Perfect, Imperfect markets and Monopoly Flashcards
3 points Why would a Firm Profit maximize
- Reinvestment
- dividends
- attract investment
3 points why a firm would not profit maximize
- knowledge of MC/MR curves
- Avoid controversy
- other interests of key stakeholders (key stakeholders may have different objectives)
what is Profit satisficing
- sacrificing profits to satisfy key stakeholders with other objectives
why might a firm profit satisfice (3 reasons)
- external pressure ( unions, shareholders, workers, regulation )
- lack of information
- Satisfy other objectives (undercutting)
2 drawbacks of profit satisficing
- inefficiency’s (dynamic/x inefficacy)
- dissatisfactory to shareholders
what are 2 cons of dissatisfying shareholders
- Negative press
- downward pressure on stock price (hostile takeover risks, more difficult to raise finance)
3 reasons to Revenue max
- Market share expanding/increase visibility
- attract investors
- undercut/ reduce competition
3 reasons against revenue max
- operational strain/factor strain
- stock market volatile (investors may perceive short term revenue spikes as a sign of uncertainty in long term prospects)
- long term profitability losses
3 reasons why a firm would sales max
- icrease consumer loyalty
- limit competition
- increase market share
3 reasons why a firm wouldnt sales max
- decreased product quality
- decreased shareholder satisfaction
- decreased profits
what is the principle agent problem
When a principle delegates power to an agent and they have different objectives
- asymmetry of information
- conflicts of interest
how to reslove the principle agent problem
- Performance based rewards
what is the shut down condition
what does it assume
AVC>AR shut down
AR>AVC stay in short run as fixed costs are being covered
all fixed costs are sunk
3 factors a firm will consider when shutting down
- Shut down condition
- Market conditions (future prospects)
- Ease of liquidating assets
2 pros and 2 cons of perfect competion
Pros
- all efficiency apart from dynamic
- zero consumer exploitation
Cons
- zero economies of scale
- No incentive to be entrepreneurial
3 Cons of monopolistic competition
- No efficiency’s
- lack of economies of scale
- cost cutting
3 pros of monopolistic competition
- Creative destruction
- Differentiated goods
- monopoly power is small
why is the demand curve in an oligopoly kinked
- Raising prices will lead to firms undercutting to gain market share
- Lowering prices will lead to price wars as firms cling to market share
how does the nash equilibrium improve oligopoly markets
- it means that the only long term price is reasonably fixed therefore firms will compete on non price factors
how does the temptation to collude and cheat apply to oligopoly’s
- Temptation to collude applies because firms will gain more profit equally if they do not undercut
- This will always create a temptation to cheat however because in the short run a firm could make more money by cheating the agreement and stealing market share
2 positives of oligopoly markets
- Price stability - as there is no aggressive price wars ( non price competition)
- ## Economies of scale - due to profits and non price competition dynamic efficiency exits
2 negatives of oligopoly’s
- Risk of collusion ( inefficiency)
- Reduced innovation ( even in competitive oligopoly’s firms will be fearful of advancement as price wars will be started)
2 Factors promoting competitive oligopolies
- Much more difficult to collude
- Market is contestable
2 factors promoting collusive oligopoly’s
- price/wage/job stability
- potential for innovation
2 Factors that may reduce the effects of oligopolistic firms cutting prices
- Consumer inertia
- Consumer loyalty
what is the legal definition of monopoly power in uk
- when a firm has at least 25% market share
2 Positives of Monopoly’s
- Large chance of economies of scale
- job security for those in the market
negatives of monopoly’s
- Missalocation of resources (ineficiancy)
- Profits will be shared out to shareholders and employees
- discrimination (consumer explooit)
What are the characteristics of a natural monopoly
- huge fixed costs
- high barriers
- competition is wasteful
2 Reasons why a government would regulate a monopoly
- The necessity of the goods they supply
- price discrimination huge capability to exploit consumers
why would a government need to subsidies a monopoly
- due to the vastness of demand they face they will not be able to supply at allocatively efficient levels.
- characteristics of contestable markets
- low barriers
- good information
- large pool of entrants
what has increased the contestablilty of markets
- Technology
- Globalisation (cheap labour/pool of entrants
- imformation
what does contestable markets illiminate
- the incentive to profit maximise
2 Pros and 2 Cons of contestable markets
Pros
- Efficiency’s
- increased labour demand
- investment
Cons
- cost cutting in dangerous areas
- creative destruction
- anticompetitive strategies
3 evaluation points about contestable markets
- Length of contestability
- Technology can also increase barriers by creating larger fixed costs
- Regulation (patents)
what is price discrimination
When a firm charges different prices do different consumers for an identical good/service based of differing demand elasticity
what are the 3 conditions necessary for price discrimination to occur
- Price making ability
- Imformation to seperate markets
- large barriers
What is first degree price discrimination
All consumer surplus is transferred to producer surplus as consumer is charged the max price that they are willing and able to pay
what is 2nd degree price discrimination
Discrimination is discrimination based of quantity of goods purchased
what is third degree price discrimination
When a firm segregates a market into categories based on differing price elasticity’s of demand.
how do the poorest consumers benefit from 1st and 3rd degree discrimination
the are charged a price the are more willing to pay wheras otherwise they may have not been able to afford the product at all
3 cons of Price discrimination
- Allocative inefficiency - firms can charge prices way above the marginal cost curve
- Inequality - price discrimination will widen income gap as consumers on lower incomes will spend more of their total income on products
- Anti competitive pricing - Firms can drive out competition by having greater knowledge
3 pros of price discrimination
- Economies of scale
- Some consumers benefit
- Cross subsidization
How does business efficiency relate to the economics problem
- It addresses how resources are utilized and allocated to meet the needs of society
