Comparison of monopoly with perfect competition

There are four factors that can be compared here price, output, profit and efficiency. It is helpful for analysis if both forms of market structure are shown on the same graph, as in Figure 8.8. This gives a long-run perspective. For the sake of simplicity it is assumed that long-run marginal costs are constant. This indicates that there are constant returns to scale, so that LMC and LAC are equal. PM and QM represent the price and output of the monopolist and PC and QC represent the price and...

Uncontrollable factors

These generally are external or environmental, and include a wide variety of factors whose relative importance varies from one product to another. This is a very important factor affecting quantity demanded for the majority of goods. Although it is expressed numerically there are a number of measurement problems. First of all, economists measure income in a number of different ways. The measure that is usually the most relevant to determining demand is personal disposable income (PDI). Although...

Transaction cost theory

Transaction costs are related to the problems of co-ordination and motivation. Costs will occur whichever method of transaction is used, spot markets, long-term contracts or internalization within the firm, but they will vary according to the method. These costs are sometimes referred to as Coasian costs, since Coase was the first economist to examine them in detail.2 The following categories of costs can be determined here 1. Search costs. Both buyers and sellers have to search for the...

Promoting competition

It needs to be stressed first of all that this policy is not mutually exclusive with either public provision or privatization and regulation rather it is an additional approach to both policies. There are a number of methods by which competition can be created or increased. 1. Liberalization of markets. This means allowing more firms to supply services for example, in the airlines industry more firms may be given licences to fly certain routes. 2. Deregulation. This has already been discussed...

Limitations of the agency model

The model presented up to this point could be described as the standard agency model. As stated at the start of this section, it focuses on the conflicts of interest between principal and agent and assumes that agents will indulge in self-seeking opportunistic behaviour. In other words the standard model is based on the neoclassical narrow self-interest model of motivation. In recent years this model has come under attack, mainly on the basis that it ignores co-operative, or altruistic,...

Limitations of the EMH

Criticisms of the EMH have tended to come on two different fronts empirical evidence and agency problems. These are discussed in turn. Over the last few decades there have been many tests of the different versions of the EMH. Different conclusions have been reached, depending on the nature of the study and the form of the hypothesis tested. Findings have been sensitive to such variables as the time frame of the study, the nature of external variables, the nature of government policy, the type...

Cost of equity

In a similar way to the cost of debt the cost of equity represents the equilibrium or minimum rate of return required by the firm's common shareholders. These funds can be obtained in two ways internally, from retained earnings, and externally, from issuing new stock. These two sources are now discussed. The cost of retained earnings represents an opportunity cost to investors. These earnings could be paid out in the form of dividends to investors, who could then reinvest the funds in other...

Factors of production

This term refers to inputs or resources these terms are used interchangeably in this text. They refer to anything used in the production and distribution of goods and services. When economists use the term factors of production they usually classify them into three, or sometimes four, categories land, labour and capital. Entrepreneurship is sometimes added as a fourth factor. These terms are not self-explanatory so each is now discussed in turn. Land is really a combination of two different...

Hidden information

The first problem relates to the existence of asymmetric information. Sometimes this is referred to as hidden information, meaning that one party to a transaction has more information regarding the past that is relevant to the transaction than the other party or parties. An example is the secondhand car market, where sellers have much more information about the history and condition of the car than buyers. This situation provides an incentive for pre-contract opportunism this means that one...

Elements of a game

The concept of a game, as we are now using it, embraces a large variety of situations that we do not normally refer to as games. Yes, chess, poker and rock-paper-scissors are games in the conventional sense, as are tennis and football (either American football or soccer) but games also include activities like going for a job interview, a firm bargaining with a labour union, someone applying for life insurance, a firm deciding to enter a new market, a politician announcing a new education...