Topic 4 Flashcards
Profit Maximisation Definition
When the total sales revenue is furthest above total cost of production.
Why is it important for a business to make profit?
Shows strong performance, invest in R&D and technology, boost owner’s profit, security if material prices change, used to expand.
Conflict between long-run and short-run profits
Long-run profits may require substantial investment in research and new capital. may be short term worries about finance or future risk and uncertainty. lack of immediate profits will lower share prices and render it vulnerable to hostile takeover.
What objectives do firms have?
Sales maximisation, growth maximisation, market share maximisation,survival.
Sales Maximisation
At the level of output at which that sale of an extra unit of output would yield no extra revenue. Firms with this objective are usually subject to a requirement or constraint that they must make a minimum or acceptable level of profit.
Growth Maximisation
Decision makers in a firm will try to make the firm grow as fast as possible, which may conflict with profit maximisation.
Market Share Maximisation
Occurs when a firm maximises its percentage change of the market which it sells its product. This involves increasing the percent of market output which the firm produces and trying to increase its market power and monopoly power.
Survival
In a highly competitive market firms may simply want to survive. Firms here will be threatened by the entry of new firms which steal away their customers.
Market Structure Definition
The organisation of a market in terms of the number of firms in the market, the ways in which they behave and conduct themselves, the extent to which the goods or services being produced and the ways in which barriers to entering the market affect the way the market operates.
Price Taker Definition
A firm which passively accepts the ruling market price set by market conditions outside its control.
Price Maker Definition
A firm possessing power to set the price within the market.
Perfect Competition Definition
A market that displays the 6 conditions.
Conditions of Perfect Competition
A large number of buyers and sellers, perfect market information, the ability to buy or sell as much as is desired at the ruling market price, the inability of an individual buyer or seller to influence the market price, a uniform or homogeneous product, no barriers to entry or exit in the long run.
Competitive Market Definition
One in which firms strive to outdo their rivals but it does not necessarily meet all the conditions of perfect competition.
Imperfect Information Definition
A situation in which the buyers and sellers have different information.
Concentrated Market Definition
A market containing very few firms, in the extreme only one firm.
Pure Monopoly Definition
When there is only one firm in the market.
Customer Sovereignty Definition
Through exercising their market power, customers collectively determine what is produced in a market.
Producer Sovereignty Definition
Producers or firms in a market determine what is produced and what prices are charged, this is exploited by monopolies.
Characteristics of a pure monopoly
No competition, price maker, customer loyalty, 100% of output produced by one firm, total market power.
Characteristics of monopoly power
price maker, little competition, large amount of market share, one dominant firm, high amount of market power.
Sources of monopoly and monopoly power
Merges& takeovers, legal barriers, economies of scale, geographical barriers, marketing barriers, technological barriers, natural monopoly, government created monopoly.
Factors which influence monopoly power
Barriers to market entry, number of competitors in a market, advertising and monopoly power, product differentiation.
Barrier to market entry
Natural barriers- economies of scale, geographical barriers, natural monopoly
Artificial barriers- merge& takeover, legal barriers, marketing barriers, technological barriers, government created monopoly.
Number of competitors in a market
The larger the number of competitors in a market, the less scope there is for exercising monopoly power. There can be exceptions for example when there is a large dominant firm and a large number of small firms with niche positions.
Product Differentiation
Making a product different from other products through product design, the method of the product or through its functionality. This will increase a firm’s monopoly power.
Advertising& Monopoly Power
Informative advertising- increases competition by providing consumers and producers with useful info about goods or services available. Persuasive advertising- makes demand curve less price elastic attempts to persuade potential customers is worth buying it reduces competition. Saturation advertising- floods the market with info and persuasion about a firm’s product functions as a monopoly man made barrier to market entry by making it difficult for smaller firms to compete.
Quantity Setter Definition
A firm chooses the quantity of a good to sell, rather than its price. The market demand dictates the maximum price that can be charged if the firm is to successfully sell its chosen quantity.
Concentration Ratio Definition
A ratio which indicated the total market share of a number of leading firms in a market, or the output of these firms as a percentage of total market output.
Oligopoly Definition
A market dominated by a few firms.
Non-price competition in oligopolies
Advertising, location, convenience, coupons, sales promotions, special orders, free gifts, marketing research, new product development, delivery services, customer service.
Resource Misallocation Definition
When resources are allocated in a away which doesn’t maximise economic welfare.
Disadvantages of Monopoly
Exploit consumers by restricting output and raising prices, productive inefficiency, lack of innovation, lack of consumer choice, can eliminate competition.
Exploit consumers by restricting output and raising prices
Monopoly will use its power to raise profit by decreasing output, market failure and resource misallocation occurs as too little of the good is produced and consumed at too high prices, economic welfare is less than it should be, increases producer sovereignty and exploit customers, persuasive advertising and other strategies aim to reduce elasticity of demand.
Productive Inefficiency
Monopolies have less pressure to decrease their costs and achieve economies of scale. protected by barriers to entry. A monopolists average costs may be higher.
Advantages of Monopoly
Benefits resulting from economies of scale, the benefits of invention& innovation, provide revenue for the government, survival on international markets.
Benefits resulting from economies of scale
Most markets are too small to allow more than 1 firm to benefit from internal EofS. Achieving EofS will decrease the number of firms in the market, decreases competition. Decreases average costs and price for consumers.
Benefits of invention& innovation
Use high profits to fund R&D and product innovation, finding better ways of making existing products and development of new products.
Price Competition Definition
Reducing price of a good or service to gain sales by making it more attractive.
Methods of price competition
Special offer pricing, limit pricing, predatory pricing.
Special offer pricing
Temporary reduced pricing for limited time on certain goods.
Limit Pricing
Reducing the price of a good to just above average cost to deter entry of new firms. Prices set at levels which are likely to make it unprofitable for potential entrants. Firms sacrifice short-run profit maximisation for long term profit.
Predatory Pricing
Temporarily reducing price of goods to below average cost to drive small firms and new entrants out of the market. Anti competitive pricing strategy, bolstering monopoly power, which in turn gives rise to consumer exploitation.
