Market Structures

Question 1

What is each market structure characterised by?

Answer 1

• number of firms in the market (the more firms, the more competitive it is)
• the degree of product differentiation (the more unique the products are, the less competitive)
• ease of entry into the market (higher the barriers of entry are, the less competitive)
  —> barriers can be structural (arise due to differences in production costs), strategic (firms use different pricing policies) or statutory (where patents protect a franchise)

Question 2

What’s the main objective of firms?

Answer 2

Profit is an important objective of most firms
- profit maximisation occurs when MC = MR (marginal revenue)
—> Profit provides better wages and dividends for shareholders
—> retained profits are a cheap source of finance
—> PLCs are particularly keen, as could loose their shareholders if they don’t receive a high dividend - likely to have a short run profit maximisation as objective to keep shareholders happy.

Question 3

Why is survival another objective for firms?

Answer 3

• some firms (especially new ones entering competitive markets) aim to simply survive in the market. This is more of a short term view - firms may aim to sell as much as possible to keep their position, even at a loss in the short term

Question 4

Why is growth an objective of firms?

Answer 4

Some firms might aim to increase the size of their firm, could be to take advantage of economies of scale. Could expand range, or merge/takeover other existing firms

Question 5

What might other objectives of firms be?

Answer 5

Social, environmental, ethical, worker welfare, etc.
increasing market share is another one (maximising sales)