EC1202 WEEK 7,9,10 Flashcards
What is the neoclassical analysis?
It is found in the perfect competition model.
It is a Broad theory that focuses on supply and demand as the driving forces behind the production, pricing and consumption of goods and services
what are the Assumptions underlying neoclassical analysis of markets ?
- Large Number of Buyers and Sellers
- Homogeneous Products
- Perfect information
- Free Entry or Exit of Firms
- Profit Maximisation
- No Discrimination
- No Selling Cost
- No Transport Costs
are firms price makers or takers?
price takers
what is a firm?
Firms are organisations that buy or hire factors of production in order to produce goods and services which can be sold for profit
why do firms exist?
they offer a range of additional advantages as organisers of production. which consumers would not otherwise benefit.
e.g. transaction costs
the capacity of firms to extend the division of labour
who wrote the nature of the firm 1937
Roal Coase
what does Coase try to explain in his essay.
why the economy is populated by several business firms instead of consisting exclusive of a multitude of independent self -employed people who contract with each other
Why cannot we offer separate contract for each function of a firm?
High Transaction cost
What is the Transaction Cost Theory ?
states that the goal of an organisation is to minimise the costs of exchanging resources in the environment and the costs of managing exchanges inside the organisation.
What are transaction costs?
THey are the costs of negotiating, monitoring, and governing exchanges between people in the marketplace.
what are examples of transaction costs?
– search and information costs
– bargaining and decision cost
– policing and enforcement costs
how does coase see the firms and the market?
as alternative methods of coordinating production.
when do firms sometimes come into existence?
When they reduce the cost of transaction
who created the assembly line?
Henry Ford
what is the assembly line?
this is the process where the product moves down the line and is assembled by a series of labourers, each of whom carried out a specific task
what is innovation?
it is the process and outcome of creating something new, which is also of value.
what whole processes does innovation involve?
from opportunity identification, ideation or invention to development, prototyping, production marketing and sales, while entrepreneurship only needs to involve commercialisation
what is schumpeter triology?
innovation
invention
diffusion
what is invention?
the creation of an idea to do or make somehting
what is innovation?
new product/ process which is commercially valuable,.
what is diffusion?
The spread of a new innovation through society or at least throughout the relevant part of society.
what are schumpeter 5 types of innovation?
- new product or service
-existing product or service for a new market - new method of production
- new organisation for production
- new sources of supply
according to schumpeter who is an entrepreneur?
An innovator.
the person who destroys the existing economic order by introducing new products and service by creating new forms of organisation or by exploiting new raw materials
Under what conditions should we expect firms to emerge and grow?
when the firms activities can be performed with lower transactional costs
Firms will emerge if?
an economising organization can reduce production + transactional costs when they are smaller than the market prices
when do firm’s expansion halt?
when the intra-organization + transaction costs are bigger than the market price.
what is the main objective of most firms?
profit maximitation
what are the 4 alternative theories of firms?
- transactional cost approach
- growth maximisation
- utility maximisation
Behavioural theories of the firm
traditional theories are?
profit maximisation model
what is the profit maximisation model?
It depends on the market structure.
Market structure depends on the number of competitors in the market, the freedom with which competitors enter a market and wether the different firms in the market sell homogeneous, differentiated or unique products.
what are the most common market structures?
perfect competition
monopoly
monopolies competiiton
oligopoly
what are the assumptions on perfect competition
- large number of sellers and buyers
-no discrimination - free entry and exit of firms
- homogeneous products
firms are price takers
perfect information
what are prices takers?
they must accept prevailing prices as they do not have enough market share to influence the price power in the market
what are price makers?
opposite to price takers they are market leaders or sole provider they have enough price power to influence how much the customers pay.
what is monopoly?
opposite of perfect competition.
They are single firms in a market
no close substitutes
barriers of entry and exit of firms
monopolistic competition assumptions?
- they have many firms
- each supplier provides a product that has a close but not perfect substitute to other products in the market
- firms have free entry and exit of firms
- demand elastic
-firms compete on quailty, price and marketing
what is an oligopoly?
it has few existing firms in the market.
- They are interdependent to competitors
- entry of new firms are restricted.
- They have similar products but not identical
- formal collusion often occurs
what are the 3 managerial approaches found in the alternative theories of the firm?
- Baumol’s model - sales maximisation
- Williamoson’s model - Managerial utility function
- Marris’s theory - growth maximisation
what is baumol’s theory of sales and revenue maximisation?
- in competitive markets firms aim at maximising revenues through maximising sales.
- sales volume determine market leadership competition
- dichotomy of managers goals and owners goals
- managers salary and other benefits are linked to sales volume rather than profit
- Managers attach their personal prestige to the company’s revenue or sales
- They attempt to maximize firms total revenue instead of profit
what is williamson’s model of managerial utility function?
Managers apply discretionary power to maximise their own utility function
- constrains on maintaining minimum profits to satisfy shareholder.
- utility funciton of mangers depend on:
job securtiy
power
status
managers salary
professional satisfaction
what is the principal - agent problem in williamson’s model of managerial utility function?
conflict of interest between the owners and the managers of a firm.
what is Marris’s theory - growth maximisation?
- strategy of maximising growth of firms:
- managers strive for growth rather than profit maximization.
- extensive advertising
- faced with 2 constrains
managerial contraints on growth
financial contraints on growth
tell managerial constraint on growth?
– Limit to managers’ ability to manage and achieve optimum efficiency
– managers’ own job security
tell me Financial constraints arise due to:
– Conflict between managers’ own utility function and owners utility function
– Um=f (salary, power, job security, status) (managers utility = Um)
– Uo=f (profit, capital, output, market share, public reputation) (owner utility = Uo)
what are behavioural theories?
- The firm’s sub-optimal behaviour arises from uncertainty and conflicting goals of various groups within the firm.
- While managerial theories emphasise the role of management.. The behavioural theories argue that groups within the firm other than managers influence the behaviour of the firm.
- The types of behavioural theories proposed are:
- Simon’s Satisfying Behaviour Modell;[
