Tutor profile: Turner C.
What are some of the conditions which lead to market failure and less than maximum surplus?
There are countless specific ways in which markets can fail, but here we will focus on just two: monopoly power and negative externalizes. Monopoly power, despite its name, does not mean a supplier has to have a monopoly in its market. Monopoly power simply means that a supplier has some ability to modify the profit maximizing price of its product. If a firm with monopoly power is not properly regulated, a situation which yields less than optimal market surplus can occur, i.e., a market failure. Negative externalities are harmful effects that are imposed on non-market actors. For example, when someone smokes, they are imposing a negative externality on those around them in the form of second hand smoke. If the buyers and suppliers of cigarettes do not take into account the costs of second hand smoke, they are facilitating a market failure because social surplus is not maximized.
Why, on your average, liner supply and demand diagram (the one that looks like an X) is the equilibrium point where the supply and demand curves meet?
The simple answer would be that "that's where supply equals demand", but this answer does not reveal any insight into the intricacies of supply and demand curves. A diagram with a single supply and demand curve is divided into four quadrants. The quadrant on the left side of the X is the only area where mutually beneficial transactions can occur. Remembering the definition of equilibrium, a situation where all mutually beneficial transactions have taken place, it becomes clear why nobody would accept a transaction in any of the other three quadrants. In this way, a simple supply and demand diagram is a brilliant summary of game theory, economic theory, and psychology.
What kind of analysis tool is Porter's Five Analysis and how can it give insight into how a firm can develop and sustain competitive advantage?
Though Porter's Five Forces Analysis helps individual firms understand how they can improve their strategies, it is a tool for analyzing the fundamental forces that affect industries as a whole. By understanding the levels of bargaining power that suppliers and buyers hold, the degree of competitive rivalry among firms, the potential threat of substitute products, and the potential for new market entrants, firms can fine tune their strategy to meet the challenges posed by their industry. For example, if there is a high degree of competition in an industry and buyers have a large amount of bargaining power, a business might choose to adopt a combination strategy in which they try to achieve overall cost leadership and differentiation.
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