Topic 4

Question 1

Profit Maximisation Definition

Answer 1

When the total sales revenue is furthest above total cost of production.

Question 2

Why is it important for a business to make profit?

Answer 2

Shows strong performance, invest in R&D and technology, boost owner’s profit, security if material prices change, used to expand.

Question 3

Conflict between long-run and short-run profits

Answer 3

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.

Question 4

What objectives do firms have?

Answer 4

Sales maximisation, growth maximisation, market share maximisation,survival.

Question 5

Sales Maximisation

Answer 5

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.

Question 6

Growth Maximisation

Answer 6

Decision makers in a firm will try to make the firm grow as fast as possible, which may conflict with profit maximisation.

Question 7

Market Share Maximisation

Answer 7

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.

Question 8

Survival

Answer 8

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.

Question 9

Market Structure Definition

Answer 9

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.

Question 10

Price Taker Definition

Answer 10

A firm which passively accepts the ruling market price set by market conditions outside its control.

Question 11

Price Maker Definition

Answer 11

A firm possessing power to set the price within the market.

Question 12

Perfect Competition Definition

Answer 12

A market that displays the 6 conditions.

Question 13

Conditions of Perfect Competition

Answer 13

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.

Question 14

Competitive Market Definition

Answer 14

One in which firms strive to outdo their rivals but it does not necessarily meet all the conditions of perfect competition.

Question 15

Imperfect Information Definition

Answer 15

A situation in which the buyers and sellers have different information.

Question 16

Concentrated Market Definition

Answer 16

A market containing very few firms, in the extreme only one firm.

Question 17

Pure Monopoly Definition

Answer 17

When there is only one firm in the market.

Question 18

Customer Sovereignty Definition

Answer 18

Through exercising their market power, customers collectively determine what is produced in a market.

Question 19

Producer Sovereignty Definition

Answer 19

Producers or firms in a market determine what is produced and what prices are charged, this is exploited by monopolies.

Question 20

Characteristics of a pure monopoly

Answer 20

No competition, price maker, customer loyalty, 100% of output produced by one firm, total market power.

Question 21

Characteristics of monopoly power

Answer 21

price maker, little competition, large amount of market share, one dominant firm, high amount of market power.

Question 22

Sources of monopoly and monopoly power

Answer 22

Merges& takeovers, legal barriers, economies of scale, geographical barriers, marketing barriers, technological barriers, natural monopoly, government created monopoly.

Question 23

Factors which influence monopoly power

Answer 23

Barriers to market entry, number of competitors in a market, advertising and monopoly power, product differentiation.

Question 24

Barrier to market entry

Answer 24

Natural barriers- economies of scale, geographical barriers, natural monopoly
Artificial barriers- merge& takeover, legal barriers, marketing barriers, technological barriers, government created monopoly.

Question 25

Number of competitors in a market

Answer 25

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.

Question 26

Product Differentiation

Answer 26

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.

Question 27

Advertising& Monopoly Power

Answer 27

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.

Question 28

Quantity Setter Definition

Answer 28

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.

Question 29

Concentration Ratio Definition

Answer 29

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.

Question 30

Oligopoly Definition

Answer 30

A market dominated by a few firms.

Question 31

Non-price competition in oligopolies

Answer 31

Advertising, location, convenience, coupons, sales promotions, special orders, free gifts, marketing research, new product development, delivery services, customer service.

Question 32

Resource Misallocation Definition

Answer 32

When resources are allocated in a away which doesn’t maximise economic welfare.

Question 33

Disadvantages of Monopoly

Answer 33

Exploit consumers by restricting output and raising prices, productive inefficiency, lack of innovation, lack of consumer choice, can eliminate competition.

Question 34

Exploit consumers by restricting output and raising prices

Answer 34

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.

Question 35

Productive Inefficiency

Answer 35

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.

Question 36

Advantages of Monopoly

Answer 36

Benefits resulting from economies of scale, the benefits of invention& innovation, provide revenue for the government, survival on international markets.

Question 37

Benefits resulting from economies of scale

Answer 37

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.

Question 38

Benefits of invention& innovation

Answer 38

Use high profits to fund R&D and product innovation, finding better ways of making existing products and development of new products.

Question 39

Price Competition Definition

Answer 39

Reducing price of a good or service to gain sales by making it more attractive.

Question 40

Methods of price competition

Answer 40

Special offer pricing, limit pricing, predatory pricing.

Question 41

Special offer pricing

Answer 41

Temporary reduced pricing for limited time on certain goods.

Question 42

Limit Pricing

Answer 42

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.

Question 43

Predatory Pricing

Answer 43

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.