Theme 3 Flashcards
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
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
Types of synergy
A
Cost (higher efficiency, better deals)
Revenue (more customers etc)
20
Q
what constrains business growth? 4
A
Size of market
Access to finance
Owners objectives
Regulation
21
Q
Whats it called when a firm splits into multiple parts?
A
demerger
22
Q
Why demerge?
A
Can focus companies
integration costs were too high
clash of cultures
lack of synergies
23
Q
formula for TR
A
P*Q
24
Q
Formula for average revenue
A
TR/Q (i.e. price)
25
Formula for marginal revenue
TRx - TRx-1 - difference in adjacent levels of output
| - addition to TR when one more unit is sold
26
What is MR when TR is at max
MR=0
27
Why does TR change?
Inelasticity changes as prices become smaller proportions of income
28
What is the short run
at least one factor of productoin is fixed
29
What is long run
all factors of production are variable
30
Very long run
state of technology can also change
31
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
32
What is average product
total product/variable factor
33
what is marginal product
change in ouput from one level of the variable factor to the next
34
When TP is at max what is MP
mp=0
35
In the long run, there are potential returns to scale - what are these three?
Increasing - more out than what is in
Constant - proportionate growth
decreasing - more in than out
36
What is economic cost?
The opportunity cost of production plus accounting costs
37
Inputted cost
- economic cost of the factors of production the firm owns
38
TC =?
TVC + TFC
39
AC = ?
TC/Q
40
MC =
change in total costs/change in output (MP)
41
What is MC and AC a reflection of?
MP AP
42
What is the long run made up of?
short runs
43
Name for a fall of average costs when output increases in the long run
Economies of Scale
44
What is the minimum efficient scale?
First output where average costs are minimised
45
What are two types of economies of scale?
Internal and external
46
Types of economies of scale
```
Risk breaking
financial
marketing
technical
managerial
purchasing (bulk buy)
```
47
What is a managerial economy of scale?
specialism increases productivity, bigger firms can attract better managers (reducing downtime)
48
What is an external economy of scale
All firms benefit from industry growth
49
What causes the external economy of scale
Locally trained workers
Specialist suppliers
Government-funded infrastructure
50
What are the benefits of a fall in LRAC
rise in abnormal profit
more funds to reinvest
can do limit pricing
51
what is a long run rise in average costs called?
Diseconomies of scale
52
4 Cs that are the reasons for Diseconomies of scale
Control
Coordination
Communication
Co-operation
53
What is crowding out
Rise in demand causes a rise in prices (can lose monopsony power)
54
What is the difference between economic profit and accounting profit
economic costs minuses opportunity costs
55
Why is profit important?
reward
signal
incentive
investment
56
Name 4 market structures
perfect competition
Monopolistic competition
oligopoly
monopoly
57
What factors affect the type of market
Barriers to entry/exit
Homogeneity
knowledge
market relationships
58
Name some barriers to entry
```
capital costs
sunk costs
scale economies
natural cost advantages
legal barriers
marketing
limit pricing
Anti-competition
```
59
What are the perfect competition
```
large numbers of buyers and sellers
homogenous product
perfect information
firms are price takers
freedom of entry and exitt
perfectly mobile factors of production
```
60
Long run of perfect competition
normal profit as abnormal acts as an incentive
61
whats special about perfect competition diagrams
D=AR=MR
62
profit maximising condition
MC=MR
63
SR loss condition to survive
PRICE is above AVC
64
Conditions for monopolistic competition
Large number of independent firms
The products are differentiable (heterogeneous)
Perfect information
No barriers to entry or exit
65
What happens in LR monopolistic competition?
No barriers to entry so businesses enter and leave creating normal profits, where AR=AC
66
What are the charactereistics of oligopoly?
Interdependence
Barriers to entry and exit
sometimes Differentiation
Market dominated by a few firms
67
What is the N-firm ratio
combined market share of the N largest firms
68
Types of collusion
Formal/overt
Tacit
Covert
69
What are the conditions for successful cartel
An agreement
No cheating
No potential competition
70
What can be used to analyse whether price should be changed?
Payoff Matrix - game theory
71
Types of price competition
Price war
Predatory pricing
limit pricing
72
Types of non-price competition
Marketing
quality/product differentiation
Brands
73
Why might price competition be favoured over non-price?
Collusion may be difficult and product differentiation may be difficult
74
How are monopolies maintained?
```
Patents
Pricing strategies
Advertising/branding
Vertical integration
High sunk costs
High capital expenditure
```
75
What are the disadvantages of monopoly power?
Higher prices and lower output
Less choice
Inefficiency
Inequity
76
What are the necesssary conditions for price discrimination
market dominance
different submarkets with different PEDs
No arbitrage
77
What is arbitrage?
Buying and selling the product to the different markets to take advantage of the price differences
78
What is the objective of the CMA and other regulators
to maximise benefit for consumers
79
What is a monopsony
single buyer of a good (consumer version of a monopoly)
80
How can firms create monopsonistic pressure
collusion - act as one buyer
81
How do you determine how much power a buyer has?
can other firms buy the suppliers produce
| how accessible are other markets
82
Why do firms want to be monopsonistic
can lower costs and therefore increase profits
83
What is a bilateral monopoly
when a monopoly (single seller) meets a monopsonist (single buyer)
84
Benefits of a monopsonist
lower prices
efficient suppliers
bigger abnormal profits
85
Negatives of a monopsonist
suppliers profits reduced
externalities
reduces incentive to supply
can cause unemployment (in supplier)
86
What is contestability
how easy it is to enter and exit a market
87
what is a sunk cost
unrecoverable set up cost
88
Profit in SR and LR in contestable market
SR abnormal profits
| LR normal profits
89
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
90
Innocent entry barrier
natural due to the type of industry (e.g. may be resource intensive)
91
5 ways contestability changes
```
Entrepeneaurs
recession
de-regulation
competition policy
technological change
```
92
What is limit pricing
when an incumbent firm lowers price, so not to profit maximise but to be below another firms AC
93
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
94
Who controls a business
```
Owners/shareholders
Directors/managers
workers
consumers
pressure groups
```
95
What will firms try and maximise in neo-classical theory
profit
96
What is economic profit
TR - costs - opportunity cost
97
what are the functions of profit
reward for risk
signal
incentive
source of investment/finance
98
what objectives may a firm have
profit max
sales max
revenue max
social objective
99
define cost plus pricing
a method of pricing which is costs to the business plus a profit margin
100
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
101
What is it called consumers have the power to shape firms through their demand for products
consumer sovereignty
102
Order Pmax Revmax Sales max in terms of quatity
Profit max first, then rev max, then sales max
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 = MR
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
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 pressure
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
Price change formula for a cap
RPI%-X% (X is efficiency gains)
129
Price change formula if investment is needed
RPI%+K%
130
2 negatives of price control
```
Government failure (Asymmetric info and reg. capture)
Profit constraints (reduces I)
```
131
What is regulatory capture
When regulators are misled to benefit those be regulated
132
What is a common profit control and where is it used
RRR Rate of return regulation
| USA canada
133
What is RRR
Allows certain level of abnormal profit
| rate of return regulation
134
What is the specific issue with RRR
Incentiveses X-inefficiency as costs don't have to minimised
135
Name 4 ways governments intervene to deal with monopolies
Price regulation
Profit regulation
Quality controls
Performance targets
136
Name 4 ways governments promote contestability and competition
Promotion of small businesses
deregualtion
Competitive tendering
Privatisation
137
Benefit of quality controls
shifts focus from profit to quality
138
What is creaming
a negative of deregulation, where services are only offered to those areas most profitable in a free market
139
What is the name of taxes on large abnormal profits
Windfall taxes
140
What is privatisation
State owned firm sold to private sector
141
What is nationalisation
Transfer of assets to state from private sector
142
How can subsidies be used to improve monopolies
Can create allocative efficiency when used to lower costs
143
What is the disadvantage of self-regulation
Codes of practice made by firms can be cheated or may be too weak
144
What is the point of merger policy
investigates mergers of large firms to protect consumers
145
Name 6 anti-competitive policies
```
Cartels/collusion
Restricting supply
Predatory pricing
Limit pricing
Price discrimination
High advertisign
```
146
What is full-line forcing
When firms force retailers to stock full range
147
What is competitive tendering
State owned industries sells contracts to private firms (contracting out) allowing them to compete for the contract
148
What is a PFI
Private Finance Initiative
| Govt rents/hires and gets private firm to mantain
149
3 ways intervene to protect suppliers
Pass anti-monopsony laws
Independent regualtors
Encourage self regulation
150
How do goverments protect employees 3
healh/safety regs
Trade unions
Encourage self regulation
151
Term when a producer takes consumer surplus
Expropriating
152
Name of regulation in UK
CMA competition and markets authority
153
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
154
What is MRP
Value of MPP
| marginal revenue product
155
Who demands labour
firms
156
Key thing to remember about labour
DERIVED DEMAND
157
Remeber about shifts in PED(L) or D(L)
Same as regular D
158
What is special about supply for labour
Backward bending
159
D substitution effect
As wages increase so do hours (leisure is substituted)
160
D Income effect
Hours work decreases as wage rate increase higher
161
2 types of concerns for supply of labour
pecuniary
| non-pecuniary
162
What does a small firm trying to employ notice
S is perfectly elastic (wage rate is set price taker)
163
2 types of labour mobility
Geographical
| occupational
164
5 ways to reduce immobility
```
Points based immigatration
apprenticeships
education
changing marginal tax rates
zero hour contracts
```
165
What is the outcome in a perfect labour market
constant wage rate for all professions as people would switch to any with higher rates
166
Name some reasons for differing wage rates
Different skills available
Trade union
Discrimination (age, race, experience)
May not seek to maximise wage rates
167
What 4 things determine trade union power
Membership/size
Militancy
Elasticity of demand (is labour a necessity)
Profitablity of employer
168
Where will a monopoly buy labour at
MC=MRP=D
169
What can a government do to intervene in labour market
Max/min wage
Public sector wage controls
Policies to tackle labour immobility
170
Good NMW evaluation
elasticity
171
Short run shut down price
AR = AVC
