5 - Competitions and Monopolies Flashcards
What are the main objectives of firms?
Profit maximisation, sales revenue maximisation, business growth/ market power, business survival, not for profit enterprises.
When does profit maximisation occur?
When MC=MR. Marginal cost = marginal revenue.
What is marginal revenue?
The change in total revenue from selling an extra unit.
What is marginal cost?
The change in total cost from producing an extra unit.
What happens if MR>MC?
Selling an extra unit adds to profit.
What happens in MR<MC?
Selling an extra unit lowers profit.
When are revenues maximised?
At an output level where marginal revenue = 0.
When is price elasticity of demand coefficient?
When revenue is maximised - unity.
What does sales growth maximisation focus on?
Generating the highest possible level of sales within a given period, potentially as part of a wider objective.
What happens as sales increase?
A business could take advantage of economies of scale, leading to lower average costs.
What can strong sales figures do for a business?
Attract investor interest, making it easier for a business to secure finance.
When does sales maximisation occur?
When Price per unit = Average cost.
What environmental and social obligations do businesses have?
Corporate social responsibility, reducing carbon emissions, waste reduction, engaging with local communities.
What is corporate social responsibility?
The importance of pursuing environmental and social objectives.
What are many companies doing to reduce carbon emissions?
Setting targets to reduce carbon emissions.
What can businesses do to reduce waste?
Minimise waste generation and promote recycling to improve sustainability.
How can businesses engage with local communities?
Through initiatives such as funding education programmes, building infrastructure, supporting healthcare.
How can businesses contribute to Philanthropy?
Businesses often contribute to charities and social causes.
Who are the stakeholders of a business?
Shareholders, managers, employees, suppliers, customers, creditors, government, community.
What is the difference between shareholders and stakeholders?
Shareholders own shares of a company, representing ownership. Stakeholders are partners with an interest in the company’s operations.
How do shareholders respond to profit maximisation?
Firm makes the highest profit, increasing returns for shareholders.
How do consumers respond to profit maximisation?
Higher prices and lower output lead to a lower level of consumer surplus.
How does the community respond to profit maximisation?
Profits provide funds for investment, more tax revenue for government.
How do shareholders respond to sales revenue?
Profits are lower than with profit maximisation - a gain in consumer surplus.
How do consumers respond to sales revenue?
Lower prices than profit maximisation - gain in consumer surplus.
How do the community respond to sales revenue?
Nearer allocative and productive efficiency at a lower price, higher output - community benefits.
How do shareholders respond to sales maximisation?
Normal profit earned - shareholders usually receive lower dividends.
How do consumers respond to sales maximisation?
Prices are lower than profit maximisation, customers benefit.
How do the community respond to sales maximisation?
AR=AC. Firm maximises output, which could benefit employment at the firm.
What is marginal profit, as a concept?
The increase in profit when one more unit is sold.
What is the equation for marginal profit?
The difference between MR and MC.
What happens if MR>MC, to marginal profit?
The firm could increase profit by raising output.
What happens to marginal profit is MR<MC?
The marginal profit is negative, the firm should decrease output.
When are profits maximised?
When marginal profit=0.
What is satisficing?
Involves owners of a business setting minimum acceptance levels of achievement of revenue.
What does satisficing mean?
Means a business is making enough profit to keep shareholders happy, or is sufficient for investors to maintain confidence in management.
What is the difference between satisficing and maximising?
Maximisers behave in a rational way, satisficers examine a limited set of alternatives, choose the best option. Satisficers could be managers who are more concerned with increasing sales revenue.
What is perfect competition?
The lowest form of market concentration.
What are the characteristics of perfect competition?
All firms have equal access to FOP, large numbers of buyers and sellers, free entry into and out of the market, perfectly elastic demand curve, profit and utility maximisation.
What exists in perfect competition?
A market structure, whose assumptions are strong, and unlikely to exist in most real world markets.
Why are economists interested in pure competition?
Because of the growth of e-commerce.
What type of profit do a competitive firm earn in the short run?
Supernormal profit.
What do most firms making abnormal profits do in the short run?
Encourages the entry of new firms into the industry, driven into the market by the profit motive.
How can firms do this easily?
There are no barriers to entry in the long run.
What do new firms in the long run cause?
An outward shift in market supply, forces down ruling market price.
What happens to prevailing market price?
Falls for individual firms, profit starts to fall.
When does this process continue until?
Price=LRAC, and firms in the industry earn normal profit, and there’s no further incentive for movement of firms.
Where is the long run equilibrium established?
Where price=AC, output where MR=MC.
What are the impacts of a perfectly competitive firm making normal profit in the long run?
Entry of new firms has reduced profits - surviving firms make normal profit only. No incentive for firms to leave or enter the market.
What does P3 show on a short term loss diagram?
The less than average variable cost, firm is making a heavy loss.
What will the firm lose if it shuts down, when it is making a loss in the short term?
It will lose a distance of AB per unit, it will lose AC per unit if it continues to supply.
What are the assumptions of the model?
Dominance in real world markets of differentiated products, highly complex products, information gaps facing consumers, impossible to avoid search costs, patents are ignored by the economic model, rare for entry and exit.
How do perfectly competitive firms achieve allocative efficiency?
In the short and long run, P=MC, allocative efficiency is achieved. No one can be made better off without making another agent worse off.
How do perfectly competitive firms achieve productive efficiency?
Occurs when equilibrium profit maximising output is supplied at minimum average cost.
How is productive efficiency achieved in the long run?
If a firm is producing at the lowest point of the average cost curve, the firm is X Efficient.
What do we assume in a competitive market?
It produces homogenous products.
How do perfectly competitive firms achieve dynamic efficiency?
There is little scope for innovation designed to make products differentiated from each other.
What is monopolistic competition?
A market structure where a large number of firms place differentiated products, where there are low barriers to entry and exit.
What are the examples of monopolistic competition?
Coffee shops, hairdressers, pizza delivery businesses, sandwich bars, corner grocery stores.
What are the characteristics of monopolistic competition?
Many producers, many consumers, non-price competition, some pricing power, low barriers to entry, no supernormal profit in the long run.
What does product differentiation allow firms to do?
To charge a different price to reflect unique qualities of their product.
What are monopolistically competitive firms able to do?
Price makers - have a downward sloping demand curve, a lower price brings greater demand.
What is PED, and why is it like this?
It’s relatively elastic, and has a large number of competitors, so market power is relatively weak.
What happens to PED if a firm uses non price competition?
It becomes less elastic, as brand loyalty increases, market power increases.
What are the characteristics of a monopolistically competitive diagram?
Other firms within the market produce partial not perfect substitutes. Demand curve is more elastic, profit maximising level is located below point A.
What happens to profit maximisation under a monopolistically competitive structure?
The profit maximising position shrinks with less customers as more firms enter the market, there is a deadweight loss to society.
What is the production of the firm in an MC diagram?
It isn’t producing at the minimum point on the AC curve.
Is a monopolistically competitive market structure allocatively or productively efficient in the long run?
Neither.
Do monopolistically competitive firms have supernormal profit?
No, so they are not dynamically efficient.
Which factors affect pricing power of an individual firm in monopolistic competition?
Many competitors with similar producers or services, PED is elastic, price is more competitive.
What do low barriers to entry mean for price?
A firm has to price competitively.
What happens to monopolistic competition in the long run?
Barriers to entry are low, supernormal profits are available. Other firms enter, supply in industry increases.
What happens to demand in monopolistic competition in the long run?
Each incumbent firm loses demand, has a lower level of demand.
Why is a stable LR Equilibrium unlikely in the long run?
The firm makes normal profit, a stable equilibrium may not be reached, and the market may be in a constant state of flux.
What happens to existing products within a market in the long run?
They go through a product life cycle, affecting the growth and volume of sales. The length of the product life cycle varies from market to market.
What are the types of goods and services in monopolistic competition?
Differentiated.
Do firms have control of prices in monopolistic competition?
Some.
Is marketing important in monopolistic competition?
Yes.
What are the examples of non-price competition?
Innovations, customer service, after-sales service, loyalty schemes, branding, packaging, promotions, marketing.
How is the gin industry an example of monopolistic competiton?
Lots of producers, small scale output, fast growth in the industry, low barriers to entry, differentiated product.
How is the taxi and private hire industry an example of monopolistic competition?
75,000 taxis, 226,000 private hire vehicles, 37% of all taxis are in London, 80% of taxis are small businesses, 2% of drivers are female, Average pay is £21,167.
What is the structure of a black cab?
Entry restricted to those with licences, and who have passed ‘the knowledge.’
What is the structure of an uber?
Restricted to people with a car and a phone - 45,000 Uber drivers in London alone.
What is the structure of private hire vehicles?
Can’t be hailed from down the street, must rely on telephone and internet bookings.
What are the examples of price competition in the taxi industry?
Pre arranged prices, different prices for different times, different price for hail vs pre booked, buy 2 get one free.
What are the examples of non price competition in the taxi industry?
Luxury cars, disabled access, late pick up times.
What are the limitations of monopolistic competition?
Information may be imperfect in the real world, analysis restricted to each firm, each firm produces a differentiated product.
What are the limitations of monopolistic competition with entry barriers?
They’re created by non price competition - gain benefits of price inelastic demand, model focuses on price and output decisions - firm will also have to decide on variety of product.
How does advertising serve as a barrier to entry?
Monopolies use saturation advertising to prevent small firms entering the market. Small firms are unable to enter the industry, they can’t afford the minimum level of advertising necessary, mass advertising crowds out newcomers.
