Chapter 4 - Firms and Market Structures

Transcription

1 Chapter 4 - Firms and Market Structures 1. a) True b) True c) True d) True e) False f) True g) False h) False I) True j) False k) False l) True m) False n) False 2. b) There is a single seller who can affect price by varying output 3. d) Total fixed costs 4. A firm's objective is to maximise profits where-as a charity's objective is to provide some kind of benevolent service. Charities are not for profit organisations where staff usually work for free and the charity uses donations to support its work.

2 5. Accounting profit is simply revenue minus monetary costs, that is, explicit costs (e.g.: cost of labour, utilities etc.) Economic profit takes into account both implicit and explicit costs. Economic profit takes into account opportunity cost (an implicit cost); the best possible alternate use of a resource, as a cost. Economists measure profit differently so that all the costs of using a particular resource are taken into consideration. 6. Fixed costs are those that do not change with the level of production. Examples are rent for a factory or office. Variable costs are those that vary as the number of units produced varies. They include labour costs and all other input costs. Firms only have fixed costs in the short run, when rental contracts have been signed for a set period and that rent must be paid, as such factory or offices cannot change in the short run. In the long run firms can move premises, expand or change locations entirely, so nothing is fixed in the long run and there are no fixed costs in the long run. 7. The law of diminishing returns states that as more and more workers are added to a firm, their marginal product will eventually decrease. In other words, the extra produce or revenue created by extra workers will begin to fall as the firm reaches its capacity. In the share trading office example, once there are more share traders than computers in the office the marginal product of each additional trader will be very low as traders will have to stand around waiting to use a computer. 8. a) Price takers

3 9. Sydney's water supply is an example of a monopoly market. Sydney Water controls the water supply to households in the Sydney region. It is run and owned by the NSW state government. Sydney Water is run this way because a private monopolist could charge extortionist prices for water in order to maximise profits. Humans need water to live, and there is no substitute for it. If water was very expensive, we might be more careful with our use of it, but we would still have to use it and pay whatever price was being charged. Additionally, the water supply is a natural monopoly, that is, it is more efficient to have just one company supplying the water rather than multiple firms as it would be inefficient to have multiple dams and piping infrastructure. Therefore, it is in society's best interests to have the water supply run and owned by a government to make sure it not run only for profit maximisation. 10. Monopolies can be good or bad for society. Generally, a privately owned monopoly can be bad for society as it will charge higher than equilibrium prices leading to deadweight losses and a loss of total surplus in the market. However government run monopolies (public monopolies) can be good for society as they are often run specifically in the public s interest and are subsidised by the government to keep prices down. However, this can also lead to inefficiencies as firms that are not trying to maximise profit may not use their resources in the most efficient manner. Natural monopolies such as public transport and the water supply are examples of when public monopolies produce the best outcome for society, as having a private supplier or having multiple suppliers would be disastrous.

4 The above diagram shows a monopoly situation. The deadweight represents lost surplus. This means that the monopoly creates an inefficient outcome, because in equilibrium there is no deadweight loss, the lost surplus goes to consumers and producers. Therefore the monopoly is worse for consumers than an equilibrium outcome as total surplus is lower than it would be under equilibrium. 11. c) all of the above 12. Deregulation of the airline industry has allowed budget airlines such as Virgin Blue and Tiger Airways to enter the market and compete for market share. This competition has led to a price war where Qantas (in its budget carrier form Jetstar), Virgin and Tiger are constantly undercutting each other with super cheap domestic specials. Previously the domestic airline business in Australia only contained Qantas and Ansett and competition was minimal. As a result domestic flight prices have dropped substantially over the last 20 years. Also increasing efficiencies in fuel and labour costs have contributed.

5 13. Cartel behaviour is when two or more firms get together (collude) to act in collaboration. This is usually in the form of setting a high price, with an agreement from all cartel firms not to undercut the agreed upon price. It can also be in the form of restricting the amount of units sold, to keep prices high. Oligopoly or duopoly firms, working together in a cartel, can act like a monopoly, and charge very high prices to make higher profits. This is anti-competitive behaviour and is illegal in Australia because it produces un-optimal social outcomes. 14. A duopoly is an oligopoly market structure with only two firms in it or that dominate it. Examples in include Pepsi and Coca Cola, Woolworths and Coles, and Myer and David Jones. Governments must prevent collusion between duopolies to prevent them acting as monopolies, as monopolies cause inefficient outcomes due to very high prices. 15. Producers of fast food distinguish themselves with clever and expensive advertising campaigns. The Oporto burger chain has been very successful in Australia by advertising its special Bondi sauce and the fact that its burgers are grilled, not fried, in an attempt to promote them being healthier than the competition. Clever marketing campaigns can make a fast food chain seem highly differentiated from the competition when in reality there is very little difference. 16. Greenwashing is a term given to companies that attempt to convince consumers that their company or product is produced in a more environmentally friendly manner than the opposition. Sometimes this can be misleading and is simply marketing PR or spin attempting to convince consumers to buy the product because of its green credentials that have been greatly exaggerated or even fabricated. The term is generally used when significantly more money or time has been spent advertising being environmentally friendly rather than actually spending resources on environmentally friendly practices. 17. c) Slightly differentiated product

6 18. Fast food chains distinguish themselves through extensive advertising, gimmicks, deals and 'new products'. Consider McDonalds and Hungry Jacks, each tries to distinguish itself from the other via a new advertising campaign or product such as the recent Angus burgers that are supposedly a gourmet or "fancy" burger that the competition does not offer. Some fast food chains try to distinguish themselves by marketing themselves as more healthy alternatives such as Oporto's 'grilled not fried' or Subway's 'less than 6 grams of fat' range. 19. A restaurant could differentiate itself from the competition through advertising and marketing, however very few restaurants have money to spend on these. These days, there are many online review agencies, such as Eatability which can provide a form of advertising that is virtually cost free. On Eatability, reviewers post a review score when they visit the restaurant and each restaurant gets an aggregate average score based on all reviews. High scores will encourage people to go to the restaurant. The internet has allowed many review based sites to garner free advertising for many industries, particularly hotels and hostels as well as the restaurant and cafe industry. 20. a) Television - Oligopoly few sellers, free to air channels plus pay TV, difficult to enter the market. b) Motor vehicles - Oligopoly few sellers, local and imported makers, high costs of entering the market c) Stock Market - Perfect competition - Many buyers and sellers, very similar products, fairly easy to enter the market d) Real estate agencies - Monopolistic completion - Many sellers with a differentiated product, extensive advertising e) Cinema -Duopoly - Village and Hoyts dominate the market.