Chapter 4

Question 1

What are the objectives of a firm

Answer 1

Profit maximization
Sales maximization
Market share maximization

Question 2

What is profit maximization

Answer 2

occurs when a firm’s total sales revenue is furthest above total cost of production

Question 3

What is a businesses ultimate objective

Answer 3

Assume that profit maximisation is a firm’s ultimate business objective

Question 4

How does profit maximization lead to firm growth

Answer 4

Firms grow because firms believe that growth leads to high profit

Question 5

What is sales maximization

Answer 5

occurs when sales revenue is maximised

Question 6

What’s sales maximization also known as

Answer 6

Revenue maximization, occurs at the level of output at which the sale of an extra unit of output would yield no extra revenue

Question 7

Why do firms aim to maximize revenue

Answer 7

Firms that aim to maximise sales usually do so to make a minimum or acceptable level of profit

Question 8

What does market share maximization involve

Answer 8

involves increasing the percentage of market output which the firm produces, it often involves a firm trying to increase its market power and monopoly power

Question 9

Define monopoly power

Answer 9

the power of a firm to act as a price maker rather than as a price taker

Question 10

What is a firms objective in a highly competitive market

Answer 10

In highly competitive markets, firms main objective is to survive; firms are always threatened by the entry of new firms which may steal away their customers. ‘Adapt or perish’ is the choice facing such firms.

Question 11

What is perfect competition

Answer 11

a market that displays the 6 conditions of:
a large number of buyers and sellers, perfect market information
Consumers have plenty of choice
No sellers have monopoly power
a uniform or homogenous product
Low barriers to entry or exit in the long run
Good access to technology
Consumer loyalty is weak
Full information about prices

Question 12

True or false: are perfectly competitive markets real

Answer 12

FALSE

Perfectly competitive markets are non-existent in the real-world, its an abstract economic model

Question 13

What is a competitive market

Answer 13

Competitive markets are markets which try possess most of the 6 key features and try to outdo their rivals

Question 14

What is imperfect competition

Answer 14

Imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market

Question 15

What is imperfect competition

Answer 15

Imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market

Question 16

What is the law of one price

Answer 16

suppliers/firms take on the prevailing price from the market. When most suppliers are price takers, then there are only small differences in the price of goods across the market.

Question 17

Define monopoly

Answer 17

only one firm in a market

Question 18

What is a working monopoly

Answer 18

dominant firm, at least 40% market shares

Question 19

What is a duopoly

Answer 19

a situation in which two suppliers dominate the market for a commodity or service

Question 20

What is a oligopoly

Answer 20

a few dominant firms

Question 21

When does a natural monopoly occur

Answer 21

There is only room in the market for one firm benefitting to the full from economies of scale

Question 22

Examples of natural monopoly

Answer 22

Utility industries: water, gas, electricity, telephone

Question 23

When does a geographical cause of monopoly

Answer 23

For climatic or geological reasons, a particular country or location is the only source of supply of a raw material or food stuf

Question 24

Examples of geographical causes of monopoly

Answer 24

A single grocery store in an isolated village

Question 25

When does a government created monopoly occur

Answer 25

In markets they believe are too important to leave to competition

Question 26

Examples of government created monopoly

Answer 26

Coal, rail and steel were nationalised in the 1940s

Question 27

what are the factors influencing monopoly power

Answer 27

barriers to enter market number of competitors in a market advertising and monopoly power product differentiation

Question 28

what do barriers to entry prevent in terms of monopolies

Answer 28

Barriers to entry prevent new firms entering the market to share in monopolies profit

Question 29

examples of natural barriers

Answer 29

Natural barriers also known as innocent barriers include; economies of scale and indivisibilities

Question 30

how are economies of scale a natural barrier

Answer 30

Economies of scale mean that established large firms produce at a lower long run average cost, and are more productively efficient, than smaller new entrants who have higher average cost curves

Question 31

how are indivisibilities a natural barrier

Answer 31

Indivisibilities prevent certain goods and services being produced in plants below a certain size e.g metal smelting and oil refining industries

Question 32

what are artificial barriers

Answer 32

the result of deliberate action by firms already in the market to prevent the entry of new firms

Question 33

example of artificial/strategic barrier

Answer 33

Patents are used by firms as a strategic barrier

Question 34

how does having a larger number of competitors in a market influence monopoly power

Answer 34

Generally the larger the number of competition in a market, the less scope there is for exercising monopoly power

Question 35

explain the exception of having many competitors in the market yet they retain monopoly power

Answer 35

there can be exceptions for example when one very large dominant firm and a large number of small firms possibly occupying niche positions survive in the markets

Question 36

define informative advertising

Answer 36

provides consumers and producers with useful information about goods or services

Question 37

define persuasive advertising

Answer 37

attempts to persuade potential customers that a good or service possesses desirable characteristics that make it worth buying

Question 38

define saturation advertising

Answer 38

through flooding the market with information and persuasion about a firms product, this functions as an man made barrier to market entry by making it difficult for smaller firms to compete

Question 39

how does informative advertising increase competition

Answer 39

increases competition because t provides consumers and producers with useful information about goods and services which are available to buy, and about the different goods that different firms produce

Question 40

how does persuasive advertising reduce competition

Answer 40

In effect, customers become ‘captive customers’ who are unwilling to buy a cheaper substitute good.

Question 41

what does persuasive advertisement focus on

Answer 41

The advertisement is focused on the ownership/use improved consumer feelings not on its price and overall information on the good itself etc

Question 42

what does persuasive advertisement make customers believe about a product

Answer 42

The product is believed to be a ‘must have product’

Question 43

why do monopolies use saturation marketing

Answer 43

Saturation advertising is used by monopolies to prevent small firms from entering the industry

Question 44

how does saturation advertising prevent smaller firms entering the market

Answer 44

small firms cannot afford a minimum level advertisement for the advertisement. For example supermarkets are often unwilling to stock goods produced by new entrants to the market because their products are insufficiently advertised

Question 45

what is product differentiation

Answer 45

Product differentiation means making a particular product different from other products whether those produced by the firm itself or those produced by rival firms

Question 46

example of product differentiation

Answer 46

For example Coca Cola is a global brand with its successful product differentiation, resulting from persuasive advertisement that Coca Cola is a ‘must have’ drink, superior to others

Question 47

coca cola is a successful example of product differentiation. How would you show this on an D/S diagram

Answer 47

a successful rightward shift of the demand curve for Coca Cola, while at the same time making the demand curve highly inelastic

Question 48

what does it mean if coca colas demand curve is highly inelastic

Answer 48

his means that many consumers are prepared to pay more for Coca Cola than supermarkets own brand colas