EC1202 WEEK 7,9,10

Question 1

What is the neoclassical analysis?

Answer 1

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

Question 2

what are the Assumptions underlying neoclassical analysis of markets ?

Answer 2

• 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

Question 3

are firms price makers or takers?

Answer 3

price takers

Question 4

what is a firm?

Answer 4

Firms are organisations that buy or hire factors of production in order to produce goods and services which can be sold for profit

Question 5

why do firms exist?

Answer 5

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

Question 6

who wrote the nature of the firm 1937

Answer 6

Roal Coase

Question 7

what does Coase try to explain in his essay.

Answer 7

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

Question 8

Why cannot we offer separate contract for each function of a firm?

Answer 8

High Transaction cost

Question 9

What is the Transaction Cost Theory ?

Answer 9

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.

Question 10

What are transaction costs?

Answer 10

THey are the costs of negotiating, monitoring, and governing exchanges between people in the marketplace.

Question 11

what are examples of transaction costs?

Answer 11

– search and information costs
– bargaining and decision cost
– policing and enforcement costs

Question 12

how does coase see the firms and the market?

Answer 12

as alternative methods of coordinating production.

Question 13

when do firms sometimes come into existence?

Answer 13

When they reduce the cost of transaction

Question 14

who created the assembly line?

Answer 14

Henry Ford

Question 15

what is the assembly line?

Answer 15

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

Question 16

what is innovation?

Answer 16

it is the process and outcome of creating something new, which is also of value.

Question 17

what whole processes does innovation involve?

Answer 17

from opportunity identification, ideation or invention to development, prototyping, production marketing and sales, while entrepreneurship only needs to involve commercialisation

Question 18

what is schumpeter triology?

Answer 18

innovation
invention
diffusion

Question 19

what is invention?

Answer 19

the creation of an idea to do or make somehting

Question 20

what is innovation?

Answer 20

new product/ process which is commercially valuable,.

Question 21

what is diffusion?

Answer 21

The spread of a new innovation through society or at least throughout the relevant part of society.

Question 22

what are schumpeter 5 types of innovation?

Answer 22

• new product or service
  -existing product or service for a new market
• new method of production
• new organisation for production
• new sources of supply

Question 23

according to schumpeter who is an entrepreneur?

Answer 23

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

Question 24

Under what conditions should we expect firms to emerge and grow?

Answer 24

when the firms activities can be performed with lower transactional costs

Question 25

Firms will emerge if?

Answer 25

an economising organization can reduce production + transactional costs when they are smaller than the market prices

Question 26

when do firm’s expansion halt?

Answer 26

when the intra-organization + transaction costs are bigger than the market price.

Question 27

what is the main objective of most firms?

Answer 27

profit maximitation

Question 28

what are the 4 alternative theories of firms?

Answer 28

• transactional cost approach
• growth maximisation
• utility maximisation
  Behavioural theories of the firm

Question 29

traditional theories are?

Answer 29

profit maximisation model

Question 30

what is the profit maximisation model?

Answer 30

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.

Question 31

what are the most common market structures?

Answer 31

perfect competition
monopoly
monopolies competiiton
oligopoly

Question 32

what are the assumptions on perfect competition

Answer 32

• large number of sellers and buyers
  -no discrimination
• free entry and exit of firms
• homogeneous products
  firms are price takers
  perfect information

Question 33

what are prices takers?

Answer 33

they must accept prevailing prices as they do not have enough market share to influence the price power in the market

Question 34

what are price makers?

Answer 34

opposite to price takers they are market leaders or sole provider they have enough price power to influence how much the customers pay.

Question 35

what is monopoly?

Answer 35

opposite of perfect competition.
They are single firms in a market
no close substitutes
barriers of entry and exit of firms

Question 36

monopolistic competition assumptions?

Answer 36

• 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

Question 37

what is an oligopoly?

Answer 37

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

Question 38

what are the 3 managerial approaches found in the alternative theories of the firm?

Answer 38

• Baumol’s model - sales maximisation
• Williamoson’s model - Managerial utility function
• Marris’s theory - growth maximisation

Question 39

what is baumol’s theory of sales and revenue maximisation?

Answer 39

• 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

Question 40

what is williamson’s model of managerial utility function?

Answer 40

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

Question 41

what is the principal - agent problem in williamson’s model of managerial utility function?

Answer 41

conflict of interest between the owners and the managers of a firm.

Question 42

what is Marris’s theory - growth maximisation?

Answer 42

• 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

Question 43

tell managerial constraint on growth?

Answer 43

– Limit to managers’ ability to manage and achieve optimum efficiency
– managers’ own job security

Question 44

tell me Financial constraints arise due to:

Answer 44

– 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)

Question 45

what are behavioural theories?

Answer 45

• 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;[