Heinz Case - Create and answer a case study similar to Heinz Case(Chap 7-10)- cases are under Assignments and Wikispaces Case Study folder on BB-that looks at how concentration measures and barriers to entry are used by the antitrust authorities to determine the competitive implications of a proposed merger. What are some of the advantages of the merger in terms of coverage, market share, barriers to entry, and collusion? -Adam Rice
Entry One Upon researching large corporate mergers I have decided to first discuss what is 'good' and what is 'bad' about mergers. Typically when a merger goes down investors see a nice boost in their portfolios and CEOs declare that the company now has a much brighter future ahead. But, what exactly are mergers good for ??
From 2000-2010 the number of mergers was much higher than the 90s, the 80s, and so on. With all the promise of success after a merger do these companies involved really improve long term? Academic research actually shows that few mergers live up to the expectations that the top management originally sets, especially in times in which buyouts are very popular. Examples of some buyout booming periods would be '92/93, '03/04, and 2008. The truth is that a merger or acquisition often does not save the company. The book "Reasons for frequent failure in Mergers and Acquisitions" (2007) discusses this M/A topic.
There have been some very successful mergers recently that are worth identifying such as Comcast buying At&t and JP Morgan Chase acquiring Bank One Corp. So why are mergers so popular? Basically the chance of improved financial performance whether it be from reduced fixed costs, increased product range and market share, or many many other reasons.
Entry Two
Mergers and acquisitions are not the same even though they are often thought to be. Mergers are rare because they entail two firms agreeing to go forward as a single new company. Key word AGREE. This is also called a merger of equals or "friendly" merger. An acquisition or "hostile" merger is when one company takes over another and simply establishes itself as the owner through an aggressive buyout. In an acquisition the buyer 'swallows' the business. Basically a merger has a more positive sound to it so the companies involved in an acquisition will just say merger to keep the morale up.
Entry Three
The primary goal of a M/A is to improve the financial performance of the firm that is being bought. Here are more detailed descriptions of how a firm can achieve this desired performance through a M/A.
Economy of Scale- combined companies can find ways to reduce fixed costs thus improving profit margins
Economy of Scope- properly increasing or decreasing the distribution or marketing to certain products
Increased market power due to the captured market share
Cross-selling- selling complimentary products through the M/A
Taxation- reduced tax liability of the buyer
Diversification- potential long term security (more favorable to investors), reduced risk exposure
Entry Four
This article published in the New York Times (2005) discusses the 'darker truths' behind mergers. What Are Mergers Good For?
When a M/A occurs it often becomes difficult for the investors to understand everything that is going on. One problem that arises from this fact is that management can place everyday expenses under the merger cost bucket and therefore make operating costs look better than they truly are. Many of the biggest company frauds have taken place during large mergers.
Another characteristic of mergers is large-scale layoffs. These layoffs have caused serious problems for the United States and the world over the past three years and there doesn't seem to be any fix for this problem.
So who benefits from these mergers? The executives and Wall Street bankers behind the M/A of course. While thousands of workers receive pink slips the CEOs receive millions of $$$ for merging. And most often it is not $1-2 million, it is outrageous figures like $150+ million to CEOs of these merging companies.
Entry Five While stumbling around the Internet I found some information regarding M/A due diligence. Due diligence is the practice of analyzing and researching a company or an organization prior to a business transaction taking place. Because mergers and acquisition activity is up both nationaly and globally I felt it would be interesting to investigate what processes can aid management during a merger.
One step in achieving a successful merger is to be aware of any agreements between customers and clients. The company can be held liable to carry out the remainder of contractual agreements such as warranties, guaranties and license agreements. Realizing the importance of these obligations is crucial for the buyer's executives.
Product and operating expenses are valuable items to have on a merger and acquisition checklist. A detailed record of the operating and product expenses for the previous fiscal years, such as outside contractor information, administrative and payroll expenses should be obtained. These records are necessary in order to research future budgeting, operation and developmental expenditures.
Lastly, look at the tax information. Researching a company's tax history is a crucial part of a merger and acquisition, since any outstanding balances can be a liability to the new firm.
Discusses M/A for smaller and mid-sized companies. Includes buying your competition, selling out to your competition, or selling to your own management team are all discussed, with particular emphasis around financing options.
Entry Seven Collusion takes place within an industry when rival companies cooperate for their mutual benefit. If there are only a few firms in a market to collude then this activity can significantly harm customers. It is easy to see why a merger could have some potential for collusion. If two major firms joined, as is the case in a M/A, then this new company would have an unfair advantage over the market (share). Collusion limits competition by misleading and defrauding customers as well as shareholders of their legal rights. Some important indicators of collusion include uniform prices and suspicious information exchange.
Entry Eight
Barriers to entry are obstacles that make it difficult to enter a given market. If a merger takes place within a market where only a small number of firms control the market share then the level of difficulty rises for any company hoping to enter that market. Thus giving the companies that have merged a large advantage over potential entrants.
Some of the advantages of merging include (vs entrants):
Advertising- Incumbent firms can seek to make it difficult for new competitors by spending heavily on advertising that new firms would find more difficult to afford
Control of resources- If a single firm has control of a resource essential for a certain industry, then other firms are unable to compete in the industry
Customer loyalty- The presence of established strong brands within a market can be a barrier to entry
Economy of scale
Predatory pricing- The practice of a dominant firm selling at a loss to make competition more difficult for new firms that cannot suffer such losses, as a large dominant firm
Vertical integration- A firm's coverage of more than one level of production due to a merger
Lastly, here is an article from Businessweek discussing the AT&T/T-Mobile merger that has recently been causing a storm for AT&T. AT&T Fails to Show Public Benefit
References
Managerial Economics and Business Strategy, Seventh Ed.(2010), Michael Baye
Basic Economics: A Common Sense Guide to the Economy, Third Ed.(2007), Thomas Sowell
Contemporary Strategy Analysis, Sixth Ed.(2008), Robert Grant
Quiz Questions
1. Economists assume that the goal of consumers is to?
A) consume as much as possible
B) expend all their income
C) make themselves as well off as possible
D) do as little work as possible
2. When a firm doubles all its inputs, its average cost of production decreases, then production displays?
A) diminishing returns
B) declining fixed costs
C) diseconomies of scale
D) economies of scale
3. Of the following which is not a characteristic of a perfectly competitive market structure?
A) All firms sell identical products
B) There are no restrictions to entry by new firms
C) There are a very large number of firms that are small compared to the market
D) There are restrictions on exit of firms
4. A conglomerate merger is the integration of?
A) two firms that produce components for a single product
B) the production of similar products into a single firm
C) different product lines into a single firm
D) None of these
5. Of the following which is considered a way to improve financial performance and therefore be a possible motive behind a M/A?
A) Economy of Scale
B) Economy of Scope
C) Cross-selling
D) All of these
Answers
1. c- economists assume that consumers will always choose the "best" bundle of goods they can afford 2. d- economies of scale refers to the cost advantages that an enterprise obtains due to expansion 3. d- there are no restraints on firms entering or exiting the market
4. c- conglomerate merger is between firms that are involved in totally unrelated business activities
5. d- all are common motives for a M/A
Additional articles relating to this topic can be found in the Discussion tab
Case Summary
In 2000, H.J. Heinz agreed to acquire 100% of the voting securities of Beech-Nut, one of its competitors in the baby food market. The baby food market is dominated by three firms, Gerber, Heinz, and Beech-Nut, with market shares of 65%, 17%, and 15%, respectively. As a result, the industry is highly concentrated, with a pre-merger HHI of 4775, which would rise to 5285 if the merger goes through. The merger would create a duopoly, with a low likelihood of new entry. The barriers to entry are considered high, due to the difficulty of distribution and obtaining store replacement.
Gerber is sold in 90% of American supermarkets, while Heinz is carried in 40% and Beech-Nut in 45%. Both Heinz and Beech-Nut make payments to grocery stores to obtain shelf placement, while Gerber does not make any such payments. Most grocery stores prefer to carry at most two brands of baby food. As a result, Heinz and Beech-Nut baby foods are rarely carried in the same stores, and therefore do not directly compete for consumer dollars. However, the brands do compete for placement in the grocery stores, competition that would be eliminated with the merger. There is a risk that with only two firms there would be strong incentives to coordinate behavior and achieve profits above competitive levels.
*The primary theme of this approach would be discussing how concentration measures and barriers of entry are used by the antitrust authority to, in part, determine the competitive implications of a proposed merger.
*Instructors wanting to tie the material from several chapters together will want to assign this case after chapters 7, 8, 9, and 10. This approach allows more complete coverage of all the case content. It takes into consideration not only the concentration and barriers to entry situation, but also the fact the firm with the greatest coverage and market share has considerable brand loyalty. Moreover, the other two firms' products are differentiated, but firms fiercely compete by setting price. Other concerns in the case include the prospect of collusion in the merger were consummated.
Discussion Questions and Answers
1. Who are the competitors in the jarred baby food market? What market share do they have? Is this industry concentrated?
• There are three primary competitors: Gerber, Heinz, and Beech-Nut. Gerber has market share around 65%, while Heinz has 17%, and Beech-Nut has 15%.
• With only three firms having almost 98% market share, this industry is very concentrated. The HHI is 4775 prior to the proposed merger.
2. How do Heinz and Beech-Nut compete with one another?
• Most grocery stores only carry one or two brands of baby food and Gerber is dominant, Heinz and Beech-Nut compete to be the second brand on stores' shelves.
• Very few grocery stores carry both Heinz and Beech-Nut, so they do not necessarily compete at the retail level.
3. Are the barriers to entry high or low for this market? What are they?
• The case states that the barriers to entry are high, and that no new competitor has entered the market for decades.
• Greatest barrier to entry is the ability to get placement on supermarket shelves. Supermarkets will be unlikely to carry a new brand without strong incentives.
• Other barriers likely include the development of a trusted brand, building of facilities, development of recipes, and creation of distribution channels.
4. What efficiencies are likely to be gained by Heinz and Beech-Nut through the merger? Is a merger necessary to develop these efficiencies?
• Heinz cites the superior recipes that Beech-Nut has as a primary benefit of the merger. Also the distribution network that Heinz has is superior to that of Beech-Nut.
• Heinz and Beech-Nut would probably reduce production costs by consolidating facilities, as well as reduce administrative expenses.
• Heinz and Beech-Nut also state that the development and launching of new products would be more cost effective through the merger. Since the combined entity would have access to more supermarkets, a new product could get wider placement and have the potential to make a greater return.
• Both companies could probably improve without the merger. The development of new recipes is not likely to be cost prohibitive. And the fact that Heinz has a strong distribution network is evidence that smaller firms can develop good distribution without a merger.
5. How could the merger be harmful to consumers?
• With only two firms, there would be an incentive to coordinate pricing and products to achieve higher than competitive returns. By restricting output and raising prices, the two remaining competitors could potentially keep prices above competitive levels. The high barriers to entry could keep out any competitors that would view this market as an opportunity.
• If collusion, either overt or tacit, were to be suspected, it would be difficult to bring the market back to a competitive state. Once the merger is allowed, it is difficult to force divestiture and bring additional competitors to the market.
Topic Summaries
1. Five Forces Analysis (Also include game theory, complements, comparative advantage (from Science of Success), and government (Fed, State, and Local))
The 'Five Forces' framework was created by Michael Porter. The framework organizes many complex managerial economics issues into five categories that impact the sustainability of industry profits. The forces include entry, power of suppliers, power of buyers, industry rivalry, and substitutes/compliments. This framework is primarily a tool for helping managers see the 'big picture'.
2. Supply and Demand (Also, include private goods vs. public goods, marginal analysis, producer and consumer surplus and how it applies to perfect competition)
Supply and demand are the driving forces behind the market economies that exist around the globe. Supply and demand analysis is a tool that managers can use to visualize the 'big picture'. It is a qualitative forecasting tool you can use to predict trends in competitive markets, including changes in the prices of your firms products, related products, and the prices of inputs that are necessary for operations.
3. Elasticity: elasticity of demand including Marginal revenue and the relationship with elasticity of demand. Also, elasticity of supply, cross price elasticity, income elasticity
Elasticity is a measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable. Two aspects of an elasticity are important: whether it is positive/negative and whether it is greater than 1 or less than 1 in absolute value. Demand is elastic if the absolute value of the own price elasticity is greater than 1. Demand is inelastic if the absolute value of the own price elasticity is less than 1. Demand is unitary elastic if the absolute value of the own price elasticity is equal to 1. Cross-price elasticity is a measure of the responsiveness of the demand for a good changes in the price of a related good.
4. Comparative advantage and trade (How do you determine your comparative advantage?)
Comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods. Even if one country is more efficient in the production of all goods than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies. The net benefits to each country are called the gains from trade. Trade costs, particularly transportation, reduce and may eliminate the benefits from trade, including comparative advantage. Conditions that maximize comparative advantage do not automatically resolve trade deficits. In fact, many real world examples where comparative advantage is attainable may require a trade deficit.
5. Economies of scale, diseconomies of scale, constant returns to scale.Efficiency in production.Economies of scope and how to maximize profit when there’re two production plants,long-run equilibrium-Include Coverage from Chapters 2-6 of Science of Success
Economies exist when long-run average costs decline as output is increased. Diseconomies of scale exist when long-run average costs rise as output is increased. Constant return to scale exist when long-run average costs remain constant as output is increased. Economies of scope is when the total cost of producing two types of outputs together is less than the total cost of producing each type of output separately.
-Adam Rice
Entry One
Upon researching large corporate mergers I have decided to first discuss what is 'good' and what is 'bad' about mergers. Typically when a merger goes down investors see a nice boost in their portfolios and CEOs declare that the company now has a much brighter future ahead. But, what exactly are mergers good for ??
From 2000-2010 the number of mergers was much higher than the 90s, the 80s, and so on. With all the promise of success after a merger do these companies involved really improve long term? Academic research actually shows that few mergers live up to the expectations that the top management originally sets, especially in times in which buyouts are very popular. Examples of some buyout booming periods would be '92/93, '03/04, and 2008. The truth is that a merger or acquisition often does not save the company. The book "Reasons for frequent failure in Mergers and Acquisitions" (2007) discusses this M/A topic.
There have been some very successful mergers recently that are worth identifying such as Comcast buying At&t and JP Morgan Chase acquiring Bank One Corp. So why are mergers so popular? Basically the chance of improved financial performance whether it be from reduced fixed costs, increased product range and market share, or many many other reasons.
Entry Two
Mergers and acquisitions are not the same even though they are often thought to be. Mergers are rare because they entail two firms agreeing to go forward as a single new company. Key word AGREE. This is also called a merger of equals or "friendly" merger. An acquisition or "hostile" merger is when one company takes over another and simply establishes itself as the owner through an aggressive buyout. In an acquisition the buyer 'swallows' the business. Basically a merger has a more positive sound to it so the companies involved in an acquisition will just say merger to keep the morale up.
Entry Three
The primary goal of a M/A is to improve the financial performance of the firm that is being bought. Here are more detailed descriptions of how a firm can achieve this desired performance through a M/A.
Entry Four
This article published in the New York Times (2005) discusses the 'darker truths' behind mergers. What Are Mergers Good For?
When a M/A occurs it often becomes difficult for the investors to understand everything that is going on. One problem that arises from this fact is that management can place everyday expenses under the merger cost bucket and therefore make operating costs look better than they truly are. Many of the biggest company frauds have taken place during large mergers.
Another characteristic of mergers is large-scale layoffs. These layoffs have caused serious problems for the United States and the world over the past three years and there doesn't seem to be any fix for this problem.
So who benefits from these mergers? The executives and Wall Street bankers behind the M/A of course. While thousands of workers receive pink slips the CEOs receive millions of $$$ for merging. And most often it is not $1-2 million, it is outrageous figures like $150+ million to CEOs of these merging companies.
Entry Five
While stumbling around the Internet I found some information regarding M/A due diligence. Due diligence is the practice of analyzing and researching a company or an organization prior to a business transaction taking place. Because mergers and acquisition activity is up both nationaly and globally I felt it would be interesting to investigate what processes can aid management during a merger.
One step in achieving a successful merger is to be aware of any agreements between customers and clients. The company can be held liable to carry out the remainder of contractual agreements such as warranties, guaranties and license agreements. Realizing the importance of these obligations is crucial for the buyer's executives.
Product and operating expenses are valuable items to have on a merger and acquisition checklist. A detailed record of the operating and product expenses for the previous fiscal years, such as outside contractor information, administrative and payroll expenses should be obtained. These records are necessary in order to research future budgeting, operation and developmental expenditures.
Lastly, look at the tax information. Researching a company's tax history is a crucial part of a merger and acquisition, since any outstanding balances can be a liability to the new firm.
Entry Six
Great video by meridianbusiness.tv posted on Vimeo. Expanding Your Business Through Acquisition
Discusses M/A for smaller and mid-sized companies. Includes buying your competition, selling out to your competition, or selling to your own management team are all discussed, with particular emphasis around financing options.
Entry Seven
Collusion takes place within an industry when rival companies cooperate for their mutual benefit. If there are only a few firms in a market to collude then this activity can significantly harm customers. It is easy to see why a merger could have some potential for collusion. If two major firms joined, as is the case in a M/A, then this new company would have an unfair advantage over the market (share). Collusion limits competition by misleading and defrauding customers as well as shareholders of their legal rights. Some important indicators of collusion include uniform prices and suspicious information exchange.
Entry Eight
Barriers to entry are obstacles that make it difficult to enter a given market. If a merger takes place within a market where only a small number of firms control the market share then the level of difficulty rises for any company hoping to enter that market. Thus giving the companies that have merged a large advantage over potential entrants.
Some of the advantages of merging include (vs entrants):
Lastly, here is an article from Businessweek discussing the AT&T/T-Mobile merger that has recently been causing a storm for AT&T. AT&T Fails to Show Public Benefit
References
Managerial Economics and Business Strategy, Seventh Ed.(2010), Michael Baye
Basic Economics: A Common Sense Guide to the Economy, Third Ed.(2007), Thomas Sowell
Contemporary Strategy Analysis, Sixth Ed.(2008), Robert Grant
http://www.businessweek.com/
http://www.nytimes.com/pages/magazine/
http://vimeo.com/
Quiz Questions
1. Economists assume that the goal of consumers is to?
A) consume as much as possible
B) expend all their income
C) make themselves as well off as possible
D) do as little work as possible
2. When a firm doubles all its inputs, its average cost of production decreases, then production displays?
A) diminishing returns
B) declining fixed costs
C) diseconomies of scale
D) economies of scale
3. Of the following which is not a characteristic of a perfectly competitive market structure?
A) All firms sell identical products
B) There are no restrictions to entry by new firms
C) There are a very large number of firms that are small compared to the market
D) There are restrictions on exit of firms
4. A conglomerate merger is the integration of?
A) two firms that produce components for a single product
B) the production of similar products into a single firm
C) different product lines into a single firm
D) None of these
5. Of the following which is considered a way to improve financial performance and therefore be a possible motive behind a M/A?
A) Economy of Scale
B) Economy of Scope
C) Cross-selling
D) All of these
Answers
1. c- economists assume that consumers will always choose the "best" bundle of goods they can afford
2. d- economies of scale refers to the cost advantages that an enterprise obtains due to expansion
3. d- there are no restraints on firms entering or exiting the market
4. c- conglomerate merger is between firms that are involved in totally unrelated business activities
5. d- all are common motives for a M/A
Additional articles relating to this topic can be found in the Discussion tab
Case Summary
In 2000, H.J. Heinz agreed to acquire 100% of the voting securities of Beech-Nut, one of its competitors in the baby food market. The baby food market is dominated by three firms, Gerber, Heinz, and Beech-Nut, with market shares of 65%, 17%, and 15%, respectively. As a result, the industry is highly concentrated, with a pre-merger HHI of 4775, which would rise to 5285 if the merger goes through. The merger would create a duopoly, with a low likelihood of new entry. The barriers to entry are considered high, due to the difficulty of distribution and obtaining store replacement.
Gerber is sold in 90% of American supermarkets, while Heinz is carried in 40% and Beech-Nut in 45%. Both Heinz and Beech-Nut make payments to grocery stores to obtain shelf placement, while Gerber does not make any such payments. Most grocery stores prefer to carry at most two brands of baby food. As a result, Heinz and Beech-Nut baby foods are rarely carried in the same stores, and therefore do not directly compete for consumer dollars. However, the brands do compete for placement in the grocery stores, competition that would be eliminated with the merger. There is a risk that with only two firms there would be strong incentives to coordinate behavior and achieve profits above competitive levels.
*The primary theme of this approach would be discussing how concentration measures and barriers of entry are used by the antitrust authority to, in part, determine the competitive implications of a proposed merger.
*Instructors wanting to tie the material from several chapters together will want to assign this case after chapters 7, 8, 9, and 10. This approach allows more complete coverage of all the case content. It takes into consideration not only the concentration and barriers to entry situation, but also the fact the firm with the greatest coverage and market share has considerable brand loyalty. Moreover, the other two firms' products are differentiated, but firms fiercely compete by setting price. Other concerns in the case include the prospect of collusion in the merger were consummated.
Discussion Questions and Answers
1. Who are the competitors in the jarred baby food market? What market share do they have? Is this industry concentrated?
• There are three primary competitors: Gerber, Heinz, and Beech-Nut. Gerber has market share around 65%, while Heinz has 17%, and Beech-Nut has 15%.
• With only three firms having almost 98% market share, this industry is very concentrated. The HHI is 4775 prior to the proposed merger.
2. How do Heinz and Beech-Nut compete with one another?
• Most grocery stores only carry one or two brands of baby food and Gerber is dominant, Heinz and Beech-Nut compete to be the second brand on stores' shelves.
• Very few grocery stores carry both Heinz and Beech-Nut, so they do not necessarily compete at the retail level.
3. Are the barriers to entry high or low for this market? What are they?
• The case states that the barriers to entry are high, and that no new competitor has entered the market for decades.
• Greatest barrier to entry is the ability to get placement on supermarket shelves. Supermarkets will be unlikely to carry a new brand without strong incentives.
• Other barriers likely include the development of a trusted brand, building of facilities, development of recipes, and creation of distribution channels.
4. What efficiencies are likely to be gained by Heinz and Beech-Nut through the merger? Is a merger necessary to develop these efficiencies?
• Heinz cites the superior recipes that Beech-Nut has as a primary benefit of the merger. Also the distribution network that Heinz has is superior to that of Beech-Nut.
• Heinz and Beech-Nut would probably reduce production costs by consolidating facilities, as well as reduce administrative expenses.
• Heinz and Beech-Nut also state that the development and launching of new products would be more cost effective through the merger. Since the combined entity would have access to more supermarkets, a new product could get wider placement and have the potential to make a greater return.
• Both companies could probably improve without the merger. The development of new recipes is not likely to be cost prohibitive. And the fact that Heinz has a strong distribution network is evidence that smaller firms can develop good distribution without a merger.
5. How could the merger be harmful to consumers?
• With only two firms, there would be an incentive to coordinate pricing and products to achieve higher than competitive returns. By restricting output and raising prices, the two remaining competitors could potentially keep prices above competitive levels. The high barriers to entry could keep out any competitors that would view this market as an opportunity.
• If collusion, either overt or tacit, were to be suspected, it would be difficult to bring the market back to a competitive state. Once the merger is allowed, it is difficult to force divestiture and bring additional competitors to the market.
Topic Summaries
1. Five Forces Analysis (Also include game theory, complements, comparative advantage (from Science of Success), and government (Fed, State, and Local))
The 'Five Forces' framework was created by Michael Porter. The framework organizes many complex managerial economics issues into five categories that impact the sustainability of industry profits. The forces include entry, power of suppliers, power of buyers, industry rivalry, and substitutes/compliments. This framework is primarily a tool for helping managers see the 'big picture'.
2. Supply and Demand (Also, include private goods vs. public goods, marginal analysis, producer and consumer surplus and how it applies to perfect competition)
Supply and demand are the driving forces behind the market economies that exist around the globe. Supply and demand analysis is a tool that managers can use to visualize the 'big picture'. It is a qualitative forecasting tool you can use to predict trends in competitive markets, including changes in the prices of your firms products, related products, and the prices of inputs that are necessary for operations.
3. Elasticity: elasticity of demand including Marginal revenue and the relationship with elasticity of demand. Also, elasticity of supply, cross price elasticity, income elasticity
Elasticity is a measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable. Two aspects of an elasticity are important: whether it is positive/negative and whether it is greater than 1 or less than 1 in absolute value. Demand is elastic if the absolute value of the own price elasticity is greater than 1. Demand is inelastic if the absolute value of the own price elasticity is less than 1. Demand is unitary elastic if the absolute value of the own price elasticity is equal to 1. Cross-price elasticity is a measure of the responsiveness of the demand for a good changes in the price of a related good.
4. Comparative advantage and trade (How do you determine your comparative advantage?)
Comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods. Even if one country is more efficient in the production of all goods than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies. The net benefits to each country are called the gains from trade. Trade costs, particularly transportation, reduce and may eliminate the benefits from trade, including comparative advantage. Conditions that maximize comparative advantage do not automatically resolve trade deficits. In fact, many real world examples where comparative advantage is attainable may require a trade deficit.
5. Economies of scale, diseconomies of scale, constant returns to scale.Efficiency in production.Economies of scope and how to maximize profit when there’re two production plants,long-run equilibrium-Include Coverage from Chapters 2-6 of Science of Success
Economies exist when long-run average costs decline as output is increased. Diseconomies of scale exist when long-run average costs rise as output is increased. Constant return to scale exist when long-run average costs remain constant as output is increased. Economies of scope is when the total cost of producing two types of outputs together is less than the total cost of producing each type of output separately.