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Ebook Managerial economics (14th edition): Part 2

(BQ) Part 2 book "Managerial economics" has contents: Competitive markets, performance and strategy in competitive markets, monopoly and monopsony, monopolistic competition and oligopoly, game theory and competitive strategy, pricing practices, risk analysis, capital budgeting,.and other contents. | www.downloadslide.com Performance and Strategy in Competitive Markets 11 To design effective policies for competitive markets, policy makers must decide when to intervene and when to adopt a hands-off strategy. This is tougher than it might seem. For example, consumer and business customers want cheap, reliable, and safe electric power, and no politician wants to be held responsible when the lights go out, or when electricity bills skyrocket. What makes energy market regulation especially difficult is the fact that the industry has distinctly different segments, including, exploration, production, transmission, and distribution. At the 'front end' of the energy industry, exploration and production are vigorously competitive with thousands of active producers, strong incentives for cost-efficiency, and low profit margins. At the 'back end' of the energy industry, transmission and distribution are dominated by large utilities with market power and the potential for cost inefficiency and excess profits. COMPETITIVE MARKET EFFICIENCY Competitive markets coordinate supply and demand and balance the economic interests of consumers and producers. Why is it Called Perfect Competition? Welfare Economics Study of how the allocation of economic resources affects the material well-being of consumers and producers.1 Social Welfare Material well-being of society. Consumer Surplus Net benefit derived by consumers from consumption. Producer Surplus Net benefit derived by producers from production. Welfare economics is the study of how the allocation of economic resources affects the material well-being of consumers and producers. From a broad perspective, it is in society's best interest to have the benefits tied to consumption and production activity made as large as possible. Equilibrium prices and quantities that create an exact balance between supply and demand in perfectly competitive markets maximize the total social welfare derived from such activity. Figure 11.1 shows