Week 10 - competition & market power Flashcards
What is the definition of profit and how is maximum profit produced?
pie = Total revenue - Total costs
To make maximum profit a firm does not need to maximise revenue or minimise cost, but needs to make sure the gap between total revenue and total cost is as large as possible.
Define marginal revenue (MR)? And marginal benefits (MB)?
The addition to total revenue by the production and sale of one more unit.
Marginal benefits may not be as easy to identify and quantify in a dollar value.
Define marginal cost (MC)?
The addition to total cost incurred by producing one more unit.
How do you maximise profit?
Marginal revenue > (greater) Marginal cost - then profit can be increased by increasing output.
Marginal revenue < (less) Marginal cost - then profit can be increased by decreasing output.
MR = MC = maximum profit.
What is Net benefit (NB)?
total benefit (TB) - total cost (TC)
How to maximise Net benefit?
Marginal benefit (MB) = Marginal cost (MC)
What is the principle-agency problem?
The problem arises because the owner (shareholders) and manager (agent) are not the same people and their interests may differ.
How to solve the principle-agency problem?
- Institutional controls - Board of directors
- Share price - if there is poor management than the share price will fall and there is a possibility of a takeover.
- Remuneration schemes - with part of the remuneration at risk.
When to hire more labour?
When - w (total cost of new staff) = MRP (Marginal revenue product).
Margin revenue product (MRP) = marginal product (MP) x marginal revenue (MR)
MP = is what the extra unit of labour will produce.
Limitations on the neo-classical view of labour?
- Labour is not bought or sold like other goods.
- Once hired it will has to be trained
- ‘units of labour’ are all different.
What is transactional costs? What are the transactional costs for labour?
They represent the cost that arise in striking a deal in the market.
Transactional costs are high for labour, however labour hired in the long-term will lower costs.
What are the optimal boundary for a business and how are they determined?
It is the balance between transactional costs and managerial costs.
Determined by:
- Economies of scale
- The number of rivals
- Governance costs
- Asset specificity.
How to keep market power?
- Architecture - corporate culture, strong relationship with supplies, customers and staff.
- Reputation - customer loyalty
- Innovations
- Economies of scale
- Exclusive ownership of resources or know-how.
What is a Monopoly ?
One one firm ; the firm is the market
Doesn’t need to profit maximise to survive, can make super-normal profit.
Chooses to restrict quantity and therefore increase price.
What is an Oligopoly?
A few firms in the industry.
They prefer non-price competition (branding, loyalty and marketing).
