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...

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...

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...

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...

A problemsolving approach

All problems related to the capital budgeting process essentially involve one or more of the five stages described in the first section of this chapter, and examined at length in the remaining sections. The two solved problems, SP11.1 and SP11.2, illustrate particularly important and problematical aspects cash flow analysis and decision tree analysis. In addition, the three case studies cover similar aspects, concentrating on the following areas 1 Cash flow analysis when benefits are...