case, profits one year from today will be (1 + g) π 0
managerial economics issues into
▪ Ex-Dividend Date
- value of the firm immediately after its current
profits have been paid out as dividends
- may be obtained by simply subtracting the
dividend π 0 from the equation:
Formula: PV Ex−Dividend Firm =¿
account, while the goal of maximizing total benefits
does not.
• Discrete
120
MC=8 ( 15 ) =120
Determine the maximum level of net
benefits at this level of Q?
MNB=MB−MC
MNB=300 ( 15 )case, profits one year from
today will be (1 + g) π 0
▪ Ex-Dividend Date
- value of the firm immediately after its current
profits have been paid out as dividends
- may be obtained by simply subtracting the
dividend π 0 from the equation:
Formula: PV Ex−Dividend Firm =¿
account, while the goal of maximizing total benefits
does not.
• Discrete
120
MC=8 ( 15 ) =120
Determine the maximum level of net
benefits at this level of Q?
MNB=MB−MC
MNB=300 ( 15 )−6(15¿ ¿2)−4(15 ¿¿ 2) ¿ ¿
MNB=4,500−1,350−900=2,250
*2,250 is the amount at which the engineering
firm maximizes profits*
• FIVE FORCES FRAMEWORK
INDUSTRY PROFITABILITY:
- pioneered by Michael Porter
- this framework organizes many complex
five
categories/forces that impact the sustainability of
industry profits and state of competition
- is primarily a tool for helping managers see the
"big picture"
- it is a schematic you can use to organize various
industry conditions that affect industry profitability
and assess the efficacy of alternative business
strategies
- it would be a mistake to view it as a
comprehensive list of all factors that affect industry
profitability
- it is not a substitute for understanding the
economic principles that underlie sound business
decisions
- can be used to identify state of competition and
profitability of an industry
►NOTE
- A key theme of this textbook is that many
interrelated forces and decisions influence the level,
growth, and sustainability of profits.
1. ENTRY
- heightens competition and reduces the margins of
existing firms in a wide variety of industry settings
- can come from a number of directions (including
the new formation of new companies)
- a number of economic factors affect the ability of
entrants to: (GREENSS) — Government restraints,
Reputation, Economic costs, Economies of scale,
Network effects, Sunk costs, Switching costs
- can come from a number of directions — ex. apple
now also sells the popular iPhone
2. POWER OF INPUT SUPPLIERS
- industry profits tend to be lower when suppliers
have the power to negotiate favorable terms for
their inputs
- supplier power tends to be low when inputs are
relatively standardized and relationship-specific
investments are minimal, input markets are not
AND highly concentrated or alternative inputs are
available with similar marginal productivity
- (RSSPG) — Relationship-specific investments,
Supplier concentration, Supplier switching costs,
Price/Productivity of alternative inputs, - it is not a substitute for understanding the
Government restraints economic principles that underlie sound business
decisions
- can be used to identify state of competition and
3.) POWER OF BUYERS
profitability of an industry
- industry profits tend to be lower when
customers/buyers have th case, profits one year ►NOTE
from today will be (1 + g) π 0
- A key theme of this textbook is that many
interrelated forces and decisions influence the level,
▪ Ex-Dividend Date growth, and sustainability of profits.
- value of the firm immediately after its current
profits have been paid out as dividends
- may be obtained by simply subtracting the
dividend π 0 from the equation: 1. ENTRY
Formula: PV Ex−Dividend Firm =¿ - heightens competition and reduces the margins of
account, while the goal of maximizing total benefits existing firms in a wide variety of industry settings
does not. - can come from a number of directions (including
• Discrete the new formation of new companies)
120 - a number of economic factors affect the ability of
MC=8 ( 15 ) =120 entrants to: (GREENSS) — Government restraints,
Reputation, Economic costs, Economies of scale,
Determine the maximum level of net Network effects, Sunk costs, Switching costs
benefits at this level of Q? - can come from a number of directions — ex. apple
now also sells the popular iPhone
MNB=MB−MC
MNB=300 ( 15 )−6(15¿ ¿2)−4(15 ¿¿ 2) ¿ ¿ 2. POWER OF INPUT SUPPLIERS

MNB=4,500−1,350−900=2,250 - industry profits tend to be lower when suppliers

have the power to negotiate favorable terms for
*2,250 is the amount at which the engineering their inputs
firm maximizes profits* - supplier power tends to be low when inputs are
relatively standardized and relationship-specific
investments are minimal, input markets are not
• FIVE FORCES FRAMEWORK AND highly concentrated or alternative inputs are
INDUSTRY PROFITABILITY: available with similar marginal productivity
- (RSSPG) — Relationship-specific investments,
- pioneered by Michael Porter Supplier concentration, Supplier switching costs,
- this framework organizes many complex Price/Productivity of alternative inputs,
managerial economics issues into five Government restraints
categories/forces that impact the sustainability of
industry profits and state of competition
- is primarily a tool for helping managers see the 3.) POWER OF BUYERS
"big picture" - industry profits tend to be lower when
- it is a schematic you can use to organize various customers/buyers have the power to negotiate
industry conditions that affect industry profitability favorable terms for the products/services produced
and assess the efficacy of alternative business in the industry
strategies - in most consumer markets, buyers are fragmented
- it would be a mistake to view it as a and thus buyer concentration is low — Buyer
comprehensive list of all factors that affect industry concentration and hence customer power tend to be
profitability higher in industries that serve relatively few "high-
volume" customers and it tends to be lower in
industries where the cost to customers of switching
to other products is high
- if the buyer is price sensitive and well-educated
about the product, then buyer power is high
- then if the customer purchases large volumes of
standardized products from the seller, buyer
bargaining power is high
- if substitute products are available on the market,
buyer power is high
- (BCGRP) — Buyer concentration, Customer
switching costs, Government restraints,
Relationship-specific investments, Price/Value of
substitute products/services
4. INDUSTRY RIVALRY
- the sustainability of industry profits also depends
on the nature and intensity of rivalry among firms
competing in the industry
- rivalry tends to be less intense (and hence the
likelihood of sustaining profits is higher) in
concentrated industries — that is, those with
relatively few firms
►NOTE
- The level of product differentiation and the nature
of the game being played — whether firm's
strategies involve prices, quantities, capacity, or
quality/service attributes also impact profitability.
5. THREAT OF SUBSTITUTES AND
COMPLEMENTS
- the level and sustainability of industry profits also
depend on the price and value of interrelated
products and services
- Porter's original five forces framework
emphasized that the presence of close substitutes
erodes industry profitability
- the availability of a substitution threat affects the
profitability of an industry because consumers can
choose to purchase the substitute instead of the
industry's products
“Anyone who is willing to learn the
language of economics and take the time to
practice making decisions can learn to be
an effective manager.”
e power to negotiate favorable terms for the
products/services produced in the industry
- in most consumer markets, buyers are fragmented
and thus buyer concentration is low — Buyer
concentration and hence customer power tend to be
higher in industries that serve relatively few "high-
volume" customers and it tends to be lower in
industries where the cost to customers of switching
to other products is high
- if the buyer is price sensitive and well-educated
about the product, then buyer power is high
- then if the customer purchases large volumes of
standardized products from the seller, buyer
bargaining power is high
- if substitute products are available on the market,
buyer power is high
- (BCGRP) — Buyer concentration, Customer
switching costs, Government restraints,
Relationship-specific investments, Price/Value of
substitute products/services
4. INDUSTRY RIVALRY
- the sustainability of industry profits also depends
on the nature and intensity of rivalry among firms
competing in the industry
- rivalry tends to be less intense (and hence the
likelihood of sustaining profits is higher) in
concentrated industries — that is, those with
relatively few firms
►NOTE
- The level of product differentiation and the nature
of the game being played — whether firm's
strategies involve prices, quantities, capacity, or
quality/service attributes also impact profitability.
5. THREAT OF SUBSTITUTES AND
COMPLEMENTS
- the level and sustainability of industry profits also
depend on the price and value of interrelated
products and services
- Porter's original five forces framework
emphasized that the presence of close substitutes
erodes industry profitability
- the availability of a substitution threat affects the
profitability of an industry because consumers can
choose to purchase the substitute instead of the
industry's products
“Anyone who is willing to learn the
language of economics and take the time to
practice making decisions can learn to be
an effective manager.”
−6( 15¿¿ 2)−4 (15¿¿ 2) ¿ ¿
MNB=4,500−1,350−900=2,250
*2,250 is the amount at which the engineering
firm maximizes profits*
• FIVE FORCES FRAMEWORK AND
INDUSTRY PROFITABILITY:
- pioneered by Michael Porter
- this framework organizes many complex
managerial economics issues into five
categories/forces that impact the sustainability of
industry profits and state of competition
- is primarily a tool for helping managers see the
"big picture"
- it is a schematic you can use to organize various
industry conditions that affect industry profitability
and assess the efficacy of alternative business
strategies
- it would be a mistake to view it as a
comprehensive list of all factors that affect industry
profitability
- it is not a substitute for understanding the
economic principles that underlie sound business
decisions
- can be used to identify state of competition and
profitability of an industry
►NOTE
- A key theme of this textbook is that many
interrelated forces and decisions influence the level,
growth, and sustainability of profits.
1. ENTRY
- heightens competition and reduces the margins of
existing firms in a wide variety of industry settings
- can come from a number of directions (including
the new formation of new companies)
- a number of economic factors affect the ability of
entrants to: (GREENSS) — Government restraints,
Reputation, Economic costs, Economies of scale,
Network effects, Sunk costs, Switching costs
- can come from a number of directions — ex. apple
now also sells the popular iPhone
2. POWER OF INPUT SUPPLIERS
- industry profits tend to be lower when suppliers
have the power to negotiate favorable terms for
their inputs
- supplier power tends to be low when inputs are
relatively standardized and relationship-specific
investments are minimal, input markets are not
highly concentrated or alternative inputs are
available with similar marginal productivity
- (RSSPG) — Relationship-specific investments,
Supplier concentration, Supplier switching costs,
Price/Productivity of alternative inputs,
Government restraints
3.) POWER OF BUYERS
- industry profits tend to be lower when
customers/buyers have the power to negotiate
favorable terms for the products/services produced
in the industry
- in most consumer markets, buyers are fragmented
and thus buyer concentration is low — Buyer
concentration and hence customer power tend to be
higher in industries that serve relatively few "high-
volume" customers and it tends to be lower in
industries where the cost to customers of switching
to other products is high
- if the buyer is price sensitive and well-educated
about the product, then buyer power is high
- then if the customer purchases large volumes of
standardized products from the seller, buyer
bargaining power is high
- if substitute products are available on the market,
buyer power is high
- (BCGRP) — Buyer concentration, Customer
switching costs, Government restraints,
Relationship-specific investments, Price/Value of
substitute products/services

4. INDUSTRY RIVALRY
- the sustainability of industry profits also depends
on the nature and intensity of rivalry among firms
competing in the industry
- rivalry tends to be less intense (and hence the
likelihood of sustaining profits is higher) in
concentrated industries — that is, those with
relatively few firms

►NOTE
- The level of product differentiation and the nature
of the game being played — whether firm's
strategies involve prices, quantities, capacity, or
quality/service attributes also impact profitability.

5. THREAT OF SUBSTITUTES AND

COMPLEMENTS
- the level and sustainability of industry profits also
depend on the price and value of interrelated
products and services
- Porter's original five forces framework
emphasized that the presence of close substitutes
erodes industry profitability
- the availability of a substitution threat affects the
profitability of an industry because consumers can
choose to purchase the substitute instead of the
industry's products

“Anyone who is willing to learn the

language of economics and take the time to
practice making decisions can learn to be
an effective manager.”