Theme 3 Flashcards
(170 cards)
1
Q
How can the size of a firm be measured (3)
A
Number of employees
Revenue/volume output
Capital stock and assets
2
Q
advantages of large firms 3
A
Economies of scale
can create barriers to entry
monopoly power
3
Q
Advantages of small firms 3
A
exploit diseconomies of scale
can be better organised for local monopolies and market niches
Can gain cost advantages by using internet and tech
4
Q
What is it called when the owners don’t run the business?
A
Divorce of ownership from control
e.g of principle agent problem
5
Q
Why is the divorce of ownership from control an issue
A
Director may not profit maximise for owner and may have other obkjectives
6
Q
What is the public sector
A
state controlled
social objective - provide a service to citizens
7
Q
What is the sector called where it is owned by individuals?
A
Private sector
8
Q
Name some not-for-profit organisations
A
charities churches food banks
9
Q
Two main types of growth
A
Internal and external
10
Q
External growth is primarily
A
merger & takeoevers
11
Q
types of integration
A
Vertical
horizontal
conglomerate
12
Q
PLC
A
Public limited company - anyone can own shares
13
Q
Ltd
A
private limited company - shareholders have to agree to sell
14
Q
Forward vs backward integration
A
Forward is towards the consumer
backwards is away from
15
Q
What are often the key issues with integration (3)
A
Firms pay too much
Often poorly managed
may lack knowledge
16
Q
Advantages of integration
A
economies of scale
less competition
spreads risk
more control
17
Q
What is it called when two firms collaborate
A
joint venture
18
Q
What is key for successful integration?
A
Synergy
19
Q
What are the 2 Types of synergy
A
Cost (higher efficiency, better deals)
Revenue (more customers etc)
20
Q
What two types of synergy did Facebooks takeover of Instagram have?
A
- Revenue synergy as it helped Facebook build Instragram’s users into its platform for more ad revenue
- Cost synergies as companies were similiar enough for duplicate roles to be replaced
21
Q
what constrains business growth? 4
A
Size of market
Access to finance
Owners objectives
Regulation
22
Q
Whats it called when a firm splits into multiple parts?
A
demerger
23
Q
Why demerge? (4)
A
Can focus companies
integration costs were too high
clash of cultures
lack of synergies
24
Q
formula for TR
A
P*Q
25
Formula for average revenue
TR/Q (i.e. price)
26
Formula for marginal revenue
TRx - TRx-1 - difference in adjacent levels of output
- addition to TR when one more unit is sold
27
What is MR when TR is at max
MR=0
28
Why does TR change?
Inelasticity changes as prices become smaller proportions of income
29
What is the short run
at least one factor of productoin is fixed
30
What is long run
all factors of production are variable
31
Very long run
state of technology can also change
32
What is it called when marginal gains of total output starts to decrease
Law of diminishing returns/law of variable proportions/law of diminishing marginal productivity
33
What is average product
total product/variable factor
34
what is marginal product
change in ouput from one level of the variable factor to the next
35
When TP is at max what is MP
mp=0
36
In the long run, there are potential affects of economies of scale - what are these three?
Increasing - more out than what is in
Constant - proportionate growth
decreasing - more in than out
37
What is economic cost?
The opportunity cost of production plus accounting costs
38
Inputted cost
- economic cost of the factors of production the firm owns
39
TC =?
TVC + TFC
40
AC = ?
TC/Q
41
MC =
change in total costs/change in output (MP)
42
What is MC and AC a reflection of?
MP AP
43
What is the long run made up of?
short runs
44
Name for a fall of average costs when output increases in the long run
Economies of Scale
45
What is the minimum efficient scale?
First output where average costs are minimised
46
What are two types of economies of scale?
Internal and external
47
Types of economies of scale (6)
Risk breaking
financial
marketing
technical
managerial
purchasing (bulk buy)
48
What is a managerial economy of scale?
specialism increases productivity, bigger firms can attract better managers (reducing downtime)
49
What is an external economy of scale
All firms benefit from industry growth
50
What are examples of three external economies of scale
Locally trained workers
Specialist suppliers
Government-funded infrastructure
51
What are the benefits of a fall in LRAC (3)
rise in abnormal profit
more funds to reinvest
can do limit pricing
52
what is a long run rise in average costs called?
Diseconomies of scale
53
What are the reasons for Diseconomies of scale (2)
Harder coordination, workers lack motivation
54
What is crowding out in terms of monopsony
Rise in demand causes a rise in prices (can lose monopsony power)
55
What is the difference between economic profit and accounting profit
economic costs minuses opportunity costs
56
Why is profit important? (4)
reward
signal
incentive
investment
57
Name 4 market structures
perfect competition
Monopolistic competition
oligopoly
monopoly
58
What factors affect the type of market (4)
Barriers to entry/exit
Homogeneity
knowledge
market relationships
59
Name some barriers to entry (8)
capital costs (capital bought at set up - could be recoverable but its still a load of money)
sunk costs (non-recoverable costs)
scale economies
natural cost advantages (the resoures available in one area is just naturally superior, or a family business just has the highest skilled workers)
legal barriers (patents)
marketing (brand identity)
limit pricing
Anti-competition (beating up employees)
60
What are the characteristics of perfect competition (6)
large numbers of buyers and sellers
homogenous product
perfect information
firms are price takers
freedom of entry and exitt
perfectly mobile factors of production
61
Long run of perfect competition
normal profit as abnormal acts as an incentive
62
whats special about perfect competition diagrams
D=AR=MR
63
profit maximising condition
MC=MR
64
SR loss condition to survive
PRICE is above AVC
65
Conditions for monopolistic competition
Large number of independent firms
The products are differentiable (heterogeneous)
Perfect information
No barriers to entry or exit
66
What happens in LR monopolistic competition?
No barriers to entry so businesses enter and leave creating normal profits, where AR=AC
67
What are the charactereistics of oligopoly? (4)
Interdependence
Barriers to entry and exit
sometimes Differentiation
Market dominated by a few firms
68
What is the N-firm ratio
combined market share of the N largest firms
69
Types of collusion
Formal/overt
Tacit
Covert
70
What are the conditions for successful cartel
An agreement
No cheating
No potential competition
71
What can be used to analyse whether price should be changed?
Payoff Matrix - game theory
72
Types of price competition
Price war
Predatory pricing
limit pricing
73
Types of non-price competition (3)
Marketing
quality/product differentiation
Brands
74
Why might price competition be favoured over non-price?
Collusion may be difficult and product differentiation may be difficult
75
How are monopolies maintained? (6)
Patents
Pricing strategies
Advertising/branding
Vertical integration
High sunk costs
High capital expenditure
76
What are the disadvantages of monopoly power? (4)
Higher prices and lower output
Less choice
Inefficiency
Inequity
77
What are the necesssary conditions for price discrimination
market dominance
different submarkets with different PEDs
No arbitrage
78
What is arbitrage?
Buying and selling the product to the different markets to take advantage of the price differences
79
What is the objective of the CMA and other regulators
to maximise benefit for consumers
80
What is a monopsony
single buyer of a good (consumer version of a monopoly)
81
How can firms create monopsonistic pressure
collusion - act as one buyer
82
How do you determine how much power a buyer has?
can other firms buy the suppliers produce
how accessible are other markets
83
Why do firms want to be monopsonistic
can lower costs and therefore increase profits
84
What is a bilateral monopoly
when a monopoly (single seller) meets a monopsonist (single buyer)
85
Benefits of a monopsonist
lower prices
efficient suppliers
bigger abnormal profits
86
Negatives of a monopsonist (4)
suppliers profits reduced
externalities
reduces incentive to supply
can cause unemployment (in supplier)
87
What is contestability
how easy it is to enter and exit a market
88
what is a sunk cost
unrecoverable set up cost
89
Profit in SR and LR in contestable market
SR abnormal profits
LR normal profits
90
What is a "hit and run competitor"
this is where a firm can enter a market to get high profits and then leave when profits fall
91
Innocent entry barrier
natural due to the type of industry (e.g. may be resource intensive)
92
5 ways contestability changes (5)
Entrepeneaurs
recession
de-regulation
competition policy
technological change
93
What is limit pricing
when an incumbent firm lowers price, so not to profit maximise but to be below another firms AC
94
What can be said to evaluate contestable markets
Firms may be influenced by the threat of new entrants so may act like perfect competition
Policies may open up markets, e.g. helping consumers switch banks or energy suppliers
95
Who controls a business
Owners/shareholders
Directors/managers
workers
consumers
pressure groups
96
What will firms try and maximise in neo-classical theory
profit
97
What is economic profit
TR - costs - opportunity cost
98
what are the functions of profit
reward for risk
signal
incentive
source of investment/finance
99
what objectives may a firm have (4)
profit max
sales max
revenue max
social objective
100
define cost plus pricing
a method of pricing which is costs to the business plus a profit margin
101
Why do prices not necessarily change when a market or firms costs/revenues change 3
price cuts may give distress signal
menu costs
may make the decision to improve market position rather than SR maximise profit
102
What is it called consumers have the power to shape firms through their demand for products
consumer sovereignty
103
Where does a business have to operate
where TC are less or equal to TR
104
What is profit satisficing
When they don't maximise profits but rather earn "just enough"
105
What are non profit objectives
managerial satisfaction
sales max
rev max
106
Two types of efficiency
Static efficiency
Dynamic efficiency
107
Key difference between economies of scale and law of diminishing marginal returns
EoS is LR, LDMR is SR
108
What is the minimum efficient scale
the LR output where minimum costs start
109
Formula for allocatively efficient
AR = MC
110
What is productive efficiency
When average costs are minimised (SR)
111
The efficiency of a firm in perfect competition in the LR
productively and allocatively efficient
112
What is X-inefficiency
When a firm fails to minimise costs at a given output
113
When is consumer utility maximised
allocatively efficient
114
What can firms compete on
4 Ps
Price, product, place, promotion
115
Which three structures have competition
Perfect, monopolistic comp, oligolpoly
116
What is the benefit of a contestable market
firms must compete on price to prevent new entrents
117
What determines price in perfect competition
Supply and demand of market
118
What happens to a monopolistic competition in the LR
Businesses enter/leave causing AR to shift such that AC = AR
119
How does a firm in perfect competition become dynamically efficient
Innovation
120
What is the key issue with perfect competition
No profit and perfect info, so no incentive to innovate
121
Where is the deadweight loss from a monopoly
triangle between MC=AR point and MC=MR line
122
What is a natural monopoly
One that arises from economies of scale and large capital costs
123
What is an advantage of monopolies
They can acheive very large economies of scale
124
What is the key 2 issues with competition laws
regulatory capture
Monopoly pressur
Lack of information for regulators
Consume tax payers money
Also monopolies could introduce a lower ATC curve than a more competitive market due to economies of scale
125
What is a surrogate competitors
when regulators act like competitors to keep an eye prices
126
What is the aim of competition authorities
Protect and improve consumer welfare
127
Key method of price control
Price capping/freezing
128
What are the three ways that a price cap can be varied?
RPI - Prices rise at rates of inflation
RPI - X Prices vary with RPI but any inefficiencies will be deducted from the price
RPI - X + K Prices vary with RPI but and amount spent on capital pushes up the price
129
2 negatives of price control
```
Government failure (Asymmetric info and reg. capture)
Profit constraints (reduces I)
```
130
What is regulatory capture
When regulators are misled to benefit those be regulated
131
What is a common profit control
When the % return on capital employed is capped at say 150%
132
What are the advantages of Profit controls?
Allows certain level of abnormal profit
Lowers prices because less profit is made on higher prices (shifts towards allocative efficiency)
133
Whats an issue with profit controls? (2)
It incentivises a firm to find a work around
It doesn't encourage firms to find X efficiencies because they can't make more profit above a certain price
134
Name 4 ways governments intervene to deal with monopolies
Price regulation
Profit regulation
Quality controls
Performance targets
135
Name 4 ways governments promote contestability and competition
Promotion of small businesses through subsidies
deregualtion - removes barriers to entry
Competitive tendering - allow private firms to bid for government contracts
Privatisation - breaks up government monopolies and encourages compeition
136
Benefit of quality controls
shifts focus from profit to quality
137
What's a negative of quality control?
138
What is the name of taxes on large abnormal profits
Windfall taxes
139
What is privatisation
State owned firm sold to private sector
140
What is nationalisation
Transfer of assets to state from private sector
141
How can subsidies be used to improve monopolies
Can create allocative efficiency when used to lower costs
142
What is the disadvantage of self-regulation
Codes of practice made by firms can be cheated or may be too weak
143
What is the point of merger policy
investigates mergers of large firms to protect consumers
144
Name 6 anti-competitive policies
Cartels/collusion
Restricting supply
Predatory pricing
Limit pricing
Price discrimination
High advertisign
145
What is full-line forcing
When firms force retailers to stock full range
146
What is competitive tendering
State owned industries sells contracts to private firms (contracting out) allowing them to compete for the contract
147
What is a PFI
Private Finance Initiative
Govt rents/hires and gets private firm to mantain
148
3 ways intervene to protect suppliers
Pass anti-monopsony laws
Independent regualtors
Encourage self regulation
149
How do goverments protect employees 3
healh/safety regs
Trade unions
Encourage self regulation
150
Term when a producer takes consumer surplus
Expropriating
151
Name of regulation in UK
CMA competition and markets authority
152
Why is demand for labour downward sloping
SR - diminishing marginal returns (utility decreases as quantity increases)
LR- As wages increase, demand for machines to replace increases, reducing quantity
153
What is MRP
Value of MPP
marginal revenue product
154
Who demands labour
firms
155
Key thing to remember about labour
DERIVED DEMAND
156
Remeber about shifts in PED(L) or D(L)
Same as regular D
157
What is special about supply for labour
Backward bending
158
D substitution effect
As wages increase so do hours (leisure is substituted)
159
D Income effect
Hours work decreases as wage rate increase higher
160
2 types of concerns for supply of labour
pecuniary
non-pecuniary
161
What does a small firm trying to employ notice
S is perfectly elastic (wage rate is set price taker)
162
2 types of labour mobility
Geographical
occupational
163
5 ways to reduce immobility
Points based immigatration
apprenticeships
education
changing marginal tax rates
zero hour contracts
164
What is the outcome in a perfect labour market
constant wage rate for all professions as people would switch to any with higher rates
165
Name some reasons for differing wage rates
Different skills available
Trade union
Discrimination (age, race, experience)
May not seek to maximise wage rates
166
What 4 things determine trade union power
Membership/size
Militancy
Elasticity of demand (is labour a necessity)
Profitablity of employer
167
Where will a monopoly buy labour at
MC=MRP=D
168
What can a government do to intervene in labour market
Max/min wage
Public sector wage controls
Policies to tackle labour immobility
169
Good NMW evaluation
elasticity
170
Short run shut down price
AR = AVC
