BTM Study Guide

You do not Just read about market behavior and resource allocation. You live it! You are asked to manage a firm in different markets (perfect competition, monopoly, monopolistic competition and oligopoly), similar to the way top-level executives manage in the real world. The purpose is to show you how microeconomics can be used to better understand the market environment and improve the performance of the firm. BET is more than Just a game. It is a dynamic hands-on simulation of the standard market structures that provides an important link between economic theory and application.

The game allows you to see how different markets function and apply microeconomic tools of analysis to try to beat the market. The mechanics of playing the game are very simple. As part of a student team or individually, you compete against firms in a simulated market that are engaged by the computer or other students in the class. The program is menu- driven and requires very little explanation. The general process is to enter your firm’s operating decisions for a given period. You advance to the next time period by pressing the execute button, and you receive immediate feedback.

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The simulation evaluates your decisions relative to the competition and market environment and generates a set of reports that show how well you are doing. You are given a performance rating between O and 100 percent based on your profits compared to the best firm. The microeconomics game will help illustrate and clarify several important theoretical concepts including: How equilibrium is achieved in different markets. How price and production decisions change under various market conditions. How elasticity are used to forecast demand and revenues.

How marginal analysis can be effectively utilized for decision-making. How costs are related to plant size and optimal levels of production. How non-price factors (such as advertising or wage rates) change market demand and supply. How the macroeconomic can affect the firm’s performance. The Four Market Structures The characteristics of each of the market structures in the game selected by the “Instructor” are summarized below: Perfect Competition with an equal market share of 0. 10%. Market share is limited by plant size. Production capacity is a very small fraction of the total market.

Each firm is selling identical products. There is no ability to differentiate each firm’s product. Advertising and product development decisions are not permitted. The firm faces a horizontal demand The firm can sell all it wants at the current market price. Firm price set above the market price will result in no demand. Full information on the market is provided. Information on 20 “representative” firms is provided each period. The performance details of the representative firms are reported in the market research and competitive analysis reports.

Entry and exit of firms occurs as profit levels change in the market New firms enter the market if profits exceed normal levels (defined as $100,000) Firms exit the market if profits fall short of normal levels. Monopoly Only 1 firm is in the market. O The firm has a 100% market share and this does not change. O Firm demand is equal to the market demand. Plant capacity can be changed with 20 different plant sizes. O Economies and discomposes of scale exist, meaning average costs of production change with plant size and the level of production. No entry of rival firms is permitted.

Non-price factors such as advertising and product development may be used to shift market demand. Student success is based on a comparison with other monopolists. O Ten monopoly markets are reported in the simulation game. O Each monopoly market is independent. Monopolistic Competition Twenty-five firms are in the market at the start of the simulation. O Each firm starts tit an equal market share of 4%. O Market share is limited by plant size. The largest plant size and production capacity are a small fraction of the total market. Product differentiation is possible but limited. O Advertising and product development decisions are permitted.

Firm demand is negatively sloped but there is limited market power. O Firm price sensitivity of demand is high (elastic) and affected by the number of firms in the market. Entry and exit of firms occur as profit levels change in the market o New firms enter the market if profits exceed normal levels (defined as $100,000) 2 Firms exit the market if profits fall short of normal levels. Information is provided on 15 of the 25 firms in the market. O The performance details of the 15 reports. Oligopoly Five firms are in the market. O Each firm starts with an equal market share of 20%. Market share may grow significantly with increases in plant size and productive capacity. Economies and discomposes of scale exist, meaning average production costs change with plant size and the level of production. Significant product differentiation is possible. O Advertising and product development decisions are permitted. Price elasticity is affected by non-price factors such as product development. Market power exists but mutual interdependence is high. O One firm can significantly affect its rivals in the market. O Rivals react to changes in market share and to pricing policies of competitors. Price wars may occur o A dominant firm or price leader may emerge. No entry or exit of firms is permitted. Macroeconomic Conditions and Random Events One of the five conditions are selected for each game by the “Instructor”: Stable Economy – no change in GAP or ICP Economic Growth – increasing GAP and ICP Business Cycles – period growth followed by decline in GAP and ICP Unknown Economy – randomly selected GAP and ICP Random Economic Events (shocks) – select yes to allow or no to disallow The macroeconomic will affect the market demand and costs of doing business.

During the game you will receive forecasts of the GAP (gross domestic product index), ICP (consumer price index), and other relevant economic events. The level of economic growth and the severity of the business cycles will change with each new game. If random economic events are allowed, there is a 30% chance each erred of the game that an important economic event will occur that will affect either market demand or supply. The nature and magnitude of the random events will change with each new game.

You will be informed a period in advance in the market research report of any random economic events that will occur so you may adjust your decisions. 3 Section 2: How to Register & Simulation Game Procedure On Line Registration You will be given a Course ID by the instructor which is necessary to register for the correct course. Go to the log on screen at www. Bedmate. Com . Press “Subscribe” for New Students to register and follow the instructions for a student. The promo code is optional and only available if given to you by the instructor. In most cases, it is not provided to students.

If you are given a promo code, enter it when you subscribe. You password for your account will be emailed there. After receiving the password, you will go back to the login screen, enter the surname and the password. Once on-line as a student, to change the password go to Account, Other Information, Password , press EDIT and follow the instructions. Simulation Game Procedure 1. Obtain the Simulation It is now time to play the game and see how it works. Go to www. Bedmate. Com, enter your user name and password, press the coursework tab and then select the GAME your instructor assigned from the list.

The details of the game are summarized on this screen. Simply press PLAY to begin. The SUMMARY screen (figure 2. 1 below) provides a summary report on your results compared to the best firm in the marketplace, an animated Reaction of your performance, a graphical representation & guidance by a CONSULTANT. The consultant is an expert in the field & will be very helpful. Figure 2. 1: Summary Screen 2. Game Objective and Decision Making Process Objectives: The game objective is to maximize the long-run profits of your firm. Long-run profits are measured by cumulative net profits over the number of periods of simulated play.

You have been hired as the President of the Company and/or are a Vice President and Board Member. The owners selected you hoping that you will be able to help them achieve the highest level of profits in the long run. You have been given full authority to implement whatever strategies and tactics you believe are most effective. Your performance as President or member of the management board will e measured each period by your firm’s profit compared to the other firms in the market. At the start of the simulation your rating is 100%, and will stay that level if you are the top performing company.

Decision Making Process: Many students ask the question “How do we begin to make decisions to achieve our objectives in the game? ” There are three major suggestions: 1. Review what the on line “CONSULTANT” suggests. 2. Click on the INFORMATION BUTTON next to each decision and read the suggested process. 3. Utilize the scientific method described below. The scientific method involves the following steps: Define the problem (what is going wrong or right? ) by studying the reports Formulate a hypothesis (or strategy) Enter decisions and make predictions of your results applying the economic concepts learned in the class and textbook.

Evaluate performance by testing the accuracy of the predictions by comparing it to the game performance. Accept or revise the hypothesis (or game strategy) based on the test results. We view the application of the scientific method as an important educational benefit that the “critical thinking” skills. These skills will help you to succeed in many different tuitions in your chosen career as well as in life. 3. Study Reports Begin by reviewing the information on the SUMMARY tab which includes guidance from your on-line CONSULTANT. Then select the STUDY tab (see Figure 2. ) which will reveal the following reports: Firm Profit Statement: Revenues, costs, and profits each period. Demand and Supply Reports: Firm demand, supply, shortages, and market share Market Research: Number of firms, market demand and market supply Economic news relevant to market 5 Macroeconomic data on GAP and ICP Competitive Analysis: Decisions and key results of rivals Section 4 gives a detailed discussion of each of these reports. 4. Make Decisions Make and enter decisions after reviewing your reports. A detailed description of each decision and its likely impact is given in Section 3.

Depending on the game there can be as little as Just two decisions. Note the information buttons listed to the right of each decision entry box. Clicking these buttons will give you valuable information and advice about each of these decisions (Fig. 2. 2). Figure 2. 2: Enter demand and supply decisions (Simpler Games may only have two decisions: Price & Production) 5. Execute Simulation This only applies to the single player game when you are competing only against computer managed firms. For the multi-player game the Instructor or Game Administrator will execute the simulation.

The “execute button” will advance the simulation to the next period of play. You can assume a period of play is 3 months in time. Simply press the execute button on the top right hand side of the screen for the single player game. “Executing” the simulation will take all the decisions of your firm, and the rival firms managed by the computer or other players, and given the state of the economy and rent events, evaluate your 6 performance. A new set of reports will be generated, and you will be informed of your profit rating from 0-100%. 6. Save Simulation the simulation game.

This will enable you to review and better understand your performance after you completed a game. You may study your decisions and results each period of the game and evaluate what you have done. 7. Evaluate and Graph Results A graphics module may be accessed by clicking the “Graph” tab on the toolbar. This is a powerful tool to help you visualize the relationships between the decisions and exults in the game. Figure 2. 3: Make graphs to analyze your performance Up to three variables are able to be graphed for each period. A drop-down menu button on the right offers a list of different variables you may choose to graph.

You may select different types of graphs including: BAR, LINE, SCATTER , CURVED, AREA and STEP. You may select a subset of periods to graph by clicking the down arrow key next to “Select Beginning Period” and “Select Ending Period”. You may select any two firms to graph; it does not have to be your own firm, by choosing “Graph Firm” and “Compare with Firm”. 7 Once you have made all your selections simply click on “Graph” to see the results. If you have the spreadsheet program Excel, you may “Click To View Data in Spreadsheet Format”. The data for each period in the game and for each firm is exported.

This option opens up the door to a wide array of sophisticated statistical data analysis and other graphics. Section 3: Description of Game Decisions The purpose of this section is to describe the game decisions and their effects on the firm in the simulation. The decisions, based on their impacts on the firm, are placed into two broad categories: demand and supply. The demand decisions affect, directly, the quantity of units demanded and the revenues of the firm whereas the supply decisions affect the production and costs of goods. The DECISION ENTRY FORM, (Figure 3. ) accessed from the main menu by clicking DECISIONS, lists the demand and supply decisions. The number of decisions that appear on the screen depend on the learning level of the game selected by the instructor. The most advanced games may include 8 decisions. The simplest game only has price and production. At the start of each new quarter, the decision values are the same as those from the previous quarter. It is up to you to decide to change the decisions or keep them the same as last quarter. Figure 3. 1 : Sample Decisions for Quarter or Quarter 1 8 Demand Decisions selected by the instructor.

The four demand decisions are price, advertising, product development, and e-commerce enhancements. Each decision and its impact on the firm are explained below. Price The price is the dollar amount you are asking your customers to pay for your product. In quarter 1 it is listed as $75. 11 unless you change it. In general, if you raise price you should expect to lose some customers (assuming your competitors do not raise rice). How significantly a change in your price will impact firm demand depends on the market structure and the price elasticity of demand.

Clicking the information button next to the price decision (Fig. 3. 1) will give you the PRICING INFORMATION screen (Fig. 3. 2). You are given the price elasticity from last quarter. For example, a price elasticity of -2. 86 means that a 1% increase in price will decrease quantity demand by 2. 86%; or lowering price 1% will increase quantity demanded by 2. 86%. The price elasticity is a useful tool to forecast demand. As an example, suppose the rim was considering lowering price from $75. 11 to $72. 11, which is a decrease of 4%.

The percent change in quantity demanded is equal to the percent change in price times the elasticity value. Using the price elasticity of -2. 86, the expected percent change in quantity demanded would be 1 1. 4% (-4% x -2. 86). Figure 3. 2: Making pricing decisions 9 Remember the price elasticity could change from quarter to quarter. Price elasticity depends on a number of factors in the game, including: Competitiveness of the market reflected by the number of rivals Price level (a higher firm price will increase elasticity)

Advertising and e-commerce enhancements relative to the competition Product quality affected by product development expenditures Macroeconomic conditions (growth versus contraction) Other economic factors such as changing consumer preference, demographics, etc. Studying the market research reports in the game will help you assess how these factors are changing. The impact of price on revenues is measured by marginal revenues. In this example, the marginal revenue (MR.) for last quarter is reported as $38. 67. This means a one unit increase in quantity demanded will increase revenues by $38. 67.

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