Assignment 4 REAL WORLD-Ans

8/12/2019 Assignment 4 REAL WORLD-Ans

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Submitted By: DevalNirmal, Dimuthu Liyanage, Shailie Shah Page 1


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Solution: Real World Case Scenario

Ans: 1

Theeconomist Joseph Stigler defined an entry barrier as "A cost of producing (at some or

every rate of output) which must be borne by a firm which seeks to enter an industry but is

not borne by firms already in the industry"

This emphasises the asymmetry in costs between the incumbent firm (already inside the

market) and the potential entrant. If the existing businesses have managed to exploit some

of the economies of scale that are available to firms in a particular industry, they have

developed a cost advantage over potential entrants. They might use this advantage to cut

prices if and when new suppliers enter the market, moving away from short run profit

maximisation objectives - but designed to inflict losses on new firms and protect their

market position in the long run.

As per the data mentioned in the case study , if consider porters five force model we can

easily say that market for flat panel TV market is going to be lucrative and it will attract new

players to compete with existing . We can say that entry for the new player in the market

will not be too tough but to survive in the competition will be difficult for them as increasing

competition will results in to lower margin as discussed above.

Ans: 2

Profits

Profit has a number of meanings in economics. At its most basic level, profit is the reward

gained by risk taking entrepreneurs when the revenueearned from selling a given amount

of output exceeds the total costsof producing that output. This simple statement is often

expressed as theprofit identity, which states that:

Total profits = total revenue (TR) total costs (TC)

However, the concept of profit needs clarification because there is no standard definition of

what counts as a cost.

Normal profit

In markets which are perfectly competitive, the profit available to a single firm in the long

run is called normal profit. This exists when total revenue, equals total cost. Normal profit

is defined as the minimum reward that is just sufficient to keep the entrepreneur supplying

their enterprise. In other words, the reward is just covering opportunity cost - that is, just

better than the next best alternative. To the economist, normal profit is a cost and is

included in total costs of production.


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Super-normal (economic) profit

If a firm makes more than normal profit it is called super-normal profit. Supernormal profit

is also called economic profit, and abnormal profit, and is earned when total revenue is

greater than the total costs. Total costs include a reward to all the factors, including normal

profit. This means that, when total revenue equals total cost, the entrepreneur is earning

normal profit, which is the minimum reward that keeps the entrepreneur providing their

skill, and taking risks. The level of super-normal profits available to a firm is largely

determined by the level of competition in a market the more competition the less chance

there is to earn super-normal profits.

Super-normal profit can be derived in three general cases:

1. By firms in perfectly competitivemarkets in the short run, before new entrants haveeroded their profits down to a normal level.

2. By firms in less than competitive markets, like firms operating under monopolisticcompetitionand competitive oligopolies, by innovating or reducing costs, and

earning head start profits. These will eventually be eroded away, providing further

incentive to innovate and become more cost efficient.

3. By firms in highly uncompetitive markets, like collusive oligopoliesand monopolies,who can erect barriers to entryprotect themselves from competition in the long run

and earn persistent above normal profits.

Now in the given case we can see that profit margin is very high during initial stage and

because of this, which entered in to the market as an early bird has opportunity to make

super normal profit which attracts competitor to enter market and later on super normal


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profit turns up to normal profit. In the case given during 2004 Sony was charging $ 3999

while at the same time Dell introduced same characteristics product at $ 2999 which helps

to understand that Sony was able to make $ 1000 as a Super Normal Profit.

Ans: 3

As mentioned in the scenario that market is expected to increase by 3% of all TV sets sold in

2004 by 55% in 2005. It can be said there would be price elasticity. Since the supply for flat

panel TV would be increasing as compared to that of 2004 bargaining power of buyers

would be stronger than in 2004. So it can be expected that potential buyers would wait for

more competitors and more substitutes thereby increasing their negotiating and ultimately

better price and superior quality of TV.

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Assignment 4 REAL WORLD-Ans