What I KNOW:

Increasing the price of a product following the increase of demand will give the firm an above-average
profit that will only last for a while (which we call short-run) since this event will open opportunities for
the new entrants to come into the industry resulting to an increase of supply and leading to a force
decrease in price. Such continuous turn of events in the industry give rise to the concept of long-run
equilibrium. That is why in the long run, competitive firms earn only an average rate of return. (Chapter
9: Market Structure and Long-Run Equilibrium – Competitive Industries.)
Unlike a competitive firm, a monopoly firm can earn an above-average rate of return for a long time
because of its less elastic demand. Still, it is not permanently protected from the forces of entry and
imitation. (Chapter 9: Market Structure and Long-Run Equilibrium – Monopoly.)
A firm with a success competitive advantage has the ability to earn a positive economic profit and the
strategy to achieve it is through: raising the product’s price or reducing its cost. ( Chapter 10: Strategy:
The Quest to Keep Profit from Eroding – A Simple View of Strategy)
There are 2 sources of economic profit: (1) the industrial organization (IO) economics perspective and (2)
the resource-based view (RBV). The IO perspective focuses on the industry level and assumes that it is
the important element for long-run profitability. According to Michael Porter, the performance of the firm
relates to the environment it competes; suggesting that the way to earn economic profits is to choose an
attractive industry and then develop the resources that will allow you to successfully compete in the
industry. On the other hand, the RBV focuses on the individual firm level stating that the firm can still
achieve sustained performance advantages due to their superior resources – tangible and intangible assets.
(Chapter 10: Strategy: The Quest to Keep Profit from Eroding – Sources of Economic Profit)
A currency devaluation will increase export demand which will help the domestic producers and foreign
consumers but at the same time it reduces supply because it raises the cost of imported parts that hurt
domestic consumers and foreign producers. (Chapter 11: Foreign Exchange, Trade, and Bubbles – The
Effects of a Currency Devaluation)
The ability of assets to move from lower- to higher-valued uses is the force that moves an industry toward
long-run equilibrium. The Indifference Principle has a huge contribution in identifying
There’s a big difference to do when the firm acquired a substitute product and complementary product.
For substitute, it has to raise price on both products to reduce price competition between them, at the
same time raise price more on the low-margin (more price elastic) product, and reposition the products so
that there is less substitutability between them. On the other hand, in acquiring a complementary product,
simply reduce price on both products to increase demand for both products. (Chapter 12: More Realistic
and Complex Pricing – Commonly Owned Complements)
The concepts of different strategic games: In Sequential Move Games, players take turns. Before making
a decision, players observe first all the prior decisions of their rival. To make an outcome is by looking
ahead and reason back. Only way to change outcome is through a credible threat that you will act against
you own self-interests. The Simultaneous Move Games is the opposite of the former. In this game, prior
to knowing the decision of the other party, strategies are already decided. It is a matrix structure and to
change the outcome is to change the game by eliminating an option. (Chapter 15: Strategic Games –
Sequential-Move Games; Simultaneous-Move Games)
The three components of a game are the: the players, strategies, and playoffs. Every game has a Nash
equilibrium. The concept of Nash Equilibrium is presenting the optimal outcome of a game. A pair of
strategies one for each player in which each strategy is a best response to the other. There can be multiple
Nash Equilibria. (Chapter 15: Strategic Games – How to Find Nash Equilibria)
Prisoner’s Dilemma illustrates that rational choices lead to bad outcomes since it is a concept of players
following their own self-interest leading unlikeable outcomes. (Chapter 15: Strategic Games – Prisoners’
Dilemma)
There are two views of Bargaining: Strategic view of Bargaining and Nonstrategic View of Bargaining.
In the former view, bargaining is viewed as a game of chicken. Both parties will try to steer the game to
their preferred equilibrium by committing to a position. One party must bargain hard and one party must
accommodate since if both parties tried to bargain hard at the same time, there will be no deal or
agreement to be perfected. By moving first, you can absolutely have the advantage of having the most
gains from the trade. On the other hand, the latter view focuses on alternatives to agreement that
determine the terms of any agreement. If you can decrease your own gain to reach agreement by
improving your outside option, you become a tougher bargainer per you have less to gain by reaching
agreement. (Chapter 16: Bargaining – Strategic View of Bargaining; Nonstrategic View of Bargaining)