Competition, profit and other objectives

Profit Maximization - A process that companies undergo to determine the best output and price levels in order to maximize its return. The company will usually adjust influential factors such as production costs, sale prices, and output levels as a way of reaching its profit goal. There are two main profit maximization methods used, and they are Marginal Cost-Marginal Revenue Method and Total CostTotal Revenue Method. Profit maximization is a good thing for a company, but can be a bad thing for consumers if the company starts to use cheaper products or decides to raise prices.

What Does Normal Profit Mean? Normal profit is the minimum level of profit needed for a company to remain competitive in the market. Normal profit represents the opportunity cost of supplying capital to a business. Any profit in excess of this is termed abnormal profit(or sometimes, pure, excess or super normal profit). When there is relative freedom of entry to the industry, as in perfect competition or monopolistic competitio, any abnormal profit will attract new firms into industry.

Explicit cost - An explicit cost is a direct payment made to others in the course of running a business, such as wage, rent and materials, as opposed to implicit costs, which are those where no actual payment is made. It is possible still to underestimate these costs, however: for example, pension contributions and other "perks" must be taken into account when considering the cost of labour.

Implicit cost - In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. It is the opposite of an explicit cost, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting, selling, or lending it. Implicit costs also represent the divergence between economic profit (total revenues minus total costs, where total costs are the sum of implicit and explicit costs) and accounting profit (total revenues minus only explicit costs). Since economic profit includes these extra opportunity costs, it will always be less than or equal to accounting profit.

Type of competition

Perfect competition In perfect competition firms are price-takers, ie they have no power to affect the market price, although they can sell all they want to at this prevailing price. In other words, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets, say for commodities or some financial assets, may approximate the concept. Perfect competition serves as a benchmark against which to measure real-life and imperfectly competitive markets. In perfect competition, 1) A large number of buyers and sellers of the commodity 2) Freedom of entry and exit to the market for both buyers and seller 3) Homogeneity of products, it all goods being sold have to be identical, and are perfect substitutes 4) Perfect knowledge of the market on the part of both the buyers and sellers

Can you name one market in Hong Kong which is close to perfect competition?

Imperfectly competition In imperfectly competitive markets firms are price-makers; they have the power to determine their own prices. Imperfect competition is a term used to describe a market in which the conditions which characterize perfect competition are not present. In the real world, it is virtually impossible to achieve the goal of perfect competition, in which no one force has the power to manipulate the market. As a result, most markets around the world exhibit characteristic of imperfect competition. In this type of market, consumer costs for products do not approach the cost of production due to the

fact that pricing is controlled to some extent by sellers and the activities of buyers. There are a number of factors which can lead to imperfect competition, and it is not uncommon to see multiple factors involved in a single market. These factors can sometimes be easy to identify and in other cases may be more obscure in nature or origin, making it difficult to determine which forces are acting upon a market.

How imperfect competition happen? 1) Consumer lack of information Both buyers and sellers may conceal information with the goal of getting a better deal, and this can contribute to imperfect competition. Sellers marketing differentiated products may also contribute, as the question for consumers boils down less to ultimate cost than it does to quality and associations with the product. Another characteristic sometimes seen in this market structure is the presence of barriers which can make it difficult to enter the market, such as high start up costs or strict government regulations.

Can you give me an example in Hong Kong which is imperfect competition?

2) Barrier to entry and exit barrier to entry, hardly surprisingly, make it difficult for new firms to enter a market; in such circumstances the established firms, or incumbents, may be able to charge a higher price and make more profit than if entry to the market was relatively easy. The main barriers to entry can be summarized as the following a) Capital requirements b) Product differentiation c) Lower unit costs

d) Pricing policy e) Legal restrictions f) Sunk costs

Oligopoly it happen when only a few sellers of a commodity, an oligopoly is a market form in which a market or industry is dominated by a small number of sellers. Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.

Monopoly - In economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. (This is in contrast to a monopsony which relates to a single entity's control over a market to purchase a good or service, and contrasted with oligopoly where a few entities exert considerable influence over an industry) Monopolies are thus characterised by a lack of economic competition to produce the good or service and a lack of viable substitute goods. The verb "monopolise" refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition.

Monopsony is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers. As the only purchaser of a good or service, the "monopsonist" may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers.

Concept of Costs

TC (Total Costs) = FC (Fixed Costs) + VC (Variable Costs)

Total costs(TC) are the costs of all the resources necessary to produce any particular level of output.

Fixed costs(FC) are those costs which do not alter with output in the short run.

Variable costs(VC) are those which vary with output. Variable costs are zero when output is zero and rise directly with output.

In economics, average cost or unit cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q). Average costs may be dependent on the time period considered (increasing production may be expensive or impossible in the short term, for example). Average costs affect the supply curve and are a fundamental component of supply and demand.

Marginal cost (MC) - In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good.

Margin cost is the first derivative of total cost with respect to output. MC = d (TC) / d Q