BEC 5 M4: Impact of Market Influences Part 1

Question 1

Key assumptions of perfect competition

Answer 1

1. Customers are indifferent about which firm they buy from
2. The level of a firm’s output is small relative to the industry’s total output
3. There is freedom of entry into and exit out of the industry

Question 2

Price taker

Answer 2

cannot fix the price

Question 3

in order to sell at the rate of output in markets, the price is set where

Answer 3

merginal revenue equals marginal cost

Question 4

Oligopoly kinked demand curve

Answer 4

If a firm in an oligopoly tries to raise its price, but the others don’t, then demand drops sharply

Question 5

3 factors of production

Answer 5

1. land (natural resources)
2. Labor (human capital)
3. capital (nonhuman physical capital accumulated through past investment)

Question 6

complementary input

Answer 6

if an increase in one input results in the increase of another input

Question 7

substitute input

Answer 7

if an increase in one input results in the decrease of another input

Question 8

derived demand

Answer 8

demand for factors of production that are related to demand for goods/services those factors produce

Question 9

equilibrium wage

Answer 9

wage at which the quantity of labor demanded is equal to the quantity supplied

Question 10

Internal Factors

Answer 10

affect strategy and are sources of strengths and weaknesses

Question 11

external factors

Answer 11

sources of opportunities in the market and threats to the firm’s ability to continue its strategic plan

Question 12

Porter’s Five Forces that affect the competitive environment of the firm

Answer 12

1. Barriers to entry
2. market competitiveness
3. existence of substitute products
4. bargaining power of customers
5. bargaining power of suppliers

Question 13

natural monopoly

Answer 13

when economic and technical conditions permit only one efficient supplier

Question 14

Game theory

Answer 14

study of mathematical models of conflict and cooperation between rational decision makers. This is used to understand oligopoly behavior

Question 15

Herfindahl index

Answer 15

measurement of the size of firms relative to the industry that gives more weight to larger firms.

Question 16

concentration ratio

Answer 16

quantitative indicator of industry concentration that measures market share of the leading firms in an industry relative to all firms in industry