

Minimum efficient scale: the quantity corresponding to the minimum point on the average cost curve

Economic costs reflect the relevant opportunity costs of the financial capita that the owners have provided to the firm. Zero prof-its thus means zero economic profit, not zero accounting profit. Zero economic profit simple means that investors are earning returns on their investment that are commensurate with what they could earn from their next best opportunity.

Game Theory

Prisoners dilemma: conflict between the collective interest and self- interest is often referred. This arises because in pursuing its self-interest each party imposes a cost on the other that it does not take into account.

Chapter 2, Economies of scale and scope

Economies of Scale
Allow some firms to achieve a cost advantage over their rivals
The production process for a specific good or service exhibits economies of scale over a range of output when average costs (i.e cost per unit of output) declines over that range.
Diseconomies of scale: if average cost is increasing, then marginal cost must exceed average cost
Is related to unit-cost savings

Economies of Scope
Exists if the firm achieves savings as it increases the variety of goods and services it produces
Defines in terms of the relative total cost of producing a variety of goods and services together in one firm versus sepa-rately in two firms or more firms
TC(Qx,Qy) < TC(Qx,0) + TC(0,Qy), this formula captures the idea that is cheaper for one firm to produce both products then for one firm to produce X and the other to produce Y
A total firms its costs are zero if it produces zero quantities of both products
Leveraging core competencies, competing on capabilities, mobilizing invisible assets

Economies of scale and scope may arise at any given point of the...
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