Theme 3 Flashcards
(161 cards)
1
Q
Why do some firms stay small? (3)
A
Niche markets with loyal customers
Diseconomies of scale
Personal/localised service
2
Q
Why do some firms choose to grow? (3)
A
Higher profits and economies of scale
Greater market power and monopsony power
Diversification to spread risk
3
Q
What is the principal-agent problem? (1)
A
When managers (agents) act in their own interests instead of shareholders (principals) due to asymmetric information.
4
Q
What are the effects of divorce between ownership and control? (3)
A
Conflict between managers and shareholders
Higher managerial salaries may lower dividends
Loss of efficiency
5
Q
What are features of public sector organisations? (3)
A
Government owned (e.g., NHS)
Aim for social welfare, not profit
Provide goods with positive externalities
6
Q
What are features of private sector organisations? (2)
A
Privately owned and profit-driven
Compete to improve efficiency and reduce prices
7
Q
Difference between profit and not-for-profit organisations? (2)
A
Profit organisations maximise shareholder returns
Not-for-profits reinvest profits to meet social goals
8
Q
What is organic growth? (2)
A
Expansion by increasing output, customer base or product range
Funded through retained profits (less risky)
9
Q
Advantages of organic growth? (3)
A
Less risky than mergers
Sustainable and controlled expansion
Retains ownership and avoids conflicts
10
Q
Disadvantages of organic growth? (2)
A
Slower growth compared to inorganic
Limited by market size
11
Q
What is backward vertical integration? (1)
A
When a firm merges with a supplier closer to production (e.g., coffee producer buying a coffee farm).
11
Q
What is forward vertical integration? (1)
A
When a firm merges with a distributor closer to the consumer (e.g., coffee producer buying cafés).
12
Q
Advantages of vertical integration? (3)
A
Control over supply chain and costs
Greater certainty over production
Potential to create barriers to entry
13
Q
Disadvantages of vertical integration? (2)
A
Risk of diseconomies of scale
Less competition may lower efficiency
14
Q
What is horizontal integration? (1)
A
Merging with a firm at the same stage of production in the same industry (e.g., two car manufacturers).
15
Q
Advantages of horizontal integration? (3)
A
Quick growth and economies of scale
Larger market share
Expertise remains in the same industry
16
Q
Disadvantages of horizontal integration? (2)
A
Monopoly power may lead to inefficiency
Potential conflict of objectives
17
Q
What is conglomerate integration? (1)
A
Merger between firms in unrelated markets (e.g., Primark and Patak’s).
18
Q
Advantages of conglomerate integration? (2)
A
Risk spreading
Access to wider customer base
19
Q
Disadvantages of conglomerate integration? (2)
A
Lack of expertise in new markets
Reduced focus may increase costs
20
Q
Constraints on business growth? (4)
A
Small market size
Limited access to finance
Owner objectives
Government regulation (red tape)
21
Q
How can macroeconomic factors affect business growth? (2)
A
Recession reduces demand and finance
Globalisation opens new markets
21
Q
What is a demerger? (1)
A
When a large firm splits into two or more separate firms.
22
Q
Reasons for demergers? (3)
A
Lack of synergies
Diseconomies of scale
Raise finance for other investments
23
Impact of demergers on businesses? (2)
Focus on core activities
Remove diseconomies of scale
24
Impact of demergers on workers? (2)
Role changes and possible job losses
Uncertainty in career paths
24
Impact of demergers on consumers? (2)
Lower prices due to better efficiency
Increased choice if more firms in the market
25
What is profit maximisation? (2)
Profit maximisation is when a firm operates at the price and output that generates the greatest profit. It occurs where marginal cost (MC) equals marginal revenue (MR).
26
Reasons why firms aim for profit maximisation? (3)
Higher wages and dividends
Retained profits are a cheap source of finance
Shareholders’ interests are prioritised in the short run
26
What is revenue maximisation? (1)
Revenue maximisation occurs when marginal revenue (MR) equals zero.
26
What is sales maximisation? (2)
Sales maximisation is when a firm sells as much as possible without making a loss. It occurs where average costs (AC) equal average revenue (AR).
27
What is satisficing? (2)
Satisficing is when a firm earns just enough profit to keep shareholders happy. Managers aim to meet multiple objectives rather than maximising profit.
27
When is satisficing more likely to occur? (1)
Satisficing is more likely when there is a divorce of ownership and control.
28
How does the economy affect business objectives? (1)
Firms are less likely to profit maximise during a recession.
29
What is marginal revenue?
Marginal revenue is the extra revenue a firm earns from selling one additional unit. When MR = 0, total revenue is maximised.
30
What is average revenue (AR)? (0)
Average revenue is the revenue per unit sold
31
What is total cost and how is it calculated?
adding total fixed costs and total variable costs.
32
What is marginal cost
Marginal cost is the cost of producing one extra unit, calculated by ΔTC ÷ ΔQ.
33
What is the law of diminishing marginal productivity? (2)
As more variable factors of production are added to a fixed factor of production, productivity will increase, but then fall after a certain point.
An example of this is workers getting in the way of each other
34
What happens to marginal cost (MC) and average total cost (ATC) when diminishing returns set in? (2)
MC rises first with diminishing returns.
ATC falls initially but rises after the point of diminishing returns.
35
What is the long-run average cost (LRAC) curve? (2)
The LRAC curve shows the lowest possible average cost for each output level when all factors are variable.
The point of minimum LRAC is called the minimum efficient scale.
36
What are internal economies of scale? (6)
Risk-bearing: Diversifying products spreads risk.
Financial: Larger firms get cheaper loans.
Managerial: Specialist managers lower costs.
Technological: Advanced machinery lowers costs.
Marketing: Advertising costs spread over more units.
Purchasing: Bulk-buying lowers input costs.
37
What are external economies of scale? (2)
They occur when an industry grows, lowering costs for all firms.
Examples include better transport and more training facilities.
38
What are diseconomies of scale? And 2 reasons
Diseconomies of scale occurs when a firm grows so large that costs per unit increase
2:
Coordination becomes more complicated with more workers.
Communication worsens, causing lower motivation and higher costs.
39
What happens to costs on the LRAC curve as a firm grows too large? (2)
Average costs fall initially due to economies of scale.
After the minimum efficient scale, average costs rise due to diseconomies of scale.
40
What is the condition for profit maximisation? (0)
Profit maximisation occurs where marginal cost equals marginal revenue (MC = MR).
41
Define normal profit.
Normal profit is the minimum reward to keep firms supplying their goods . It occurs when AR = AC
42
Define supernormal profit. (0)
Supernormal profit is profit above normal profit, where average revenue exceeds average costs (AR > AC).
43
When does a firm make a loss? (0)
A firm makes a loss when it fails to cover its total costs.
44
What is the short-run shut down condition? (0)
A firm should shut down in the short run if price (P) is less than average variable cost (AVC).
45
What is the long-run shut down condition? (0)
A firm will exit the market in the long run if average revenue (AR) is less than average cost (AC).
46
What is allocative efficiency?
Allocative efficiency is when resources are distributed to produce what consumers want, maximising utility (AR = MC).
47
What is productive efficiency?
Productive efficiency is when firms produce at the lowest point on the average cost curve (MC = AC).
48
What is dynamic efficiency?
Dynamic efficiency is when resources are allocated efficiently over time with innovation, lowering long-run costs.
49
What is x-inefficiency?
X-Inefficiency occurs when a firm lacks the incentive to control costs due to lack of competition. This causes the average cost of production to be higher than necessary
50
What are the characteristics of perfect competition? [7 bullet points]
Many buyers and sellers
Sellers are price takers
Free entry and exit
Perfect knowledge
Homogeneous goods
Firms are short-run profit maximisers
Perfectly mobile factors of production
51
What happens to profits in perfect competition in the short run and long run? [2 bullet points]
Short run: Firms can make supernormal profits.
Long run: Only normal profits remain as new firms enter.
52
What are the advantages of perfect competition? [2 bullet points]
Allocative efficiency (AR = MC)
Productive efficiency (lowest AC)
53
What are the disadvantages of perfect competition? [2 bullet points]
Limited dynamic efficiency (lack of supernormal profits)
Few or no economies of scale
54
What are the characteristics of monopolistic competition? [6 bullet points]
Imperfect competition
Product differentiation (branding)
Many small firms
Some price-setting power
Imperfect information
Free entry and exit
55
What happens to profits in monopolistic competition in the short run and long run? [2 bullet points]
Short run: Firms earn supernormal profits.
Long run: Only normal profits as new firms enter.
56
What are the advantages of monopolistic competition? [3 bullet points]
Consumer choice
Short-run supernormal profits boost dynamic efficiency
Lower prices
57
What are the disadvantages of monopolistic competition? [4 bullet points]
Allocative inefficiency (AR > MC)
Productive inefficiency (excess capacity)
X-inefficiency
Limited dynamic efficiency
58
What are the characteristics of an oligopoly? [4 bullet points]
High barriers to entry and exit
High concentration ratio
Interdependence of firms
Product differentiation
59
What does a high concentration ratio show?
A high concentration ratio shows fewer firms control most of the market, meaning less competition.
60
Why might firms collude in an oligopoly? [3 bullet points]
Raise prices and profits
Minimise competition
Deter new entrants
60
When is non-collusive behaviour more likely? [3 bullet points]
Many firms
Cost advantages
Homogeneous products
61
What is overt collusion?
Overt collusion is a formal agreement between firms, like price fixing.
62
What is tacit collusion?
Tacit collusion is unspoken cooperation between firms.
63
What is price leadership?
Price leadership is when one firm sets a price and others follow.
64
What is a cartel?
A cartel is a group of firms that fix prices or limit output.
65
What does game theory show in oligopolies?
Game theory shows how firms' decisions depend on the likely actions of rivals.
66
What is the Prisoner’s Dilemma?
The Prisoner’s Dilemma shows that firms have incentives to cheat on collusion.
67
What is the dominant strategy in the Prisoner’s Dilemma?
The dominant strategy is for both players to not confess.
68
Define price wars and explain how they affect prices in the market (2):
A price war occurs when firms repeatedly cut their prices below competitors, leading to continuous price reductions.
69
Define predatory pricing and explain why it is illegal (2):
Predatory pricing is illegal and involves setting low prices to drive competitors out of the market, leading to losses in the short term.
70
Define limit pricing and explain how it discourages new firms from entering the market (2):
Limit pricing involves setting low prices to prevent new firms from entering the market, making it difficult for them to compete.
71
What is a monopoly?
A monopoly is a market structure with only one seller.
72
What does "single seller" mean in a monopoly?
There is only one firm that dominates the market.
73
What is a unique product in a monopoly?
The monopolist offers a product with no perfect substitutes.
74
How does a monopoly have pricing power?
The monopolist controls the price and output of the product.
75
What are high barriers to entry in a monopoly?
Factors like patents, economies of scale, and government regulations prevent other firms from entering the market.
76
What is meant by "price maker" in a monopoly?
A monopoly can set the price of its product due to its market dominance.
77
What is market power in a monopoly?
The ability of a monopoly to set output and set prices above competitive levels.
78
How do you determine the profit-maximizing quantity in a monopoly?
Find the output level where MR = MC.
78
How can a monopoly earn long-run profits?
By setting prices above production costs and maintaining market dominance.
79
What is profit-maximizing equilibrium?
The point where marginal revenue (MR) equals marginal cost (MC), maximizing profit.
80
How do you determine the profit-maximizing price in a monopoly?
Locate the price on the demand curve corresponding to the profit-maximizing quantity.
81
What is third-degree price discrimination?
Charging different prices to different consumer groups based on their willingness to pay.
82
What is market segmentation in third-degree price discrimination?
Dividing the market into groups with different price elasticities of demand.
82
What is price discrimination in third-degree price discrimination?
Charging different prices to each consumer group.
83
What is no arbitrage in third-degree price discrimination?
Preventing resale between consumer groups.
84
What are the benefits of third-degree price discrimination?
Producers can increase profits by capturing more consumer surplus.
85
What are the costs of third-degree price discrimination?
Consumers in more elastic groups may pay higher prices, reducing their surplus.
86
What are the benefits of a monopoly for firms?
Monopolies can earn significant profits over the long term.
87
What are the costs of a monopoly for consumers?
Consumers may face higher prices and reduced choices.
88
How does a monopoly affect employees?
Monopolies may offer job security but reduce competition, potentially lowering wages.
89
How does a monopoly affect suppliers?
Suppliers may face pressure to offer lower prices and have limited bargaining power.
90
What is a natural monopoly?
A market where a single firm can serve the entire market efficiently due to economies of scale.
91
What are the characteristics of a natural monopoly?
High fixed costs and declining average costs as production increases.
92
Where are natural monopolies commonly found?
In industries like utilities and infrastructure, such as water, electricity, and telecommunications.
93
Why is regulation necessary for natural monopolies?
To prevent the abuse of market power and ensure benefits to consumers through lower costs.
94
What is a monopsony?
A market structure with a single dominant buyer.
95
What does "single buyer" mean in a monopsony?
One buyer controls a significant share of demand and has substantial market power.
96
What are limited substitute buyers in a monopsony?
Sellers have few or no alternative buyers for their goods or services.
97
What does "price maker" mean in a monopsony?
The monopsonist sets the price it pays because sellers have limited alternatives.
98
Why does a monopsonist face a downward-sloping supply curve?
Sellers are willing to supply more at lower prices, giving the monopsonist bargaining power.
98
What barriers to entry support a monopsony?
Barriers like regulations, high startup costs, or economies of scale discourage new buyers.
99
What are the costs of monopsony power to firms?
Costs: Overexploitation can harm suppliers, reduce supply, and lower product quality.
100
What are the benefits of a monopsony to consumers?
Benefits: Lower input costs can lead to lower final prices.
101
How can employees benefit from a monopsony?
Competitive wages and stable conditions if cost savings are shared.
102
How can employees be harmed by a monopsony?
Depressed wages and fewer job opportunities if the monopsony uses its power unfairly.
103
What are the benefits and costs of monopsony to suppliers?
Benefits: Stability and a consistent buyer.
Costs: Pressure for lower prices, reduced profit margins, and weaker bargaining power.
104
Why might regulations be needed in monopsony markets?
To prevent abuse of market power and promote fair competition through antitrust measures.
105
What are the characteristics of a contestable market?
A contestable market has low barriers to entry and exit, perfect information, and no sunk costs.
106
What does "low barriers to entry" mean in a contestable market?
New firms can easily enter the market with minimal obstacles like high startup costs or regulations.
107
What does "low barriers to exit" mean in a contestable market?
Firms can leave the market without incurring significant costs or facing obstacles.
107
What is meant by "perfect information" in a contestable market?
All firms have access to complete information about prices, costs, and demand, allowing informed decisions.
107
What are "no sunk costs" in a contestable market?
Firms do not have significant costs that cannot be recovered, making it easier to exit the market.
108
What does "freedom of entry and exit" mean in a contestable market?
Firms can enter or exit the market without legal or regulatory restrictions.
109
Why is "no collusion" important in a contestable market?
Collusion is unlikely due to easy entry and exit, as new competitors can quickly undercut any attempts to raise prices or restrict output.
110
How does price competition behave in contestable markets?
Firms engage in intense price competition to avoid being undercut by new entrants.
111
How do firms behave in terms of efficiency and innovation in contestable markets?
Firms continuously innovate and operate efficiently to stay competitive, driven by the threat of new entrants.
112
What is the focus of firms in contestable markets?
Firms focus on maximizing short-term profits, as market conditions can change rapidly with new entrants.
113
How does a contestable market affect monopoly power?
Contestable markets discourage the establishment of monopoly power, as attempts are likely to be short-lived.
114
What are economies of scale as a barrier to entry?
Firms with economies of scale can produce at lower average costs, making it hard for new firms to compete.
115
How do capital requirements act as a barrier to entry?
High startup costs or capital investment requirements can prevent new firms from entering the market.
116
How does government regulation act as a barrier to entry?
Regulatory requirements, like licensing or safety standards, can restrict new firms from entering certain markets.
116
How does access to distribution channels affect market entry?
Difficulty in accessing distribution channels can prevent new firms from entering the market, especially in industries with established networks.
117
How does brand loyalty act as a barrier to entry?
Strong customer loyalty to established brands can make it difficult for new firms to gain market share.
118
What are network effects as a barrier to entry?
In markets where the product’s value increases with the number of users, new entrants struggle to compete with established networks.
119
How do patents and intellectual property act as barriers to entry?
Firms with patents or proprietary technology can block new entrants by preventing them from using innovations.
120
How do sunk costs affect contestability?
Low Sunk Costs: Firms can exit the market easily, enhancing contestability.
High Sunk Costs: Firms may stay in the market despite losses, reducing contestability.
121
Why are low sunk costs important for market contestability?
Low sunk costs allow firms to exit the market without losing significant investments, keeping the market more competitive.
122
How do high sunk costs affect contestability?
High sunk costs can trap firms in the market, even if unprofitable, reducing contestability.
123
What is the Labour Market?
The labour market is the interaction between employers who demand labour and workers who supply it.
124
What is the Demand for Labour?
The demand for labour refers to the number of workers employers want to hire at different wage levels.
125
How does wage rate affect demand for labour?
Higher wages may discourage demand for labour if firms can use machines instead.
126
What is Labour Supply?
The supply of labour is the number of workers willing to work at different wage levels.
127
How Do Wages Affect the Supply of Labour?
People are more willing to work more hours when the wages are higher.
128
What is the Role of Non-Monetary Benefits in Labour Supply?
Non-monetary benefits like holidays and career development can increase the supply of labour
129
What is Labour Market Equilibrium?
Labour market equilibrium occurs when the quantity of labour demanded equals the quantity of labour supplied.
130
How Do Changes in Supply or Demand Affect Labour Market
If demand for labour increases, the equilibrium wage rises.
If labour supply increases, the equilibrium wage may fall unless demand increases as well.
131
What is the Minimum Wage?
The minimum wage is the lowest legal wage that employers can pay workers.
132
How Does the Minimum Wage Affect the Labour Market?
If the minimum wage is above the equilibrium wage, it can lead to unemployment.
132
What is the Role of Unions in the Labour Market?
Unions represent workers to negotiate better wages and conditions.
133
How Do Unions Affect Labour Market Outcomes?
Unions increase workers' bargaining power, which can lead to higher wages and better working conditions.
134
What is the Elasticity of Labour Demand?
The elasticity of labour demand measures how sensitive employers are to changes in wages.
135
What is Government Intervention in Mergers?
The government intervenes to prevent anti-competitive mergers that would create monopolies.
135
What is Labour Market Mobility?
Labour market mobility refers to the ability of workers to move between jobs or locations.
136
What is the Elasticity of Labour Supply?
The elasticity of labour supply measures how responsive workers are to changes in wages.
137
What is the Role of the Competition and Markets Authority (CMA)?
The CMA regulates competition and merger activities.
138
Why Do Governments Control Monopolies?
To prevent the negative effects of monopoly power on the market and consumers.
139
What is Market Failure in a Monopoly?
Monopolies can charge high prices and reduce consumer surplus.
Leads to inefficient allocation of resources.
140
What is Price Regulation?
Price regulation sets limits on how much a monopoly can charge consumers.
141
How Does RPI-X Capping Work?
RPI-X is a price capping method used to control monopoly prices.
RPI: Retail Price Index.
X: Efficiency factor.
Aims to reduce price increases while encouraging efficiency.
142
How Does Profit Regulation Affect Investment?
Strict price caps may limit profits, reducing funds for future investments.
143
Why Use RPI-X Price Regulation?
Firms can increase profits by reducing costs beyond X.
Encourages firms to lower costs for greater profit margins.
144
What Are the Risks of RPI-X Regulation?
Difficult to determine the correct value for X.
Risk of limiting investment and profit-making.
145
What is Profit Regulation?
Profit regulation controls the amount of profit firms can earn.
146
What Are the Challenges of Profit Regulation?
If tax rates are too high, firms might pass costs to consumers.
