micro Flashcards
(28 cards)
organic growth
organic growth:
organic growth (internal) —> firms use their own FOP or retained profit to grow e.g. increasing product range, opening new stores
example:
apple —> using retained profits to grow e.g. increased product range e.g. airpods, apple watches
advantages:
- organic growth can be financed through internal funds (retained profits)
- the firm has control over exactly how this growth occurs —> less conflict
- can develop brand loyalty through organic growth
disadvantages:
- access to finance may be limited
- organic growth is usually slow —> shareholders in the business may want more rapid growth
inorganic growth
inorganic growth:
- inorganic growth (external) —> growth as a result of mergers or takeovers
- takeover —> larger firm buys a smaller firm and they become one
- merger —> 2 firms combine
- horizontal integration —> combining firms at the same stage of the production process e.g. carphone warehouse and dixons
advantages:
- cost savings (don’t need 2 of the same thing e.g. don’t need 2 managers)
- 2 firms merge —> eliminating a rival that exists —> collectively have more market share —> price making power increases —> ability to generate more profit will increase —> profits can be used to exploit EoS (costs decrease and output increases) e.g. profits can be used for reinvestment purposes like more efficient capital (technical economies of scale)
disadvantages:
- risk of diseconomies of scale as the firm gets bigger due to the 3 Cs and M (poor communication, coordination, control and motivation)
- risk of attracting scrutiny from competition authorities —> 2 firms merge —> have a lot of market share —> allows firms to have more price making power that isn’t in the interest of consumers e.g. sainsbury’s and asda wanted to merge in 2019 but they were unable to do so
- vertical integration —> combining firms at different stages of the production process
- forward vertical —> when a firm takes over another firm that is further forward in the production process (close to the end customer) e.g. a leather manufacturer buying a shoe shop
- backward vertical —> when a firm takes over another firm that is further back in the production process (further away from the end customer) e.g. a bakery purchases a wheat producer
advantages:
- control of the supply chain —> e.g. backward vertical —> helps to reduce costs —> allows firms to lower prices for consumers
- allows you to limit access to rival firms and charging them more for access
- can limit access to rival firms so they can’t sell their product in a specific retail store
disadvantages:
- causes problems of communication and coordination which can lead to diseconomies of scale —> making firm more inefficient
- creates barriers to entry —> market is less contestable —> firms become less efficient// less innovation —> less variety for consumers
- conglomerate integration —> combining firms which operate in completely different markets
advantages:
- allows firms to diversify and spread out risk
- increased customer base —> increased profits
disadvantages:
- firms are going into markets in which they have no expertise —> can be damaging for the business
- risk of diseconomies of scale as the firm gets bigger due to the 3 Cs and M (poor communication, coordination, control and motivation)
law of diminishing returns
law of diminishing marginal returns:
- short run - when there is at least 1 fixed FOP
- long run - when all factors of production are variable
- law of diminishing returns —> when variable FOP (e.g. labour) are added to a stock of fixed FOP (e.g. land and capital), productivity will initially rise and then fall
- marginal product (extra output when we employ one more worker) = change in total product/change in quantity of workers —> curve rises initially and then begins to fall
- average product = total product/quantity of workers —> curve rises initially and then begins to fall
MP, AP, TP diagram:
- x axis - quantity of workers, y axis - output
- AP —> n shape curve
- MP cuts through highest point of AP —> rises then falls (upside down nike tick) —> starts at same point as AP —> cuts through x axis
- TP —> maximised when MP = 0 (kinda n shaped)
DRAW ANOTHER DIAGRAM:
TP CURVE —> rises and then falls —> draw down from MP = 0
- if MP is 0 (cuts through x axis) then TP will be maximised
why does MP/AP curve increase?
1. labour productivity is increasing due to:
- specialisation
- under utilisation of fixed FOP
why does MP/AP curve decrease?
2. labour productivity decreases due to:
- fixed FOP become a constraint on production (not enough fixed FOP to take more workers)
fixed costs and variable costs
- fixed costs - costs that don’t vary with output e.g. rent, salaries, advertising
- variable costs - costs that vary with output - pay more as you produce more e.g. wages, utility bills, raw material costs
- marginal costs - cost of producing an additional unit of output
equations:
- total cost = total fixed cost + total variable cost
- total variable cost = variable cost x quantity
- average total cost = total cost/quantity
- average fixed cost = total fixed costs/quantity
- average variable cost = total variable costs/quantity
- marginal cost = change in total cost/change in quantity
LRAC and SRAC
economies and diseconomies of scale
- economies of scale - average costs decrease as output increases
- internal economies of scale - within a businesses control
really fun mums try making pies:
- risk bearing - as firms gets larger, it’s able to grow their product range - this allows them to diversity their risk as they’re not relying on 1 good/service to generate profits
- financial - as firms get larger, they are more trusted by banks and can negotiate lower rates of interest when they get a loan from the bank - a cheaper loan lowers AC
- managerial - as a firm gets larger, they can employ specialist managers - these managers monitor productivity of workforce and boost productivity of workers// also bring in specialist skills as managers which can boost productivity - this reduces AC
- technical - as a firm gets larger, they can bring in specialist machinery - productivity increases//employing more workers and making them specialise - boosts productivity - this reduces AC
- marketing - large firms spread the cost of advertising over a large number of sales - this reduces AC
- purchasing - as a firm gets larger, they get a discount when they buy in bulk - this reduces AC
- external economies of scale - businesses in industry can benefit without having done anything themselves
- better transport infrastructure e.g. government build a bridge to allow local firms to reduce travel time and therefore costs - this reduces AC
- suppliers move closer - cuts costs of transporting raw materials - this reduces AC
- research and development firms move closer to firms - firms can use their research and development to improve technology - productivity increases - this reduces AC
- diseconomies of scale - average costs increase as output increases (3Cs and M)
- control - as a firm gets larger, it becomes much more difficult for managers to control the workforce - productivity decreases - this increases AC
- communication - as a firm gets larger, messages cant spread as quickly - productivity decreases - this increases AC
- coordination - as a firm gets larger, coordinating a business becomes more difficult - productivity decreases - this increases AC
- motivation - as business gets larger, each person will feel less valued - may feel dispensable - less motivated - productivity decreases - this increases AC
EoS and DEoS diagram:
- x axis - quantity, y axis - AC
- wide U shaped curve - LRAC
- minimum efficient scale - lowest level of output required to exploit full economies of scale - firms would ideally like to operate at this point
profits
- profit = total revenue - total costs
- normal profit - minimum level of profit required to keep FOP in their current use - AR = AC
- supernormal (abnormal) profit - any profit made above normal profit - AR > AC
- subnormal profit - any profit made below normal profit - AR < AC
revenue
total revenue:
- money made from selling goods/services
- TR = P x Q
average revenue:
- revenue per unit sold
- AR = TR/Q = P
marginal revenue:
- extra revenue generated from one additional unit
- MR = change in TR / change in Q
revenue curves diagram - perfect competition - price takers
- x axis: quantity, y axis: price/revenue
- AR = MR = D —> perfectly elastic curve
- TR —> upwards sloping (looks like supply curve)
revenue curves diagram - imperfect competition - price makers
- x axis: quantity, y axis: price/revenue
- AR = D —> (looks exactly like normal downwards sloping demand curve)
- MR —> twice as steep as AR
DRAW another diagram:
- TR is maximised when MR = 0 —> draw down from MR (n shaped)
objectives of firms
profit maximisation:
- MC = MR
- some firms may choose not to profit maximise - avoid scrutiny from regulators
profit satisficing:
- sacrificing profit to satisfy as many key stakeholders as possible
revenue maximisation:
- MR = 0
- lower prices than profit maximising point - can attract more customers - larger customer base can help establish brand loyalty and create barriers to entry for rivals - helps to increase market share - can pursue profit maximisation in the LR
sales maximisation:
- AC = AR
- business wants to become as large as they can possibly be without making a loss
- limit pricing - if firms price at normal profit, it takes away incentive for new firms to enter the market - limits competition
- flood the market - consumers become aware of your product - as they become more aware, they develop loyalty towards it - can change objective down the line
business efficiencies
- allocative efficiency - resources follow consumer demand
diagram:
- occurs where D = S (demand curve = AR = P, supply curve = MC curve) - P = MC
- productive efficiency - when a firm is operating at the lowest point on their AC curve - full exploitation of economies of scale
diagram:
- minimum point on AC curve
- x efficiency - when a business is minimising waste e.g. there are no excess costs
2 reasons for X inefficiency:
- monopolies - lack competitive drive - complacency takes place - x inefficiency creeps in
- public sector firms - lack profit motive - aim is to maximise social welfare - x inefficiency
diagram:
- production on AC curve - point a
- if firm is x inefficient - production would take place above their average cost curve - point b
- difference between point a and b is the x inefficiency
- dynamic efficiency - re-investment of LR supernormal profit
diagram:
- go to MC = MR - difference between AR and AC x quantity = supernormal profit
static vs dynamic efficiency:
- static (allocative, productive and x efficiency) - at a given point in time
- dynamic - occurs overtime
perfect competition
perfect competition:
- many buyers and sellers (infinite)
- homogenous goods - firms are price takers
- perfect information
- firms are profit maximisers - MC=MR
supernormal profit diagram - SR:
market diagram:
- x axis: quantity, y axis: price
- supply and demand curve
- equilibrium at P and Q
firms diagram:
- x axis: quantity, y axis: costs/revenue
- firms are price takers - take price from the market
- draw across from market price (straight horizontal line) - demand curve - MR=D=AR=P
- average cost (u shaped) will be below average revenue
- draw on MC
- firms are profit maximisers - produce at MC=MR
- compare AR and AC - AR > AC
- difference between AR and AC x quantity = supernormal profit
- this won’t last in the LR - SNP will attract new firms into the market - they can enter the market as there’s no barriers to entry and perfect information - as they enter the market, supply will shift right - as supply shifts right, prices will fall and will continue to do so until there’s no more incentive to enter the market - normal profit in the LR
LR diagram:
- straight horizontal line - cuts through lowest point of AC - MR2=D2=AR2=P2 (normal profits)
- draw supply curve shifting right on market diagram
subnormal profit - SR diagram:
market diagram:
- x axis: quantity, y axis: price
- supply and demand curve
- equilibrium at P and Q
firms diagram:
- x axis: quantity, y axis: costs/revenue
- firms are price takers - take price from the market
- draw across from market price (straight horizontal line) - demand curve - MR=D=AR=P
- average cost (u shaped) will be above average revenue
- draw on MC
- firms are profit maximisers - produce at MC=MR
- compare AR and AC - AC > AR
- difference between AR and AC x quantity = subnormal profit
- this won’t last on the LR - firms will be incentivised to leave the market - no barriers to exit so they can leave - as they leave, supply will shift left - prices will increase and this will keep happening until there’s no more incentive to leave - normal profits in the LR
LR diagram:
- straight horizontal line - cuts through lowest point of AC - MR2=D2=AR2=P2 (normal profits)
- draw supply curve shifting left on market diagram
- AE - P = MC - AE is achieved ✅
- PE - operating at lowest point of AC - full exploitation of EoS - PE achieved ✅
- XE - producing on AC curve ✅
- DE - no SNP in the LR - cannot be dynamically efficient ❌
- firms have to be statically efficient due to the nature of competition
shutdown condition
shutdown condition:
- when AR = AVC, shutting down will be considered
- if AR < AVC - firms should shut down
- if AR > AVC - if a loss is being made, firms should still continue producing for a short while
diagram - loss no shutdown:
- x axis: quantity, y axis: cost/revenue
- straight horizontal line - MR=D=AR=P
- AVC (U shaped) below AR
- AC curve (U shaped above AR and tending towards AVC)
- MC curve (cuts through lowest point of AVC and AC)
- go to MC=MR - find AR and AC - difference between AR and AC x quantity = subnormal profit
- AR is covering AVC - should continue producing - wait for other firms to leave and prices to go up - subnormal profits converted into normal
diagram - loss shutdown:
- x axis: quantity, y axis: cost/revenue
- straight horizontal line - MR=D=AR=P
- AVC (U shaped) above AR
- AC curve (U shaped above AR and tending towards AVC)
- MC curve (cuts through lowest point of AVC and AC)
- go to MC=MR - find AR and AC - difference between AR and AC x quantity = subnormal profit
price discrimination
price discrimination - when a firm charges different prices to different consumers for an identical good/service with no differences in cost of production
examples of price discrimination:
- different train ticket prices for different times of the day e.g. peak and off-peak train times
- different bus ticket prices for different ages
conditions necessary for price discrimination:
- price making ability
- information to separate the market - separate consumers based on PED
- prevent re-sale (market seepage)
3rd degree - when firm is able to segment the market into different PED —> will charge different prices to different groups
diagrams:
- draw 3 diagrams side by side
inelastic/elastic
- x axis: quantity, y axis: C/R
- MC curve is constant across all market segments (elastic, inelastic and combined)
- AR=D —> steep curve
- MR is twice as steep as AR
- profit max —> produce where MC=AR —> label Q1 and draw up to AR curve and label P1
- make supernormal profit __
combined
- x axis: quantity, y axis: C/R
- MC curve is constant across all market segments (elastic, inelastic and combined)
- AR=D
- MR —> twice as steep as AR
- make supernormal profit __
- by price discriminating, the firm can make higher profits —> the supernormal profits from inelastic and elastic market is greater than the combined market
costs and benefits of third degree price discrimination:
consumers:
- price inelastic consumers will lose out as they pay higher prices - consumer surplus falls
- price elastic consumers will benefit as they pay lower prices - consumer surplus increases
producers:
- firms can make greater supernormal profits - have the ability to exploit economies of scale
- producer surplus increases
natural monopoly
natural monopoly - when the optimum number of firms in the industry is one
characteristics:
- rational for 1 firm to supply the entire market - competition is undesirable - competition would result in a wasteful duplication of resources and non exploitation of full economies of scale
- huge fixed costs e.g. railtracks, water distribution, gas/electricity distribution
- ability to exploit economies of scale e.g. it makes sense to have one firm as opposed to five firms - average costs will be lower with one firm - lower prices for consumers
natural monopoly diagram:
- x axis: quantity, y axis: C/R
- AC - downwards sloping curvey line
- MC - twice as steep and also curvey
- AR=D - normal downwards sloping demand curve
- MR - twice as steep
- profit maximiser so produce where MC=MR - show area of SNP
- regulators will intervene and produce at the allocatively efficient point - however this point, natural monopolies are making a loss (show on diagram) - subsidies are given by the regulators to cover loss
monopoly
- monopoly - one seller/firm dominating the market
- pure monopoly - 1 firm with 100% market share
- monopoly power (legal monopoly) - when a firm has more than 25% market share
characteristics of monopoly:
- differentiated products - firm is a price maker
- high barriers to entry/exit
- imperfect information (keeps firms out of the market)
- firm is a profit maximiser
monopoly diagram:
- x axis: quantity, y axis: costs/revenue
- price maker so downwards sloping demand curve - AR=D
- MR is twice as steep as AR
- AC (u shaped)
- MC (crosses AC at lowest point)
- go to MC=MR - compare AR and AC - difference between AR and AC x quantity = supernormal profit
- DWL
firms:
- DE - LR SNP - no firms can enter due to higher barriers to entry and imperfect info keeps other firms out of market - reinvest ✅
- greater economies of scale - due to the larger size of monopolies, they can achieve greater EoS (evaluation - monopoly might get too big - diseconomies of scale) ✅
- due to a lack of competition, there is a reduced incentive to be efficient - productive and x-inefficiency ❌
employees:
- greater SNP - can result in higher wages for workers ✅
consumers:
- prices may fall if firms pass on their cost savings (due to economies of scale) in the form of lower prices ✅
- cross subsidisation - use their supernormal profits to subsidise a loss making good/service that they are also producing ✅
- productive inefficiency, x inefficiency due to lack of competition - consumers are exploited via higher prices - allocative inefficiency ❌
suppliers:
- monopoly often has the power to dictate what price they will pay to suppliers - monopsony power ❌
evaluation:
- dynamic efficiency - may not use SNP to reinvest - could give it to shareholders via higher dividends etc
- regulation can reduce inefficiencies
- pure monopoly doesn’t exist in real life so there could still be competition or threat of competition - encourage firms to be more efficient - reduce inefficiencies
efficiencies:
- AE ❌
- PE ❌
- XE ❌
- monopolies are statically inefficient (allocative, productive, x)
- DE ✅
monopolistic competition
characteristics:
- many buyers and sellers
- slightly differentiated goods - firms are price makers but only slightly as there are very good substitutes available
- low barriers to entry and exit
- good information
- firms are profit maximisers
e.g. fast food, hairdressers
diagram - SR:
- x axis: quantity, y axis: costs/revenue
- price maker so downwards sloping demand curve - AR=D
- MR is twice as steep as AR
- AC (u shaped)
- MC (crosses AC at lowest point)
- go to MC=MR - compare AR and AC - difference between AR and AC x quantity = supernormal profit
diagram - LR:
- new firms will enter the market as they’re attracted by SNP - low barriers to entry and good information means that they can enter the market - as new firms enter the market, demand for individual firms in the market will fall - demand will keep shifting left until AR=AC
- downwards sloping demand curve - AR=D
- MR is twice as steep as AR
- MC (crosses AC at lowest point)
- go to MR=MC
- AC curve (econplusdal)
LR:
- AE ❌ - price doesn’t equal MC
- PE ❌ - voluntarily foregoing EoS
- DE ❌ - no LR supernormal profit being made
evaluation:
- monopolies are also not AE - monopolistic competition is better - price making ability is lower - price exploitation won’t be as bad as a monopoly
- productive inefficiency - no where near as bad as monopolies - good substitutes means that firms cannot afford to forego EoS to the same extent as monopolies
- dynamic efficiency - SR supernormal profits might be enough to invest for monopolistic competition
oligopoly
characteristics:
- few firms dominate the market - high concentration ratio (higher the concentration ratio - the lower the number of firms)
- differentiated goods - firms are price makers
- high barriers to entry and exit
- interdependence - firms make decisions based on actions/reactions of rival firms
- profit max not the sole objective (whatever objective allows a firm to get more market share)
e.g. soft drinks, supermarkets
concentration ratio:
- concentration ratios - the collective market share of the largest firms in an industry
- ignore the word ‘others’ —> does not count
diagram:
- x axis: quantity, y axis: costs/revenue
- draw AR (oligopoly way - elastic then inelastic)
- makes no sense to raise prices from P1 to P2 (elastic part of curve) - quantity demanded decreases proportionately more than the increase in price (show on diagram) - market share will decrease
- decrease in price from P1 to P3 (inelastic part of curve) - due to the law of demand, demand will increase from __ but proportionately less than the reduction in price - other firms will follow a price fall in order to protect their market share - overtime, there will be no change in market share
collusive and non collusive oligopolies:
- competitive oligopoly - price wars and non price competition
collusive oligopoly:
types of collusion:
- cartel - agreement between firms to collude
1. overt collusion - formal agreements between firms - firms get together and decide to fix prices or quantities
2. tacit - informal agreements between firms e.g. price leadership - smaller firms follow the pricing decisions of the dominant firm
factors promoting collusive oligopoly:
- small number of firms - easier for firms to get together and organise collusive agreements
- similar costs - easier to fix prices/quantities
- high barriers to entry - if SNP are being being made, high barriers to entry will not necessarily attract new firms into the market
- ineffective competition policy - firms are likely to get away with collusion
- consumer loyalty - if a firm decides to cheat on a collusive agreement - won’t necessarily work as consumers might by loyal
- consumer inertia - consumers aren’t willing to switch suppliers e.g. too much effort - if a company cheats on a collusive agreement, there’s no guarantee that consumers will go to them
game theory:
prisoners dilemma model:
diagram:
- 3 x 3 table
- firm A - high price (£1) and low price (90p)
- firm B - high price and low price
- high and high - £3m, £3// high and low - £0.5m, £4m// low and high - £4m, £0.5m// low and low - £1m, £1m
- left hand number is always profit for firm on the left of the table (firm A)// right hand number is always profit for firm on the top (firm B)
- nash equilibrium - rational equilibrium that can last in the long run - occurs when both firms are charging the low price
conclusions:
- temptation to collude - if firms collude and agree to charge the high price - make lots of supernormal profits - incentive to cheat on collusive agreement to make even higher profits
price competition:
- firms in an oligopoly market engage in three types of price competition
1. price wars - when competitors repeatedly lower prices to undercut each other in an attempt to gain or increase market share
2. predatory pricing - pricing lower on purpose to drive out competition
3. limit pricing - firms price at normal profit to limit competition into the market
non price competition:
- advertising
- loyalty cards
- branding
- customer service
contestability
characteristics:
- threat of competition is high
- low barriers to entry/exit
- large pool of potential entrants
- good information
- hit and run competition - SNP in SR and normal profit in LR
SNP are made in the SR - firms enter due to low barriers to entry (hit) - in the LR normal profit is being made (run) so firms leave due to low barriers to exit
factors that suggest a market is contestable:
- if there is evidence of firms entering the market
- if there is a gap in the market
- if incumbent (existing) firms receive repetitional damage
- if incumbent firms are being inefficient
factors that suggest a market is not contestable:
- if incumbent firms have strong brand loyalty
- if it requires significant capital to reach MES
- if incumbent firms are advertising
- if incumbent firms are being efficient
monopsony
- dominant buyer in the market e.g. supermarkets buy majority of milk supplied by dairy farmers
- profit maximisers - aim to minimise costs and maximise profits by paying suppliers as little as possible
diagram:
- x axis: quantity, y axis: C/R
- demand curve —> D
- supply curve —> S=AC
- MC is twice as steep as AC
- D=MC —> P1 and Q1
- competitive market —> go to demand and supply —> Wc and Qc
- monopsonist reduces the quantity of workers compared to competitive market outcomes// also give lower wages than competitive labour outcomes
- DWL - due to low wages and low employment
monopsonist:
- pay suppliers as little as possible - reduced COP leads to higher profits - dynamic efficiency - EOS - closer to MES ✅
- bad reputation for the way they treat their suppliers ❌
consumers:
- lower prices - CS increases - allocative efficiency ✅
- the quality of the product may decrease as suppliers attempt to cut their own costs in response to the price pressure from the monopsonist ❌
suppliers:
- direct and consistent income ✅
- suppliers have little choice but to accept lower prices because they rely heavily on the monopsonist for sales - less profitability - may have to exit the market ❌
- lower wages for suppliers - PPF shifts in ❌
government intervention to control mergers and monopolies
intervention to control mergers:
- CMA (competition and markets authority) - protect the interest of consumers
intervention to control monopolies:
1. price regulation
- maximum prices
- RPI - rate of inflation
- RPI - X - restrict the level by which firms can increase their prices below RPI - promotes firms to be more efficient
- RPI + K - allows monopolies to adjust prices in line with inflation (RPI) while the K factor ensures they generate enough profit for capital investments
maximum price diagram:
- MR, AR, MC curve (monopoly diagram)
- draw on profit max and allocatively efficient point
- draw horizontal line across from Pc - label maximum price
issues:
- level of X/K - we are assuming that governments/regulators have perfect information// level of X may be set too harshly - firms might not make enough profits - can lead to firms shutting down// level of X set too low - outcomes may not be competitive// if K too high - outcomes may not be competitive// if K set too low - might not make enough profits to sustain capital investment
- costly (burdens tax payer, opportunity cost)
- incentive to keep X low - firms may be successful in finding ways to be efficient - government will want to keep X low - will keep making X lower - not fair on firms
- regulatory capture - can ask to reduce extent of regulation - regulation won’t do its job
- quality control/performance targets e.g. trains, NHS, gas and electricity
evaluation:
- unintended consequences - quality of NHS might fall
- game the system - if trains are only allowed a certain number of delays in a day, they may extend journey times and say that journeys will take longer
- profit control covering costs and adding % ROR on capital employed
evaluation:
- asymmetric information - firms may over report capital employed and over report costs - in order to make more profit
- incentive to over employ capital - can lead to x-inefficiency
windfall taxes on profit
- government imposes windfall taxes on firms making excess profits - reduces the incentive to exploit monopoly power and charge high prices as extra profits will be taxed
evaluation:
- tax evasion and avoidance
- under reporting level of profit
- less dynamic efficiency
privatisation, deregulation and nationalisation
- privatisation - when state organisations are sold off to the private sector - will run organisations more efficiently as they have a profit motive
- deregulation - governments reduce legal barriers to entry in given industries - incentivises more firms to enter the market - promotes competition
advantages:
- allocative efficiency increases
- productive efficiency increases
- X-inefficiency decreases
- dynamic efficiency increases
disadvantages:
- loss of natural monopoly and loss of economies of scale benefits - productive inefficiency
- reduced service quality - to maximise profits, firms may cut costs (privatisation)
- worse working conditions - to maximise profits, firms may cut costs e.g. lower wages and poorer working conditions
depends on:
- the level of competition post privatisation/deregulation (no guarantee that competition will be high) - inefficiencies
- height of other barriers to entry - if other barriers to entry are still high then there is still no incentive to enter the market - competition won’t increase (deregulation)
- nationalisation - the process of taking an industry into public ownership - nationalisation can prevent the negative impacts of privatisation e.g. cost cutting
advantages:
- greater economies of scale - productive efficiency - lower AC - lower costs for consumers
- more focus on service provision - governments will want to maximise social welfare - allocative efficiency
disadvantages:
- diseconomies of scale - public sector too large - increase in AC - productive inefficiency
- lack of incentive to minimise costs - higher COP
- lack of SNP due to lack of profit motive - dynamic inefficiency
- greater risk of moral hazard - when individuals who take the risk are not the ones bearing the cost (e.g. government may risky decisions because they know taxpayers will cover any financial losses)
business growth
Reasons why firms grow:
- To make more profits
- To gain monopoly power and hold greater market share —> gives them price making ability
- To benefit from economies of scale
Reasons why small firms exist:
- Unable to access finance for expansion
- They offer a more personalised service and focus on building relationships with their customers
The principal agent problem:
- There is a separation (divorce) between the owners and the managers who control the day-to-day running of the business
2 stakeholders have different aims:
- The owners (shareholders) will want to maximise the returns on their investment
- However, managers are unlikely to want the same thing. They will want to maximise their own benefits e.g. increase in salaries
Public and private sector:
- Private sector - owned by individuals or groups of individuals e.g. sole traders and PLCs
- Public sector - owned by the government (profit making is not their main aim)
Profit and not-for-profit organisations:
- Almost all private sector firms exist to make profit
- Some private sector organisations are not-for-profit e.g. charities
constraints of business growth
Constraints on business growth
- The size of the market: the more niche the market, the smaller the number of potential customers
- Access to finance: small firms find it harder to access loans as they are considered to be more risky than larger firms
- Owner objectives: some owners may not want their business to grow any further as they are happy with their current profits
- Regulation: government may introduce regulation which prevents businesses from growing
demergers
demerger - the reversal of a merger between two firms or the reversal of a takeover - one large firm is broken into two or more smaller firms
reasons for demergers:
- reducing diseconomies of scale
- increased business focus - removes cultural differences between firms - improves profitability
- increase competition - increase efficiency
impact on businesses, workers, consumers:
firm:
- increased business focus - removes cultural differences between firms - increased efficiency - lower COP - improves profitability
- smaller size of firm - loss of economies of scale
- demerger - increased competition - increased efficiency
employees:
- some workers may lose their jobs - unemployment
- smaller workforce provides more opportunity for promotion
consumers:
- better quality products due to increased efficiency
- lower prices due to increased efficiency
- higher prices due to loss of economies of scale
