Business Economics Flashcards
Market structure characteristics
- Number of firms in the market
- Degree of product differentiation
- Barriers to enter/exit the market
- Price setting power
Profit maximisation
- The level of output where MC = MR
- Any extra unit produced would cost more to make then it earns in revenue
Reasons for profit maximisation
- Provides the highest dividends for shareholders
- Profit can be used as a cheap source of finance
Principal-agent problem
Agents make decisions for the principal, even though the agent is inclined to act in their own interests instead of those of the principal
Other objectives of a firm
- Revenue maximisation
- Sales maximisation
- Satisficing
- Corporate social responsibility
- Survival
Revenue maximisation
- MR = 0
- Selling one more unit provides no extra revenue
- Managers may do this if they are rewarded based on turnover instead of profit
Sales maximisation
- TR = TC
-The firm sells the highest quantity of output that does not cause a loss - Allows for firms to gain more market share and achieve economies of scale
Satisficing
Firms aim to satisfy multiple objectives, for example providing enough profit to keep shareholders happy whilst managers aim to maximise revenue to get the highest bonuses
Corporate social responsibility
Firms voluntarily pursue ethical, social, or environmental goals, even if it means lower short-term profits
Survival
Where the primary objective of the firm is to minimise/avoid taking a loss in order to keep operating
Perfect competition characteristics
- Infinite number of buyers and sellers
- Sellers are price takes
- No barriers to entry/exit the market
- Perfect information
- Homogeneous goods
- Firms are short-run profit maximisers
Profit in a perfectly competitive market
- In the short run firms are still able to make supernormal profits
- However, in the long run perfect information and no barriers to entry allow new firms to enter the market
- This shifts the industry supply curve to the right, causing a fall in price and AR = AC
Allocative efficiency
- Where P = MC (so AR = MC)
- Prices reflects the true cost of production, removing any welfare loss
Productive efficiency
- Production occurs at the lowest point of the AC curve
- No resources are wasted as firms use inputs most efficiently
Dynamic efficiency
- Where firms invest into innovation and R&D
- Funded by supernormal profits
Short run shut down point
AR < AVC (or TR < TVC)
Long run shut down point
AR < ATC (or TR < TC)
Static efficiency
The optimal allocation of resources at a specific point of time
Allocative efficiency in perfect competition
Firms are allocatively efficient in both the short and long run
Productive efficiency in perfect competition
In the long-run firms will be productively efficient
Dynamic efficiency in perfect competition
- Perfect competition assumes firms produce homogeneous goods so there is little scope for innovation
- Limited profits in the long run reduce funds available for innovation
Characteristics of monopolistic competition
- Large number of buyers and sellers
- Differentiated products
- Limited barriers to entry/exit
- Firms are price makers
- Supernormal profit is competed away in the long run
Monopolistic competition in the short run
- Firms are assumed to profit maximise so will produce where MC = MR
- AR > AC at this point so firms can achieve supernormal profit
Monopolistic competition in the long run
- There are low barriers to entry/exit so firms will join the market as they are attracted to the supernormal profit
