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Section 3 - Business economics - Firm objectives - Coggle Diagram
Section 3 - Business economics - Firm objectives
Profit maximization
Assumption
Firms are assumped to maximise proft
However, they may want to revenue/ sales maxmise
Long run
Maxmising profit in the long run can mean sacrificing profit in the short run
Firms may expect to reduce costs when they're able to output at higher production levels in the future
Firms may simply try to survive in the short run and maximise profits later, especially in a highly competitive market
Some may maximise sales/ revenue inorder to gain monopoly power
Alternative objectives
Non profits aim to do good to benefit the public
Some chose to produce high quality goods at the expense of profit maximising to gain loyal customers
Some may chose to pay workers above standard market rate to encourage consumer to buy from them
Perfect competition
Conditions
Infinite number of suppliers and consumers - no market power and everyone is a price taker
Consumers have perfect information - they know every firm in the market's prices
Producers have perfect information - no secret low cost methods
Products are homogeneous - all products are substitutes for eachother nad consumers can easily switch
No barriers to entry/ exit - new entrants can join very easily
Firms are profit maximisers - all decisions made are to maximise profit
Profits
High profits cause new firms to enter the market, supply curve shifts to the right
Price falls so profits are lower
If firms still make high profits, it'll cause even more firms to enter the market
Less competitive market has high barriers to entry, so profits will be higher
Market structures
Real life markets lie between perfect competition and pure monopoliy markets
Number of firms - If there are only a few firms, the market will be less competitive
Product differentiaiton - If a firm's products stand out, it'll have a bigger market share an more monopoly power
Barriers of entry - higher barreirs of entry lead to less competition
Monopolies
Monopoly power
Pure monopoly - one single seller
Monopoly power means firms can be price makers
Reasons
Barriers to entry - prevent new competition
Advertising and differentiation - Firms may become price makers if consumers prefer their products to others
Few competitors - Fewer firms means its easier to dominate
Consumers can still choose to by the good so demand depends on price still
Natural monopoly
Industries where there are high fixed costs
More than one firm means all firms would have a high fixed csot and leads to high prices for consumers
Monopoly is more efficient
Barriers to entry
Obstacle that makes it harder for a new firm to enter the market
Makes it more expensive to supply to the market
Examples
Existing firms could lower their prices to force out new entrants
Brand loyalty makes it harder for new firms to get attention
Legislation - governments can maintain a monopoly using law to protect competition
Concentration ratios
Concentrated market - one dominated by a few industries
n-firm concentration is found by adding the revenue of the n biggest firms and dividing the value of the market
Benefits
Economies of scale advantages can be taken, average costs will be lower and leads to lower prices
Security of firms means its easier to invest in invention and innovation
Large firms will still compete eachother for lower prices
Disadvantages
Restrict consumer choice
Less incentive to innovate
Less incentive to cut costs, consumers can be exploited
Suppliers can be exploited as a firm could demand a lower price of raw materials