Theme 3 - Business Behaviour and the Labour Market Flashcards

Question

What is organic growth

Answer 1

- internal growth - occurs when a business gets larger by increasing scale of its own operations rather than relying on integration with other businesses

Answer 2

- external growth - occurs when a business gets larger by buying other companies or forming a business relationship with them

Answer 3

- cheaper than external growth - firm is able to keep control of their business

Answer 4

- sometimes another firm has a market or asset which the company would be unable to gain through organic growth (expanding into markets in another country) - organic growth may be too slow to maximise salaries for directors - difficult to get new ideas

Answer 5

- vertical integration - horizontal integration - conglomerate integration

Answer 6

- integration of firms in the same industry but at different stages in the production process - forwards vertical integration - backwards vertical integration

Answer 7

- integration with a firm in the same industry but closer towards the final good produced

Answer 8

- integration with a firm in the same industry but closer towards the supplier

Answer 9

- increased potential for profit as firm takes potential profit from a larger part of chain of production - less risks - suppliers do not need to worry about buyers not buying goods and buyers do not need to worry about suppliers not supplying goods - backward integration allows increased control of quality of supplies and allows costs to be kept low - forward integration secures retail outlets and can restrict access to outlets for competitors

Answer 10

- firms may have no expertise in the industry they take over

Answer 11

- when firms in the same industry at the same stage of production integrate

Answer 12

- reduces competition as competitor is taken out and leads to increased market share - firms able to specialise and rationalise, reducing areas of businesses which are duplicated - able to grow in a market where it already had expertise (more successful)

Answer 13

- increases risk for business - if market fails then they have nothing to fall back on

Answer 14

- AstraZeneca acquiring ZS Pharma for $2.7bn in 2015 allowing them access to new compounds - Curry’s and PC Worlds

Answer 15

- Tesco taking over Booker for £3.7bn in 2018, led to increase in sales for Tesco

Answer 16

- LEGO, introduced new products such as LEGO Friends and board games to expand customer base

Answer 17

- Enron Scanal of 2001, executives used loopholes to hide billions of dollars in debt from Board of Directors. Shareholders filed a lawsuit to the firm and the executives when share prices fell from nearly $100 to less than $1 in just over a year

Answer 18

- when firms in different industries with no obvious connections integrate

Answer 19

- useful for firms where there is no room for growth in present market - reduces risk for firms as if whole industry fails, they will still survive due to other parts of business - easier for each individual part of business to expand than if they were on their own finance - can transfer resources (managers) from company to company

Answer 20

- firms going into markets in which they have no expertise

Answer 21

- General Electric was founded as a lighting business and is now involved in aircraft, water, oil and gas, financial services, healthcare, energy, aviation, rail, and software. Successful model as they conducted extensive market research into each market

Answer 22

- business strategy in which a single business is broken into two or more components - components either operate on their own, are sold, or are dissolved

Answer 23

- Pepsi announcing demerger of its Pizza Hut, KFC and Taco Bell restaurants to focus on competition with Coca Cola

Answer 24

- lack of synergies - value of company/share price - focussed companies - competition authorities

Answer 25

- different parts of company have no impact on each other and fail to make each other more efficient - managers are having to split time between areas which are so different - can lead to diseconomies of scale, firm splits to prevent these

Answer 26

- value of separate parts of company is worth more than the company combined - some parts of business might be doing well and have potential to grow but is restricted due to lack of success/potential for growth of other parts

Answer 27

- some people believe if company and management are more focussed on an individual market, they become more efficient and successful = more profit - managers can improve skills and knowledge by focusing on only one area

Answer 28

- large businesses gain attraction from competition authorities - demerging leads to attention avoidance from competition authorities

Answer 29

- workers can gain or lose - separate firms may need managers so chances of promotion - goal of making firm more efficient may lead to job losses

Answer 30

- concentrating on smaller core businesses allow it to be more efficient - concentration may lead to more innovation and surging higher competition - size of small firms could lead to loss of economies of scale and reduced efficiency

Answer 31

- profit maximisation - revenue maximisation - sales maximisation - satisficing - managerial utility maximisation - marginal cost pricing/allocate efficiency - ethical and environmental concerns, corporate social responsibility (CSR)

Answer 32

- assumes interests of owners/shareholders are most important - firms aim to profit maximise in short run to maximise owners’ returns - assume all firms profit maximise for all market structures

Answer 33

- reinvest back into the firm - provide dividends back to shareholders - lower costs, pass on lowered costs to consumers by lowering prices which increases demand and possibly market share - reward entrepreneurship

Answer 34

- anything to the right of MC = MR leads to a higher cost than revenue so those units make a loss and reduce profit - anything to the left of MC = MR allows space for revenue to still be greater than cost with any increase in units until MC = MR

Answer 35

- cannot compute / lack knowledge of MC = MR - avoid scrutiny from competition authorities and regulators - key stakeholders may be harmed (consumers, workers, government, environmental groups) - other objectives may be more appropriate

Answer 36

- occurs due to the principle agent problem - make enough profit to keep shareholders happy whilst following other object and not profit maximising

Answer 37

- any additional units leads to a fall in revenue leading to a loss - any less units allows for space of marginal revenue to still increase

Answer 38

- managers are interested in revenue as that is what their salary is dependent on - even when not directly related to salary, revenue growth is positive for business and can lead to managerial rewards from shareholders - fall in revenue can lead to downward spiral for company - firms aim to revenue maximise as long as they provide some profit for owners

Answer 39

- Apple and pharmaceutical companies - need money to reinvest

Answer 40

- amazon, generating revenue nearing £120bn in 2015 but profit staying relatively stable - aim is to dominate the market

Answer 41

- Netflix and Spotify - both trying to increase size of their businesses

Answer 42

- an increase in units lead to a loss being made - any point before this allows for an increase in units while costs still stay below revenue

Answer 43

- managers aim to maximise growth of company as salary is linked to company size - easier for people to judge level of growth rather than profit => prestige - size is linked with security - growth increases market share and can push other firms out of business => increased market power - short term strategy

Answer 44

- they necessitate a fall in price - other firms may copy this so there may be no or little increase in revenue or sales (important in oligopoly) - bring lower profits

Answer 45

- managers will make decisions to maximise their own satisfaction - dependent on salary, number of staff controlled, power over decision making, and other benefits received - result of this may be to cut into profits and make these lower than they would otherwise be

Answer 46

- MC = AR - some firms aims to maximise social welfare - this is done by producing where the value society places on the good is equal to extra cost of producing that good - achieves allocative efficiency

Answer 47

- pursuit of self interest does not need to conflict with ethic and environmentally responsible behaviour - negative image can cut into revenue and profit - socially irresponsible behaviour may lead to government regulation

Answer 48

- profit maximising firms produce at OA and price at OE - revenue maximising firms produce at OB and price at OF - sales maximising firms produce at OC and price at OG

Answer 49

- economies of scale benefits, could lead to lower costs - predatory pricing, firm undercuts rivals, by lowering profits, to drive out competitors from market - principle agent problem, managers may ask for more benefits due to growth occurring

Answer 50

- economies of scale - limit pricing, takes away incentive for new firms to join market - principle agent problem, managers may ask for more benefits due to growth occurring - flooding market to make consumers aware of product to gain loyal customers then changing objective to make profit

Answer 51

- money earned from sale of goods and services

Answer 52

- total revenue (TR) - average revenue (AR) - marginal revenue (MR)

Answer 53

- total amount of money coming into the business through sale of goods and services

Answer 54

- quantity x price

Answer 55

- revenue per unit sold - = P

Answer 56

- total revenue / output

Answer 57

- extra revenue firm earns from selling one more unit of production

Answer 58

- change in total revenue / change in output

Answer 59

- those in perfect competition - no price setting power - price taker - price received by firms for good is constant so MR=AR=D

Answer 60

- prices are constant - more goods sold, higher revenue is made

Answer 61

- those in imperfect competition - have price setting power - price maker/giver - AR = D, indicates price consumers are willing to pay

Answer 62

- marginal revenue

Answer 63

- when firm sells product at a lower price or increases output, total revenue still grows and so demand is elastic - until output Q, demand curve is elastic

Answer 64

- total revenue decreases as price decrease / output increases - demand curve is inelastic - after output Q, demand curve is inelastic

Answer 65

- total revenue is maximised - demand curve is unitary elastic at point Q

Answer 66

- total cost (TC) - total fixed cost (TFC) - total variable cost (TVC) - average total cost (ATC) - average fixed cost (AFC) - average variable cost (AVC) - marginal cost (MC)

Answer 67

- cost of producing a given level of output

Answer 68

- costs that do not change with output and remain constant - e.g. rent, machinery

Answer 69

- costs that change directly with output - e.g. materials

Answer 70

- extra cost of producing one extra unit of a good

Answer 71

- fixed costs + variable costs

Answer 72

- total costs / output

Answer 73

- total fixed cost / output

Answer 74

- total variable cost / output

Answer 75

- change in total cost / change in output - total cost of producing N goods - total costs of producing (N-1)

Answer 76

- time period in which at least one factor of production is fixed

Answer 77

- time period in which all factors of production are variable

Answer 78

- when one variable factor of production is increased while other factors stay fixed, eventually the marginal returns from the variable factor will begin to decrease - marginal output decreases as more inputs are added in the short run

Answer 79

- starts high because whole fixed costs are being divided by a small output - as output is increased, AFC falls as the same amount is being divided by a larger amount

Answer 80

- U shaped due to law of diminishing marginal productivity - costs initially fall as machinery is used more efficiently - as production expands, efficiency falls as machinery is overused

Answer 81

- U shaped but gets closer to ATC as output increases since AFC gets smaller

Answer 82

- U shaped due to law of diminishing marginal productivity - initially fall as machines are used more efficiently - rises as production continues to rise

Answer 83

- at point A, average costs are C/D - at point B, average costs are E/F - average costs at B are lower than at A, since the gradient of A is steeper than B

Answer 84

- SRACs are U shaped because of the law of diminishing returns - LRACs are U shaped because of economies and diseconomies of scale

Answer 85

- LRAC is either equal to or below SRACs - firm may initially be set to produce a certain amount but increase this causing a rise in SRAC = law of diminishing returns as some factors are defined - in LR, factors become variable so SRAC can be shifted - new SRAC is lower due to economies of scale until diseconomies of scale

Answer 86

- boundary represents minimum level of average costs attainable at any given level of output - points below LRAC are unattainable - producing above LRAC is inefficient

Answer 87

- change in output which changes the average cost of production due to internal economies/diseconomies of scale

Answer 88

- occurs due to external economies/diseconomies, taxes, or technology, which affects the cost of production for a given level of output

Answer 89

- until Q1, firm is experiencing economies of sale and thus sees falling LRAC - from Q1 to Q2, the firm has constant returns to scale / maximum efficient scale where their LRAC are constant - any output above Q2 shows the firm experiencing diseconomies of scale and their LRAC rising

Answer 90

- advantages of large scale production - enables a large business to produce at a lower average cost than a smaller business - the firm is able to experience increasing returns to scale, where an increase in inputs by a certain percentage will lead to a greater percentage increase in output

Answer 91

- disadvantages that arise in a large business - reduce efficiency and cause costs to rise - firm experiences decreasing returns to scale, where output increases by a small percentage than inputs

Answer 92

- where firms increase inputs and receive an increase in output by the same percentage

Answer 93

- minimum level of output needed for a business to fully exploit economies of scale - it is where the LRAC curve first levels off and when constant returns to scale is first met

Answer 94

- advantage that a firm is able to enjoy because of a growth in the firm, independent of anything happening to other firms or the industry in general

Answer 95

- technical economies - financial economies - risk bearing economies - managerial economies - marketing and purchasing economies

Answer 96

- arise as a result of what happens to the production process

Answer 97

- specilisation - balanced teams of machines - increased dimensions - indivisibility of capital - research and development

Answer 98

- large firms able to appoint specialist workers and buy specialist machines - allows for job to be done quicker and better than machines/workers which are not specialised

Answer 99

- large firms can afford to buy a number of every kind of machine for each stage of production - by combining these machines, they can ensure they run each machine at its optimal level - smaller companies may only be able to afford one machine for each stage, if one stage of production runs faster than other then machines will spend a long time turned off

Answer 100

- relates to the fact if the size of walls was double, area increase by 4 times - 4x increase in capacity occurring without the cost increasing by 4x

Answer 101

- some processes require huge items of machinery and investment that make it only possible for them to produce on a large scale

Answer 102

- often large firms can afford to carry out large scale R&D - means they are able to gain large advantage over competitor

Answer 103

- greater security as they have more assets and therefore harder to be forced out of business overnight - easier for them to obtain finance and interest rates will be lower due to lower risk - makes investment more accessible

Answer 104

- large companies able to operate in a range of different markets, producing different products - means if one area of business falls, whole business will not collapse - higher room for growth

Answer 105

- large companies can afford to appoint specialist managers in every field, who have greater knowledge so can do job better - staff represent an indivisibility and so small firms cannot employ specialist staff

Answer 106

- can buy in bulk - can specialise - can distribute

Answer 107

- large firms able to buy in large numbers - may be able to buy raw materials at a cheaper price than competitors - lower costs

Answer 108

- businesses can afford to take on specialist buyers and sellers who could be more efficient due to the extra time and knowledge

Answer 109

- large firms can enjoy preferential rates from transport companies as they offer company a lot of business - will transport in large batches, which is cheaper - can also establish regional distribution centres, allowing them to reduce costs

Answer 110

- advantage which arises from the growth of the industry within which the firm operates, independent to the firm itself - cause LRAC curve to shift downwards

Answer 111

- labour - support services

Answer 112

- businesses established in an area with other successful firms from same industry find labour comes to that area, reduces cost and time taken to recruit - local education and training providers likely to develop courses to prepare people to take up jobs in these businesses - firms able to hire staff trained by other businesses = cheaper and more efficient

Answer 113

- businesses who provide products/services for large businesses naturally move to area where those businesses are based - reduces transport cost / time delays for business

Answer 114

- workers - geography - change - prices of materials - management

Answer 115

- people can think their efforts go unnoticed so love motivation and work less hard - decreased productivity

Answer 116

- firm may have to transport finished products huge distances and firms may find it harder to control parts of business far away

Answer 117

- takes much longer and is much more difficult for a large firm to respond to change

Answer 118

- as business grows, demand for raw materials and equipment do to - although this increases bargaining power, increase in demand causes prices to risk => costs

Answer 119

- coordination and control - as business grows, it becomes difficult to coordinate different parts - can lead to poorer quality to work and business decisions that don’t work well together - communication - can be slowed and lose accuracy because of distance and number of people it has to be passed through

Answer 120

- difference between revenue and costs

Answer 121

- TR and TC are further apart, with TR above TC - MC = MR

Answer 122

- return that is sufficient to keep the factors of production committed to the business - if firm covers its costs, it earns normal profit - AC = AR OR TC = TR

Answer 123

- when profit is greater than normal profit - abnormal profit - AR > AC OR TR>TC

Answer 124

- when a firm fails to cover its costs - AR < AC OR TR < TC

Answer 125

- normal profit is at AC = AR or TC = TR - supernormal profit is at AR > AC or TR > TC - loss is at AR < AC or TR < TC

Answer 126

- when making a loss, shutting down is not always necessary, dependent on the average variable cost - if AVC < AR, firms should continue production - each good made generates more revenue than it costs to produce, so can make a contribution to their fixed costs

Answer 127

- if AVC > AR, producing more increases loss, so firm should shut down - firm needs to make at least normal profit to stay open in long run

Answer 128

- does not affect losses - do not want to let go of workers or let down customers

Answer 129

- AC is greater than AR so firm is seen to be making a loss

Answer 130

- used to judge how well the market allocates resources - shows relationship between scarce inputs and outputs

Answer 131

- allocative efficiency - productive efficiency - dynamic efficiency - X-inefficiency

Answer 132

- resources are used to produce goods and services which consumers want and value more highly - social welfare is maximised - occur when value to society from consumption is equal to marginal cost of production - P = MC

Answer 133

- when products are produced at lowest average cost so fewest resources used to produce each product - minimum resources used to produce maximum output - only exist if firms produce at bottom of AC curve, MC=AC in the short run - possible if there is technical efficiency, given output is produced with minimum inputs

Answer 134

- resources are allocated efficiently over time - concerned with investment, bringing new products and production techniques - achieved in markets where competition encourages innovation but there are copyright/patent laws - supernormal profit required

Answer 135

- firm failing to minimise its average costs at a given level out output - occurs when there is a lack of competition so firms have little incentive to cut costs

Answer 136

- market where there is a high degree of competition

Answer 137

MAIN - many buyers and sellers - freedom of entry and exit from industry - perfect knowledge - homogenous product - firms aim to profit maximise - firms are price takers EXTRA - no buyer or seller can influence market price/output - no externalities - price is set by forces of demand and supply - each firm faces a perfectly elastic demand - P=MR=AR - allocativelly and productively efficient - dynamically inefficient - cannot earn supernormal profit in the long run

Answer 138

- no one firm or customer is able to influence market - decision of one firm to double output has no effect on rest of market

Answer 139

- when a business is making profits, anyone can enter and start producing that product themselves - businesses are unable to make huge profits in the long run and tend to make normal profits instead - if making a loss, can leave easily

Answer 140

- enables firms to know when other firms are making profits, attracting them to the market - all firms have same costs as they can use same production techniques - any attempt to raise prices above market determined level will lead to no sales, customers aware and will look at other firms

Answer 141

- products are identical, cannot tell difference between one make and another

Answer 142

- price takers

Answer 143

- firms assumed to short run profit maximise, so firm produces at MC = MR - firms in perfect competition can only make normal profit in long run

Answer 144

- prices set by market at P1 where S1=D1 => firms faces demand curve of AR1=MR1 and product at MC=MR1 at Q1 - perfect information and easy entry with supernormal profit encouraging new firms to enter - this increases supply from S1 to S2, leading to fall in price from P1 to P2 - firm now has AR2=MR2, producing at MC=MR2 at Q2 - also AR2=AC, so normal profit being made - if loss being made, firms leave industry decreasing supply pushing prices up returning to normal/supernormal profit

Answer 145

- productively efficient as they produce at MC=AC - allocative efficient as they produce where P=MC - therefore are static efficient - not dynamic efficient and no firm has enough for R&D - perfect knowledge also prevents competitive benefits - competition should keep costs low, therefore prices as well - however, firms unable to benefit from economies of scale meaning costs are higher than they could beesa

Answer 146

- form of imperfect competition - downward sloping demand curve - e.g. hairdressers, estate agents, and restaurants

Answer 147

- many buyers and sellers - no/low barriers to entry and exit - low concentration ratio - non-homogenous goods - firms aim to profit maximise - market power to an extent - imperfect information - downward sloping demand curve - price maker

Answer 148

- can make supernormal profits, normal profits, or losses in the short run - due to lack of barriers to entry/exit, firms can only make normal profit in the long run

Answer 149

- firms assumed to be short run profit maximisers, producing at MC=MR1, producing at Q1 at P1, making supernormal profit - new firms enter market in long run due to supernormal profits, causing demand to decrease => AR and MR shift inwards - firms then produce at MC=MR2 at P2Q2 - firm is now at AC=AR2, making normal profits - if industry making loss, firms leaves industry, increasing demand for other firms => normal profit in long run

Answer 150

- information may be imperfect so firms may not enter market as predicted due to being unaware of supernormal profits - firms may also be of differing size, with different cost structure allowing them to maintain supernormal profits

Answer 151

- only make normal profit in LR, AC=AR, and as they profit maximise, MR=MC, so allocatively inefficient - MR ≠ AR so AC ≠ MC or MR, so productively inefficient - dynamically efficient due to differentiated profits

Answer 152

- small number of firms, none of which can keep the others from having significant influence

Answer 153

- goods can be both homogenous or differentiated - profit maximisers - firms are interdependent - market power - high barriers to entry and exit - indeterminate demand - firms can collude - allocatively and productively inefficient

Answer 154

- if firm raises price in oligopoly, others do not follow - they have lower prices so are more competitive - if firm lowers prices, others must follow to remain competitive - issue with theory is that it assumes there is an initial price set within the market but does not explain why this price was set

Answer 155

- assume price set at P1 - above P1 curve is elastic (competitors offer lower prices) - below P1 curve is inelastic (firms also lower prices) - result is a kink in demand, meaning no gap in MR so rise/fall in costs/demand is unlikely to impact price or output - prices thus tend to be stable

Answer 156

- concentration of supply in the industry, which measures percentage of total market that a particular number of firms has

Answer 157

- (total size of formula / total size of market) x 100

Answer 158

- when firms make collective agreements that reduce competition - when firms don’t collude, it is a competitive oligopoly

Answer 159

- if firms compete, lowering prices will cause others to lower prices - when working together, they can maximise industry profits - reduces uncertainty - firms may decide to be a non-collusive oligopoly since collusion is illegal - firm with strong business model will not want to collude as they feel they can increase market share

Answer 160

- few firms that are all well known to each other - firms not secretive about costs and production methods, and costs and production are similar - producing similar products - one dominant firm which others are happy to follow - market is relatively stable - high barriers to entry

Answer 161

- overt when firms come to a formal agreement - tacit when there is no formal agreement

Answer 162

- price fixing - synchronising advertising - insider information

Answer 163

- prices may be forcibly lowered to drive out smaller competitors - prices may be inflated to a level to support group colluding - can eliminate competition while also leading to even higher barriers for new entrants

Answer 164

- partnering businesses may limit consumers’ knowledge about a product or service for an added advantage

Answer 165

- colluding groups can gain advantages from sharing of private or preliminary information with one another - can allow parties to enter and exit trades before the shared information is publicly available - predominant in financial industry

Answer 166

- called a cartel - group of firms who enter into agreement to mutually collude - rules laid out in a formal document which may be legally enforced and fines be charged for firms who break these rules

Answer 167

- agree on price for good and compete freely using non-price competition to maximise market share, or agree to divide market according to present market share of each business

Answer 168

- no firm is likely to set prices/output at level they would not ideally choose - constant temptation to break cartel - more successful the cartel, greater incentive to break it - important for firms to be the first to break and not be the firm who is left to deal with after effects - since collusion is illegal, firms may be involved in tacit collusion such as price leadership and barometric firm

Answer 169

- one firm has advantages due to size or costs and becomes dominant firm - other firms follow as they are fearful of taking on the firm in a price war - as a result, dominant firm decides price and allows other firms to supply as much as they want at this price

Answer 170

- firm develops a reputation for being good at predicting next move in industry - other firms decide to follow their leader

Answer 171

- behaviour of a firm depends on how it thinks other firms will react to its policies - game theory can be used to examine best strategy a firm can adopt for each assumption about its rivals

Answer 172

- antitrust laws - supervision in industries - defection

Answer 173

- Organisation of Petroleum Exporting Countries (OPEC) - made up of 13 oil producing countries - acts as a monopoly by restricting output and raising prices - lead by Saudi Arabia as price leadership

Answer 174

- explores reaction of one player to changes in strategy by another player - aim is to examine best strategy a firm can adopt for each assumption about rival’s behaviour - provides insight into interdependent decision making that occurs in competitive markets

Answer 175

- two strategies firm could take, maximin policy or maximax - maximin involves working out the strategy where worst possible outcome is the least bad - maximax policy involves working out best outcome - if maximin and maximax don’t have same solution, this is the called the dominant strategy - dominant strategies aren’t common and best strategy tends to depends on what the other firm does - some cases have a Nash Equilibrium

Answer 176

- neither player is able to improve their position and has optimised their outcome based on the other plays expected decisions - no incentive to change behaviour, unless someone changes theirs

Answer 177

- two people questioned over involvement in crime and are kept apart to not communicate - dominant strategy is to confess, with best reward - if prisoners could collude, or had confidence in each other, best option is to deny crime

Answer 178

- price wars - predatory pricing - limit pricing - cost plus pricing - psychological pricing - market-led pricing - price skimming - penetration pricing

Answer 179

- occur in markets were non-price competition is weak, goods have weak brans and consumers are price conscious - also occur in markets where it is difficult to collude - drives prices down to levels where firms are making losses - in short run, firms continue to produce if AVC is below AR but in long run they leave - firms will have to leave and prices will rise since supply falls - lowers industry profits

Answer 180

- supermarkets - firms desperately trying to offer lower prices than rivals

Answer 181

- occurs when established firm is threatened by new entrant, or if one firm feels another is gaining too much market share - established firm sets low price so others cannot make a profit, driving them out of the market - existing firm then puts price back up - illegal and only works when one firm is large enough to be able to have low prices and sustain losses

Answer 182

- firms set low prices (limit price) to prevent new entrants - price is high enough to make normal profit but low to discourage other firms entering market - greater the barriers to entry, higher the limit price - mainly used in contestable markets - drawback is firms cannot make profits as high as they would be able to

Answer 183

- firms work out their AC and add a percentage increase, determining level of profit - size of this increase depends on level of competition and barriers to entry - problem is that it does not consider market

Answer 184

- firms use non rounded numbers to give impression price is cheaper than it is - aim is for consumers to feel they can afford good and be encouraged to buy it

Answer 185

- firms set prices simply by looking at prices charged by competition - price their good close to other firms - if price is higher than people would not buy it - if price is lower than they lose profit - no consideration of costs

Answer 186

- when product initially launched, firms set high prices to cover research and development costs and keep demand at management levels - once no longer new, price is lowered - mainly used by technology firms

Answer 187

- when product first introduced, firm sets prices low to encourage people to use it for first time - hopefully people like product and continue to buy even at higher prices

Answer 188

- advertising - loyalty cards - branding - quality - customer service - product development

Answer 189

- creates awareness of company/product - can persuade customer to purchase profit - if successful, increases sales and market share for a business, which increases profits in long run - can also make demand for a product/service more inelastic

Answer 190

- encourage repeat purchases by rewarding customers for loyalty - also provide firms with lots of data on consumers’ buying habits, which firm can use to increase sales

Answer 191

- successful brand help increase loyalty and repeat purchases for a business - people trust band and quality represented, so will be likely to continue buying - established brands find it easier to release new products

Answer 192

- firm known for good quality can charge higher prices and is likely to have strong brand loyalty - have a good reputation and benefit from positive recommendations

Answer 193

- encourage loyalty amongst customers and give business a more positive reputation

Answer 194

- business that invests in product development will have a competitive advantage over rivals - if they are first to release a new produce, they would see an increase in sales, likely to help with branding

Answer 195

- often expensive, firms will need money before they undertake competitor - only large firms can do large scale advertising, research and development - no guarantee that it will be successful

Answer 196

- statistically inefficient tas they are not productively or allocative efficient - dynamically efficient, making supernormal profits so have funds and incentives to invest - able to exploit economies of scale, lowering costs

Answer 197

- incentive to collude - incentive to compete

Answer 198

- limit competition - reduce uncertainties - maximise profits

Answer 199

- capture portion of its rivals’ market shares and profits

Answer 200

- based on plans of action taking into account rivals’ possible action - strategic behaviour of oligopolistic firms is results of their mutual interdependence - firms planning strategies make efforts to guess actions and reactions of rivals to formulate their own strategy

Answer 201

- incentive to cheat - cost differences between firms - number of firms - possibility of a price war - recessions - potential entry into industry - industry lacking dominant firm

Answer 202

- every firm faces incentive to cheat by offering lower prices for more buyers - can result in higher market share and profits - leads to collapse of cartel

Answer 203

- each firm faces different costs and cost curves - price is mutual to all firms - firms with higher AC have lower profits - leads to difficulties in coming to agreeing on common price

Answer 204

- more firms, more difficult to reach an agreement - more numbers of differing views - harder to reach compromises

Answer 205

- price war would make all firms of an industry collectively worse off due to lower prices and lower profits

Answer 206

- sales fall and profits are reduced - firms have stronger incentive to lower prices and cheat on agreement

Answer 207

- if successful, cartel makes large economic profits, encouraging entry of new firms into industry - if there are no entrants, industry supply increases, driving down price and curing into cartel’s profits - cartel’s long run survival depends on high barriers to entry, blocking new entrants

Answer 208

- presence of dominant firm facilitates reaching agreement, as this firm can assume leadership in negotiations - lack of dominant firm makes agreement among cartel members more difficult to reach

Answer 209

- where two companies own all/nearly all of the market for a given product or service - can have same impact on market as a monopoly if both collude on prices or output

Answer 210

- market structure where a singular seller or producer assumes a dominant position in an industry - discourages in free market economies, as they stifle competition and limit substitutes for consumers

Answer 211

- only one firm exists in the market - demand curve is downward sloping - no close substitutes for goods - very high barriers to entry - price markers - can price discriminate - allocative and productively inefficient

Answer 212

- downward sloping demand curve, since people can still choose whether to buy good or not - profit maximising is at MC-MR - produce at Q1 at P1, and make supernormal profits - firm is able to earn supernormal profits or loss in long run since there is no freedom of entry and exit to market

Answer 213

- competitive pricing strategy - involves use of different prices charged to various customers for same product/service - company can enhance profits by charging each customer maximum they are willing to pay, eliminating consumer surprises

Answer 214

- first degree - second degree - third degree (need to know)

Answer 215

- personalised pricing / perfect price discrimination - businesses accurately determine what each customer will pay for a specific product/service - expectation to negotiate - e.g. eBay and the auto industry

Answer 216

- ability to gather information on every buyer is not possible - companies price products based on preferences of groups - does not eliminate consumer surprise but allows company to increase profit margin - can be done through quantity discounts, buy 2 get 1 free, coupons, and loyalty rewards - e.g. warehouse retailers such as Costco

Answer 217

- companies price products and services based on unique demographic of customer base - consumer groups that may not be willing to purchased a product due to lower income can be captured by this strategy - companies understand characteristics of consumers more easily than preferences of individuals - reduces consumer surprises by catering to price elasticity of demand - companies need to ensure customers don’t sell cheaper products and services to others - common in travel, tourism, and entertainment

Answer 218

- market power - information - ability to resell

Answer 219

- price discrimination not possible in perfectly competitive market, where no seller has power to charge other than going market price - can only take place where firms have some ability to vary price

Answer 220

- firm needs to be able to identify different groups of consumers with different willingness to pay - price discrimination is profitable because different consumers display different sensitivities to price, they have different price elasticities of demand

Answer 221

- price discrimination not possible if consumers could resell product

Answer 222

- firm produces where MC=MR in each market, making supernormal profit in each - in inelastic market, they produce at Q1P1 - in elastic market, they produce at Q2P2 - in combined market, they produce at Q3P3 - shows two separate markets in price discrimination, rather than combined market, allowing for higher profits

Answer 223

- firms can increase profits, which can be reinvested into research and development, improving dynamic efficiency - those in elastic market gain as they are able to pay a lower price, benefiting from cross subsidisation, allowing for an increase in equality by buying goods they could not previously access - consumers lose some consumer surplus to producers and some pay higher price

Answer 224

- economies of scale are so large that even a single producer is not able to fully exploit all of them - decreasing cost industries - e.g. National Grid, Royal Mail, and National Rail

Answer 225

- AC and MC continue to fall - firm will profit maximise - produces where MC=MR at Q1P1 - makes supernormal profit

Answer 226

- pointless to encourage competition, as it raises AC for industry - new firms entering market will be priced out due to high costs, raising question for competition policy and nationalisation - tend to be found in industries with very high fixed costs, e.g. railways - need to invest bullions in track, tunnels, bridges, and stations, whilst running extra trains shows small increase in costs, meaning AC decreases drastically - allocative and productively inefficient as there is no minimum on AC curve and at allocative efficiency loss is made

Answer 227

- potential to make huge profits for shareholders through profit maximisation - existence of supernormal profit allows for investments and building reserves to overcome short term difficulties - firms able to compete against large overseas organisations - firms able to maximise economies of scale, reducing costs furthering increasing profit - firms may not choose to profit maximise due to X-inefficiencies, sales or revenue maximising, profit satisficing, or contesability, leading to limit pricing. Firms become complacent in long run from lack of competition

Answer 228

- monopolists produce at lower outputs so will employ fewer workers - inefficiency of monopoly may mean employees receive higher wages

Answer 229

- impact depends on extent the monopolist is also a monopsonist - if monopolist buys all/most of suppliers’ goods, reduces suppliers’ profits as monopolist will decrease prices

Answer 230

- more efficient, customers enjoy higher consumer surplus - increased range of goods due to cross subsidisation - survival of product from price discrimination, benefitting some customers - consumers may pay higher prices for poorer quality due to lack of competition - less choice as there is only one firm

Answer 231

- productively inefficient as they do not produce at MC=AC - allocative inefficiency since P>MC - dynamically efficient as they make supernormal profit, but lack of competition leads to lack of incentives to invest

Answer 232

- shows effects of a monopolist compared to perfect competition 0 assumed that industry is a constant constant industry, where AC=MC - if market perfectly competitive, it produces where P=AR=MC at Q1P1 If industry was a monopoly, it produces where MR=MC at Q2P2

Answer 233

- shift from perfect competition to monopoly => less production => less resources => deadweight loss BCD - fall in consumer surplus from ADP1 to ABP2 - P2BCP1 turned into producer surplus - MC=AC may rise => further fall in consumer surplus - large monopolist could enjoy large EoS => AC falls + consumer surplus growing to larger than in perfect competition - avoid undesirable duplication of services, preventing misallocation of resources - Cross subsidisation may waste resources

Answer 234

- X-inefficient, lack of competition - productively efficient, low costs through investment into new production techniques from retained profits - allocative efficient, new products in market - dynamically efficient

Answer 235

- both have large numbers of small firms - competition exists in both markets - firms do not earn supernormal profit in long run - both profit maximise - firms can earn supernormal profit/losses in short run - demand is elastic

Answer 236

- homogenous/identical products in PC but slightly differentiated in MC - price takers in PC but price makers in MC - perfect substitutes in PC but close substitutes in MC - PC is allocative and productively efficient but MC are inefficient - perfect knowledge in PC but imperfect knowledge in MC

Answer 237

- competition in both markets - both profit maximisers

Answer 238

- homogenous in PC but slightly differentiated in O - no barriers to entry in PC but higher barriers in O - PC is price taker, O is price maker - collusion possible in O but not in PC - uniform prices in PC but price rigidity in O - perfect knowledge in PC, imperfect knowledge in O - no selling costs in PC but present in O (advertising) - PC firms are independent but O firms are interdependent - demand curve in PC is perfectly elastic but indeterminate in O - productively and allocatively efficient in PC but inefficient in O

Answer 239

- both profit maximise - both suffer economies loss

Answer 240

- price in PC = MR but not in M - allocative and productively efficient in PC but inefficient in M - abnormal profit in M in long run but not in PC - M are price makers but PC are price takers - high barriers to entry in M but none in PC - demand curve for M is downward sloping but horizontal line for PC

Answer 241

- allocatively and productively inefficient - imperfect knowledge - price makers - multiple firms in market - unlikely to price discriminate

Answer 242

- slightly differentiated goods in MC but perfectly differentiated or homogenous in O - low barriers in MC but high in O - few firms big in O but many small firms in MC - demand curve for MC is downward sloping but non determinable for O - excess capacity in MC but less likely in O - price competition not common in MC but common in O - collusion common in O but uncommon in MC

Answer 243

- profit maximisers - downward sloping demand curve - MR curve lower than demand curve - excess capacity present - price makers - allocatively and productively inefficient

Answer 244

- high barriers in M but low in MC - M can make supernormal profit in long run, MC only makes normal profit - no competition in M but high levels in MC - close substitutes in MC but not in M - price discrimination possible in M but not in MC - product differentiation and non price competition common in MC but absent in M - M has high levels of market power - M can influence supply of goods in market

Answer 245

- price markers - high barriers to entry - imperfect knowledge - price greater than MR - influence market output - profit maximisers - allocatively and productively inefficient

Answer 246

- one supplier in M but multiple in O - no close substitutes in M but goods in O can be homogenous or differentiated - M can price discriminate, O cannot - price decisions interdependent on O but prices set in M with no regard for competitors - collusion possible in O but not M - single price in M but price rigidity in O

Answer 247

- only one buyer in the market - same characteristics as a monopoly - prevents new firms entering market - aims to profit maximise - barely exist but many firms experience monopsony power, they they buy large percentage of market - pay suppliers lowest price possible to lower costs through being the only buyer, allowing them to maximise profits

Answer 248

- produce where MC=AR => MC=D - MC curve is above supply curve, since it costs more to pay for last good than average cost of all goods - if market competitive, then they produce where S=D at Q2P2 - in monopsony, firm produces at MC=AR at Q2P2

Answer 249

- monopsony gains higher profits by purchasing at lower prices => investments - purchasing economies of scale => lower costs and increase profits

Answer 250

- customer can gain from lower prices being passed on from lower costs - fall in supply, business buys less inputs - counter-weight to monopolists - fall in quality as prices fall

Answer 251

- suppler sells less goods and so employ less people, while monopsonist may employer less/more/same amount since they have less inputs for production but costs are lower - monopsonist may pay higher wages as a result of higher profits

Answer 252

- lose out as they receive lower prices - less supplied leading to some firms leaving marker

Answer 253

- model concerned with possibility of firms entering market if opportunity to make money is seen - high threat of new entrants, keeping firms producing at competitive level

Answer 254

- perfect knowledge - freedom of entry/exit => relative absence of sunk costs - low product loyalty - short run profit maximisers, producing at MC=MR - number of firms can vary from one in control, many in control and none in control - firms compete and do not collude to fix prices - can be homogenous or branded goods

Answer 255

- supernormal profits can be made in short run - normal profits can be made in long run - if firms in market were making supernormal profit, other firms would join market - supply would increase, driving prices down so only normal profit/losses are made - when firms start making losses, they leave market, decreasing supply, allowing for prices to rise

Answer 256

- productively and allocative efficient - if firms do not produce at lowest point on AC curve then new firms can enter market and undercut them by offering lower prices (productively inefficient) - as they only make normal profits at AC=AR, and produce at lowest point at AC=MC => AC=MR=AR so value on society is equal to cost

Answer 257

- innocent entry barriers - legal barriers - marketing barriers - pricing decisions of incumbent firms - capital start up costs - economies of scale - barriers to exit

Answer 258

- natural barriers - can include monopolies and high entry/sunk costs

Answer 259

- prevent new firms from entering an industry - laws put in place making it more difficult for firms to enter marker - can sometimes prevent firms entering at all - can include patents and exclusive rights to production (television) - some industries, such as taxi industry, gain market licenses to operate

Answer 260

- high levels of advertising having built up consumer loyalty => inelastic demand - brand can sometimes be associated with product, e.g. ‘Hoover’ with vacuum cleaners - new firms entering market unlikely to have funds to undertake large scale advertising, so struggle to compete with incumbent firms

Answer 261

- predatory pricing means prices are so low that they can be driven out of market - makes it extremely difficult for firms to enter - limit pricing discounters entry of other firms as prices are set at a level preventing entrants - some firms may employ anti-competitive practises, such as refusing to supply retailers which stock competitors

Answer 262

- high costs to begin production - most firms may not have funding - sunk costs may also be high

Answer 263

- firms unable to produce on same AC curve as large, incumbent firms - if they were to enter industry, their costs would be higher, so prices are higher and they are unable to compete

Answer 264

- prevent firm from leaving a market quickly and cheaply - include cost to write off assets, pay leases, and making workers redundant

Answer 265

- fixed costs that a business cannot recover if it leave the industry - includes property (if lease is longer than it is actually used for), machinery and equipment that cannot be resold, and advertising - all businesses face sunk costs, even if things are resolved, it is generally for a lower price

Answer 266

- firms can enter a market at low cost attracted by high profits then leave the market at low cost when profits fall

Answer 267

- refers to ease which new firms can enter and exit a market - measured by extent to which the gains from market entry for a firm exceed the costs of entering the market - market with no sunk costs and no barriers to entry/exit is a perfectly contestable market - the more contestable a market, the more unstable it is as there can be regular hit and run competition - no market is likely to be perfectly contestable, always likely to be some sunk costs

Answer 268

- recession meant entrepreneurs do not accept existing market structure is fixed - deregulation of markets allowed reduction of some barriers to entry - competition policy meant firms can not use predatory pricing and cartels so markets are more contestable - globalisation has increased contestability since foreign firms can enter domestic markets - changes in technology has reduced entry costs as capital is more mobile

Answer 269

- quantity of labour that employers would wish to hire at each possible wage rate

Answer 270

- marginal revenue product (MRP) - extra revenue generated by an individual worker - higher MRP, higher demand for workers - law of diminishing marginal productivity means increasing number of workers, whilst other factors are fixed, is likely to increase MRP at first then decline - demand for labour assumed to be downward sloping

Answer 271

- in long run, all factors of production vary, so high wage rates encourage businesses to use machinery instead of workers - in short run, firms have fixed levels of capital, so diminishing marginal productivity means adding extra workers gives lower return so to employ workers, wage rate has fallen

Answer 272

- marginal output x price OR difference in total revenue

Answer 273

- firms hire workers in order to produce goods to meet aims (profit) - demand for labour is derived demand as it is derived from demand for the product the labour produces - businesses only want the worker for as long as people are willing and able to buy the product they produce

Answer 274

- wage rates - demand for the product - prices of other factors of production - wages in other countries - technology - regulation - state of economy

Answer 275

- wage is price of labour so has same influence on demand for labour as price on demand for a product - as wage rates increase, demand for labour contracts - MRP of labour must be higher for it to be worthwhile employing more people - less people employed

Answer 276

- labour is a derived demand - if there is no demand for product, there is no demand for labour - firms won’t employ people if the good will not make a profit - increase in demand for product leads to increase in demand for labour - linked to concept of MRP, increase in output/price of good increases demand for labour

Answer 277

- if machinery and equipment becomes cheap, people will switch machinery for labour and therefore demand for labour falls

Answer 278

- if wages are lower in other countries but high in the UK, people will be employed in other countries as it is a lower cost for businesses - means demand in the UK is low

Answer 279

- improvements in computers and technology means many jobs have been lost with work being done by machines - means there is less demand for labour, but demand for labour in technological based industries is increasing

Answer 280

- as laws are passed, some jobs disappear while others are made - high regulations within labour market is likely to discourage firms from hiring since it can be expensive, so demand reduces

Answer 281

- state affects demand for product - when economy is in a poor state, there is low demand for product - state also affects expectations for future and business confidence - when business confidence low, workers are laid off

Answer 282

- responsive of the quantity of labour to the wage rate

Answer 283

- PED of product - proportion of wages to TC of production - substitutes - time

Answer 284

- if good is elastic, rise in wages and hence rise in prices for consumers, will have large impact on quantity sold - business then reduces number of people employed, in order to make a profit - if good is inelastic, rise in wages and hence rise in price for consumers, will have minimal impact on quantity sold

Answer 285

- if wages are a huge proportion of costs, increase in wages increases costs massively - results in a large fall in demand for labour - elastic

Answer 286

- many substitutes (machinery and labour in other countries), demand is elastic - high skilled jobs tend to be more inelastic than slow skilled jobs as labour cannot be easily replaced

Answer 287

- in long run, demand is more elastic as machinery can be developed and jobs can be moved - in short run, firms have to employ workers and redundancy payments can be expensive so in more inelastic

Answer 288

- ability and willingness of people to make themselves available to work at different wage rates

Answer 289

- wages - population and distribution of age - non-monetary benefits - education, training, qualification - trade unions and barriers to entry - wages and conditions of other jobs - legislation

Answer 290

- supply of labour curve for an individual is backward bending, increase in wages leads to increase in hours worker first but after it decreases in hours worked - supply curve for a industry labour is upward sloping - firms can increase number of hours worked by in existing labour force or recruiting new workers - although increase in wage rates may not increase hours worked by existing labour, it will increase number of workers

Answer 291

- when wages are low, individual increases hours to increase income - when income is high, individual reduces hours of work to increase leisure time

Answer 292

- people willingly work more hours when wages are higher

Answer 293

- high population means there is large supply of labour - distribution of age ensures there is lots of labour, even from people of high working age - migration also affects size of workforce and high migration of working age come to the UK to work

Answer 294

- supply of labour increases if there is high job satisfaction - some jobs are attractive as they are close or in a social area and require little commuting - some jobs offer perks such as free healthcare - factors such as holiday, hours of work, flexibility, and opportunity for promotions also influence supply

Answer 295

- more educated workers means higher supply of workers - important for industries where certain qualifications are necessary - occupations requiring high levels of education may suffer from lower supply of labour compared to low skilled jobs

Answer 296

- trade unions able to restrict supply of labour by introducing barriers to entry - for example, degree required for teaching

Answer 297

- if many jobs in local area are considered to be unpleasant and offer low wages, supply for alternatives will be higher

Answer 298

- government rules can affect supply - e.g. school leaving age and retirement age

Answer 299

- labour immobility

Answer 300

- barriers preventing mobility of labour - workers being unable to move from job to job, despite high amounts of unemployment

Answer 301

- occupational immobility - geographical immobility

Answer 302

- excess supply of labour in one area/occupation but excess demand in another - even if wages are higher where there is excess demand, people are unable to leave where there is excess supply to get a job in that area/occupation due to immobility

Answer 303

- workers find it difficulty to move from one job to another - due to a lack of transferable skills - difficult in short term when workers need to get new training - possible in long run at high costs

Answer 304

- workers find it difficult to move from one place to another due to cost of movement, family, etc. - workers may also not know about vacancies in other areas and would not be able to attend interviews - also related to issue of housing as people possibly do not have funds to purchase new housing - those on lower incomes are more geographically immobile

Answer 305

- severe skills shortage which could cost £90bn a year following Brexit - four million too few high skilled people but six million too many low skilled people - engineering suffering particularly badly from skills shortages

Answer 306

- responsiveness of supply of labour to a change in wage rates

Answer 307

- level of qualifications and training - availability of suitable labour in other industries - time - level of unemployment

Answer 308

- if there are high levels of qualifications necessary for job, people will not be able to easily take up job so supply of labour is inelastic - if not much training/qualifications necessary then supply is elastic

Answer 309

- if a company can poach workers from other industries then it is seen to be elastic

Answer 310

- long run supply of labour is elastic as people have time to train - if job is vocational, it is inelastic since even if wages fall, people will not leave job

Answer 311

- high levels of unemployment makes supply more elastic - firm can increase number of people it employs without having to raise wage rates significantly

Answer 312

- high tax rates and high welfare benefits reduce incentives to work meaning there is lower supply - this affects whole workforce, and so therefore will have an impact on individual occupations

Answer 313

- age - education - training - work experience - skill/talent/ability to perform tasks - sex - ethnic background - sex and ethnic background are illegal to affect wage but still is an issue

Answer 314

- highest paid workers have low supply and high MRP - immobility of labour means there may be excess supply in one area/occupation, causing low wages, and not enough in others, meaning high wages - low elasticity means minimal change in employment, regardless of change in wage rates - effect also dependent on size of shift

Answer 315

- wages determined by demand and supply - all workers paid the same - if worker not paid the same then they would move somewhere else where rate was higher - would reduce supply and increase wages in first area while increasing supply and reducing wages in second

Answer 316

- only one buyer of labour - businesses know to increase labour they need to increase wage - increase of wage for one is an increase for all - MC curve is above AC of labour as it costs more to employ additional worker than AC of labour - firm will determine how many workers to employ where cost of employing is equal to value of worker

Answer 317

- employed at MC=D at Q1 and W1 - compared to a perfectly competitive market (W2Q2), they employ less people at a lower wage rate

Answer 318

- existence of trade unions means they operate as only seller of labour - can set barriers of entry which reduce supply - could set wages at a specific wage and ensure workers are not prepared to work for less, creating kinked supply - both lead to higher wages but cause a fall in employment from the perfectly competitive equilibrium of Q1W1

Answer 319

- supply is perfectly elastic till QS - if company wants to hire more, they need to increase wages - firm employs where S = D at QDW2

Answer 320

- when there is a monopoly and monopsony in a labour market

Answer 321

- firm is monopsonist, wanting to employ at Q2W2 - union still sets minimum wage at W1, causing kicked supply - wage set depends on relative bargaining strength of both

Answer 322

- times of economic recession and unemployment may reduce bargaining power of unions and wage is set at W1 - times of full employment, unions have high levels of power so wages set at W3 - unions can have a positive impact on wages and number of people they employ - able to increase wages to W3 without impacting number of workers

Answer 323

- skills shortage - young workers - retirement - wage inequality - zero hour contracts - the ‘Gig economy’ - migration

Answer 324

- UK suffers from geographical and occupational immobility - means even if there is enough of one profession, there may not be enough in certain areas

Answer 325

- workers joining workforce during recessions tend to receive lower lifetime earnings than those entering in better times - during hard times, firms are unlikely to employ new workers and reluctant to let go of current staff so young struggle to find jobs

Answer 326

- rising life expectancy and increasing people reaching retirement age has negative effects on government budget - pensioners make up over 50% of welfare spending - retirement age continues to rise but government is trying to encourage people to save for their own pensions

Answer 327

- those on highest wages have seen their wages grow by bigger percentages than those on lowest wages - contentious issue and raises questions over relative poverty and level of redistribution required

Answer 328

- rise in zero hour contracts causing problems for employees who do not know how much they will earn in a week and receive little notice of when they will work

Answer 329

- many more people self employed and undertake short term contracts - concerns over rights of these workers and unreliability of their pay each week

Answer 330

- many people suggest migration causes wages to fall - allows employers to recruit from a larger pool of workers and helps fill skills shortages

Answer 331

- national minimum wages - maximum wages - public sector wage setting - tackling immobility

Answer 332

- Labour introduced national minimum wage in April 1999 - raises people out of poverty - decent minimum standards in workplaces - changes ever April - all workers over school age receive minimum wage - failure to pay employees minimum leads to fines

Answer 333

- reduces poverty - reduces male/female wage differentials - makes employees less likely to leave job, decreasing labour turnover and therefore training costs - more content workforce leading to more productivity, but it assumes all people are motivated by money - provides incentive to work, preventing unemployment trap - ensures everyone receives fair wage

Answer 334

- potential loss of jobs in the industry - minimum wage raises costs for companies - wage spiral as people will try to protect wage differentials between them and lowest price workers - no consideration of regional differences - most people on minimum wage are secondary earners meaning minimum wage is ineffective at reducing poverty

Answer 335

- reduce inequality - leads to rise in AD since poorest see rise in income and have an MPC => economic growth - Punic finances worsened as government employs many on minimum wage - rise in business costs reduces competitiveness, affecting trade balance and reducing net trade of AD, also increases SRAS causing inflation in short term

Answer 336

- some people suggest there should be a maximum wage for chief executives or a maximum pay ratio compared to lowest wage earners - government can set maximum pay limits for public sector workers in order to keep public spending down - helps reduce inequality

Answer 337

- excess demand within industry - people think they can get higher wages abroad so UK suffers from loss of best workers, reducing quality and competitiveness

Answer 338

- elasticities of supply and demand - argued that supply and demand for highest paid is very inelastic as there’s a small supply and firms tend to only need one chief executive - their cost is then a very small part of total costs - could mean maximum wages have no effect on market apart from reducing wages

Answer 339

- government can make whatever wage decisions it decides in short run to improve budget

Answer 340

- trade unions in the UK are weak

Answer 341

- between 2010-15, public sector workers experience pay freeze - put downward pressure on private wages - few people likely to leave private for public - private employers used this as evidence to limit pay rises for workers

Answer 342

- if private workers receive pay rises and public workers don’t, people shift from public to private sector - forces government to increase public sector wages in order to expand supply - thus, wages of public and private sector tend to rise by same percentage over long period of time but can rise by different rates in short term

Answer 343

- government attempting to improve either geographical or occupational mobility of labour

Answer 344

- improve supply of houses and reduce price of properties making easier for people to move - improve transport links - national advertising - subsidised on houses in area with labour shortages - move public agencies out of London => DVLA was moved to Swansea, may not improve mobility of labour but prevents excess demand for labour in one place and excess supply in another

Answer 345

- vocational training increase - encourage further study - encourage greater spending on training within work - targeted education

Answer 346

- Competition and Markets Authority (CMA)

Answer 347

- works to promote competition for benefit of consumers - investigates mergers and breaches of UK and EU competition law - enforces consumer protection law - brings criminal cases against individuals who participant in cartels - impose financial penalties, prevent mergers taking place and force businesses to reverse actions already taken

Answer 348

- mergers assed in terms of specific Ciri chances of each case - consideration of whether there will be a substantial lessening of competition (SLC) - CMA considers likely competitive situation if the merge goes ahead compared to if it does not - merger will be approached if its potential benefits are greater than costs

Answer 349

- if it will result in a market share greater than 25% - if it meets the turnover test of a combined turnover of £70 million or more

Answer 350

- preventing two large companies merging so they do not exploit customers by raising prices, offering poorer quality service and reducing choice - prevents firms from gaining monopoly power

Answer 351

- very few mergers are investigated every year - CMA can suffer from regulatory capture and may not have all the information necessary to make a decision

Answer 352

- Tesco’s takeover of Booker was allowed as CMA believed impact on competition would not be too high since supermarkets are in a hyper competitive industry - European Commission blocked merger of Ryanair and Aerlingus in 2010 as they would control more than 80% of all Europe flights from Ireland

Answer 353

- allocative and productively inefficient - firms may exploit dominant position in industry to stifle competition and become anti-competitive - most regulation occurs for utilities, which tend to be natural monopolies

Answer 354

- price regulation - profit regulation - quality standards - performance targets

Answer 355

- used to regulate natural monopolies in the UK - objective is to bring price closer to allocatively efficiency (P=MC) - important for utilities as there is a need to make them more affordable since they are essentials - two main forms of price regulation used - used in airport industry

Answer 356

- RPI-X - RPI+K

Answer 357

- form of price regulation used as a price cap - maximum prices firms are allowed to make is RPI-X - RPI is the retail price index which is a measure of inflation - X refers to expected efficiency gains - if one year RPI was 2.4% and regulator calculated that X was 1.5%, RPI-X would be 0.9%, i.e. the maximum price rise in the industry would be 0.9%

Answer 358

- OFGEM and ORR

Answer 359

- restrain price rises for essential services - incentivise utility providers to increase efficiency

Answer 360

- a firm’s total profit is equal to total revenue minus total costs - RPI-X lowers price of the good/service thereby limiting total revenue - there force, to maintain or increase profit, a firm must reduce costs i.e. become more efficient

Answer 361

- they face an absence or lack of competitive pressures - means there is less incentive to cut costs as they are unlikely to lose customers regardless of actions they take

Answer 362

- regulator investigates costs of firms in the industry to gain an understanding of possible efficiency gains - it is vital that the regulator has access to all necessary information and has a sufficient number of competent staff

Answer 363

- protects consumers by restraining producers’ ability to raise prices. Important for goods and services that are considered essential or produced by firms that have significant monopoly power - gives incentive for firms to be efficient as if they lower costs by more than X then they can enjoy increased profits - prevents excessive prices and ensures that gains are passed onto consumer

Answer 364

- setting X requires time and manpower - asymmetric information as information of efficiency gains comes from firms who may lie - less inventive for firms to make efficiency gains if X is set too low - firms less likely to make profit and thus leave if X is set too high

Answer 365

- used to regular utilities in the US - involves regulators setting limits on amount of profit firms can make - one form is rate of return regulation

Answer 366

- regulator allows firms to cover costs and earn a return based on amount of capital used - therefore, more capital employed then higher amount of profit can be earned - regulator wants to incentivise investment as productivity gains and general maintenance are vital for utilities

Answer 367

- firms are incentivised to increase capital investment which is vital for maintaining and improving quality

Answer 368

- little pressure for firms to be productively efficiency as regulator guarantees costs will be covered - danger firms overload on capital investment to earn higher profit. Involves investment that is done for the sake of it rather than maintenance or improving quality

Answer 369

- monopolists only produce high quality goods id this is the best wat to maximise profits - government can introduce quality standards, ensuring firms do not exploit customers by offering poor quality - Post Office has to deliver letters on a daily basis to all areas - OFGEM requires energy providers to restore power supplies within a certain time period, also need to have enough cavity to prevent blackouts

Answer 370

- used to regulate monopolies and also incentive improvements in public organisations - e.g. Office of Rail and Road sets out quality standards such as number of times a train company is allowed to be late

Answer 371

- incentive to improve quality is provided by need to meet/exceed consumer expectations and stay ahead of rivals - for a pure/natural monopoly, this incentive is absent as there are no competitors and a captive market - setting quality standards and performance targets regulators aim to motivate monopolies to meet minimum standard of provision

Answer 372

- if set correctly, may act as a surrogate for competition by forcing firms to behave as if they were in a contestable market

Answer 373

- without sufficient sanctions, firms may not be motivated to meet targets/standards e.g. Network Rail failed to deliver on performance targets for their long distance sector in 2013-14 - risk people game system, e.g. surgeons avoiding difficult surgeries in order to maintain high success rate - unintended consequences e.g. police spending time completing paperwork to meet standards than protecting public - requires political will and understanding to introduce and firms will try to meet targets without improving

Answer 374

- small and medium enterprise - outnumber large companies by a wide margin and employ more people

Answer 375

- company initiated by an entrepreneur to develop a scalable business model - refer to businesses that intend to grow large beyond the solo founder

Answer 376

- create competition - create jobs - increased consumer choice - source of exports - be a seedbed for innovation - may be more innovative, flexible and quick in responding to changes in market conditions

Answer 377

- credit => banks see smaller businesses as risky so small businesses struggle to find funding - business skills => some people feel they lack skills to succeed in business - recruitment => finding competent staff can be difficult

Answer 378

- provide information on how to set up businesses - deregulate making it easier to enter markets - streamline process for setting up and running a business - provide training to help people gain business skills - educational reforms to increase skills of workforce - provide business mentoring services

Answer 379

- removal of government regulations in a market - became a popular policy tool from the 1980s

Answer 380

- removing regulations make entry and exit to a market easier, thereby raising contestabilty - should increase number of firms in market - incumbent firms will be more fearful of near entry - therefore, competition increases, leading to greater efficiency and consumer satisfaction

Answer 381

- increases contestability as it reduces barriers to entry and exit

Answer 382

- incumbent firms less likely to profit maximise, increased competition puts downward pressure on prices - puts pressure on incumbent firms to raise quality - level of innovation increases - efficiency increases

Answer 383

- firms may take excessive risks and load up on debt causing market failure (08 Financial Crisis) - may lead to deterioration in public safety => many believe deregulation was an important factor behind Grenfell Tower disaster

Answer 384

- process in which private sector firms compete to win contracts to perform tasks on behalf of government - government chooses firm they believe will be best for public in terms of quality and cost

Answer 385

- idea is that introducing profit motive to economic activity performed by state leads to increase in efficiency and quality, allowing taxpayer to benefit frmo improved/cheaper public services - relies on assumption there will be a competitive market for government contracts and government will be able to competently administer contracts

Answer 386

- if there is a competitive market for government contracts, private sector will be responsible for allocating more resources in economy - allows for market forces to improve quality and choice - prices fall - taxpayer benefits highly

Answer 387

- if government focuses heavily on price of contracts firms may respond by reducing quality - firms involved often have ability to drive hard bargain in contract talks so may overpower government, meaning taxpayer ends up with poor value for money - contracts UK government puts to tender often only have a few bidders, lack of bidders meaning competition is limited

Answer 388

- Enterprise Act 2002 - means firms engaging in anti-competitive practises (collusion and predatory pricing) can face up to five years in prison and unlimited fines - in 2011, 9 supermarkets in the UK were found to be fixing price of milk and cheese products - Tesco alone was fined £10ms

Answer 389

- fines and jail sentences - increased contesability - minimum prices

Answer 390

- to discourage buyers from exploitative practises such as delaying payments, regulators could make such offences punishable through fines and/or jail sentences

Answer 391

- firms are able to obtain favourable terms from suppliers due to monopsony power, emanating from limited number of firms - increasing number of firms reduces monopsony power meaning suppliers are no longer bullied by sole buyers

Answer 392

- monopsonies cannot pay low prices to suppliers when minimum prices are set - reduces exploitation - promotes profitability and investment for suppliers

Answer 393

- minimum wages - legislation to improve working conditions - fines and jail sentences

Answer 394

- prevents workers from receiving pay rates that leave them in poverty

Answer 395

- health and safety legislation aims to reduce risks of injury in workplace - paid leave and break period legislation aims to prevents burnout at work and allows for healthy work-life balance - pension legislation aims to allow workers to be financially secure in retirement

Answer 396

- employers breaking labour laws can be made to face fines and jail sentences - if punishment is sever enough and authorities are vigorous, unscrupulous employers will be forced to mend their ways or be forced to leave market

Answer 397

- government can prevent monopolists exploiting suppliers by reducing prices by passing anti-monopsony’s laws, making certain practises illegal and introducing independent regulators forcing monopsonists to buy fairly - fines can be put in place - self regulation can be used but is weak

Answer 398

- when a firm or whole industry changes from being run by public sector to private sector

Answer 399

- transferring economic activity to private sector introduces profit motive and competition - there force, firms seek to reduce costs and improve quality to increase profit, resulting in increased efficiency

Answer 400

- most, e.g. rail, energy, water

Answer 401

- poor regulation/natural monopoly conditions may not improve outcomes for consumer - social costs and benefits likely to be ignored - government loses out on source of revenue - public sector assets often sold too cheaply - infrastructure arguably better under state control as it is vital to national interest - externalities and inequality

Answer 402

- stronger incentive to cut costs and be more efficient and productive - government gains revenue from sale of assets - encourages greater competition, reducing X-inefficiency - managers become more accountable - reduces government interference, allowing long term investment instead of worrying about a changing government

Answer 403

- better for natural monopoly to be run by state - government considers externalities - guarantee of minimum level of service - dangerous for key industries to fall into private hands

Answer 404

- public industries suffer from principal agent problem and moral hazard - experience X-inefficiency - influenced by government decisions - government may not have enough money to invest (NHS)

Answer 405

- government taking competitive bids for and then buts a whole investment project package - government pays back the costs of the whole project over a set period of time

Answer 406

- private sector is more efficient than public - allows for extra funding to kick start more projects, bringing economic and social benefits - private sector has higher dynamic efficiency - PFI firms pay tax meaning it could be cheaper for the government

Answer 407

- high debt costs => financing PFI is typically 3-4% of government debt - inflexibility and poor value for money => long term contracts are hard to change - risk lies with public sector - high spending on administration - government can be overdependent on PFI

Answer 408

- price cap - used by OFWAT to regulate private water companies in England and Wales - maximum price firms are allowed to make is determined by RPI + K - K stands for capital investment

Answer 409

- regulators and the water industry argue that capital investments required to maintain a high quality service are far larger in the water industry - therefore, firms need to be able to earn higher revenues to make this investment viable

Answer 410

- economic theory saying regulatory agencies may come to be dominated by the industries or interests they are charged with regulating - result is that an even y, charged with acting in the public interest, instead acts in ways benefitting the industry it is supposed to be regulating

Answer 411

- bribery - familiarity - revolving door

Answer 412

- government officials to some extent are motivated by financial reward - firms regulated by government often stand to benefit from weak oversight - firm may have chance to earn high amounts but is stopped by regulator - becomes tempting to bribe government official responsible

Answer 413

- to regulate industries, government officials often work closely with members of firms the regulate - can mean regulators and employees become friendly - can lead to bias and increased willingness to go easy on those they are regulating - UK audit regulators have been accused of this

Answer 414

- regulators often go work for companies they were previously responsible for regulating - people often paid large salaries - jobs may be rewarded due to lenient treatment these firms received during the time regulators were in office

Answer 415

- quality - price - externalities - asymmetric information

Answer 416

- if regulators do not enforce minimum standards of service, quality of goods and services and likely to fall - e.g. if regulatory capture occurs in the regulator responsible for rail service, quality of service would likely deteriorate over time

Answer 417

- likely to be higher if a regulator has been captured - for natural monopolies, this means regulators likely to be more generous when setting permitted price rises - e.g. RPI +3% instead of RPI + 2% - impacts poorer households more than richer ones => regressive effect

Answer 418

- external costs more likely to be ignored if regulators have been captured - e.g. restaurant regulator that has been captured is less likely to ensure high food hygiene standards - could result in outbreaks of food poisoning, causing people to miss work and increase costs for public health care

Answer 419

- competition policy partly relies on information - e.g. OFWAT must have good understanding of costs and levels of required investment in water industry to effectively regulate the water industry - it is likely firms have better knowledge of their firm and industry than regulators - therefore there is a risk information is withheld by firms or that regulators lack resources to properly oversee firms - decreases changes of them being effective

Theme 3 - Business Behaviour and the Labour Market Flashcards

(451 cards)