Markets, Strategies, and Firms
- The majority of economic transactions take place through markets. Newspaper articles focus on developments in a plethora of markets daily.
- Although the concept is familiar to most of us through mass media, markets have a myriad of flavors, each one with particular characteristics.
- What is a market from an economic perspective?
- Why are economists and politicians so interested in how markets are organized?
- How do markets contribute to the organization of production?
- The sustained increase in living standards is primarily due to technological progress (e.g., the industrial revolution, the information revolution, etc.).
- However, not all technological changes favor everyone in the economy.
- How is technological progress incorporated into firm production?
- How does it affect the scaling of production?
- How does it affect the allocation of production resources?
- Profit maximization is ubiquitous in the economic theory of firms’ behavior.
- In practice, many successful managers often divert from following this objective.
- Why is then profit maximization used so often in theory?
- Can we still learn something from it?
- How does it work?
- In contrast to profit maximization, cost minimization is less controversial. Economists and managers agree that minimizing production costs is good practice.
- In fact, cost minimization arguments frequently appear in political discussions about minimum wages.
- How is cost minimization different from profit maximization?
- How is it similar to profit maximization?
- How is it used in political debates?
- Not all costs have the same characteristics. Economists talk about fixed and variable costs and distinguish between short- and long-run horizons.
- Different costs sway (rational) business decisions in distinct ways.
- How do fixed and variable costs differ?
- How do short- and long-run costs differ?
- How do these differences affect business decisions?
- Competition is a frequent topic in political and economic discussion. Competition can constrain firms to act as price takers.
- Markets are not perfectly competitive, and firms are typically not purely price takers in reality. Nevertheless, such arguments remain central in economics, finance, and business.
- Why is price taking behavior still so relevant?
- How does competition restrain the behavior of firms?
- How do firms decide how much to produce in competitive markets?
- Prices and traded quantities in any market are predominantly determined by demand and supply. Our understanding of supply is based on individual firm behavior.
- Nevertheless, most empirical estimations, analysis, and media discussions focus on markets instead of particular firms.
- How do we consolidate individual firm production decisions into market supply?
- Why do most popular discussions focus on a market level?
- Why do we frequently rely on econometrically modeling markets as being competitive?
- The goal in the popular economic-themed board game “Monopoly” is to monopolize a fictional property market by driving other players to bankruptcy.
- In real markets, however, monopolies tend to have unpleasant connotations. In fact, the competition policies in both the US and EU aim (among others) to prevent the growth and abuse of monopoly power.
- Why do regulators try to reduce monopoly power?
- Are monopolies bad in terms of economic efficiency?
- How do monopolies choose prices for their products?
- Many market structures examined in economics assume that the market has a single price. Both perfect competition and monopoly, which we have previously studied, are single price market structures.
- However, in practice prices for similar, and in some cases even identical products, can be different from seller to seller.
- Why do we observe price dispersion in real markets?
- How is this related to the firms’ choices?
- How does this affect the total market welfare?
- In most real-life situations, economic agents do not operate in isolation. Their gains and losses depend not only on their own choices but also on the choices of others.
- Markets are typical examples of economic situations where social interactions matter.
- How can we study social interactions in economics?
- How do economic agents compete and coordinate with each other?
- What are the social dilemmas that arise in such situations?
- Many real markets are neither perfectly competitive nor monopolies. Instead, they are oligopolies comprising a small number of firms that have large enough market shares and can influence prices.
- Nonetheless, firms’ profits do not exclusively depend on their own choices. Their small numbers allow them to utilize a variety of cooperation and competition strategies.
- How do firms strategically interact?
- What means do they use to compete?
- How do the welfare outcomes of oligopolies compare with those of monopolies and perfect competition?
- Free markets of regulation? Ideal free markets result in economically efficient allocations on many occasions. Property rights and enforceable contracts are two necessary conditions for a free market structure to be viable.
- Nevertheless, property rights and enforceable contracts are not available in all situations, markets fail, and states intervene.
- What characteristics lead to market failures?
- What are the welfare implications of such failures?
- Do policy interventions improve the welfare conditions of the agents?
The mathematical appendix contains some remainders of useful mathematical results of general interest, remainders of frequently used calculus rules, and frequently used symbols of the material.