Theory Of Thr Firm

Question 1

Direct labour

Answer 1

The cost to the firm of the workers who participated in the actual making of the product

Question 2

Direct materials

Answer 2

The cost to the firm of the actually used in making the product

Question 3

Marginal revenue

Answer 3

Is the extra revenue received from selling one extra unit

Question 4

Marginal cost

Answer 4

Is the extra cost incurred in the production of one extra unit of output

Question 5

Profit max

Answer 5

Mc = mr

Question 6

If MC>MR

Answer 6

Then dont make an extra unit

Question 7

If MC<MR

Answer 7

Then make an extra unit

Question 8

Perfect competition characteristics

Answer 8

Many buyers and sellers (no single buyer or seller can influence the market price)
Price takers
Homogenous products ( there is no benefit to the buyer of purchasing one or other of the products)
No advertising or branding
Perfect information: consumers and firms have perfect knowledge
No barriers to entry or exit
All firms are faced with the same cost functions

Question 9

The marginal cost curve acts as

Answer 9

Firms supply curve

Question 10

Monopoly definition

Answer 10

A single supplier of a good or service for which there is no close substitute

Question 11

A potential monopoly merger goes to

Answer 11

Competitive and Markets Authority if it would be greater than 25% of the market

Question 12

An approved monopoly merger

Answer 12

Disney and pixar

Question 13

A rejected merger of monopoly

Answer 13

Sainsbury and Asda

Question 14

What profits do monopolies make

Answer 14

Supernormal

Question 15

Monopoly can determine

Answer 15

Price or output but not both

Question 16

In a monopoly mc = ac when

Answer 16

Productive efficiency

Question 17

In a monopoly when ac = ar

Answer 17

Technical efficiency (sales max)

Question 18

Characteristics of monopoly

Answer 18

High set up costs ( deterrent to firms)
Brand loyalty (large amounts on marketing and advertising)
Anti-competitive practices (deliberately restricting or removing competitors using cartels)
Price makers

Question 19

Advantages of monopoly

Answer 19

Dynamic efficiency (efficiency over time, the huge profits allow monopolies to spend enormous amounts on research and development

Economics of scale
Managerial (specialisation)
Financial (interest rates)
Purchasing (bulk buying)

Question 20

Characteristics of oligopoly

Answer 20

Concentration ratio (supply concentrated in the hands of few firns)
Firms are interdependent
Barriers to entry and exit

Question 21

Ways oligopolies compete

Answer 21

Loyalty cards
Advertising
24/7

Question 22

Price leadership (dominant firm) oligopoly

Answer 22

One form of tacit collusion is firms setting the same price as an established price leader. Price leader usually tge dominant firm eg Sony tv

Question 23

Price leadership barometric

Answer 23

This is when a change occurs by one firm as a result of changes in the macroeconomic environment eg a recession or market conditions in the industry eg change in demand

Question 24

Key remember monopoly power

Answer 24

If the seller of a good or service can control price or output and adjust these to control profit that seller has a degree of monopoly power

Question 25

Monopolistic characteristics

Answer 25

Many buyers and sellers Low to no barrier ti entry Differentiated products Long run - normal Short run - supernormal Eg takeaway

Question 26

Contestable markets

Answer 26

An entrant has access to all production techniques available to the incumbents, is not permitted from wooing the incumbent’s customers and entry decisions can be reversed without cost

Question 27

Contestable market characteristics

Answer 27

Advertising expenditure High start up costs Legal contracts (patent) Possession of exclusive rights

Question 28

Competitive market

Answer 28

A competitive market is one where no single firm has a dominant position and where the consumer has plenty of choice when buying goods or services. There are a few barriers to entry of new firms which allows new businesses to enter the market if they believe they can make sufficient profits.

Question 29

Anti- competitive behaviour

Answer 29

Anti- competitive practices are strategies by firms that are deliberately behaviour designed to limit the degree of competition inside the market. Such actions can be taken by one firm in isolation or a number of firms engaged in some form of explicit or implicit collision. Where firns are found to be colluding on price it could be seen to be against public interest.

Question 30

Horizontal integration

Answer 30

When two firms join at the same stage of production in one industry. For example two car manufacturers may decide to merge, or a leading bank successfully takes over another bank.

Question 31

Cartel

Answer 31

A cartel is a formal agreement among firms. Cartels usually occur and an oligopolistic industry. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. Cartels are illegal under UK and European competition laws.

Question 32

Market power

Answer 32

Market power refers to the ability of a firm to influence or control the terms and conditions on which goods are bought and sold. Monopoly can influence price by varying their output because consumers have limited choice of rival products.

Question 33

Oligopoly definition

Answer 33

An oligopoly is a market dominated by a few large suppliers. The degree of market concentration as high with typically the leading five firms taking over 60% of total market sales.