Managerial Economics Term Paper

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Managerial Economics

Get the financial data for a company or organization for five years. From the balance sheet and the income statement for the company or organization develop regression line formulae for each line item and predict those line item revenues and costs over the next five years. Don't do prediction for any item in the statement less than 10% of the total sales on the incomes statement or 10% of the total Assets. Lump all those values into one account.

Financial Data for Starbuck's Cafe

Projections for the Next Five Years

Line Item

Net Revenues From Retail Sales

Net Revenues From Specialty Sales

Total Net Revenues

Working Capital

Longterm Debt

Total Assets






Shareholder's Equity






Operating Income






Internet Related Investment Losses

Net Earnings






Net Earning Per Common Share

Too small to tell from graph

Long-Term Debt cannot be reduced to below zero as the linear regression suggests.

Internet Related Losses is also not a good fit. The regression line tells us that the loss will continue upward. However common sense tells us that they have fixed the problem and do not expect any further inter-net losses, especially since they were large last year and almost non-existent this year.

The Net Earnings per common share are too small to see on this graph. The raw data suggests that it is on the decline.

3. Discuss how elasticity of demand is affected by each of the four types of theoretical market models. (Monopoly, Perfect Completion, Oligopoly, and Monopolistic Competition) Explain how you would compete in each of the four market models if you were to export a product to a country that had an economy with each economic model.

Elasticity of demand is a measure of how one thing is effected when you change another. For example if you change the price of a product, it will directly effect the demand for the product. In most situations when you raise the price, the demand drops. Likewise, if you lower the price the demand for an item should increase. This assumes a direct relationship and does not consider, other factors, which may effect this situation. Elasticity of demand could be used to compare many other things as well, such as the relationship between supply and income. In order for one factor to be affected by the other the change of one item must be large enough to cause a change. If the change is too small the other factor will not be affected. In this case the factor is said to be inelastic.

The elasticity of demand will behave differently in different market settings. If we were to export our product into another country who had an economy based on a particular model, our strategy for competing would be different in each case.

A perfect competition exists where many firms sell a standardized product. Buyers are fully informed about the prices of the standardized product offered by these competitive companies. Each firm has only a small market share of total demand and the price of the product is beyond its control. In this case market price is regulated by competition.

In a perfect competition the only ways to increase demand for the product is to increase its value to the customer by means other than price. Often these things are intangible items such convenience, speed of delivery, or friendly service. Greater product awareness would be another way to accomplish this goal.

In this case the amount of widgets firm can sell is only affected by the number, which it can produce. In this type of market there are two strategies to attract more customers and sell more widgets. The first strategy involves reducing your production costs and therefore maximizing profits. In this case you do not necessarily sell more widgets, but you make more money for the widgets that you do sell.

In this case price is a fixed variable and therefore cannot be manipulated to effect demand. Another way to compete in this market would be to produce and offer more widgets. This works, of course, provided that the market is not already saturated.

The best way to compete in a perfect competition is through advertising. This can be tricky, however, because many advertising concepts do not work in this situation. First of all of your widgets are just like your competitors widgets. They are the same price, therefore, you cannot say they are better or cheaper. Other advertising tactics would have to be used such as convenience, location, easier ordering, or payment options. Other tactics might be used such as special offers, for example, "get your free calculator when you buy a new car."

A monopoly exists when a product has only one producer or seller for which there is no close substitute. In a monopoly the seller has complete control of his price. Usually this situation exists where there is some limiting factor, which prevents others from entering the market. This may be a high cost to enter the market, or a social, political, or economic situation which prevents competition from entering the market. A business may have exclusive control of a natural resource. Other producers cannot compete, because they don't have that resource at their disposal. A business may have copyright or patent right on it's product, thus making it illegal for other producer to duplicate the product. A monopoly may be created by a state making it legal. A well-known trademark could ensure customer loyalty, such as with Pepsi.

The United States feels that competition is healthy, and therefore has laws, which make it difficult to obtain and keep a monopoly. That is not to say that in some cases it does not happen in some cases. A local business may have a monopoly in a certain location of a country because they are the only ones offering their product or service locally, even though there may be thousands offering the same product or service in other parts of the country.

In other parts of the world, monopolies are allowed and do control certain markets. Entering into a market in a foreign country where a monopoly exists for the particular widget that you intend to offer would be difficult, if not impossible. If the monopoly exists because of a law, which supports it, entry would be impossible, as it would be illegal. If the monopoly exists because someone has control over a natural resource, it would also be difficult and expensive. The natural resource would have to be obtained from another source and transported to the location. This could prove to be quite expensive. Under these two circumstances it would be impossible to enter a foreign market with these types of monopolies.

If, however, the monopoly exists because it has controlling market shares or because of brand recognition, then it would be feasible to enter the market. This is where elasticity of demand comes into play in a monopoly. In this monopoly model, your actions could directly effect demand both for you and your competition. You could enter the market with a superior product, lower prices, and a heavy advertising campaign. Keep in mind, however, that once you enter the market, it is no longer a pure monopoly by definition. Many partial monopolies exist in which one company has a major portion, but not complete control of a market.

In an oligopoly products may be homogeneous or differentiated. Firms are mutually interdependent. Each must consider possible reactions of its rivals to price, advertising, and development. Concentration ratios are used to measure the structure of an industry. They are a percentage of the total industry sales accounted for by the four largest firms. When the largest four firms control 40% or more of the total market, that industry is considered oligopolistic. The barriers to entry are similar to those in pure monopoly. Oligopoly exists when the number of firms in an industry is so small that each must consider the reactions of rivals in formulating its price policy.

In this situation formal or informal arrangements are made to coordinate pricing strategies. This is called collusion. There is much incentive to cheat in an oligopoly. Let us use the example of an oligopoly consisting of three companies offering the same product. They will be called A, B, and C. Two things may happen. When A drops his price, B and C. may follow and the market remains equal. All stay in business and everyone is happy. Due to elasticity of demand, demand would increase for all.

In another scenario, A increases his price and B. And C. ignore this and keep their price the same. A is not happy, because this directly effects his personal elasticity of demand causing the demand for his product to decrease, while causing the demand for his competitors' to increase. This is one way that B. And C. could use collusion to force A out…[continue]

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