Chapter 6&7 B

Question 0

How does management differ from SH?

Answer 0

Shareholders want what’s best for them.
they just wants profits.
management is looking In the long run, may need to sacrifice profits in order to maintain social responsibility, image, security,
growth. interests differ which can lead to market failure.

Question 1

Public vs private firms

Answer 1

private have a profit motive. in business to make money for SH. Public (gov owned) have other motives than profit. might be distributive objectives.

Question 2

Five different market structures?

Answer 2

1. monopoly
2. dominant firm
3. oligopoly
4. monopolistic competition
5. perfect competition
   (ranked in least to most competitive)

Question 3

Perfect competition is what? explain

Answer 3

no buyers or sellers have control over price.
no barriers to entry or exit.
buyers and sellers hav all relevant info.
many buyers and sellers

Question 4

Explain monopoly.

Answer 4

single seller in the market. complete opposite of perfect competition. downward sloping demand curve.

a natural monopoly arises when increasing returns to scale are sufficiently significant that any feasible level of demand can best at a lower average
cost by a single form than by two or more firms.
can also be created by legal monopolies (by patent laws)
may also e created by an increase In barriers to other firms.

Question 5

Explain dominant firms

Answer 5

similar to private monopoly. it’s when a single firm controls a large share d the market (50%+).
smaller firms must accept the market conditions set by the dominant firm. ex. Microsoft, p&g, Campbell’s soups.

Question 6

What is monopolistic competition?

Answer 6

close to perfect competition. this is for firms that are associated with industries like restaurants, corner grocery stores, clothing, movie theaters, hotels. entry and exit barriers are low. only hold small share of mkt share. can increase prices without losing demand.
firms compete through product differentiation (similar but slightly different products)
there is competition so mkt keeps price within certain bounds.

Question 7

what is an oligopoly?

Answer 7

oligopoly means few sellers. this category is for all mkt structures that don’t fit in the other four. nah have 2 firms in the industry,
may have 20+. main characteristics are:
each firm faces a downward sloping demand curve, and firms are in a strategic position relative to one another.

entry barriers don’t really matter. a firms business is highly reliant on their competitors.

ex. are car companies. Hondas prices and sales are related to Buick etc bc it changes demand for them.
if both firms choose to charge a high price,
it must be accepted, if both low,
low is accepted. prisoners dilemma, you don’t know if you will be undercut so each just chooses low.
ex. banks

Question 8

What is a concentration ratio?

Answer 8

how much control a business has over the market. 
Perfect competition : 0
monopolistic competition: low
oligopoly : high
monopoly: 100

Question 9

What does rule of law say?

Answer 9

must be a legal system in place to govern economic, political, and social actions.
laws must be clear, well understood, and applicable to everyone.
there must be protection of property through “property rights”
there must be an enforcement d contracts.

Question 10

The three broad categories of the total business sector?

Answer 10

1. primary sector-direct use of major physical natural resources: fishing, farming.
2. secondary sector- manufacturing and fabrication of physical goods
3. Service sector- activities of the financial industry, civil service, personal and business service, and retail wholesale sales or trade.