Chapter Two

Question 1

What are the 4 Ps of marketing?

Answer 1

Product, place, promotion and price

Question 2

Conditions for the perfectly competitive firm?

Answer 2

1. Average revenue = marginal revenue
2. Marginal revenue = marginal cost

Question 3

What are long-run attributes of an industry under perfect competition?

Answer 3

1. Firms profit maximisie
2. Each firm faces a horizontal demand curve

Question 4

What is true about the behaviour of a profit-maximising monopoly?

Answer 4

It will only produce at the level of output where the price elasticity of demand is greater than one. It will produce where MC = MR. Since MC will always be positivel, this must be where R is above the horizontal axis and on the elastic portion of the demand curve.

Question 5

Demand curve and elasticility relationship?

Answer 5

Demand curve has a falling elasticity as you move down the line

Question 6

What is true about substitutes?

Answer 6

If two goods are substitutes, the cross price elasticity of demand is likely to be positive

Question 7

What is expected with a good with elastic demand?

Answer 7

The total expenditure on a good with elastic demand can be expected to fall when the price rises

Question 8

What is true about complements?

Answer 8

If two goods are complements, then a fall in price of one good will lead to an increase in the demand for the other good, as it becomes more attractive

Question 9

What does the cross-elasticity of demand give?

Answer 9

The strength of the relationship between two goods

Question 10

What is true about marginal cost and average cost?

Answer 10

Beyond the point where marginal cost equals average costs, the marginal cost must be greater than average cost and hence, average costs will be rising

Question 11

Are constant long-term average costs a barrier to entry?

Answer 11

No

Question 12

PED formula

Answer 12

(Q2-Q1)/Q1 / (P2-P1)/P1, then ignore the sign.

Question 13

What do normal profits not provide compensation for?

Answer 13

Revenue minus expenditure as this gives accounting profits. Normal profit is an economic measure

Question 14

Demand is the quantity of goods that consumers wish to buy

Answer 14

At each possible price

Question 15

Where will a firm produce in the short run?

Answer 15

A firm must cover average variable costs in the short term. Average total cost must be covered in the long term but not necessarily in the short term

Question 16

What is marginal cost?

Answer 16

It represents the increase in total cost as a result of producing one extra unit

Question 17

A company still gaining the benefit of economies of scale as output levels rise is trading at an output level below?

Answer 17

Below minimum long run average total cost

Question 18

Where does the mc curve cut average total cost curve?

Answer 18

The marginal cost curve always intersects the average total cost curve at its lowest point

Question 19

When might short-run costs rise?

Answer 19

They may fall then rise due to increasing then decreasing returns to a factor

Question 20

A company increases its output and average costs rise as a result. What is the best explanation of what is happening in the short run?

Answer 20

Average variable costs are increasing. A short-run increase in output will not have any impact on the scale of activities or on fixed costs

Question 21

What analytical techniques are likely to be considered when analysing various industrial sectors and companies within those sectors?

Answer 21

SWOT, Porter’s Five Competitive Forces, and Four Ps of marketing

Question 22

What is SWOT?

Answer 22

Strengths, weaknesses, opportunities, threats

Question 23

What does the seven Ps add?

Answer 23

People, process and physical

Question 24

In a perfectly competitive market in respact of demand curves faced by individual firms, what is the PED

Answer 24

Negative infinity

Question 25

What is the minimum point on the long-run averagetotal cost

Answer 25

The minimum efficient scale

Question 26

When consumer preference for a good increases, this will cause the equilibrium price to move

Answer 26

To the right along the supply curve

Question 27

What is true about elasticity?

Answer 27

Supply becomes more elastic in the long term and elasticity of supply is positive

Question 28

What are the five phases of the product life cycle

Answer 28

1. Introduction
2. Growth
3. Maturity
4. Decline
5. Obsolescence

Question 29

An economist has applied the kinked demand model to examine an industrym which is the most likely market structure being analysed?

Answer 29

Oligopoly. This is one of the price inter-dependence models of oligopoly which assumes that if one firm lowers prices, then others will follow

Question 30

Which theory can’t be applied to analysing oligopolies?

Answer 30

Price discrimination theory which most frequently occurs in a monopoly where different customers are offered different prices