Firms In Different Types Of Markets 1

Question 1

What is the divorce of ownership from control

Answer 1

Those who own a firm are different to those who manage it.

Question 2

3 reasons why firms would want to pursue a different objective of a firm

Answer 2

1. Shares may be widely dispersed, giving no individual shareholder significant power.
2. Many large shareholders are institutions such as pension funds, who are passive investors.
3. Shareholders may lack the information of managers actions.

Question 3

3 other objectives of a firm

Answer 3

1. Survival
2. Growth
3. Quality

Question 4

How is survival an objective for a firm

Answer 4

New firms establishing themselves in a market, or facing difficult economic conditions.

Question 5

How is growth an objective for a firm

Answer 5

Small firms aim for long term profits. Sacrifice short term profits and spend on advertising or sell output beyond profit max level to establish themselves in the market.

Invest in capital to grow, even if they are unprofitable in short term.

Due to managers increase reputation and influence or build long term monopoly position.

Question 6

How is quality an objective for a firm

Answer 6

Builds brand loyalty and increase profits in long run.

Question 7

3 factors affecting firms objectives

Answer 7

1. Size of firm
2. Short run vs long run
3. Private vs public sector

Question 8

How is the size of the firm going to affect an objective for a firm

Answer 8

Small firms possess entrepreneurial attitude. Desire to achieve profits to gain foothold in the market. Managers and owners one and the same. Easy decision making. Cost and revenue easily identified.

As a firm grows, divorce of ownership increases. Harder to identify costs and revenues. More competing interest.

Question 9

How is private vs public sector going to affect objectives for the firm

Answer 9

Public sector firm less likely to be motivated by firms and seek to achieve social welfare maximisation instead.

Question 10

How is short run vs long run going to affect the objectives of the firm

Answer 10

Growth or brand loyalty short run strategy that will allow long run profit maximisation.

Question 11

Perfect competition

Answer 11

Many sellers,
 many buyers, 
freedom of entry and exit
, perfect information
, perfect factor mobility 

homogeneous products

Question 12

Monopoly

Answer 12

A monopoly stands at the other extreme to perfect competition

Question 13

What are the 2 assumptions of monopoly

Answer 13

1. The firm is the industry

2. Barriers to entry prevent new firms entering

Question 14

3 sources of monopoly power

Answer 14

1. Nationalisation - government ownership preventing commercial competition
2. Nature barriers to entry - economies of scale, sunk costs (costs that cannot be recovered when leaving a market)
3. Artificial or strategic barriers to entry

Question 15

Consumer surplus

Answer 15

Measure of the welfare consumers gain from consuming a good or service

Question 16

Producer surplus

Answer 16

Difference between the price producers are willing and able to supply the good for, and the price they actually receive.

Question 17

Disadvantage of monopolies

Answer 17

They can use their market power to exploit customers, by reducing output and raising prices.