ECON Flashcards
Market structure:
The no. and size of firms within a market for a particular good or service
Perfect competition
A market structure that has a large no. of buyers and sellers who have perfect information about the market, it also has identical/homogenous products and little to no barriers to entry for small firms/ startups. With each firm being to small to influence the market price on its own, thus them being price takers and not makers.
Imperfect competition:
Any market structure that is not perfect competition
Pure monopoly:
When only one firm supplies the market
Rank from Concentrated to Competitive:
Monopoly
Perfect comp
Oligopoly
Monopolistic comp
- Monopoly
- Oligopoly
- Monopolistic competition
- Perfect competition
Profit Maximisation:
When a firm seeks to make the largest positive difference between total revenue and total costs.
So inc. revenue and limit costs to inc. profits
Occurs when the TR (total revenue) exceeds TC (total costs) by the greatest amount. And average costs are minimised on the average cost curve.
Also MC = MR needs to occur (this is yr2 tho)
Maximising profits is assumed to be:
the main objective of firms (you should as well assume this in economic theory unless told otherwise)
Large profits enable firms to:
Pay out higher returns to shareholders which can encourage more people to buy their shares or to help boost the share price.
They can also reinvest funds into developing new products that lead to them to gain more consumers
Divorce of ownership control
the separation that exists between shareholders/owners of the firm and the directors/managers in large public limited companies.
Because managers/directors may prioritise maximising revenue than profit for bonuses or other reasons. While shareholders are assumed to prioritise profit maximisation so conflicting objectives occur and profit maximisation is not always achieved. However a solution could be by giving managerial shares to the directors and managers of the company as now they own shares and are likely to prioritise profit maximisation as well and realign the objectives of shareholders and managers.
Objectives of directors/managers
Growth maximisation: as it may serve to boost the profile and CV of senior managers, including more media publicity. It can aslo reduce the threat of takeover by other firms, thus contributing to a ‘quiet life’ for senior executives.
Sales revenue maximisation: as executive pay and bonuses can be linked to annual sales revenue rather than profit, this is likely to lead a firm to not targeting profit maximisation as its primary objective.
Satisficing/ profit satisficing: given that it is likely to be extremely difficult in practice to produce at the precise output at which MC = MR, firms are more able to target a satisfactory, suboptimal level of profit rather than a maximal one.
Shareholders will be happy with achieving any level of output between the profit maximising level and satisficing level as there is still profit.
information during satisficing
Managers will be operating with imperfect information, and shareholders will be subject to asymmetric information about the intentions and objectives of the managers, making satisficing a realistic view of what happens
Sales maximisation
when firms sales revenue is at a maximum. Occurs when MC=MR so sale and output of and additional unit would not add to or take away from the overall revenue. Can help benefit Economies Of Scale. As you produce more with no additional costs so avg unit production costs dec.
Survival
Large proportion of new businesses fail in first few years so their objective is to survive the critical period before it establishes a customer base and repeat sales, and is able to cover its costs.
Growth
When a firm has survived the first few years, its owners are likely to pursue growth as an objective. By increasing output and scale of operations, expanding its productive base and the size o its workforce. Can as well lead to benefiting from Economies of Scale (EOS) to fend off takeover bids from rival companies
Inc. Market Share
Having highest market share can benefit a firm by giving them monopoly power, but can attract the government and lead to them monitoring or placing regulations and intervening due to the fear that the monopoly might abuse its power.
Stakeholder:
Any individual or group interested in how a business is run
Stakeholder objectives:
The preceding objectives assume that all firms are mainly interested in financial objectives. But a modern view includes non-financial objectives as well at the same time of achieving a financial one, this is to satisfy the needs of a range of business stakeholders. Firms may prioritise employees wellbeing as much as profit maximising. If there is genuine commitment to doing this, it may show the firm in good light and make it seem like a good place to work.
Price taker
A firm that is obliged by the market forces to accept the market equilibrium price as they are unable to influence the ruling market price on their own, however if they attempt it would be a huge risk and they would risk going out of business.
Firms in competitive market
Have to accept the equilibrium as if they increase their prices they will not make any sales as the firm’s consumers’ demand is elastic as products are homogenous so the market lacks the loyalty of consumers.
Price determination in highly competitive markets
In a highly comp market, with suppliers earning supernormal profits at equilibrium, leading to all individual firms doing the same and supplying at EQ.
Due to features of comp market, if firms know that firms in this market are making supernormal profits, then these firms might join as there is perfect information of the product so it is easy to produce and they will enter the market easily due to low barriers or non-existent barriers to entry. This can lead to supply increasing and shifting to the right so EQ is at a lower price but higher quantity and it will occur up to the point only normal profits are made so the firms may just be surviving in the market instead. In the short run a firm can be making normal or supernormal profit or a loss. But in the long run firms enter the market as stated.
Perfect comp in the LR
Normal profits take place due to supply increasing as new firms enter market. And firms making losses will likely leave. But overall effect is normal profit occurs and each firm produces at the profit-maximising output and price where Average Total Costs are at their lowest on the ATC curve.
In the long-run, firms in perfect comp are both productively and allocatively efficient. Productive efficiency when at lowest point on their ATC curve. Allocative occurs when price of product or marginal revenue = marginal cost so MR = MC when producing the last unit of output, meaning there is an optimum allocation of society’s resources.
Exam tip
During perfect comp, the marginal cost curve is equivalent to the firm’s supply curve.
Adv. of perfect competition
Productive and Allocative efficiency
Productive: minimum inputs used to produce maximum outputs and G+S are produced at minimum avg cost. If not achieved, can lose market share to rival firms that produce more cheaply.
Allocative: high comp markets lead to firms producing what consumers demand since, if they don’t, they’ll lose market share to firms producing most desired products, which leads to consumer sovereignty where the consumer is basically in power and considered as the ‘king’.
Both are components of static efficiency, i.e. efficiency measured at a point in time.
Static efficiency
Efficiency measured at a point in time, comprising of allocative and productive efficiency
Monopolistic competition:
form of imperfect competition with a large number of firms producing slightly differentiated products by branding or quality. And barriers to entry and exit are low.
Examples: independent fast food takeaways, plumbers, and hairdressers
Short run in monopolistic comp
some brand loyalty exists
can make supernormal profit
Long run in monopolistic competition
only make normal profit
low barriers to entry so firms enter market attracted by supernormal profits and eventually becomes normal.
This will reduce demand for individual firms as the new ones take some market share. The end result will be D = AR curve which is tangential to the firm’s ATC curve, meaning normal profit is made at the profit-maximising output.
Oligopoly
a market structure dominated by a small number of relatively powerful firms who compete for market share. Oligopolies still tend to be highly concentrated than competitive and they are forms of imperfect competition. These firms are interdependent, so they take into account the likely actions of other firms in the industry when deciding how to behave.
Concentration ratio
a measurement of how concentrated a market is - the total market share held by the largest firms in a market.
For example if the top four firms in the supermarket industry had market shares of 15% 25% 13% 17% then the concentration ratio of these four is 60% as you add them all up.
Oligopoly non-price competition
product differentiation, e.g: marketing, packaging, advertising, quality and branding
customer service e.g: point of scale and after-sales service
loyalty products, e.g: loyalty cards, warranties and guarantees
Monopoly examples
Tesco with market share of around 30% in groceries market
Google with 90% market share of internet traffic, may be considered to be monopolies in the UK
Monopoly power
not a pure monopoly but has power of a monopoly. Monopoly power is the power of a firm in a market to act as a price maker.
Barriers to entry tend to be high
Firms with power can restrict output to raise price which boosts supernormal profits which firms can maintain due to high barriers to entry so newer firms are less likely to enter the market.
Monopoly
Single supplier of a G or S which therefore has 100% market share. Price maker. High barriers to entry, lack of choice for consumers. Supernormal profits and high prices. Profit maximisation since already have all market share. Not perfect information available to firms or consumers. benefit from EOS.
Barrier to entry:
any feature of a market that makes it difficult or impossible for new firms to enter the market and can therefore lead to monopoly power
Natural barriers to entry
May include naturally occurring climatic, geographical or geological factors that make the product difficult to replicate elsewhere
EOS
Avg cost of production falls as output inc. meaning large firms can set prices lower than new entrants into the market and still make supernormal profit.
Legal barriers
include patents, copyrights and trademarks that give a single firm or individual the right to have a monopoly over a new product , process or other intellectual property
