Behaviour of Firms Flashcards
what are assumptions of traditional theory
Firms seek to maximise profits.
To maximise profits a firm makes use of marginal analysis.
Firms and managers are rational. With their rational objectives being to maximise profits.
Information symmetry. Owners and workers of the firm have access to good information which enables them to maximise profits.
what are problems of traditional theory
Firms may not want to maximise profit.
Discuss market failure and give an example
Situation when markets fail to allocate scarce resources efficiently.
There are four broad categories of market failure recognised by HM Treasury’s The Green Book:
Under-provision of public goods: Example defence, street lightning, and asteroid protection programme.
Positive (immunisation) or negative externalities (antibiotics resistance)
Imperfect information: adverse selection and moral hazard
Market power
Example: Opioid Crisis in US: Doctors were free to prescribe opioids and patients were free to take them.
