Market Structures (obj of firms)

Question 1

What is profit maximisation

Answer 1

• when marginal cost = marginal revenue (MC=MR)
• So each extra credit produced gives no extra loss or revenue

Question 2

When do firms break even

Answer 2

when TR=TC

Question 3

Why might some business not profit maximise

Answer 3

• They aren’t aware of MC & MR
• To avoid scrutiny as regulators might investigate if prices are too high etc
• Key stakeholders might be harmed
• Other objectives might be more appropriate

Question 4

What is divorce of ownership from control

Answer 4

When shareholders are separate from the day-to-day operations

Question 5

Causes of divorce ownership

Answer 5

• widening business cause as business grows, bigger demand of management is more complex so separate ownership
  Eg: small family restaurant expanding franchise and hiring managers

Question 6

Consequences of divorce ownership

Answer 6

• Principal agent problem; linked to asymmetric info. Agent acts in own interest rather than those of shareholders.
  May have different views that may conflict.

Question 7

What is survival

Answer 7

New firms entering market aim to survive in market. This is short term view.
- During economic declines like 2008 GFC, when consumption plummets, firms might have aimed for survival as their objective unit there is economic growth.

Question 8

What is revenue maximisation & explain diagram

Answer 8

Sales revenue occurs when MR =0
- On diagram profit max. Is at Q1 & rev max in at Q2.

Question 9

Why might firms want to maximise revenue

Answer 9

• For economies of scale benefits ( greater growth, lower AC so lower prices)
• Predatory pricing, when firms undercuts rival on purpose sacrificing profit to drive out competitors.
• Principle agent problem

Question 10

What is sales maximisation

Answer 10

When a business wants to become as large as they can without making a loss
- on a diagram this where AC = AR

Question 11

An example of a business sale maximising

Answer 11

• amazons kind launch. They sold as many kindles as possible to gain market share, so they can easer more profit in the long-run.
• Helps keep competitors out

Question 12

Why might businesses want to maximise sales

Answer 12

• economies of scales
• Limit pricing- pricing at break even at normal profit takes away incentive fr new firms to enter market so limiting competition.
• Principle agent problem
• Flood market - producing loads to products so consumers become aware of product and develop loyalty (netlfix,Spotify)

Question 13

What is the satisficing principle

Answer 13

• Firm is profit satisficing when it is earning enough profits to satisfy shareholders.

Question 14

How can stakeholders be affected

Answer 14

• Shareholders : receive higher dividends
• Managers : might receive higher incomes
• Consumers : excess price
• Workers : wages lower