Week 3 Flashcards
What is the range of market structures (most competitive to least competitive)
- perfect competition
- monopolistic competition
- oligopoly
- monopoly
what are 3 factors that effect the market structure
- number of firms
- barriers of entry and exit
- product differentiation
how does the number of firms effect the market structure
more firms = more competition
- perfect competition = infinitely many
- monopolistic competition = lots
- oligopoly = few
- monopoly = one
how does barriers of entry and exit effect the market structure
the more competitive the less / no barriers of entry and exit there are
- perfect competition = none
- monopolistic competition = none
- oligopoly = high
- monopoly = high
why do we study the theory of perfectly competitive markets if they cannot exist
markets can be competitive enough to be modeled as perfectly competitive
how does less competition benefit producers
less competition favors producers means higher prices due to being more of a monopoly or oligopoly and having no substitutes
how does product differentiation effect market structure
the less competitive the more product differentiation there is
- perfect competition = none
- monopolistic competition = some
- oligopoly = a lot
- monopoly = not applicable (only 1 firm)
how does more competition benefit consumers
competition generally means lower prices for consumers increasing their utility, more availability and choice aswell
what is the traditional theory of a firms objective and why is that
to maximize profit
- this is because it is derived from the assumption that economic agents are selfish and rational
- but the theory isn’t completely true businesses may have a wide range of objectives
how to draw a profit maximising condition graph
y axis = costs/revenue
x axis = output
MR sloping downwards
MC sloping upwards
how is maximised profits shown on a profit maximising graph
where MC = MR (equilibrium)
- if MC < MR increase output until MC=MR
- if MC > MR decrease output until MC=MR
what are 5 business objectives
- survival
- increase market share
- maximise revenue
- corporate social responsibility
- maximise sales volume
how to draw a maximise revenue graph
y axis = revenue
x axis = output
TR revenue curves upwards
MR slopes downwards
what does maximised revenue look like on a maximise revenue graph
MR = 0 (where it crosses the x axis) is when TR is at the maximum point
- if MR > 0 = increase output
- if MR < 0 = decrease output
why might businesses have corporate social responsibility as their objective
in the short run improve quality and customers will have faith and so gains brand loyalty in the long run
why might businesses have increase market share as their objective
in the short run increasing sales increases market share gains monopolistic power which allows them to earn higher profits in the long run
what 2 reasons might businesses have maximise revenue as their objective
- allows them to focus just on revenue and sales instead of costs too (easier to monitor)
- achieve maximum revenue then cut costs later
why might businesses have maximise sales volume as their objective
in the short run more sales increases customers, they may develop brand loyalty,
- which in the long run the business can charge higher prices and gain more profits due to increased brand loyalty
why do public sector firms and private sector firms hold different objectives
public sector firms are their to maximise social welfare
while private sector firms are their to maximse profits
what are the negatives of public sector firms acting in society’s interests
- it can make them inefficient (no competition, so no innovation)
- can effect private sector firms who have large government contracts and are very dependent on the government due to having different objectives
what objectives do non-profit organisation likely focus upon
focus on social goal
- survival (continue charitable operations)
- growth (start supporting more people)
- social welfare (how to utilise resources to help people best)
what is satisficing
satisfy + suffice
firms may settle for satisfactory outcomes instead
- Herbert Simon believed that in many situations economic agents did not always optimise
why might firms satisfice
- too much effort to optimise (enough to satisfy stakeholders)
- they do not know the optimal level of output to maximise profits
- principle agent problem (enough to meet the needs of investors, then managers freely pursue self-interest)
what is the principle agent problem
There is a divorce of control from ownership because both principals and agents are self-interested
what are principals
large firms usually owned by shareholders
- self-interest of profits and maxing them out
what are agents
managers that run the firms
- self-interested by self-gain
what 3 reasons cause managers to not run the firm in the best interests of owners
- satisfice, (meet the needs to satisfy investors, so managers can freely pursue their own interests)
- revenue targets, (managers may focus on revenue at the expense of profit for bonuses)
- market share targets, (larger firms hold more market share, managers may target expansion over profit)
what 2 things does the principal-agent problem result in
- misaligned incentives
- asymmetric information
what 2 ways solve misaligned incentives (principal-agent problem)
- remuneration in shares, (managers become owners, removing the divorce of ownership
- bonus “claw-back” schemes, (any bonuses given due to short-term gain that don’t benefit shareholders or the business in the long-term, the shareholders can take back the bonus)
2 ways that solve asymmetric information
(principal-agent problem)
- greater shareholder activism, (shareholders get more involved and understand how it’s being run)
- increased managerial reporting, (making managers report more and in more detail exactly their reason for their decisions)
what sector public or private suffers from the principal-agent problem
both public and private sector businesses suffer from it
stakeholders definition
all relevant parties who have an interest in the operation and results of the business
