CHAPTER 4 : OBJECTIVE OF THIS CHAPTER

After studying this lesson, students will be able to: explain what a firm is and distinguish the different forms of business organization develop a basic understanding about the range of market types give a description on how firms determine price in each type of market

CHAPTER 4: FIRMS


Business firms define as an institution that hires resources to produce and sell goods or services for profit motive business firms exist to achieve goals to maximize profit not in a short run but it also look at the survival and growth of the company basically there are 3 different types of firms and these firm differ in terms of the control over the company (decision making) , the liability, assessment of income and how profit and tax are distributed

I. Sole Proprietorship


It can be easy to get started in your own business. You can begin a word processing service out of your home, open a car center, or start a restaurant. An organization that is owned and usually managed by one person is called a sole proprietorship. It is still being regulated by the Government.

CHAPTER 4: FIRMS
Sole Proprietorship
Pros 1. Own by a single owner makes all the decisions 2. Being your own boss 3. Profits own only by the owner 4. Easy to set up - low start up cost 5. Tax included in the individuals total income Cons 1. Owner has unlimited liability 2. Limited financial resources 3. Limited growth 4. Firms life expectancy : Firms dies with the owner

II. Partnership


A partnership is a form of business with two or more (50) owners. Often it is much easier to own and manage a business with one or more partners. Some of the people who are enjoying the advantages of partnerships today are doctors. Lawyers, dentists and other professionals

CHAPTER 4: FIRMS
Partnership ( 2 or more- 50 members)
Pros 1. Easy to set up 2. Tax charges as part of owners income 3. Sharing decision making 4. Ability to grow Cons 1. Unlimited liability 2. Potential disagreement 3. Difficult to terminate

III. Corporation


Although the word corporation makes people think of big businesses like IBM, Ford and Petronas, it is not necessary to be big in order to start a corporation.

CHAPTER 4: FIRMS
Corporation - public or private limited
Pros 1. Limited liability 2. Ability to hire specialized management 3. Ease of drawing talented employees 4. Corporation has perpetual life - although the shareholders pass away, the business will continue

Cons 1. Complex decision making 2. Possible conflict with the board of directors 3. Profit is tax even before it is distributed among the shareholders

CHAPTER 4: MARKET STRUCTURE



Market refers to all kind of firms and structure can be define by how many firms there are in the industry - whether it produce differentiated product, or can the firm control the price and can the firm enter or exit easily. Market structure - refers to degrees of competition in different types of market, whether the firm is competitive, less competitive or highly competitive it is also refers to the characteristics that the firms have in different type of market

CHAPTER 4: MARKET STRUCTURE

Market structure

Pure market structure consist of pure competition (perfect competition) and pure monopoly

Other market structure (Imperfect competition) consist of oligopoly and monopoly competitive

PURE MARKET STRUCTURE

1. PERFECT COMPETITION


The market structure that produce the same product is what we call as pure competition or perfect competition Examples : producer of sugar, flour, rice

CHARACTERISTICS OF PURE COMPETITION 1. Numerous buyers and sellers in the market - many buyers go to one shop and one shop can sell everything to lots of buyers those businessman involve in this type of market act as a price taker, why? - one seller produce only a tiny proportion of the total output of a particular goods and buyers are wellinformed about the price of other firms. There is no effect on the market price if the seller increase or decrease the price of the product.

CHARACTERISTIC OF PURE COMPETITION

2. Homogenous product produce by all the producers. products which are exactly the same across the market 3. Fully informed buyers and sellers - as buyers are aware of all the info they need about the product in order for them to easily get the goods or services 4. No barriers of entry and exit for the producers - seller can enter or leave the industry without incur cost - no need to have huge technology capacity or heavy machine and no need to undergo strict legal requirement

INFLUENCE OF PURE COMPETITION

It is not beneficial for sellers of the pure competition market structure to reduce the price of product below the existing market price the seller is a price taker, the changes in quantity supply is too small to affect the market price of that product in pure competition producers have no market power - market power is the control producer or seller have over the price of their product

Influence on Pricing : Price



Assuming that the market price of sugar is RM1.50, the demand curve will be a horizontal line intersecting at RM1.50 at the y-axis. The darkened area above the line of the demand curve shows the prices which are greater than the market price. When a producer charges any price in the darkened area, consumers will not be willing to pay.

Influencing on Pricing : Price

Influencing on Pricing : Price



If the supplier reduces the price to RM1.00 which is 50 sen below the market price, the demand for sugar will be only at 50kg. This is because 50kg is the only amount that supplier able and willing to supply. Hence, only a small portion of consumers would be able to purchase sugar. The rest have no choice but to turn to other sellers in the market, resulting in no significant change in price in the overall market.

Influencing on Pricing : Price

Influence on price: Quantity



Assuming that on a normal day, the grocery shop would supply 20kg of potatoes at a market price of RM1.00 per kilogram. This is represented by X1 on the curve. When he reduces the quantity supply to 10kg we can see that the price that the shop owner should charge its customers is RM1.00 per kilogram, illustrated as X2 on the curve. How is this so?

Influence on price: Quantity

Price

X2
1.00

X1

10

20

Quantity (KG)

Influence on price: Quantity



when the shop owner increases the supply to 30 kilograms, the demand curve of pure competition will show that he should still charge the market price of RM1.00 per kilogram of potatoes. If he charges lower than the market price, he will make less profit than the rest of its competitors. He should not worry because there will always be great demand for the goods. He should not lower price with hopes that customers would buy the extra supply of potatoes. We can conclude that since there are numerous sellers of potatoes, any increases or decreases in the quantity of potatoes supplied by a single seller alone will not have any effect on the total quantity supplied by other sellers. To sum things up, we can say that when quantity increases, price stays the same. Similarly, when quantity decreases, price still stays the same.

Pure Competition


Demand is perfectly elastic a small change in the price of products result in a big change in the quantity demanded

2. PURE MONOPOLY
Is the industry that produces goods or services for which no close substitutes exist CHARACTERISTICS 1. No close substitutes - Only one producer 2. High barriers of entry - High Capital requirement, Bigger protection, Exclusive ownership and

economies of scale e.g. electricity

3. Substantial but regulated control over price examples : TNB, Indah water

PURE MONOPOLY
PRICE SETTING STRATEGY - 2 different tradeoff a) Price discrimination - practice of selling different units of goods or services for different prices. Different customers might pay different amount of money b) Single price - firms that sell each units of its output for the same price and customers pay the same amount of money for each unit they buy.

Influence on pricing: Price



Let us look at the scenario in terms of the demand curve. When FedEx charges RM100 per overseas express delivery and makes 100 trips per month, this point is indicated as "X" on the demand curve in a pure monopoly market structure. When FedEx increases the price for overseas delivery to RM130 per trip, FedEx is still able to maintain its customers because there are no close substitutes for the service. Customers will either pay a higher price for the service or they will not be able to courier their items.

Influence on pricing: Price

Quantity

100

100

200

300

Price

Influence on pricing: Price

Price X1 X X2
70

130 100

90 100

110

Quantity

Influence on pricing: Price



Customer can adjust the cost of the service offered by a monopoly company. After customers are informed of the reduction in price to RM70, they may be able to send more than one parcel each. Customers who could not afford the price of RM130 or RM100 per parcel, will most probably afford to pay RM70. Notice the down sloping demand curve in a pure monopoly market structure. The monopoly company can alter their profits by using this approach - charging on different price level.

Features of perfect competition and monopoly in summarized form

Characteristics Number of producers Type of product Pure Competition Many Identical Pure Monopoly One Unique; no close substitute Considerable but usually regulated High Local utilities (telephone, electricity, gas)

Control over price None Barrier Example None Agricultural products like wheat, corn etc.

Monopoly


Price maker producer can charge any price they want but subjected to regulated control Demand is inelastic the change in price of products will result in slight change in quantity demanded

OTHER MARKET STRUCTURE

MONOPOLISTIC COMPETITION


Is a market structure with a large number of firms compete by making similar but slightly different product - and this is what we call as product differentiation. They also have the element of monopoly power

CHARACTERISTICS 1. A large number of firms compete - Each of these producers is said to have a small share of the total market and a slight ability to control the price of their products. e.g. tissue paper - the produce are independent because the decisions made by any producer in the market will not affect the decisions of other producers.

Characteristics
2. Each produce a differentiate product which is a close but not a perfect substitutes products for other firms - Products that are similar are products that fall in the same product group and perform the same function. e.g. soap 2 types differentiation real i.e. physical charac. - artificial i.e. obvious diff 3. Different advertising approach - grabbing slogan e.g. pepsi 4. Firms are free to enter or exit not as low as pure competition and not as high as monopoly Examples : Pizza producers, running shoes etc

Monopolistic


When the seller increases the price the quantity demanded falls but the amount of decrease is not severe due to brand loyalty. When the seller reduces the price, the quantity demanded increases Demand is moderately elastic change in price will cause a slight bigger change in quantity demanded A producer in this market structure have slight market power because there are numerous producers in the market. If one producer decides to increase/decrease price of product, the decision will not affect prices of other producers

Monopolistic


Products are similar but slightly differentiated. That is why when for example Adidas increase the price of its shoes, it will not lose all of its customer as some will still buy Adidas shoes due to brand loyalty If Adidas decrease the price of its shoes, other producers customer will turn to buy Adidas shoes. Some of the other producers customers will remain buying other higher priced products due to brand loyalty. This brand loyalty in market leads to a moderately elastic demand curve.

OLIGOPOLY
Characteristics:
1. Small number of producers compete. 2. Price charges were influenced by each other e.g. Petronas reduce price, it will not be long when other producers will also reduce the price 3. Interdependency between the producers. Each producer is said to be affected by the actions of other producers. 4. Moderate degree of barriers of entry i.e. in between pure competition and monopoly

Characteristics
5. The quantity sold by any one producer depends on that producers price and also the other producers price and quantity sold. - For Example: If Petronas cut its price to half, Petronas will attract the customers of other producers. As a result of that price cut, other producers will also reduce their prices to half because they do not want to lose their customers. 6. producers in the market structure compete by producing either identical or differentiated products - Example: Proton is an economical car whereas Mercedes is a luxury car. Petrol identical products.

Oligopoly
 

 

Demand curve shows a kink at X also known as market price Upper left side of the kink shows that slope is small and relatively flat because any increase in price will cause a big decrease in quantity demanded Lower right side of the kink has a slope which is large and the curve is relatively steep. This is because the reduction in the price of the results in small increase in quantity demanded. For e.g. handphone line providers The upper left is relatively elastic and the lower right side is less elastic

Oligopoly
  

Producer in oligopoly market structure have a fair degree of market power Competitors follow price decreases not increases For example, if Bannax reduces its price from RM60 RM40 , its demand would increase. Other producers do not want to lose their customers so they would reduce their prices. Therefore Bannaxs demand would show a relatively small increase in units. Demand curve said to be less elastic lower right side of market price When Bannax increases the price of its product higher than market price by RM60 RM80, competitors will not follow because they want to attract customers to buy their lower priced products. Bannax would lose its customers and its demand would reduce. Upper left side of market price of demand is said to be relatively elastic because when the producer slightly increase price of its product, the quantity demanded for producers products decreases substantially.

THE END