M4-The Impact of Market Influences: Part 1 Flashcards
Key assumptions of perfect competition include:
- Customers are indifferent about which firm they buy from
- The level of a firm’s output is small relative to the industry’s total output.
- There is freedom of entry into and exit out of the industry
A key assumption of perfect competition is that the firm is a “price taker,” that is, it cannot fix the price.
Horizontal demand curves represent demand that is perfectly price elastic (buyers will only pay one price for any quantity of a product). This occurs in perfectly competitive markets.
No matter which model is representative of the industry in which the firm operates, the firm will maximize profits by producing at Marginal revenue = marginal cost. In order to sell at the rate of output in markets controlled by monopolists, the price is set where marginal revenue equals marginal costs. The monopolist’s price will be higher than MR resulting in large profits. (true or false)
true
A natural monopoly exists when economic and technical conditions permit only one efficient supplier. (true or false)
true
Government control may create a monopoly, but not a natural monopoly. This is a regulated monopoly.
Barriers to entry help create a monopoly, but the product must be unique.
The characteristics of monopolistic competition include:
- numerous firms with differentiated products
- ease of entry - few barriers
- firms exact some influence over price and market
- non-price competition is frequent and critical
Oligopoly market conditions are characterized by:
- few firms in the market
- significant barriers to entry
- differentiated products
- fixed (or semi fixed) prices
- kinked demand curves
The demand cure for any individual oligopolist is kinked sharply downward. This occurs because, in oligopoly market conditions, the other firms in the market will match any price reduction so they do not lose market share but will not match any price increase of an individual firm. Therefore, for the individual firm attempting to raise its prices beyond equilibrium, consumers will quickly buy from other firms in the market and demand will drop off sharply creating a kinked demand curve. (true or false)
true
The process of strategic planning actually beings with defining the firm’s vision and mission statements and then moves to setting the goals and objectives of the firms before it considers creation of the strategic plan. (true or false)
true
Under pure (or perfect) competition, strategic plans include maintaining the market share and responsiveness of the sales price to market conditions. (true or false)
true
Under monopolistic competition, strategic plans include maintaining the market share (as with pure competition), but they also likely include plans for enhanced product differentiation and allocation of resources to advertising, product research, etc. (true or false)
true
Under monopoly, strategic plans ignore market share and focus on profitability from production levels that will maximize profits. (true or false)
true
Strategic planning is the creation of an overall strategic plan for an organization to achieve its overall “business objectives.” The strategic plan will establish the general direction of the organization. (true or false)
true
Game theory is a study of mathematical models of conflict and cooperation between rational decision makers. There are several versions of game theory models that are used to evaluate participant behavior under oligopolies. (true or false)
true
Under oligopoly, strategic plans focus on maintaining market share and call for the proper amount of advertising (to ensure product differentiation) and ways to properly adapt to price changes or required changes in production volume. (true or false)
true
Compared to firms in a perfectly competitive market, a monopolist tends to produce substantially less but charge a higher price. (true or false)
true
Evaluation of internal and external factors contributing to an organization’s success is referred to as Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis. Strengths and weaknesses focus on internal factors while opportunities and threats relate to external factors. (true or false)
true
