ECON

Question 1

Market structure:

Answer 1

The no. and size of firms within a market for a particular good or service

Question 2

Perfect competition

Answer 2

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.

Question 3

Imperfect competition:

Answer 3

Any market structure that is not perfect competition

Question 4

Pure monopoly:

Answer 4

When only one firm supplies the market

Question 5

Rank from Concentrated to Competitive:
Monopoly
Perfect comp
Oligopoly
Monopolistic comp

Answer 5

1. Monopoly
2. Oligopoly
3. Monopolistic competition
4. Perfect competition

Question 6

Profit Maximisation:

Answer 6

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)

Question 7

Maximising profits is assumed to be:

Answer 7

the main objective of firms (you should as well assume this in economic theory unless told otherwise)

Question 8

Large profits enable firms to:

Answer 8

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

Question 9

Divorce of ownership control

Answer 9

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.

Question 10

Objectives of directors/managers

Answer 10

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.

Question 11

information during satisficing

Answer 11

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

Question 12

Sales maximisation

Answer 12

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.

Question 13

Survival

Answer 13

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.

Question 14

Growth

Answer 14

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

Question 15

Inc. Market Share

Answer 15

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.

Question 16

Stakeholder:

Answer 16

Any individual or group interested in how a business is run

Question 17

Stakeholder objectives:

Answer 17

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.

Question 18

Price taker

Answer 18

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.

Question 19

Firms in competitive market

Answer 19

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.

Question 20

Price determination in highly competitive markets

Answer 20

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.

Question 21

Perfect comp in the LR

Answer 21

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.

Question 22

Exam tip

Answer 22

During perfect comp, the marginal cost curve is equivalent to the firm’s supply curve.

Question 23

Adv. of perfect competition

Answer 23

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.

Question 24

Static efficiency

Answer 24

Efficiency measured at a point in time, comprising of allocative and productive efficiency

Question 25

Monopolistic competition:

Answer 25

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

Question 26

Short run in monopolistic comp

Answer 26

some brand loyalty exists
can make supernormal profit

Question 27

Long run in monopolistic competition

Answer 27

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.

Question 28

Oligopoly

Answer 28

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.

Question 29

Concentration ratio

Answer 29

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.

Question 30

Oligopoly non-price competition

Answer 30

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

Question 31

Monopoly examples

Answer 31

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

Question 32

Monopoly power

Answer 32

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.

Question 33

Monopoly

Answer 33

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.

Question 34

Barrier to entry:

Answer 34

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

Question 35

Natural barriers to entry

Answer 35

May include naturally occurring climatic, geographical or geological factors that make the product difficult to replicate elsewhere

Question 36

EOS

Answer 36

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.

Question 37

Legal barriers

Answer 37

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