Download Big test in prep for 3

Big test in prep for 3.1!
1) Define 'price' and 'non price' competition
Price Competition involves firms in the same market competing for a greater market
share through the price of their product, usually by undercutting their competitors
2) Name the two categories of non price competition
Product Differentiation and Product Variation
3) In regards to marketing strategies name 5 types of non price competition
Non-Price Advertising, Sponsorship, Loyalty cards, Branding, Customer service,
Location, Packaging
(Any 5 of the above)
4) Define the optimum purchase rule
States that at a price where p<U consumers will buy and consume more of the product,
and when p>U consumers will few or less of the product
5) Define consumer equilibrium
Consumer equilibrium is where point of maximum consumer satisfaction is reached: the
point at which a consumer is deriving maximum satisfaction from his or her purchases.
Where MU1/P1 = MU2/P2 = MU'n'/P'n'
6) Explain the difference between accounting profit and economic profit
Accounting profit is income less expenses; Economic profit is accounting profit less
opportunity cost.
Note: if economic profit is 0 or better an owner of a firm will stay in this industry as he
can do no better in the 'next best occupation'.
7) State the law of diminishing returns
It states that as you increase input (e.g. labour) the amount of output (the marginal
product) will eventually proportionately fall.
8) Explain why diminishing (marginal) returns causes marginal cost to rise
Because Marginal Cost (MC) is the total cost resulting form the production of one or
more unit of OUTPUT (thus it is the change in Variable costs when an additional product
is produced, since FC=constant) Past the profit maximizing point MC=MR this occurs.
9) Where is the shutdown point for a firm?
If a firm cannot earn at least enough to cover all of its variable costs then in the short run
it will shut down. This occurs at 'point B' where marginal cost is equal to minimum
average variable cost. This is called the 'shut down point'.
10) Why is the MC curve a firm’s supply curve when it is above the 'shutdown
point'?
Because if a firm earns a price higher than 'B' it can cover all of its variable costs and
some of its fixed costs and it will stay in business. Put another way, the firm will
maximize profits by minimizing losses.
11) Draw two graphs,(a) one of the perfectly competitive firm(note MR=AR),(
b) and one of a monopoly (label and position MR and AR curves)
Can’t be bothered uploading ;)
12) Explain why you have drawn the AR curve in 11(a) the way you have
The AR=MR curve is flat because in a market, a perfectly competitive firm cannot
influence price (they are a price taker). Therefore,
The firm is unconstrained and can sell as much as it wants at the prevailing price, unless
they get really big and start to hit market demand. But their costs prevent this...
13) At each output level for a monopoly explain why MR is less than AR
I can’t explain this, someone please help!
14) State the profit maximising rule for (a) the perfectly competitive firm, and (b) a
monopoly
(a) MC=MR (b) MC=MR
15) Define the break even point
Where a firm is earning just enough to cover both its FC and AVC i.e. where P=AR=AC
Note if a firm is earning normal profit, it is ‘breaking even’
16) Why in any market situation would a monopoly produce less than and demand a
higher price for good than a perfectly competitive market?
The monopolist must aim maximize profit just like any other firm as the sole producer of
a particular good the monopolist has complete market share and control over price. This
does not mean they can charge any price they like (unless their good was extremely
inelastic) they must still charge the price that will allow them to maximize profit where
MC=MR.
17) What is the long run profit situation for (a) the perfectly competitive firm? And
(b) a monopoly?
(a) A normal profit situation, as there are weak barriers and low set up cost, knowledge,
to entry and exit and if firms are earning supernormal profits more people will enter into
the business increasing supply and reducing price. and vice versa.
(b)The long-run situation in a monopoly will be characterized by economic profits. If, on
the other hand, a monopoly experiences short-run losses it will adjust the scale and
characteristic of its plant to eliminate such losses in the long-run. If this is not possible
the monopolist will leave the industry.
18) Define total cost and total revenue
Total Cost is the combined costs of production AVC+FC, Total revenue (TR) is PxQ (the
amount of money received from the sale of its goods and services
19) Define 'utility'
Utility is the satisfaction gained by the consumption of a product be it a good or service.
'a bargain' a rip off' or 'fair'.
20) State the law of diminishing marginal utility; in regards to the optimum
purchase rule (refer to q4)
The law of diminishing marginal utility states that with each consecutive unit of a good
consumed the marginal utility (satisfaction gained through consumption) decreases. In
relation to the optimum purchase rule a 'logical' consumer would consume up until the
point where P/MU=1 because going any further would mean they would not be getting
their 'moneys worth'.