# Special Issues of Microeconomics

- Credits: 6
- Ending: Examination
- Range: 2P + 2C
- Semester: winter
- Faculty of Business Management

## Teachers

## Included in study programs

**Teaching results**

Knowledge:

• Expanding the knowledge base of microeconomic models with a focus on their applicability in real economic life in firm´s decision-making, their creation on the basis of accessible real data and the change in the firm´s decision-making in different market structures. The course includes the expansion of the knowledge base for effective managerial decision making of the firm using microeconomic models and commonly available as well as specialized software.

Competence:

• Effective using of knowledge of microeconomic market functioning, estimation of demand and supply functions in real market conditions, impact of introduction/change of subsidies and direct taxes on market equilibrium as well as firms' decision making.

• Identify and characterize the factors influencing the demand for firms' products as well as quantify and identify the strength and direction of the relationship between demand and selected factors influencing it.

• Gaining knowledge of new product introduction through the creation of diffusion models as well as the use of these models in the decision-making process for the introduction of new products into the market.

• Introduction and application of various possibilities for estimating parameters of diffusion models of new product introduction to the market, as well as demonstration of the use of commonly available, but also special software for estimating the parameters of these models and the applicability of the models in firm´s decision-making.

• Evaluate the diversity of the results obtained, select and defend the choice of the proposed model and its parameters with respect to the firm´s objectives.

Skill:

• Identify the relevant factors influencing demand and supply as well as estimate these functions for firms' decision-making and planning needs.

• Analyze the impact of exogenous factors on the market equilibrium and decision making of firms operating in different market structures.

• Construct and use models of new product introduction in firm decision making.

• Interpret the results obtained by the selected microeconomic models for the purpose of decision making on the entry or introduction of an innovation in the selected market.

**Indicative content**

Thematic definition of lectures:

1. The impact of selected factors on the equilibrium change and the level of consumer´s, producer´s surplus and economic welfare in a competitive market

2. Estimation of demand and supply functions from real data

3. Innovation and new products

4. Hype cycle

5. New product introduction models – Durable goods

6. Bass diffusion model – possibilities of its use and estimation of model parameters

7. New product introduction models – Non-durable goods, Model Assessor

8. Market structure of imperfect competition

9. Quantity competition on oligopoly market

10. Price competition on oligopoly market

11. Oligopoly with partially differentiated production

12. Advertising expenditure models

Thematic definition of exercises:

1. Introduction

2. Demand, supply and economic welfare

3. The impact of selected factors on producer´s, consumer´s surplus and economic welfare

4. Identification of factors influencing demand, supply for the selected product

5. Demand and supply function estimation from real data

6. Assignment and preparation of the 1st seminar paper

7. 1st seminar paper presentation

8. Innovation, new products, Hype cycle

9. Bass diffusion model

10. Bass model parameter estimation

11. Model Accessor

12. Assignment and preparation of the 2nd seminar paper

**Support literature**

1. BASS, Frank M. A New Product Growth Model for Consumer Durables. In Management science (15), pp 215 – 227, 1969.

2. GOLDER , P. N. - TELLIS , G. J. Will it Ever Fly? Modelling the Takeoff of Really New Conumer Durables. In: Marketing Science (16), s. 256 – 270, 1997.

3. CHANDRASEKARAN, D. - TELLIS, G. J. A Critical Reviw of Marketing Research on Diffusion of New Products. In Review of Marketing, s. 39-70, 2007.

4. LILIEN, G. L., - RANGASWAMY, A. (2004). Marketing Engineering. Bloomington, USA: Trafford Publishing, 2004.

5. MAHAJAN, V. - MULLER, E. - SRIVASTAVA, R. K. (1990). Determination of Adopter Categories sing Innovation Diffusio. Marketing Science, 27, 37 - 50.

6. SCHMITTLEIN, D. C. - MAHAJAN, V. (1982). Maximum Likelihood Estimation for an Innovation Diffusion Model of New Product Acceptance. Marketing Science, 1, 57-78.

7. SRINIVASAN, V. - MASON, Ch. H. Nonlinear Least Squares Estimation of New Product Diffusion Models. In Marketing Science, 5(2), s. 169 – 178, 1986.

8. GOLD, I. - EHM, H. - PONSIGNON, T. - AFRIDI, M. T. (2019, December). Applying Diffusion Models to Semiconductor Supply Chains: Increasing Demand by Funded Projects. In 2019 Winter Simulation Conference (WSC) (pp. 2384-2395). IEEE

9. MAJDÚCHOVÁ, Helena - GAJDOVÁ, Denisa - ŠTETKA, Peter. Entrepreneurship education in Visegrad countries. In Entrepreneurship education in Visegrad Group countries. - Plzeň : NAVA, 2015. 37-61 s. ISBN 978-80-7211-479-5.

10. ŠTETKA, Peter - ŠLOSÁR, Róbert - MAJTÁN, Štefan. The Role of cultural diversity in new product sales forecasting. In Studia Ekonomiczne : Zeszyty naukowe Uniwersytetu ekonomicznego w Katowicach. - Katowice : Wydawnictwo Uniwersytetu ekonomicznego w Katowicach, 2016. ISSN 2083-8611, 2016, nr. 280, s. 199-211.

**Syllabus**

Thematic definition of lectures: 1. The impact of selected factors on the equilibrium change and the level of consumer´s, producer´s surplus and economic welfare in a competitive market The previous analysis is extended by the theoretical insights into the impact of the introduction of taxes, subsidies, price floors and price ceilings in the first step on the equilibrium in the market under analysis; in the second step, the analysis focuses on the impact of the introduced government measures on the level of consumer´s, producer´s surplus and economic welfare. 2. Estimation of demand and supply functions from real data Options for estimating demand and supply functions from real data identification, with emphasis on estimating linear functions using information about prices, saled or produced production and price elasticity of demand. As part of the problem, the own price elasticity of demand, the possibilities of its calculation (point, arc, ...) are presented. Its different value over time and in case of availability/unavailability of substitute goods is also applicated with real data. Envelope theorem explanation as a method for estimation linear demand and supply functions. 3. Innovation and new products Approaches to defining a new product or service - enterprise-oriented, product-oriented, service-oriented, market-oriented and consumer-oriented definitions of innovation, explaining the relationships between them and their relevance to new product introduction models. Familiarization with concepts such as new product, innovation, its different types, possibilities to increase the acceptance of innovation by potential consumers. Finally, we look at the different types of new product adopters over time - i.e. which type of consumer adopts a product first and which consumers need recommendations or more time to decide to try and adopt a product. 4. Hype cycle The creation and use of hype cycle curves, which provide information about the of a new product early stages of the development cycle and where the product is in the development cycle. The hype cycle presentation focuses on well-known products such as 3D printers, electronic book readers, quantum computers, augmented reality and others. Some of the selected products are in the stable production phase, some are only at the beginning of their hype cycle for many years, and some have been eliminated from the news tracking. 5. New product introduction models – Durable goods Familiarization with the conditions and rules for Bass diffusion model creations. This model is used in the introduction of new consumer durables. Explanation and clarification of the so-called basic Bass equation and its extensions - introduction of marketing variables, introduction of change in the number of consumers, introduction of the competitive effect, distribution of the introduction and consumer adoption phases. 6. Bass diffusion model – possibilities of its use and estimation of model parameters Possibilities of using the Bass model in real market conditions during deciding period of new product introduction. Estimation of the market share, estimation of the coefficient of innovation and imitation (the so-called coefficients of external and internal diffusion of products), forecast of sales of the new product. Options for estimating the parameters of the Bass model, with emphasis on the available estimation options, i.e. via MS Excel or Enginius, which is freely available and usable also for the introduction of short-term products. 7. New product introduction models – Non-durable goods, Model Assessor The second presented model of new product introduction is used for non-durable goods. The Accessor model consists of two parts - a preference model and a retry model, and is only used when the product packaging and advertising are ready and the firm has at least an idea of the marketing mix of the product. For the above model, all its parts will be explained as well as the exact procedure of implementation in the company. 8. Market structure of imperfect competition The last thematic area of the course is imperfect market structures and the formation of equilibria within them. Identification of the types of imperfect market structures on the supply side, but also on the demand side, the conditions under which they occur and their comparison with each other. In the following analyses we will discuss the formation of equilibria in an oligopolistic market in the case of quantity competition, price competition and for partially differentiated production. 9. Quantity competition on oligopoly market Two models are studied in quantity competition: simultaneous quantity determination (Cournot equilibrium) and quantity leadership (Stackelberg equilibrium). We give a general solution of these two equilibria and an analysis of the stability of the equilibria found when some parameters of the model are varied. Also, the strengths and weaknesses of the so-called quantity competition are presented and analyzed. 10. Price competition on oligopoly market Bertrand's model of price competition was first introduced in a review of the Cournot equilibrium. That basic model was later extended to include the so-called price leader model. In both of these models, oligopolists set the price of their output and let the market determine the quantities sold by the oligopolists. Price competition can lead to a so-called price war and to prices at the marginal cost level of the lowest cost firm. For these models, the general solution, their strengths and weaknesses, as well as the analysis of the stability of the equilibrium state under changes in the parameters of the model are examined. 11. Oligopoly with partially differentiated production Under current market conditions, there are almost never perfectly homogeneous goods. Every producer tries to differentiate itself from its competitors at least in small ways. This effort can be introduced into oligopoly models by means of output differentiation coefficients. We focus on the construction of Cournot and Stackelberg equilibria in the case of partial output differentiation, the comparison of these equilibria with those in the case of homogeneous output, and the investigation of the stability of the model’s equilibria. 12. Advertising expenditure models The end of the semester is devoted to combining two topics already covered. This is the connection of the Bass equation describing the diffusion of a new product and oligopoly models. The Cournot model of oligopoly is used to calculate the equilibrium conditional on oligopolists maximizing their profits from the new product, considering advertising expenditures and the rate of diffusion of the product through the market. Thematic definition of exercises: 1. Introduction Familiarization with the requirements for obtaining the exam and the course of the semester. During the semester, seminar papers related to the topics covered will be prepared and presented in smaller study groups. Each seminar paper as well as its presentation, will be evaluated and at the end of the semester students will receive a grade after answering theoretical questions. 2. Demand, supply and economic welfare Solving a case study for finding a market equilibrium. Calculating the rents of producers, consumers and economic welfare, first for linear, then for non-linear demand and supply functions. In the case of nonlinear functions, recapitulation of the calculation of certain integrals is required. 3. The impact of selected factors on producer´s, consumer´s surplus and economic welfare Synthesis of knowledge and understanding from previous weeks of the semester and previously acquired knowledge in microeconomics and macroeconomics. The impact of the introduction of taxes, subsidies, production and import quotas on the equilibrium state of the market, as well as their impact on the level of producer´s and consumer´s surplus, is analyzed and calculated. The analysis then focuses on calculating the inefficiency of the above instruments through deadweight loss. Finally, the share of producers and consumers in the benefits (costs) from the above measures is analyzed. 4. Identification of factors influencing demand, supply for the selected product Students divided on smaller study groups first try to identify the factors that may have influenced the change in the demand (supply). They then make assumptions about the direction of influence of these factors and the intensity of their impact. In the case of quantifiable factors (e.g. weather, population, average monthly wage, etc.), they have to find relevant data on the development of the indicators and verify their assumptions by means of correlation analysis. They make this analysis on the base of sales volume of selected product. 5. Demand and supply function estimation from real data Students within the formed study groups apply the envelope theorem to estimate the parameters of a linear demand and supply function from real data. In this step of the solution they are provided with data on the volume of fuel sold and its average price in Slovakia. After correct application of the above method, they have to identify the equilibrium state of the gasoline market. Once the equilibrium is identified, the impact of a change in the level of excise duty on the equilibrium and on the amount of tax revenue to the government is analyzed. Subsequently, the results of the introduction of the tax in different time periods are compared and the effectiveness or ineffectiveness of its introduction is evaluated. 6. Assignment and preparation of the 1st seminar paper Formation of study groups (by random draw) for the first seminar paper preparation. The working group chooses the product - the object of their study. It is necessary to obtain information about the production and prices of selected product, to estimate the demand and supply function, to calculate the market equilibrium. Then, depending on the type of product, the impact on the market equilibrium of a tax change, the introduction of a subsidy or a production quota is analyzed. Calculation of the amount of producer surplus, consumer surplus, government revenue/expenditure, the amount of deadweight loss before and after market interventions. Conclusions formulation about the functioning of the analyzed good and services market formulation. 7. 1st seminar paper presentation The exercise is devoted to the presentation of the achieved results of the investigation of demand, supply, equilibrium state and their changes of the selected product. The students have to master the presentation of the selected product as well as the interpretation of the obtained results and the reactions within the resulting discussion. As students have been working on the assignment during the exercise, interaction is expected not only within the teams formed but also between them. The above situation encourages more discussion and sharing of successes as well as failures in the data acquisition phase as well as in the actual calculations. 8. Innovation, new products, Hype cycle Discussion and identification about well-known new products and innovations. Then students search for technological innovations that could be included in Hype cycle. This is followed by a comparison of their perceptions of new products and innovations with the real, most recently published Hype cycle curve of technological innovations. The discussion is triggered by the comparison of students' ideas and real data on the rationale for the creation and formation of Hype cycle curves and on the search for them also for non-technological innovations. 9. Bass diffusion model Bass diffusion model parameters estimation on real durable product sales data (analysis of household internet connectivity in V4 countries). On the basis of the theoretical knowledge already presented and knowledge of working with statistical databases, the students first search in four smaller groups for information on the number of households with internet connection in each V4 country. Then they estimate the parameters of the Bass equation for the diffusion of Internet connections in households in V4 countries. MS Excel and Enginius are used to estimate the parameters. 10. Bass model parameter estimation After estimating the parameters of the Bass model using the nonlinear least squares method, students compare the estimated form of the equation with the real Internet connection diffusion. They make simulations of the found parameters at different initial values of the coefficients of innovation, imitation and saturated demand. Then they make a related goods method analysis - i.e. they do not use the non-linear least squares method to estimate the parameters, but the product analogy method (parameters estimated for similar products), parameter estimates obtained by the marketing software Enginius, comparison and selection of the most appropriate method of estimating for the diffusion of Internet connectivity in each V4 country. 11. Model Accessor Accessor model application to the introduction of a selected new non-durables product. The Enginius program developed for the creation of marketing analyses will be used for the processing. Students are introduced to the Accessor module. They analyze the introduction of a selected new product on the basis of the answers generated by the programme. 12. Assignment and preparation of the 2nd seminar paper After randomly dividing the students into working groups, the second assignment of the course is explained and given to them. It is about their selection of a new durable product. The task is to estimate the parameters of the Bass model for the chosen product by means of the nonlinear least square’s method, the analogy method and by using the Enginius program for the extended Bass model, which considers the marketing variables. The results obtained for the selected product are compared and the best method of estimating the parameters is recommended with a justification of the choice. The second part of the assignment analyses impact of selected factors on the chosen product demand. Correlation analysis is used on this last part of seminar paper.

**Requirements to complete the course**

40 % semester work, 60 % combined examination

**Student workload**

156 h (Lectures participation 26 h, active seminar participation 26 h, preparing for the seminar 26 h, preparing semester papers 26 h, preparing for final exam 52 h)

**Language whose command is required to complete the course**

Slovak

Date of approval: 09.02.2023

Date of the latest change: 14.05.2022