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Work and Leisure > Market structures and competitive behaviour in leisure markets > Flashcards

Market structures and competitive behaviour in leisure markets Flashcards

1
Q

Short run

A

at least one factor of production is fixed, usually capital

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2
Q

Long run

A

All factors of production are variable

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3
Q

Fixed costs

A

Costs that don’t change in the short run with changes in output e.g. rent

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4
Q

Variable costs

A

Costs that change with changes in output e.g. raw materials

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5
Q

Labour costs - fixed/variable??

A

Wage rate = fixed Overtime and bonus payments = variable with output

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6
Q

Total cost (TC)

A

Total cost of producing a given output - made up of fixed and variable costs in the short run

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7
Q

Average cost (AC)

A

Unit cost total cost divided by output

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8
Q

Average fixed cost (AFC)

A

Total fixed cost divided by output Reduces with output increasing

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9
Q

Average variable cost (AVC)

A

Total variable cost divided by output Falls at first and then rises - due to the problem of a fixed factor of production, combination of resources becomes less efficient

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10
Q

Marginal cost (MC)

A

Change in cost resulting from changing output by one unit Key cost - firms are constantly considering whether to reduce or increase output Influences average cost - falls in MC reduce AC, vice versa

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11
Q

Long run costs

A

Total costs rise with output 3 possible LRAC curves

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12
Q

U shaped cost curve reasons

A

Economies of scale and then diseconomies of scale

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13
Q

Downwards sloping CC reasons

A

Economies of scale over a high range of output

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14
Q

L shaped cost curve reasons

A

Firm reaches minimum efficient scale of production then experiences constant returns to scale

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15
Q

Economies of scale

A

Reduction in long run average costs resulting from an increase in the scale of production

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16
Q

Diseconomies of scale

A

an increase in long run average costs resulting from an increase in the scale of production

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17
Q

Minimum efficient scale

A

the lowest level of output at which full advantage can be taken of economies of scale

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18
Q

Constant returns to scale

A

Long run average cost remaining unchanged when the scale of production increases

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19
Q

Internal economies of scale

A

economies of scale that occur within the firm as a result of its growth

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20
Q

Purchasing economies of scale

A

When firms buy in bulk they often pay less per unit purchased

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21
Q

Selling economies

A

A larger firm can make fuller use of sales and distribution facilities than a small one e.g. doesn’t cost twice as much to use an HGV twice the size of a lorry

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22
Q

Technical economies of scale

A

Large firms can afford to use high tech equipment and use it efficiently

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23
Q

Managerial economies of scale

A

As a firm grows in size it’s viable to employ specialists e.g. accountants

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24
Q

Financial economies of scale

A

Large firms usually find it easier and cheaper to raise finance than small firms - banks trust them more

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25
Q

Risk-bearing economies

A

Firm can produce a greater range of products - diversifying product range reduces the chance of experiencing a loss, should one of the products prove to be unpopular

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26
Q

External economies of scale

A

Savings in costs available to firms arising from the growth of the industry on the whole e.g. rise in tourism has led to universities running courses on travel and tourism Firms may be able to specialise in particular areas of the market Infrastructure, good reputation

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27
Q

Internal diseconomies of scale

A

Diseconomies of scale experienced by a firm caused by its growth e.g. difficult to run a large firm, keeping a check on everything that’s happening and coordinating production More people between whom there can be disputes

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28
Q

External diseconomies of scale

A

Diseconomies of scale resulting from the growth of the industry e.g. competition for resources, traffic congestion, pollution

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29
Q

Total revenue (TR)

A

The total payment a firm recieves May not move in the same direction as sales e.g. if a cinema raises ticket prices for a particular film, demand might be inelastic - same sales, more revenue

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30
Q

Marginal revenue (MR)

A

the change in total revenue resulting from the sale of one more unit

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31
Q

Average revenue (AR)

A

Total revenue divided by the output sold

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32
Q

Price taker

A

A firm that has no influence on the price of the good it sells

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33
Q

Perfect competition

A

A market structure (hypothetical) with many buyers and sellers, free entry and exit and an identical product

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34
Q

Price maker

A

A firm that influences price when it changes its output

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35
Q

Reality of most markets

A

Not perfect competition

Vast majority of firms including those in the leisure industry have a degree of market power & price making

36
Q

Unit elasticity of demand

A

When a given percentage change in price causes an equal percentage change in demand, leaving total revenue unchanged

37
Q

When is there UeD??

A

When total revenue does not change and marginal revenue is zero

38
Q

Predatory pricing

A

Setting price “predatorily” low in order to force rival firms out of the market

Aim = maintain a monopoly

39
Q

Leisure product elasticity

A
  • Most leisure products have income elastic demand
  • Changes in income can effect revenue of leisure market firms
  • Things e.g. cinema and theatre are superior goods
40
Q

Superior good

A

A good with positive income elasticity of demand greater than one - demand for the good rises disproportionately as incomes rise

41
Q

Effect on leisure products from changes in the prices of related goods

A
  • Changes in the price of related products affect a firm’s revenue
  • E.G. a rise in the price of public transport man reduce demand for cinema tickets - increased cost of getting there
42
Q

Other factors that influence demand for leisure products

A
  • Weather
  • e.g. period of bad weather may increase demand for TV
  • Special events
  • Big concert is likely to increase the demand for a band’s merchandise
43
Q

Barriers to entry and exit

A
  • Obstacles to new firms entering a market
  • Obstacles to firms leaving a market
44
Q

Sunk costs

A

Costs incurred by a firm that it can not recover should it leave the market

e.g. costs involved in building/buying assets - formula 1 race track

45
Q

Limit pricing

A

Setting a price low to discourage the entry of new firms into the market

46
Q

Examples of barriers to entry

A
  • legal barriers - patents, licences
  • high start up costs
  • brand names and loyalty
  • economies of scale
  • Limit pricing
47
Q

Examples of barriers to exit

A
  • Sunk costs
  • Advertising expenditure - especially long term
  • Contracts - firm may be legally obliged to supply a product for an amount of time

Awareness of barriers to exit act as barriers to entry

48
Q

Pure monopoly

A

The firm is the only firm in the industry

49
Q

Profit maximisation

A

Achieving the highest possible profit

Marginal cost = marginal revenue

50
Q

Supernormal profit

A

Profit earned where average revenue exceeds average cost

51
Q

Normal profit

A

The level of profit necessary to keep a firm in the market in the long run

52
Q

Natural monopoly

A

A market where long run average costs are lowest when the market is dominated by only one firm

53
Q

Legal monopoly

A

A market where a firm has a share of 25% or more

54
Q

Dominant monopoly

A

40% share or more

55
Q

Oligopoly

A

Market structure characterised by several large firms

UK definition = CR5 of more than 50%

56
Q

Key features of an oligopoly

A
  • High barriers to entry and exit - allow supernormal profits in the long run
  • Differentiated products
  • Price makers
  • Firms are interdependent
  • High level of non price competition
57
Q

Problems with price cutting

A
  • Likely to provoke a price war
58
Q

Kinked demand curve

A
59
Q

Explanation of kinked demand curve

A
  • Above current price, demand curve will be relatively elastic - likely that rivals will not follow price rise, so choosing to raise price will lose a significant number of sales
  • Below current price, demand is inelastic - firm anticipates that its rivals will match price cuts
  • Kink in demand (AR) curve means MR curve has a discontinuity at output Q
  • Small change in MC does not alter the profit maximising output
60
Q

What does the kinked demand curve suggest

A

Price rigidity likely to exist in an oligopoly

firms more likely to rely on non-price competition e.g. advertising, competitions

61
Q

Cartel

A
  • Formal collusion involves firms forming a cartel
  • Firms produce separately but sell at one agreed price
  • Illegal in UK
62
Q

Tacit collusion

A

When firms follow the price strategy of one firm

Price leadership

63
Q

Monopolistic competition

A

Market structure characterised by a large number of small firms selling a similar but not identical product

64
Q

Incumbent firms

A

Firms already in the market

65
Q

Characteristics of monopolistic competition

A
  • Low barriers to entry and exit - normal profit earned in the long run
  • differentiated products
  • non-price competition e.g. after-sales service, good location
66
Q

Dynamic efficiency

A

Efficiency in terms of developing and introducing new production techniques and new products

67
Q

Monopoly efficiency

A
  • Price set above marginal cost - output is below and price is above allocatively efficient levels - ALLOCATIVELY INEFFICIENT
  • No incentive to minimise average cost - PRODUCTIVELY INEFFICIENT
  • Lack of competition may mean it doesn’t spend much on research, development, innovation - DYNAMICALLY INEFFICIENT
  • Economies of scale significant - prices may be lower under monopoly
  • Supernormal profits - llikely to be able to innovate
68
Q

X inefficiency

A

The difference between actual costs and attainable costs

69
Q

Contestable market

A

Market in which there are no barriers to entry and exit and the costs facing incumbent and new firms are equal

70
Q

Monopolistic competition efficiency

A
  • Fail to achieve allocative efficiency - restricts output in order to maximise profit, under-produces the product - ALLOCATIVE INEFFIENCY
  • Not productively efficient - excess capacity - PRODUCTIVE INEFFICIENCY
  • Criticised on the grounds that there are too many firms producing too low an output at relatively high prices, wasting resources
71
Q

Hit-and-run competition

A

Firms quickly entering the market when there are supernormal profits and leaving it when the profits disappear

72
Q

Features of a contestable market

A
  • What determines behaviour and efficiency is not actual but potential competition
  • Perfectly contestable = no barriers
  • Incumbent and new firms have equal costs, access to technology
  • No brand loyalty
  • No potential barriers to entry - existing firms wouldn’t engage in limit pricing
73
Q

One firm in a contestable market?

A

Threat of competition would still ensure that the firm is efficient and earns normal profit in the long run

74
Q

Contestable market efficiency

A
  • Allocatively efficient
  • Productively efficient
75
Q

Regulation

A

Rules administered by a government agency or legal body

Designed to influence barriers, prices charged, product standards, how the product is sold

76
Q

Examples of regulation

A
  • British board of film classification
  • ABTA (association of british travel agents)
    *
77
Q

Government regulations

A
  • Backed up by law, operated by government
  • Designed to correct market failure arising from abuse of market power, lack of information, under-consumption of merit goods etc.
78
Q

Objectives that a firm follows

A

Influenced by type of organisation, priorities of managers and owners

79
Q

Assumed main objective of private sector firms?

A
  • Profit maximisation
80
Q

Criticism of profit maximisation as a prime objective

A
  • Hard to calculate marginal cost and marginal revenue
  • IN PLCs (often found in oligopolistic markets e.g. cineworld group) there is a separation of ownership and control
  • Owners (shareholders) care about high a profit as possible, managers may have other objective
81
Q

Sales revenue maximisation

A
  • An alternative objective to profit maximisation
  • Objective of achieving as high a total revenue as possible
  • Because managers salaries are often linked to growth of sales rather than profit performance
  • High/expanding sales may attract external finance/greater economies of scale
  • To maximise sales reevnue, firm would produce as long as extra output increases revenue - until MR is zero
  • In practice, usually subject to a minimum profit constraint - level needed to keep shareholders content
82
Q

Profit satisficing

A

Aiming for a satisfactory level of profit rather than the maximum level

83
Q

Stakeholders

A

People affected by the activities of a firm

e.g. workers, managers, owners, creditors (accountants)

84
Q

Growth maximisation

A

Objective of increasing the size of the firm as much as possible

  • Managers likely to earn more, higher status, increased career prospects if they run a big firm
85
Q

Utility maximisation

A

The aim of trying to achieve as much satisfaction as possible

e.g. owners of low down sports clubs may do it for satisfaction rather than high profits

Work and Leisure (4 decks)

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