MGT437H5 Lecture Notes - Lecture 2: Economic Surplus, Profit Margin, Cost Leadership
Document Summary
This chapter develops a conceptual framework for characterizing and analyzing a firm"s strategic position within an industry. A consumer will purchase a product only if the product"s consumer surplus is positive. Moreover, given a choice between two or more competing products, the consumer will purchase the one for which consumer surplus is largest. Value-created by firms must be divided between consumers and producers. Consumer surplus, represents the portion of the value-created that the consumer captures. The seller receives the price p and uses it to pay for the inputs that are needed to manufacture the finished product. The producer"s profit margin, represents the portion of the value-created that it captures. Adding together consumer surplus and the producer"s profit gives us the value-created expressed as the sum of consumer surplus and profit. The firm with the lowest cost can slightly undercut its rivals" prices, capture the entire market, and more than cover its production costs.
