Firms & Decisions Flashcards
(11 cards)
explain what determines the price and output decisions of large firms
large firms
- monopolies
- oligopolies
profit-driven
- like all firms, large firms will produce to the point where MR = MC
monopolies and oligopolies set high prices
- sig BTE –> few substitutes –> PED < 1 –> raise P by limiting output [Qd falls LTP] –> TR rise –> at MR = MC, P > MC
oligopolies set stable prices [price rigidity]
- kinked demand curve theory –> no incentive for oligopolies to change prices
- mutual interdependence –> even if COP changes, more likely to absorb rather than pass it on to consumers
multiple prices due to price discrimination
- large firms have market power, ability to prevent arbitrage and segment the market
alternative aims of the firm [esp when markets are more contestable]
- even large firms like monopolies may lower P and increase Q –> earn less SNP or even NP at AR = AC to give potential entrants less incentive to enter the market [limit pricing]
discuss to what extent should firms in SG aim to be big
cost considerations
- adv: IEOS [expanding closer to MES]
- disadv: IDOS [expanding beyond MES]
revenue considerations
- adv: AR/MR shift right + more inelastic as firms gain more MP and MS –> as P and Q rise, TR rises
- EV: SNP also rises –> more ability to do process and product innovation
wider range of products
- more risk-bearing abilities [dd fall in one product / sector/ market is cushioned by other markets]
type of industry
- personalized services –> less able to use large scale machinery –> less able to enjoy technical IEOS –> MES occurs at lower levels –> more susceptible to IDOS –> should be small
- capital intensive sectors –> more scope to enjoy IEOS + high SUC can be spread more thinly across large outputs –> should be large
type of product
- niche markets –> dd is small + firms may want to remain exclusive –> remain small
EV
- SG: small domestic market + limited resources but well connected to other markets via FTA
- globalization + tech advancements
- SG firms should tap onto these opportunities and become larger by venturing into larger overseas markets, e.g. emerging economies such as India
reasons why firms may not produce at the theoretical level of MR = MC include
may not have the ability to
- imperfect information about MR and MC [esp when market conditions are constantly changing + finding out information may be costly and time consuming]
- govt intervention
may not want to
- alternative aims of the firm –> revenue maximization: MR = 0 + profit satisficing: minimum acceptable levels of revenue and profits so as to enjoy other benefits like less stress and shorter working hours [principal agent problem] + market share dominance: limit/predatory pricing
firms’ decision to enter a new industry depends on
profits
- is the new industry likely to bring much profits? [in SR and LR]
TR
- market conditions: ageing/health consciousness/sedentary lifestyle –> dd rise for certain sectors –> TR expected to rise –> enter these sectors
TC
- SUC + opp cost –> go ahead if TR > TC
response of incumbent firms
- will they employ strategies like limit pricing to prevent entry? –> constraints
govt intervention
firms’ decision to merge depends on
benefits
- IEOS –> lower AC due to movement along LRAC closer to MES
- MS and MP increase –> TR rise
- lower cost + higher TR –> SNP rise –> greater ability to do RnD
- wider range of markets and products –> higher risk bearing abilities
costs / UC / constraints
- IDOS [depends on industries –> some industries reach their MES at low outputs] –> larger scale of production: expand beyond MES –> AC rise
- complexity of production: more coordination and communication problems –> lower productivity –> AC rise
- govt intervention
govt’s decision to allow firms to merge depends on
benefits
- IEOS –> lower P
- SNP –> RnD –> DE
cost
- AEx [gap between P and MC gets larger as MR/AR shifts]
- inequity worsens as P gets higher
others
- type of good –> necessity?
- contestability –> BTE falling due to tech advancements and globalization –> chances of new rivals entering is higher –> to prevent firms from entering, incumbents will have higher incentive to lower P or do more RnD –> merger is less undesirable
- aim of merger –> dominate the market [Grab] vs better to compete against foreign rivals [POSB-DBS against Citibank]
big firms may be desirable for SG because
problems of big firms is mitigated by openness of economy –> higher levels of competition / contestability
benefits of big firms
- Sg is heavily reliant on X for EG –> big firms help improve our X competitiveness
- Sg is heavily reliant on FDI –> big foreign firms enter Sg markets –> rise in FDI –> AD / AS benefits
barriers are falling because
tech advancements
- lower SUC –> e commerce vs brick and mortar
globalization
- lower trade barriers and transport cost
govt liberalization
- offers more licenses –> (eg) Open Electricity Market –> introduce more competition in electricity retail –> reduces the market dominance of Singapore Power
barriers are rising because
trade war
- higher trade barriers
patents [esp for pharmaceutical sectors]
more mergers
- rise of big firms
big firms may charge lower prices because
IEOS
- pass on cost savings to consumers
alternative objectives
- revenue maximization
- profit satisficing
- market share dominance
govt regulation
- price controls
price discrimination
- lower P in markets where PED > 1
perfect competition is not the most ideal because
DEx
- innovation is oftentimes the key to progress of society as more and better products are developed
- lack of SNP which could have been used for RnD [product and process innovation]
AEx
- due to externalities, even perfect competition does not deliver optimum allocation of resources
limited consumer choice
- homogeneous products
