Business Economics Flashcards
(50 cards)
1
Q
Define a firm
A
A firm is an organisation consisting of one or more individuals working as a decision making unit to produce goods or services.
2
Q
What are the different types of firms?
A
Private Sector Firms:
- Unincorporated firms such as Partnerships
- Incorporated firms such as Virgin (Private) or Aviva (Public)
Public Sector Firms:
Such as the NHS
3
Q
How can we describe the role of a firm?
A
The role of a firm is as a production- distribution unit where production can be organised in the firm or via the market.
4
Q
Outline the Neoclassical Theory of the Firm
A
- The Firm can be reduced to a mathematical construct
- It is convenient as it allows the modelling of the firm strategies in different market structures and behaviour under specific assumptions.
5
Q
What determines firm size according to the Neoclassical View?
A
- Technology
- Economies of scale
- Pursuit of profit maximisation
- Problems of market power
- Input prices
6
Q
What are the problems with the Neoclassical View?
A
- Assumes rationality and perfect information
- Treats the firms as a ‘black-box’
- Doesn’t explain the need for a firm to exist
7
Q
Outline the Transactions Cost Theory of the Firm
A
- The firm is characterised by an authority structure and incomplete contracts.
- The alternative to incomplete contracts is the market which has complete contracts with legal force
- Complete contracts give firms flexibility in cases of uncertainty
8
Q
What determines the size of the firm according to the Transactions Cost View?
A
- The point where the cost of internal organisation of a transaction and external organisation are equal
9
Q
What are the problems with the Transactions Cost View?
A
- Authority is not the essence of the firm; loyalty and identification may be more important
- Market transactions not just contract based; trust matters
10
Q
What are transaction costs?
A
Transactions costs are the cost of discovering prices and the cost of negotiating and concluding prices as well as making and enforcing contracts.
11
Q
What is the fundamental intuition behind the Transaction Theory of the Firm?
A
If markets are efficient resource allocators why don’t firms contract everything through the market - transactions costs
12
Q
What is the Properties Rights Theory of the Firm?
A
- Assumes a world with transaction costs and incomplete contracts
- Ownership matters because it carries residual control rights to take decision in unpredicted/un-contracted for situations.
- Ownership reduced the likelihood of returns behind partially appropriated by other firms.
13
Q
What are the problems with the Property Rights View?
A
Separation of ownership and control
14
Q
What is the Marxist Theory of the Firm?
A
- The rise of the factory system is an attempt by factory owners to extract a larger share of the value added in production by gaining greater control over the production process.
- The purpose is not efficiency but exploitation
15
Q
What is the Managerial Theory of the Firm?
A
The Managerial theory is characterised by diapered shareholdings and separation of Owners and Managers. Managers maximise their own welfare vs meeting shareholder objectives
16
Q
What is the Behavioural Theory of the Firm?
A
- Bounded rationality and uncertainty make optimisation impossible
- Organisations have multiple objectives reflecting the interest groups in an organisation
- Managers reconcile the competing objectives of interest groups within the firm subject to satisfactory level of profits
- Firm will need to adjust to an uncertain environment leading to organisational slack
17
Q
The Capabilities Approach to the Firm
A
- The modern capitalist firm exists because it has the ability to do certain things
- Capabilities arise from core competencies: management skill, industry experience, assets and location.
18
Q
What is the Evolutionary Theory of the firm?
A
- Dis-equilibrium
- Bounded rationality (Human Decision Making)
- Competition as a process: Variation, Selection and Retention
- Innovation-driven structural change
19
Q
How does the Neoclassical View explain the growth of the firm?
A
- The quest for lower average cost and the achievement of minimum efficient scale can drive growth
- Changes in the cost curve drive longer trends in scale in an industry
- Optimal size is known as the Minimum Efficient Scale (MES)
20
Q
How is growth affected by the age of the firm?
A
As the firm gets older, successful firms tend to grow and better exploit economies of scale. As a result, they will eventually achieve the minimum efficient scale
21
Q
What are the demand considerations for growth and profitability?
A
- Nature of the product
- Opportunities for diversification
- Economies of scope
22
Q
Define economies of scope
A
An economy of scope means the productions of one good reduces the cost of another related good. This can be achieved by acquisition, supply chain management and flexible manufacturing processes.
23
Q
What is the relationship between growth and profitability?
A
- Growth depends on profitability
- Growth affects profitability
- Growth is not always profitable or desired
24
Q
What are the constraints on firm growth?
A
- Management skills
- Management objectives
- Available finance
- Technology
- Learning Opportunities
- Market Size
- Macroeconomic environment
- Chance/Luck
25
What does the role of management play in firm growth?
- Penrose effect: if the organisation grows more readily than the individuals can obtain the necessary experience, efficiency will suffer. This results in managerially constrained growth.
- Conflict between profit maximising growth and welfare maximising managers
- Organisational change and development needed for permanent growth
26
What is the role of new firms in the economy?
Challenge to the monopolistic positions of larger firms through the introduction of new technologies and ways of doing business into the market.
27
What is the principle of creative destruction?
New and small firms find more efficient ways of satisfying existing needs and as a result survive and grow. Less efficient firms shrink and exit.
28
Why should smaller firms aim to be more innovative?
- Innovation is their best/only chance to gain a competitive edge
- SME may have capabilities and skills that established firms do not possess
- SMEs are more adaptable in rapidly changing environments.
29
How do SME affect net job creation in the market?
- Revolving Door Effect: SMEs create new jobs but as many jobs may be lost among SMEs as they are created.
- Smaller firms grow faster but new firms create jobs
- The smallest SMEs do not have the resources to grow
- Increases in the number of SMEs does not correspond to promotional increases in the share of economy wide turnover accounted for by SMEs.
30
How are growth and innovation distributed across firms?
- Growth rates and innovation are extremely skewed amongst firms. A small minority are response for most of the positive contribution to the overall economy.
- High growth firms are disproportionately more likely to be innovators
- Most innovation is concentrated is approximate 20% of firms.
31
Outline the key stages in Industry Dynamics
- Early stages: experimentation and new entry
- Emergence of a dominant design (most powerful in mass markets with first move effects)
- Easy imitation/design modification
- Follower frequently appropriates profits
32
What are the alternative growth strategies for a firm?
- Growth strategies can be characterised as either internal or external.
- Internal: Differentiation, Vertical Integration or Diversification.
- External: Horizontal Integration, Vertical Integration or Diversification.
33
Define internal and external horizontal expansion?
1. Differentiation (Internal) - change or adapt product characteristics to increase market share
2. Horizontal integration (external) - merger or acquisition of firms producing the same product. Leverage economies of scale, access to new markets and increased differentiation.
34
Define internal and external vertical integration?
- Vertical Integration (internal) - different products/services but belonging to different stages of the core product.
- Vertical Integration (external) - merger or acquisition of firms producing at different stages in the same process.
35
Define internal and external diversification?
- Diversification (internal) - introduction of totally different products.
- Diversification (external) - merger of firms producing unrelated products.
36
What is the objective of the government in markets?
The objective of the government is to maximise social welfare. This is the difference between social benefits and social costs. Governments intervene when markets don’t maximise social welfare - market failure.
37
What are the types of market failure?
- Public Goods: Non rivalry and free rider problem (underpaying for a shared resources)
- Market Power: Lack of social efficiency and deadweight loss under monopoly (measure of lost economic efficiency)
- Ignorance and uncertainty by consumers and firms
- Protecting civic interests such as that of dependants and merit goods (i.e education)
38
How can governments intervene in the market?
- Taxes and subsidies: correct for monopoly by taxing exceeds profits and subside extra output.
- Changes in property rights
- Legal restrictions
- Regulatory bodies
- Price controls (maximum of minimum prices)
- Direct (public) provision of goods and services
- Competition policy on mergers, collusion, goods and services.
39
What are the advantages and disadvantages of taxation as a government intervention?
Advantages:
Can vary tax rate according to the size of the market distortion
Disadvantages:
Infeasible to use different tax subsidy rates
Lack of knowledge to calculate optimal taxation rate
40
What are the drawbacks of government intervention
- Shortages and surpluses
- Bureaucracy and inefficient
- Lack of market incentives
- Variability of government policies
- Voter’s ignorance
- Unrepresentative government
- Restrictions on individual freedom
41
What is the main advantages of the free market (Laissez Faire)
- Automatic adjustments
- Dynamic advantages of capitalism
- High degree of competition even in monopolistic markets - threat of competition from rivals, foreign companies and disruptive innovation.
42
What is competition policy?
Competition policy consists of government measures aimed at stimulating competition and protection against a monopoly.
43
What are the alternatives premises of competition policy?
- Structuralist view: lower market concentration (share of largest firms) is better
- Austrian view: process of market competition is the issue not concentration
44
Outline the three approaches to competition policy enforcement?
- Efficiency approach: how social surplus is effected by actions of firms
- Public interest: such as the impact on employment
- Competition test: the extent to which prices are reduced or choice is increased.
45
Outline the role of the CMA?
The role of the CMA (Competition and Markets Authority) is to launch investigations and appeals and was previously co-ordinated with the EU (pre-Brexit)
46
What are other examples of competition policy?
- Deregulation (and Privatisation)
- Reduction of tariffs (GATT rounds)
- Stimulation of innovation (passing industrial policy aimed at improving competitive environment.
47
What are the three ways market competition can be affected by a firm/group of firms.
- Abuse of dominance (i.e. dominant market share)
- Impact of a merger/acquisition (efficiency analysis and affect on prices)
- Collusion
48
Explain predatory pricing as an instance of abuse of dominance
Predation is the deliberate acceptance of losses, with the intention of driving competitors out of business, with the expectation that it will be possible to earn higher profits.
49
How can predatory pricing be identified?
- Identification of predatory pricing involves determining feasibility, losses and intent.
- Losses must be characterised as incremental (firms makes less profit due to predatory pricing) and deliberate (predatory pricing is the sole reason for reduced profits)
50
Outline the main issues surrounding mergers and acquisitions in the context of market competition.
- Presumption that mergers of competing/complementary firms raise prices - principle of scale economies
- Trade-off between company gains in operation efficiency and consumer losses due to raised prices.
- Absence of concern regarding transfer of money from consumers to companies can lead to a small increase in firm efficiency justifying a large rise in prices.
