micro theme 3 Flashcards
(77 cards)
1
Q
why might businesses struggle to profit max?
A
- dont know where MC=MR is
- if marginal costs change, businesses may struggle to adjust in the SR as they would disrupt customers
2
Q
where is the point of revenue maximisation?
A
where MR=0
3
Q
where is the point of sales maximisation?
A
AC=AR
4
Q
why type of efficiency is monopolistic competition ?
A
- allocatively inefficient not operatinng at P=MC
- productively inefficient not producing on the lowest point of the AC
5
Q
what efficiency is perfect comeptition ?
A
-dynamically inefficient
- productively efficient: lowest point on the AC curve. IN THE LONG RUN
- allocatively efficient firm produces at Q1, MR=MC. operates at P=MC
- x - efficiency: HIGHLY COMPETITIVE MARKET LIKELY TO MAKE THE FIRM EFFICIENT.
6
Q
what type of efficiency is a monopoly?
A
productively ineffeicent, dont produce where MC meets AC at lowest point
allocatively inefficient, set a price higher than MC
dynamically efficient ONLY IF THIS IS THE SHAREHOLDERS’ OBJECTIVE. SOME SHAREHOLDERS WANT THE PROFITS RATHER THAN ALLOWING THE COMPANY TO INVEST.
7
Q
what are factors that influence the detived demand for labour?
A
- demand for the product itself
- if capital is too expensive
- substitute inputs of production: capital
- wage rates
- when the economy is more productive
- if workers become more productive
- regulation
8
Q
is demand elastic or inelastic?
A
- inelastic in the SR
- PED of the product being manufactured
- how easily the labour can be substituted
- if wages are a small proportion of total prices
9
Q
what is an individuals labour supply?
A
the total number of hours a person is willing to work at a given wage rate
10
Q
what is an individual’s labour supply in the SR?
A
- substitution effect: opportunity cost of liesure is your wage and this increases the incentive to work
- income effect: as wages increase incomes will rise at the same time. but after workers have met their target income they may be less inclined to work more
11
Q
what affects an individual’s supply of Labour in the long run?
A
- pecuniary and non pecuniary benefits
- if workers enjoy their work they may be willing to accept a lower wage and work for longer hours
12
Q
what is the role of the CMA?
A
- can intervene to break up monopolies
- their role as regulator is to surrogate competition because monopolies could exploit their power and take advantage of consumers
13
Q
what are performance targets as a method of government intervention?
A
- targets set by regulators otherwise the firm will incur a loss
-these targets act as a surrogate for competition to ensure that firms have an incentive to improve quality and customer service
14
Q
what is a PFI ( private finance initiative) ?
A
when a major infrastructure project is issued by the government to private contractors. it is then leased to the public sector over 25- 30 years
- it is useful in times of financial austerity as the government does not have to finance the total amount during that year. therefore they can spend money on current demands instead
- however a cost to the government in the long run
15
Q
what are performance targets?
A
- aim to ensure that a certain level of quality of service must be met otherwise the firm will encounter a fine.
- performance targets act as a surrogate for competition and an incentive to become more efficient so that AC is reduced in the long run
- the impact of the fine is also to deter other firms from becoming too inefficient.
16
Q
what is market share?
A
- the percentage of sales controlled by a firm
17
Q
what is rate of return regulation/ windfall taxes?
A
- the regulator decides a reasonable level of price from the capital base if the form is making too much profit compared to their relative size, the regulator may enforce price cuts or impose a one off tax
disadvantage: may encourage cost padding where firms will become productively inefficient so that costs rise and profit levels are not deemed excessive.
- gives little incentive to firms to increase profit and efficiency
- may fail to accurately evaluate how much profit is reasonable, may set it at the wrong place and the firm could abuse their monopoly power
18
Q
what is RPI +/- K regulation?
A
k= a percentage set by the regulator that allows the firm to make a large amount of profit to increase their efficiency.
+ encourages firms to cut costs and become more productively and x efficient
+ natural monopolies may have no incentive to innovate so this will force them to be more dynamically efficient
+ MAXIMUM PRICE DIAGRAM. increases allocatively efficiency. firm is now producing at PQQC.
19
Q
why do some firms choose to grow?
A
- want to gain market control: - become dominant in the market and influence the market price of goods. can limit the entry of other firms in the market. monopoly power can also lead to monopsony power which means they can reduce their costs from their suppliers
- firms can gain economies of scale by reaching their minimum efficient scale which will help their costs of production and will be able to sell more goods to generate higher revenue
- expand into different markets, for example Tesco has F&F, Tesco mobile and Tesco bank
- more security as they can build up assets and cash and likely to sell a wider range of assets
20
Q
why do some firms choose not to grow?
A
- constraints on growth
- size of the market
- access to finance
- owner objectives
- regulation
- not all firms
21
Q
what is satisficing?
A
- a firm’s profit is satisficing when it is earning just enough profit to keep its shareholders happy
- managers may not aim for high profits because managers will have little personal gain
- this occurs when there is divorce of ownership and control
22
Q
how is market concentration calculated?
A
- n: total market share, 4: firm 1+ firm 2+ firm 3+ firm 4
- then divide total market share by the total global sales x 100
23
Q
what is collusion?
A
- collusion refers to when firms work together to fix prices.
- the aim of collusion is to increase the firms’ combined profits
- collusion is illegal
24
Q
what is predatory pricing?
A
making short term losses in order to force out competition. the long run benefits of this is that low profits will prevent other firms from entering and therefore higher market share and profits for the dominate firms
25
what is a price war?
- firm reacts to another firms price cut by cutting their own prices
- can use a pay-off matrix to demonstrate this
26
what is price leadership?
- if one firm is the dominant producer, they may take the lead in setting the price and other firms follow
- barometric price leadership: a firm will increase prices and wait to see if other firms will follow
27
what is a cartel?
- an agreement between firms on price and output in order to maximise joint profits
- overt collusion: firms openly will work together to fix prices or market shares
- tacit collusion: when firms refrain from competing on price but without communication or formal agreement
28
what are the conditions needed for collusion?
- small number of firms in order to monitor that each firm is keeping up with the agreement
- produce relatively similar goods because then firms could be non-price competitive and compete on non-price factors
29
what are the conditions needed for price discrimination?
- different segments must ave different price elasticities
- no seepage/ no arbitrage
- firm must have some degree of monopoly power
30
what are the advantages of price discrimination?
- profit maximisation, the producer can extract all consumer surplus and make it producer surplus
- lower prices for consumers at certain times there may be a gain in consumer surplus
- GREATER DYNAMIC EFFICIENCY
- GREATER ECONOMIES OF SCALE WHICH MAY LEAD TO LOWER PRICES IN THE FUTURE
- CROSS SUBSIDISATION
31
what are the disadvantages of price discrimination?
- limits to the extent to which different prices may be applied
- exploitation of captive markets: consumers in the inelastic sub-market are being exploited due to their inelastic PED, limits allocative efficiency
- worsens inequality
- anti-competitive pricing when the firm lowers its costs, gives it monopoly power will lose x-effeciency
32
what is allocative efficiency?
- static efficiency
- occurs when AR=MC (P=MC), the cost to producers matches the price consumers are willing to pay
- resources are allocated in such a way that consumers and producers get the maximum possible benefit, where demand=supply
- society surplus is being maximised, welfare is maximised
- consumer analysis
- resources follow consumer demand
- low prices
- maximisation of CS
- high choice
- high quality
- producer analysis
- retain market share
- stay ahead of their rivals
- increase profit by bringing consumers
33
what is the formula for % change?
new - original/ original x 100
34
What are constraints on business growth?
- regulation: business growth may attract attention of CMA and they may block a merger or increase regulatory pressure
- competition: threat of entry from rival firms, improvements in technology may reduce barriers into the market. monopoles that are inefficient and charging high prices may find that challenger irms can compete away profits
- finance: small or medium sized enterprises may have limited access to loans and face risks and costs of rssiing equity in capital markets. commercial banks are more risk averse lending to businesses post 2008 and complain they cannot access loan finance at affordable interest rates
- size of the market: businesses achieve success in local or niche markets may find limits to scalability because there is not enough consumer spending to finance this. niche markets have limited opportunities for opportunities of scale to be exploited because they are niche can charge high prices
- human capital weakness/skills shortage: struggle to recruit the skilled personnel they need
- bureaucracy and red tape: as businesses grow, their legal requirements will also, for example auto enrolling staff to pension schemes
- cost of recovering late payments: smaller businesses struggle with this. £6.7 billion worth of late payments for businesses in 2017. damages cash flow and chances of survival
- insufficient funds to train employees and money to put aside for innovation and research
- high cost of rasing fresh funding: commercial banks charge higher interest rates to smaller businesses
35
what is rpi-x regulation?
limits the level of price increase
- if the regulator thinks the firm can make savings by becoming more efficient they may set a high level of X
36
What are the benefits of a national maximum wage?
- reduces inequality
- employees may be more motivated if they see their wage gap decrease, for example Jeremy Corbyn suggested that ceo salaries be limited to 20x the amount of their employees
- reduces the wage costs to businesses and makes them more competitive
37
What are the disadvantages of a national maximum wage?
- corbyn suggested a policy where CEOs could only max make 20x what the person paid lowest in their organisation could make.
+ would reduce income inequality
+ may increase motivation of workers
- market failure/ government failure shortage of labour. could lead to brain drain
- The extent of the shortage depends on the elasticity the less elastic for demand and supply. There is smaller labour shortage
- free market wage rate is needed to attract entrants
38
What is economic rent?
The excess a worker is paid above the minimum required to keep them in their current occupation (this minimum payment is their transfer earnings
39
what are the reasons a business may choose to remain small?
- owners. may wish to retain control of their business
- avoiding diseconomies of scale
- offers a more personal service
- lack of finance for exapansion
40
What is organic growth?
- organic growth: grow by being successful. use their profits to reinvest and expand the firm
- diversify product range, finding new markets or offering new products
- diversification can be dangerous when the market the firm is moving into is alien to the firm
41
What is economies of scale?
a reduction in LRAC as output increases
42
What are internal economies of scale: occur within a business: REALLY FUN MUMS TRY MAKING PIES:
Risk: as a business gets larger tey can spread their risk over a larger output
financial: as a business gets larger they can negotiate interest rates. this is because te firm is reputable for being successful and the business is low risk
managerial: as a firm gets larger firms may higher specialist managers who will monitor the productivity of the workforce and boost it. they also bring their special skills as managers which will also boost productivity. AC: Quantity will rise much faster than total cost and therefore bringing down average cost
technical: bringing in specialist machinery as a firm gets larger which will boost productivity. EMploying more workers and specialise those workers. Quantity will grow quicker than total cost, bringing average cost down
marketing: can bulk buying their advertising, negotiate better units of advertising, TC is rising slower than Q
purchasing: purchasing , when buying in bulk, companies may get discounts, quantity increases faster than total cost. the cost is spread out across output
43
What are external economies of scale?
- occurs outside of the business, but within the industry and therefore businesses within te industry can benefit
- benefit of better transport structure: reduces cost as a business
- component supplies move closer
- R&D firms will move closer because you are a key business. you can use their research to improve your technology and thus boost your productivity.
44
What is diseconomies of scale?
an increase in LRAC as output increases
45
what is the minimum efficient scale?
when a firm first reaches its lowest LRAC
46
what happens with shut down points in the SR?
if the firm's price or AR is higher than the AVC then the firm will stay in the market even if it is making a loss because at least they are covering their AVC. a loss making firm will at least cover avc and make some profit to pay off fc.
otherwise the firm will make further losses on each output sold.
when AR = AC SHORT RUN SHUT DOWN POINT (doesn't really matter could do either)
AVC> P
If avc are higher than price the firm should shut down in the SR because its not covering its variable costs, this means it is making a loss on every unit sold and therefore the firm should shut down and avoid further losses
47
what happens in long run shut down points ?
- all fcators of production are variables and no fixed costs .
- in the LR ATC= AVC + 0
LR SHUTDOWN POINT IS: P/AR > ATC
ATC= P is shut down point
48
What is diminishing marginal productivity of labour?
refers to when an additional unit of labour the additional increase in productivity declines so the additional cost of hiring more labour needs to be set against the additional productivity gained
as marginal productivity declines diminishing return setting marginal cost increases at a faster rate given labour is homogenous in the short run labour is variable so an additional unit of labour will result in less additional output
an additional unit of flavour results in marginal product declines average product declines total product increases as a rate total cost rise of faster rate marginal cost increases average cost rises 
49
what is organic growth?
when businesses will grow by being successful. they may diversify their product range. for example tesco has opened branches overseas and provides financial services like tesco banking
50
what is horizontal inteagration?
when a businesses will takeover or merge with a business in the same industry and stage of production
51
what is vertical integration?
merger or takeover with a business in the same industry but different stage of production.
52
What is diminishing marginal returns?
An additional factor of production results in lessening of output. Marginal costs will raise quicker
53
what type of efficiency is monopolistic competition in the long run?
- allcatively inefficient. price set above marginal cost
- productively inefficient: firm not producing on the lowest point of the AC curve
- dynamic inefficiency: normal profit. not enough profit to invest in R+D
- x- efficiency. face competitive pressures to lower costs in order to maximise profits.
54
What is limit pricing?
- setting price below the costs of new entrants in the market
55
What is the formula for m arginal cost?
Change in total cost / change in total output
56
Why do marginal costs for a business increased after a certain amount?
The constraints on productivity will reduce productivity per output because of over specialisation
- only variable costs affect marginal costs
57
What are short run costs for businesses?
When there is at least one fixed factor of production, usually land or labour
58
When are businesses in the long run?
When all factors of production are variable
59
What are the different costs for a business?
Implicit costs: their opportunity cost
Fixed costs: salaries, insurance, rent, loans
Variable costs: wages, utility bills, raw materials
60
Why does the avc curve take a u shape?
Up to a certain amount of labour input, there are increasing returns to labour, marginal product is increasing, labour productivity is increasing thus reducing average variable costs. After this point, average labour output decreases.
61
Long run costs
In the lr all factors of production are variable. This is because in the long run the business can expand their supply by increasing number of FoP
Lrac curve is u shaped because of increasing returns to scale
The left hand side where the curve is decreasing is increasing returns to scale. When a firms increases scale of production in the LR it will increase the factors of production
Increasing returns is demonstarted by the output as a result of increasing inputs, is more than the increase in inputs there is increasing returns (% change in output > % change in inputs = increasing returns to scale)
In the middle, there is constant returns to scale (% change in output = % change in input)
In the last section there is decreasing returns to scale % change in output is < % change in inputs
62
What is the Point of minimum efficient scale?
The point whee the curve stops falling, it represents the level of output required to fully exploit economies of scale.
63
What are the conditions needed for perfect competition?
Homogenous goods
Perfect information
Many buyers and sellers
No barriers to entry/ exit
64
What is the principal agent problem?
When the owners or stakeholders of a business (principals) experience a divorce of ownership and control, mainly because the agents (managing directors or employees) have different objectives or lack motivation
This means they may act to sales maximise rather than profit maximise because their pay may be based on sales.
Principals may tackle this by changing their incentives to profit maximise, such as changing bonuses to reward profit rather than sales
- principals Can also remove managing directors - however may be hard to determine who
65
What is Internal growth?
Organic growth is the result of a firm increasing the levels of the factors of production it uses
+ the firm can control how much and how this grow happens
- this growth can be slow and expensive
66
What is external growth?
Inorganic growth is a result of takeovers and mergers
- takeover: when one firm buys another and becomes part of the first one
- a merger is when two firms unite to form a new company
+ external growth is quicker and cheaper than internal growth and may be the easiest way to gain experience and expertise in a new area of business
- external growth can happen throw horizontal, vertical or conglomerate integration
67
What is horizontal integration?
Horizontal integration means combining firms which are at the same stage of the production process of similar products
+ firms can increase economies of scale, reduce competition and increase market share
- however there may be diseconomies of scale: where the change in inputs exceeds the change in outputs, therefore making the extra inputs an unnecessary cost
- clash of cultures: demotivating atmosphere if there are redundancies
68
What is vertical integration?
Combining firms at different stages of the production process of the same product
+ firms can gain more xontrol of the production process and therefore may make it more efficient and higher quality
+ reduce costs massively in comparison to competitors, thus giving it monopoly power
+ creates barriers to entry for competitors
- the firm may not have experience running a firm in another stage of production
69
What is conglomerat eintegration?
Integration between firms in completely unrelated markets
+ allows firms to diversify and spread their risk, this allows them to expand their range of products, giving consumers more choice and possibly customer retention
+ the profits generated from one sector of the business could be used to invest in another
70
What are the disadvantages of a merger for a business ?
- there can be duplication of staff such as in the HR, marketing and finance departments. It is likely that some of these people would be made redundant
- the firms may have different and incompatible differences which will need to be resolved
- may cause debt to finance a takeover
- the firm hats is taking over may overestimate the value of he firm and therefore it may be hard to make a return on the investment
Affect on consumers
+ may lead to price reductions because of economies of scale
+ may leader to more innovation
- less choice
- reduction of competition may lead to higher prices for consumers
- the two merged firms may suffer from diseconomies of scale and therefore may have reduced output, leading to higher prices
71
What happens in a demerger - why does it occur and what are the impacts on the business, workers and consumers?
- may be done if the merger was unsuccessful and will now allow for each smaller firm to focus on a specific market and make more profit
May demerge to: pay off business loans, reinvest in the business, in response to government intervention
Impact on business:
- may become. More efficient and improve its production process
- economies of scale will be reduced and there will be. A reduction in diseconomies of scale
- firm will have greater independence
- market value may inctrasr
Workers
- improvement in manager worker relations
More jobs
May lose morale
Consumers
+ improved consumer choice, competition my increase
+ consumers may benefit from smaller firms focused on their needs
- higher prices
- may lose benefits of EOS
72
What is productive efficiency?
Where average cost is at its lowest, mc= ac
73
What is x- inefficiency
For a given level of output,the firms costs are above the ac curve
74
What is dynamic efficiency?
How changing technology improves a firms output over time
75
What is a monopsony?
- monopsonies are the sole employer/buyer in a given market, for example the NHS is 90% of the buyer in the UK
- wage setters/ price setters
- purchasing economies of scale for colluding oligopolies
- monopsony maximises profits by employing wokrers where MRP= MCL
76
Occupational immobility can lead to structural unemployment
77
What is predatory/ limit pricing?
When a firm sets its prices below its AC curve.
This is to increase market share and set up high barriers to entry because new firms will not be able to compete with that
