Chapter 5 : Perfect competition, imperfectly competitive markets and monopoly Flashcards
(18 cards)
What is a monopoly?
When there is only one firm in the market with more than 25% of the market share.
What assumptions do economists make to model a monopoly?
- high barriers to entry
- profit maximisers they produce when MC=MR
- one firm in the market
What is a pure monopoly?
When there is only one firm in the market.
What is a legal monopoly?
When one firm has 25% of the market share.
What is a legal barrier?
A legal barrier that stops entry to a market.
Ex. patents
What is a sunk cost?
When you leave a market you cannot recover any costs.
Ex. Specialist machinery, advertising
What is market structure?
The number or size of firms within the market for a particular good or service this can include a large number of small
firms, one firm or a small number of firms.
What is perfect competition?
It a market structure that has a large number of buyers and sellers, perfect information about the market, identical products and barriers to entry.
What is imperfect competition?
Any market structure that isn’t perfect competition.
What is profit maximisation?
When the firm aims to make the largest possible difference between a firms total revenue and total costs.
When does profit maximisation occur?
When MC=MR
What does profit maximisation allow firms to do?
It enables firms to reinvest into developing new products to increase the amount of customers. This increases the returns to shareholders and attracts more people to buy shares in the company.
What is divorce of ownership from control?
That the owners of the firm and the managers that run the firm from day to day have different objectives.
What are the objectives of directors that control the firm from day to day?
- Growth maximisation
- Sales revenue maximisation
- Satisficing
Explain growth maximisation:
The growth of the firm can help boost the CV and profile of executive managers and can lead to media publicity. This can prevent the takeover of a firm.
Explain sales revenue maximisation:
The annual sales revenue of a firm goes towards executives pay and bonus pay. The executives controlling the firm will prioritise maximising sales revenue instead of profit maximisation to benefit themselves.
Explain satisficing:
It is extremely difficult to achieve MC=MR so the executives settle to maximise profits to the suboptimal level.
What are some other firm objectives?
- Sales maximisation
- Survival
- Growth
- Increasing market share
- Stakeholder objectives
