1.5 Perfect competition, imperfectly competitive markets and monopoly

Question 1

what is a market structure

Answer 1

a market structure is concerned with how the market is organised

Question 2

what does market contestability mean

Answer 2

ease in which new firms can enter the market

Question 3

in what conditions is there more contestability

Answer 3

lower barriers to entry

Question 4

what happens when there’s more market power in a market

Answer 4

less efficiency

Question 5

depict the spectrum of market structures.

Answer 5

Question 6

each market structure can be characterised by (3)

Answer 6

• number of firms in the market
• the degree of product differentiation
• ease of entry into the market

Question 7

• number of firms in the market

Answer 7

the more firms, the more competitive

Question 8

• the degree of product differentiation

Answer 8

-if products are more differentiated than one another then the market will be less competitive. (as there’s less firms doing the same thing)

-In a perfectly competitive market, products are homogonous (same) so
products can be differentiated using price, branding, or quality - this affects the cross elasticity of demand (substitute/complement)

Question 9

• ease of entry into the market

Answer 9

the number/degree of barriers to entry. Barriers to entry are designed to prevent new firms entering the market profitably. This increases producer surplus. Higher the barriers, the less competitive the market.

Question 10

3 examples of how higher barriers to entry, the less competitive

Answer 10

economies of scale

brand loyalty - makes demand more inelastic (change in price doesnt change demand)

backwards vertical integration - acquiring a firm earlier in supply chain, this controls supply and means firms can control prices.

Question 11

the most important objective of a firm

Answer 11

profit

Question 12

traditional theory of the firm

Answer 12

maximise profits

Question 13

how to calculate profit

Answer 13

total revenue - total cost

Question 14

when do firms break even

Answer 14

TR=TC

Question 15

the point in which profit maximisation occurs

Answer 15

Marginal cost (MC) = Marginal revenue (MR)

Question 16

4 reasons why traditional theory of the firm is good (profit max)

Answer 16

• re-investment
• dividends for shareholders
• lowers costs and lowers prices for consumers
• rewards entrepreneurship

Question 17

Can you draw the profit maximisation curve for imperfect competition and suggest 3 points to Why marginal cost = marginal revenue for profit maximisation

Answer 17

any quantity to the right of MC = MR cannot be maximising profit, marginal cost > marginal revenue. So any of those units to the right generate a loss and reduce profit.

if you stop at any quantity to the left of MC=MR, there would be no point in stopping because each extra unit will bring in more revenue i.e. more profit. So as long as MR>MC the next unit will generate more revenue and profit.

The point in which you stop is where no more extra profit can be made, where MC=MR.

Question 18

reinvestment

Answer 18

pharmaceutical companies reinvest into R+D

Question 19

dividends for shareholders

Answer 19

without shareholders finance there wouldn’t be a company so must reward them with dividends

Question 20

lowers costs and lowers prices

Answer 20

costs low so profit high so can pass those lower costs on to consumers

Question 21

rewards entrepreneurship

Answer 21

rewards risk taking activity

Question 22

why traditional theory of the firm is bad, where firms decide not to profit maximise for certain reasons, such as

Answer 22

firms lack knowledge of Mc = Mr (firms don’t compute it)

Greater scrutiny

Key stakeholders harmed
and so (profit satisficing)

Other objectives more appropriate

Question 23

firms lack knowledge of MC=MR

Answer 23

firms don’t compute it

Question 24

greater scrutiny

Answer 24

large profits encourage regulators who may investigate and worsen the business environment e.g. suggestions to improve safety etc which may raise costs.

Question 25

key stakeholders harmed ?

Answer 25

consumers? may suffer from worsened reputation

workers? workers could strike e.g. trade unions get involved, may raise costs further

gov? investigate and outcomes may be very anti business

environmental groups? protest and attack on social media

Question 26

what is profit satisficing

Answer 26

sacrificing profit to satisfy as many key stakeholders as possible

Question 27

why other objectives may be more appropriate

Answer 27

revenue maximisation

Question 28

profit satisficing

Answer 28

sacrificing profit to satisfy as many key stakeholders as possible

Question 29

revenue maximisation occurs when

Answer 29

MR=0

Question 30

why does revenue maximisation occur when MR=0 , must look at both points to the right and left

Answer 30

any point to the right the MR will go negative, so extra revenue generated from one extra unit is negative which reduces revenue which cannot be revenue maximised.
any point to the left, where MR is positive wont revenue maximise because we can increase TOTAL revenue by producing more units until MR = 0.

Question 31

reasons why revenue maximisation is at MR=0

Answer 31

QP - PP = profit max
QR - PR = revenue max
- economies of scale benefit - rev max qty > profit max qty therefore greater growth and lower average costs and lower average price for consumers
- predatory pricing - the monopolies rev price < profit max price - undercuts rivals and drives them out

• principle agent problem (behavioural economics) that there is a divorce between ownership and control. Owners (principles) are the shareholders but those who control (managers)
  those who own do not control therefore managers run day in and day out. revenue max uses leverage to go to shareholders for greater perks in their job.

Question 32

sales maximisation point

Answer 32

AC=AR

Question 33

why sales maximisation is a good idea

Answer 33

however sales maximisation suggests businesses want to become as large as they possibly can be without making a loss which occurs at break even.