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Lecture 4

MGEC40H3 Lecture Notes - Lecture 4: Economic Surplus, Marginal Cost

Economics for Management Studies
Course Code
Jack Parkinson

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MGEC40 Lecture 4
Benefits of using the market
1. External supplier costs are lower due to scale economies, scope economics, and learning
economies and enough competition exists so that there is a better price
2. Your own internal costs may fall due to
... Agency costs
Costs related to goofing off on the job
Cost of the lost output due to goofing and cost of the firm trying to reduce the goofing off
... Influence costs
Costs of misallocation and things like having a bigger office with a bigger title
Problems of mergers and acquisitions
Mergers may drive up costs
Advantages of vertical integration
1. Entry deterence
- entry of new firms
- ex.) selling branded UTSC mugs... Didn't want to enter the market because if
successful, the supplier will cut you off
- depends on the nature of the firm
2. Avoid monopoly distortions
- if there are two monopolies in a vertical chain, there is a possibility of the two
monopolies merging
- they'd set their price higher than marginal cost
- the merged firm is more profitable than the sum of two separate monopolies
- Dwl is also smaller and higher consumer surplus
- interesting because the firm earns more profit and yet consumers and government are
still happy
- this has to be for monopolies that are at separate stages on the vertical side. So it's not
like Bell and Rogers merging but something like the design and mining of stones for
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