market structures

Question 1

Market structure:

Answer 1

Market structure: the number and size of firms within a market for a particular good or service.

Question 1

Profit maximisation:

Answer 1

Profit maximisation: when a firm seeks to make the largest positive difference between total revenue and total costs.

MC=MR
TR>TC

Question 2

benefits of profit max

Answer 2

• re-invest funds into developing new products that lead to them to gain more customers
• pay out higher returns to shareholders which may encourage more people to buy shares in the company, or help boost the share price

Question 3

Divorce of ownership from control:

Answer 3

Divorce of ownership from control: the separation that exists between owners of the firm (shareholders) and directors in large public limited companies.

exists in large firms may mean that profit maximisation is not always achieved. Large corporations may be predominantly owned by shareholders who are separate from the day-to-day running of the business, having bought shares in various businesses on the stock market as a form of financial investment. On their behalf, the businesses are run by a board of directors who may not hold any shares.

Question 4

Satisficing:

Answer 4

Satisficing: making do with a satisfactory, sub-optimal level of profit.

Question 5

objectives of directors:

Answer 5

• Growth maximisation: since growth of a firm may serve to boost the profile and CV of senior managers, including more column inches in publications
  such as the Financial Times. It may also reduce the threat of takeover by other firms, contributing to a ‘quiet life’ for senior executives.
• Sales revenue maximisation: as executive pay and bonuses may be linked to annual sales revenue rather than profit, this is likely to lead to a firm not
  targeting profit maximisation as its primary objective.
• Satisficing: given that it is likely to be extremely difficult in practice to produce at the precise output at which MC = MR, firms are more able to target a
  satisfactory, sub-optimal level of profit rather than a maximal one. This is shown in Figure 5.3. Profit maximisation occurs at a single, specific output, Q1, which will be hard to achieve. A satisfactory level of profit (Psat) that most shareholders will be happy with can be achieved at any level of output between Q2 and Q3. Note that managers will be also operating with imperfect information and shareholders will be subject to asymmetric information about the intentions and objectives of the managers, making satisficing a realistic view of what happens.

Question 6

Increasing market share:

Answer 6

Increasing market share: when a firm seeks to maximise its percentage share of a market in terms of sales value or number of units sold.

Question 7

Stakeholder:

Answer 7

Stakeholder: any individual or group with an interest in how a business is run.

Question 8

Oligopoly:

Answer 8

Oligopoly: a market structure dominated by a small number of powerful firms.

Question 9

Monopolistic competition:

Answer 9

Monopolistic competition: a form of imperfect competition with a large number of firms producing slightly differentiated products.

Question 10

Concentration ratios

Answer 10

Concentration ratios indicate the total market share held by the largest firms in the industry. For example, a concentration ratio of 5:80 in the supermarket industry would indicate that the largest five firms held 80% of the total market share.

Question 11

Cartel:

Answer 11

Cartel: a collusive agreement among a group of oligopoly firms to fix prices and/or output between themselves.

The Organization of the Petroleum Exporting Countries (OPEC) is a famous example of a cartel.

Question 12

Natural monopoly:

Answer 12

Natural monopoly: a market where a single firm can benefit from continuous economies of scale.