Micro Theorists Flashcards
What is the theorist for sales maximisation
Robin Marris which states managers aim to maximise the growth of their company above any other objective.
Increased market share - increased growth
Creative destruction
This is the idea that when an innovative, efficient production or industry evolves, this leads to growth in the new sector etc but death to the old way - could structurally unemploy staff etc
Why did Schumpeter argue that perfect competition was undesirable in contrast to monopolies
Schumpeter argued that perfect competition was undesirable due to lack of innovation
Monopolies have the inbuilt incentive to meet consumer needs due to Creative Destruction. If they don’t, they will lose market share (assumes is some level of contestability in this monopoly market)
Which theorists argues Oligopolies may not profit maximise and be interdependent
William Baumol
* Only interdependence and watch each other on big decisions
* MR=0, total revenue is maximised
* Price * Q
* Firms revenue maximise (with a minimum profit constraint), with elasticity affecting pricing decisions
* Maximising revenue increases market share
* Higher sales often correlate with higher managerial salaries and market share, incentivizing managers to focus on revenue.
Properties of the Baumol Model
Key properties of the Baumol model include:
1) Revenue maximization goals lead firms to lower prices, increasing sales volumes.
2) A minimum profit constraint is maintained to satisfy shareholders.
3) The long-run growth of the firm is prioritized over short-term profit gains.
4) Non-price competition is emphasized.
Adam smith invisible hand
Adam smith states that supply and demand is determined by market forces which is known as the invisible hand
Karl Marx capitalism
Karl marx was against capitalism in free markets because he said they exploited labour and so provision by the government will prevent capitalism
Freidrick Hayek
He stated that the market should be a free market but the government should act as a safety net to prevent externalities and provision of demerit goods etc
Joan Robinson
she came out with the idea that all competitive markets have some degree of monopoly power - she started the monopolistic competition revolution along with edward chamblin
Creative destruction
This is the idea that when an innovative, efficient production or industry evolves, this leads to growth in the new sector etc but death to the old way - could structurally unemploy staff etc
Rational decision making
People make decisions to maximise their own utility
Pareto Efficiency
This states that in a perfectly competitive market, this means that they are maximising efficiency to the point that nothing can be changed without making someone else worse off
What is the theory for revenue maximisation and the principle agent problem?
William Balmoul said that managers are most interested in their level of revenue since this is what their salary depends on
- Also said to increase the prestige of the business
What is the theorist for sales maximisation?
Robin Marris which states managers aim to maximise the growth of their company above any other objective.
Increased market share - increased growth
What is oliver williamsons theory?
Managers make decisions based upon their own satisfaction
Williamson tradeoff model
Tradeoff associated with horizontal mergers via gains from lower CoP and the losses associated with higher prices due to greater degree of monopoly power
Adam Smith- benefit of free market
Individuals pursuing their own self-interest, guided by the “invisible hand,” lead to efficient resource allocation and economic prosperity and utility maximisation
Schumpeter- benefit of free market
Creative destruction, where innovation continuously disrupts industries, eliminating outdated businesses while creating new opportunities. He saw capitalism as dynamic and driven by entrepreneurial innovation
Hayek- benefit of free market
He believed that price signals and competition drive innovation and economic growth.
Adam Smith- issues with free market economy
Argued that some control of monopolies was needed and state intervention for public goods like defence
Karl Marx- issues with free market economy
Leads to exploitation, inequality, and alienation of workers through profit maximisation over all else
Schumpeter- issues with free market economy
He controversially predicted that capitalism might evolve into socialism over time, as large corporations and bureaucracies increasingly replace small entrepreneurs, reducing the dynamism of free markets
Karl Marx- benefit of command economy
He believed in central planning to ensure resources are distributed based on need rather than profit; poverty would be minimised
Schumpeter- issues with command economy
bureaucratic control stifles innovation and entrepreneurship
Hayek- issues with command economy
Decentralized decision-making leads to efficient allocation of resources. Not taking into account preferences. At the extreme is food shortages and famine (not allocatively efficient and not on ppf) arguing that central planning leads to inefficiency and loss of individual freedom. In The Road to Serfdom, he warned that too much government control over the economy leads to authoritarianism.
Better via AI?
What is coase theorem
COASE THEOREM STATES WITH SMALL NEGATIVE EXTERNALITIES, LET THE PARTIES SOLVE THESE ISSUES
There is no cost of administration
Give some failings of price mechanism
- Information gaps
- Asymmetric information
- Externalities
- Peer pressure ignores utility
- Habit forming distorts utility
failings of price mechanism means market failure
