Theme 3

Question 1

What is organic business growth

Answer 1

when a business expands its own operations rather than relying on mergers and takeovers

Question 2

what is horizontal integration

Answer 2

two companies at the same stage in the supply chain and in the same market merge e.g VW buying Porsche

Question 3

what is backward vertical integration

Answer 3

when one firm merges with or takes over another operating earlier in the supply chain

Question 4

what is forward vertical integration

Answer 4

acquiring a business further along the supply chain (forwards)

Question 5

what is conglomerate integration

Answer 5

a merger between firms involved in unrelated business activities e.g Amazon buying Twitch

Question 6

what is internal (organic) growth

Answer 6

when a business gets larger by increasing the scale of its own operations without the need for mergers or takeovers

Question 7

name characteristics of monopolistic competition?

Answer 7

1. many buyers and sellers
2. slightly differentiated goods- allows for a small amount of pricing power, but relatively elastic demand as many substitutes
3. low barriers to entry/ exit
4. non-price comp
5. good information
6. firms are profit maximisers

Question 8

why are supernormal profits not maintained in the long run in a monopolistically competitive market?

Answer 8

1. there are low barriers to entry, meaning new firms can join the market, incentivised by the supernormal profits and undercut the market leader, this increases supply and brings down AR and MR of the market leader until normal profits are made

Question 9

how efficient are monopolistically competitive markets?

Answer 9

1. allocatively inefficient as goods are priced more than AC and consumers are being exploited, consumer surplus is depleted
2. productively inefficient- firms voluntarily forgo economies of scale and restrict output in order to maximise profit
3. dynamically inefficient- because supernormal profits are not maintained in the long run firms cannot reinvest into R and D or new innovative products, new production techniques to save money therefore dynamically inefficient

Question 10

how would you evaluate the inefficiencies in a monopolistically competitive market?

Answer 10

1. not as allocatively inefficient as a monopolistic market, as there are low barriers to entry, firms cannot exploit consumers and erode consumer surplus as easily as new firms will undercut them