Week 3

Question 1

What is the range of market structures (most competitive to least competitive)

Answer 1

• perfect competition
• monopolistic competition
• oligopoly
• monopoly

Question 2

what are 3 factors that effect the market structure

Answer 2

• number of firms
• barriers of entry and exit
• product differentiation

Question 3

how does the number of firms effect the market structure

Answer 3

more firms = more competition
- perfect competition = infinitely many
- monopolistic competition = lots
- oligopoly = few
- monopoly = one

Question 4

how does barriers of entry and exit effect the market structure

Answer 4

the more competitive the less / no barriers of entry and exit there are
- perfect competition = none
- monopolistic competition = none
- oligopoly = high
- monopoly = high

Question 4

why do we study the theory of perfectly competitive markets if they cannot exist

Answer 4

markets can be competitive enough to be modeled as perfectly competitive

Question 4

how does less competition benefit producers

Answer 4

less competition favors producers means higher prices due to being more of a monopoly or oligopoly and having no substitutes

Question 4

how does product differentiation effect market structure

Answer 4

the less competitive the more product differentiation there is
- perfect competition = none
- monopolistic competition = some
- oligopoly = a lot
- monopoly = not applicable (only 1 firm)

Question 5

how does more competition benefit consumers

Answer 5

competition generally means lower prices for consumers increasing their utility, more availability and choice aswell

Question 5

what is the traditional theory of a firms objective and why is that

Answer 5

to maximize profit
- this is because it is derived from the assumption that economic agents are selfish and rational

• but the theory isn’t completely true businesses may have a wide range of objectives

Question 5

how to draw a profit maximising condition graph

Answer 5

y axis = costs/revenue
x axis = output
MR sloping downwards
MC sloping upwards

Question 6

how is maximised profits shown on a profit maximising graph

Answer 6

where MC = MR (equilibrium)
- if MC < MR increase output until MC=MR
- if MC > MR decrease output until MC=MR

Question 7

what are 5 business objectives

Answer 7

• survival
• increase market share
• maximise revenue
• corporate social responsibility
• maximise sales volume

Question 8

how to draw a maximise revenue graph

Answer 8

y axis = revenue
x axis = output
TR revenue curves upwards
MR slopes downwards

Question 9

what does maximised revenue look like on a maximise revenue graph

Answer 9

MR = 0 (where it crosses the x axis) is when TR is at the maximum point
- if MR > 0 = increase output
- if MR < 0 = decrease output

Question 10

why might businesses have corporate social responsibility as their objective

Answer 10

in the short run improve quality and customers will have faith and so gains brand loyalty in the long run

Question 11

why might businesses have increase market share as their objective

Answer 11

in the short run increasing sales increases market share gains monopolistic power which allows them to earn higher profits in the long run

Question 12

what 2 reasons might businesses have maximise revenue as their objective

Answer 12

• allows them to focus just on revenue and sales instead of costs too (easier to monitor)
• achieve maximum revenue then cut costs later

Question 13

why might businesses have maximise sales volume as their objective

Answer 13

in the short run more sales increases customers, they may develop brand loyalty,
- which in the long run the business can charge higher prices and gain more profits due to increased brand loyalty

Question 14

why do public sector firms and private sector firms hold different objectives

Answer 14

public sector firms are their to maximise social welfare
while private sector firms are their to maximse profits

Question 15

what are the negatives of public sector firms acting in society’s interests

Answer 15

• it can make them inefficient (no competition, so no innovation)
• can effect private sector firms who have large government contracts and are very dependent on the government due to having different objectives

Question 16

what objectives do non-profit organisation likely focus upon

Answer 16

focus on social goal
- survival (continue charitable operations)
- growth (start supporting more people)
- social welfare (how to utilise resources to help people best)

Question 17

what is satisficing

Answer 17

satisfy + suffice
firms may settle for satisfactory outcomes instead
- Herbert Simon believed that in many situations economic agents did not always optimise

Question 18

why might firms satisfice

Answer 18

• too much effort to optimise (enough to satisfy stakeholders)
• they do not know the optimal level of output to maximise profits
• principle agent problem (enough to meet the needs of investors, then managers freely pursue self-interest)

Question 19

what is the principle agent problem

Answer 19

There is a divorce of control from ownership because both principals and agents are self-interested

Question 20

what are principals

Answer 20

large firms usually owned by shareholders
- self-interest of profits and maxing them out

Question 21

what are agents

Answer 21

managers that run the firms
- self-interested by self-gain

Question 22

what 3 reasons cause managers to not run the firm in the best interests of owners

Answer 22

• satisfice, (meet the needs to satisfy investors, so managers can freely pursue their own interests)
• revenue targets, (managers may focus on revenue at the expense of profit for bonuses)
• market share targets, (larger firms hold more market share, managers may target expansion over profit)

Question 23

what 2 things does the principal-agent problem result in

Answer 23

• misaligned incentives
• asymmetric information

Question 24

what 2 ways solve misaligned incentives (principal-agent problem)

Answer 24

• remuneration in shares, (managers become owners, removing the divorce of ownership
• bonus “claw-back” schemes, (any bonuses given due to short-term gain that don’t benefit shareholders or the business in the long-term, the shareholders can take back the bonus)

Question 25

2 ways that solve asymmetric information
(principal-agent problem)

Answer 25

• greater shareholder activism, (shareholders get more involved and understand how it’s being run)
• increased managerial reporting, (making managers report more and in more detail exactly their reason for their decisions)

Question 26

what sector public or private suffers from the principal-agent problem

Answer 26

both public and private sector businesses suffer from it

Question 27

stakeholders definition

Answer 27

all relevant parties who have an interest in the operation and results of the business