Theme 3 - Business Behaviour and the Labour Market Flashcards
(155 cards)
1
Q
Reasons some firms choose to grow
A
- Firm will be able to experience economies of scale which helps them to decrease their costs of production. They will also be able to sell more goods and therefore make more revenue. Together, these will help a firm to make a larger profit: and many firms are motivated by profit
- A larger firm will hold a greater share of their market. This will give them the ability to influence prices and restrict the ability of other firms to enter the market, helping them to make profits in the long run
- Monopoly power often means firms have monopsony power, and so will be able to reduce their costs by driving down the prices of their raw materials
2
Q
Reasons some firms choose to stay small
A
- Avoiding Diseconomies of Scale
- Owner’s Preference (profit satisficing)
- Niche Markets
3
Q
Principal agent problem
A
Where one group, the agent, makes decisions on behalf of another group, the principal. In theory, the agent should maximise the benefits for those whom they are looking after but in practice agents have the temptation to maximise their own benefits. It is for this reason that many firms are not run to profit maximise but to profit satisfice
4
Q
Separation of ownership and control
A
Firms are owned by their shareholders , who play no part in the day to day running of the business but the chief executive and senior managers work for the company and control day-to-day decision making.
5
Q
Differing aims of the two stakeholders
A
Owners will want to maximise the return on their investment so will want to short run profit maximise, whereas directors and managers are unlikely to want the same thing so as employees, they will want to maximise their own benefits
6
Q
Public sector
A
The part of the economy which is owned or controlled by local or central government. The purpose of these organisations is to provide a service for UK citizens and profit making is not their main aim, some may even make a loss which is funded for by the taxpayer
7
Q
Private sector
A
The part of the economy that is owned and run by individuals or groups of individuals, including sole traders and PLCs
8
Q
Profit organisations
A
A business that operates with the primary goal of maximising profits for its owners or shareholders. These firms produce goods or services and generate revenue that exceeds costs, with profits being distributed among owners, reinvested into the business, or both
9
Q
Not-for-profit organisations
A
A business or institution that operates to achieve social, charitable, or community-focused objectives rather than to generate profits for owners or shareholders. Any surplus revenue is reinvested into the organisation’s mission rather than distributed as profit
10
Q
Organic growth
A
Expansion of a business using its own resources, rather than through mergers or acquisitions. This growth comes from increasing sales, expanding production, or improving efficiency
11
Q
Inorganic growth
A
When a business expands through mergers, acquisitions, or takeovers rather than relying on internal resources
12
Q
Advantages of organic growth
A
- Lower risk, organic growth relies on internal resources rather than risky takeovers, reducing financial and operational uncertainty
- Better control, the business grows at a steady, manageable pace, allowing for strategic decision-making
- Maintains business culture, since expansion happens within the existing company, there are no cultural clashes like in mergers or acquisitions
13
Q
Disadvantages of organic growth
A
- Slower expansion, growing internally takes time, making it difficult to keep up with fast-moving competitors
- Limited market reach, expanding into new regions or industries can be harder without external support or acquisitions
- Competitive pressure, larger firms using inorganic growth (mergers/acquisitions) may expand faster and dominate the market
14
Q
Integration
A
Process by which businesses expand by merging with or acquiring other firms to increase market share, reduce costs, or achieve strategic advantages
15
Q
Merger
A
When two or more businesses agree to combine into a single entity, pooling their resources to enhance market position, efficiency, or profitability
16
Q
Takeover
A
When one company buys a controlling stake (more than 50%) in another company, gaining full decision-making power over it. This can be done with or without the consent of the acquired company
17
Q
Vertical integration
A
Process by which a company expands its operations into different stages of production within the same industry
18
Q
Backward vertical integration
A
When a company acquires or merges with a supplier or moves into earlier stages of the production process. This type of integration involves securing control over the sources of raw materials or key components used in the company’s production
19
Q
Forward vertical integration
A
When a company moves downstream in its supply chain by merging with or acquiring its distributors, retailers, or any business closer to the final consumer. This integration strategy allows the company to control the distribution, sale, and marketing of its own products
20
Q
Advantages of vertical integration
A
- Increased potential for profit as the firm takes the potential profit from a larger part of the chain of production
- Less risks as suppliers do not have to worry about buyers not buying their goods and buyers do not have to worry about suppliers not supplying the goods
- With backward integration, businesses can control the quality of supplies and ensure delivery is reliable . Moreover, they don’t have to worry about being charged high prices for supplies, keeping costs low and allowing lower prices for consumers
- Forward integration secures retail outlets and can restrict access to these outlets for competitors
21
Q
Disadvantages of vertical integration
A
- Firms may have no expertise in the industry they took over, for example a car manufacturing company would have deep knowledge of car manufacturing but little knowledge of selling cars and vice versa
- Potential for diseconomies of scale
- Reduced flexibility
22
Q
Horizontal integration
A
Process where a company expands its operations by acquiring or merging with other companies at the same stage of the production process within the same industry
23
Q
Advantages of horizontal integration
A
- Helps to reduce competition as a competitor is taken out and increases market share, giving firms more power to influence markets
- Firms will be able to specialise and rationalise , reducing the areas of the businesses which are duplicated
- Business is able to grow in a market where it already has expertise , which is more likely to make the merger successful
24
Q
Disadvantages of horizontal integration
A
- Will increase risk for the business as if that particular market fails, they have nothing to fall back on and will have invested a lot of money into that area
- Loss of innovation
- Risk of redundancy and job losses
25
Conglomerate integration
Process where a company acquires or merges with businesses that are in unrelated industries. Unlike horizontal or vertical integration, conglomerate integration involves diversifying into new sectors or markets, often outside the company's core area of expertise
26
Advantages of conglomerate integration
1. Useful for firms where there may be no room for growth in the present market
2. A range of products reduces the risk for firms and if a whole industry fails, they will still survive due to the other parts of the business
3. Will make it easier for each individual part of the business to expand than if they were on their own as finance can be easily obtained and managers can be transferred from company to company within the firm
27
Disadvantages of conglomerate integration
1. Firms are going into markets in which they have no expertise which can often be damaging for the business
2. Brand dilution
3. Increased complexity in management
28
Constraints of business growth
1. Size of the market
2. Access to finance
3. Owner objectives
4. Regulation
29
Demerger
Process where a company splits into two or more separate entities, each becoming an independent company
30
Reasons for demergers
1. Lack of synergies
2. Value of the company/share price
3. Focussed companies
4. Avoid attention from the competition authorities
5. Diseconomies of scale
31
Impacts of demergers on workers
Could gain or lose through a demerger. Separate firms may need their own managers and leaders so people could get a promotion. However, the goal of making the firm more efficient may result in job losses
32
Impacts of demergers on businesses
Concentrating on a smaller core business may enable it to be more efficient and concentration may lead to more innovation and surviving higher competition. However, the smaller size of the business could lead to a loss of economies of scale and reduce efficiency
33
Impacts of demergers on consumers
Consumers could gain or lose. They may gain from innovation
and efficiency, leading to better products and cheaper prices . However, demerged firms may be less efficient through loss of economies of scale or raise prices/reduce quality or range of goods as they become motivated by profits
34
Profit maximisation
Process by which a firm seeks to achieve the highest possible level of profit, typically by optimising its production and pricing strategies. In economic theory, this is achieved when a firm determines the level of output where its marginal cost (MC) equals its marginal revenue (MR)
35
Revenue maximisation
Strategy where a firm aims to achieve the highest possible revenue, regardless of whether this maximises profit. It focuses on increasing the total revenue (TR) rather than the difference between total revenue and total cost. A firm maximises revenue when it adjusts output to the level where marginal revenue (MR) equals zero
36
Sales maximisation
Strategy where a firm seeks to achieve the highest possible sales volume, often at the expense of profit maximisation. The firm may lower prices or increase output to boost the number of units sold, aiming to expand its market share or sales figures in the short term. Sales maximisation occurs when average revenue (AR) equals average cost (AC)
37
Profit satisficing
Strategy where a firm aims to achieve a satisfactory level of profit rather than maximising profit. This approach is often adopted by firms that prioritise stability and other goals over the pursuit of maximum profit. In this case, the firm accepts a "satisfactory" or "acceptable" profit level that meets its basic financial requirements, but it does not push for the highest possible profit
38
Marginal revenue
The additional revenue a firm earns from the sale of one more unit of output
39
Marginal cost
The additional cost incurred by a firm when producing one more unit of output
40
Average revenue
The revenue a firm receives per unit of output sold. It is calculated by dividing the total revenue by the quantity of output produced
41
Average cost
It represents the cost of producing each unit, on average, and is calculated by dividing the total cost by the quantity of output produced
42
Total revenue
Total amount of money coming into the business through the sale of goods and services
43
Formula for total revenue
Price * Quantity
44
Formula for average revenue
Total revenue / Output
45
Positive marginal revenue
When the firm sells the product at a lower price or when they increase output, total revenue still increases so the demand curve is elastic
46
Negative marginal revenue
Total revenue decreases as price decreases or output increases, so the demand curve is inelastic
47
Opportunity cost of production
Value that could have been generated had the resources been employed in their next best use
48
Diminishing marginal productivity
As more variable inputs (e.g., labor or raw materials) are added to a fixed factor of production (e.g., capital or land), the additional output produced by each extra unit of input will eventually decrease
49
Economies of scale
The cost advantages that a firm experiences as it increases production, leading to lower average costs (AC) per unit. These occur because fixed costs are spread over a greater output and operational efficiencies improve
50
Diseconomies of scale
When a firm's average costs increase as output expands beyond an optimal level. This happens because growth leads to inefficiencies in communication, coordination, and control
51
Types of internal economies of scale
1. Technical
2. Financial
3. Risk bearing
4. Managerial
5. Marketing
6. Purchasing
52
Technical economies of scale
When a firm reduces its average costs by investing in advanced technology, machinery, and production processes. These cost savings happen because larger firms can afford more efficient production methods than smaller firms
53
Financial economies of scale
When larger firms can borrow money at lower interest rates and access better financial resources than smaller firms. This reduces their cost of capital, making expansion and investment cheaper
54
Risk bearing economies of scale
When larger firms can spread risks across multiple products, markets, or investments, reducing their overall exposure to financial losses. This makes them more resilient compared to smaller firms that rely on fewer revenue streams
55
Managerial economies of scale
When large firms can afford to hire specialised managers, leading to greater efficiency and lower average costs. In contrast, small firms may have generalist managers who handle multiple tasks, reducing productivity
56
Marketing economies of scale
When larger firms can spread their advertising and promotional costs over a larger output, reducing the average cost per unit of marketing. They can also negotiate better deals with advertisers and benefit from stronger brand recognition
57
Purchasing economies of scale
When large firms can buy raw materials, components, or stock in bulk, allowing them to negotiate lower prices and reduce their average costs per unit. This gives them a competitive advantage over smaller firms
58
Types of external economies of scale
1. Labour
2. Support services
59
Labour as an external economies of scale
When a business benefits from being located in an area with a large, skilled workforce, reducing recruitment and training costs. This is an advantage that arises due to the growth of the industry as a whole, rather than just the individual firm
60
Support services as an external economies of scale
When firms benefit from the availability of specialised services in their area, which are tailored to the needs of their industry. These services are developed in response to the concentration of firms in a particular sector and contribute to lower operational costs
61
Types of diseconomies of scale
1. Workers
2. Geography
3. Management
62
Workers as a diseconomies of scale
The negative effects on a firm’s productivity and efficiency when the number of workers increases beyond an optimal level. This typically happens when a firm becomes too large, leading to coordination problems, reduced individual productivity, and inefficiencies in the management of labour
63
Geography as a diseconomies of scale
The negative effects on a firm's efficiency and productivity that occur when the physical distance between different parts of the firm becomes too large. As firms expand across different regions or countries, it can lead to increased costs and inefficiencies due to the geographical spread of operations
64
Management as a diseconomies of scale
The negative effects on a firm’s productivity and efficiency when a business grows too large, requiring more complex management structures. As a firm expands, the management layers and the number of managers increase, which can lead to inefficiencies, slower decision-making, and reduced control over operations
65
Normal profit
The minimum amount of profit required to keep a firm in business in the long run
66
Supernormal profit
When a firm earns more than the normal profit (which is the minimum profit required to keep the firm in business)
67
Short run shut down point
Level of output at which the firm is unable to cover its variable costs such as wages or raw materials and should therefore cease production in the short run to minimise losses (AVC=AR)
68
Long run shut down point
Point where a firm should exit the market if the price of its product is below its average total cost
69
Types of efficiency
1. Allocative
2. Productive
3. Dynamic
4. X-inefficiency
70
Allocative efficiency
When resources are used to produce goods and services which consumers want and value most highly and social welfare is
maximised. It will occur when the value to society from consumption is equal to the marginal cost of production, where P=MC
71
Productive efficiency
When products are produced at the lowest average cost so the fewest resources are used to produce each product. The minimum resources are used to produce the maximum output. This can only exist if firms produce at the bottom of the AC curve, in the short run this is where MC=AC
72
Dynamic efficiency
When all resources are allocated efficiently over time, and the rate of innovation is at the optimum level, which leads to falling long run average costs. It is related to the rate of innovation, which might lead to lower costs of production in the future, or the creation of new products
73
X-inefficiency
When a firm fails to minimise its average costs at a given level of output. It often occurs where there is a lack of competition so firms have little incentive to cut costs
74
Perfect competition
Market where there is a high degree of competition. In reality, the assumptions made rarely hold and no market is completely perfectly competitive
75
Characteristics of perfect competition
1. Many buyers and sellers
2. Homogeneous goods
3. Freedom of entry and exit from the industry
4. Perfect knowledge
76
Efficiency in perfect competition
Perfect competition is productively efficient, since they produce where MC=AC. They are also allocatively efficient since they produce where P=MC. Thus, they are static efficient. However, they are not dynamically efficient since no single firm will have enough for research and development and small firms struggle to receive finance. Also the existence of perfect information also means one firms’ invention will be adopted by another firm and so the investment will give the firm no competitive benefit
77
Monopolistic competition
Form of imperfect competition, with a downward sloping demand curve. It lies in between the two extremes of perfect competition and monopoly, both of which rarely exist in a pure form in real life
78
Characteristics of monopolistic competition
1. Large number of buyers and sellers
2. No barriers to entry or exit
3. Differentiated goods
4. Imperfect information
79
Efficiency in monopolistic competition
Since they can only make normal profit in the long run, AC=AR and since they profit maximise, MR=MC. Therefore, the firm will not be allocatively or productively efficient, as MR does not equal AR so AC cannot equal MC and AC cannot equal MR. However, they are likely to be dynamically efficient since there are differentiated products and so know that innovative products will give them an edge over their competitors and enable them to make supernormal profits in the short run
80
Oligopolistic competition
Where there are a few firms that dominate the market and have the majority of market share
81
Characteristic of oligopolistic competition
1. High barriers to entry and exit
2. High concentration ratio
3. Interdependence of firms
4. Product differentiation
82
N-firm concentration ratio
The percentage of the total market that a particular number of firms have. The higher the concentration ratio, the less competitive the market, since fewer firms are supplying the bulk of the market
83
Collusion
When firms make collective agreements that reduce competition. For example, they might choose to set a price or fix the quantity of output they produce, which minimises the competitive pressure they face
84
Overt collusion
When firms come to a formal agreement
85
Tacit collusion
When there is no formal agreement
86
Cartel
Group of firms who enter into agreement to mutually set prices. The rules will be laid out in a formal document which may be legally enforced and fines will be charged for firms who break these rules
87
Benefits of collusion
1. Industry standards could improve, because firms can collaborate on technology and improve it
2. Excess profits could be used for investment, which might improve efficiency in the long run. Alternatively, they might be used on dividends
3. By increasing their size, firms can exploit economies of scale, which will lead to lower prices.
88
Costs of collusion
1. Loss of consumer welfare, since prices are raised and output is reduced
2. Absence of competition means efficiency falls. This increases the average cost of production
3. Reinforces the monopoly power of existing firms and makes it hard for new firms to enter
4. Lower quantity supplied leads to a loss of allocative efficiency
89
Game theory
Explores the reactions of one player to changes in strategy by another player. The aim is to examine the best strategy a firm can adopt for each assumption about its rival’s behaviour and it provides insight into interdependent decision making that occurs in competitive markets
90
Prisoner’s Dilemma
Model based around two prisoners, who have the choice to either confess or deny a crime. The consequence of their choice depends on what the other prisoner chooses
91
Types of price competition
1. Price wars
2. Predatory pricing
3. Limit pricing
92
Price wars
Firms constantly cutting their prices below that of its competitors. Their competitors then lower their prices to match. Further price cuts by one firm will lead to more and more firms cutting their prices
93
Predatory pricing
Firms setting low prices to drive out firms already in the industry. In the short run, it leads to them making losses. However as firms leave, the remaining firms raise their prices slowly to regain their revenue. They price their goods and services below their average costs
94
Limit pricing
Low prices that discourage the entry of other firms, so there are low profits. It ensures the price of a good is below that of which a new firm entering the market would be able to sustain. Potential firms are therefore unable to compete with existing firms
95
Types of non-price competition
1. Advertising
2. Loyalty cards
3. Branding
4. Quality
5. Customer service
6. Product development
96
Pure monopoly
Where one firm is the sole seller of a product in a market
97
Characteristics of a monopoly
1. Profit maximisation
2. High barriers to entry
3. 25% or more market share
98
Factors influencing monopoly power
1. Barriers to entry
2. Economies of scale
3. Sunk costs
4. Limit pricing
5. Brand loyalty
6. Degree of product differentiation
99
Third degree price discrimination
When monopolists charge different prices to different people for the same good or service, for example peak and off-peak train times or child and adult tickets
100
Benefits of third degree price discrimination
1. Consumers could benefit from a net welfare gain as a result of cross subsidisation, if they receive a lower price
2. Some consumers, who were previously excluded by high prices, might now be able to benefit from the good or service
3. Firms benefit since they are able to increase their profits. This can go into research and development, improving dynamic efficiency
101
Costs of third degree price discrimination
1. Usually, price discrimination results in a loss of consumer surplus. Since P > MC, there is a loss of allocative efficiency
2. Strengthens the monopoly power of firms, which could result in higher prices in the long run for consumers
3. Might cost the firm to divide the market, which limits the benefits they could gain
102
Benefits of a monopoly
1. Monopolies can earn significant supernormal profits, so they might invest more in research and development. This can yield positive externalities, and make the monopoly more dynamically efficient in the long run. There could be more invention and innovation as a result
2. If there is a natural monopoly, it might be more efficient for only one firm to provide the good or service, since having duplicates of the same infrastructure might be wasteful
3. Monopolies could generate export revenue
4. Since monopolies are large, they can exploit economies of scale, so they have lower average costs of production
5. High profits could be a source of government revenue through taxation
103
Costs of a monopoly
1. Basic model of monopoly suggests that higher prices, profits and inefficiency may result in a misallocation of resources compared to the outcome in a competitive market
2. Monopolies could exploit the consumer by charging them higher prices. This means the good is under-consumed, so consumer needs and wants are not fully met. This loss of allocative efficiency is a form of market failure
3. Monopolies have no incentive to become more efficient, because they have few or no competitors, so production costs are high
4. Consumers do not get as much choice in a monopoly as they do in a competitive market
104
Natural monopoly
Where a single firm can supply the entire market's demand for a good or service at a lower cost than multiple firms could. This typically happens in industries with high fixed costs and significant economies of scale, making it inefficient for multiple firms to compete
105
Monopsony
When there is only one buyer in the market
106
Benefits of a monopsony
1. Monopsony gains higher profits by being able to buy at lower prices. This increases the funding for research and development and leads to more return for shareholders
2. Achieve purchasing economies of scale, which will lower costs and increase profits
3. Customers may gain from lower prices as reduced costs are passed on
107
Costs of a monopsony
1. Could lead to a fall in supply, since the business buys fewer inputs. The extent to which supply to customers will fall will depend on the price elasticity of supply
2. May be a fall in quality as prices are driven down
3. Employees are likely to lose out with lower wages
4. Workers might become unproductive if wages are low
5. Suppliers will sell less goods and so employ less people
6. Suppliers will lose out as they will receive lower prices ; less will be supplied leading to some firms leaving the market
108
Contestable market
Market with a high threat of new entrants, which keeps firms producing at a competitive level. Even in a monopoly, a firm may be forced to be efficient due to the potential of new entrants to the market. Any attempt to make a huge profit will mean other businesses will be attracted to the industry
109
Characteristics of contestable markets:
1. Perfect knowledge
2. Freedom of entry and exit
3. Low product loyalty
4. Assume firms are short run profit maximisers
5. Assume firms do not collude with each other
110
Types of barrier to entry and exit
1. Legal barriers
2. Marketing barriers
3. Pricing decisions of incumbent firms
4. Sunk costs
5. Economies of scale
111
Legal barriers
Laws that are put in place which make it more difficult for firms to enter the market, or explicitly mean they cannot enter
112
Marketing barriers
High levels of advertising that build up consumer loyalty, so demand becomes more price inelastic, and consumers are less likely to try other brands
113
Sunk cost
A fixed cost that a business cannot recover if it leaves the
industry. It includes property (if the lease is longer than it is actually used for), machinery and equipment that cannot be resold, and advertising
114
Degree of contestability
The extent to which the gains from market entry for a firm exceed the costs of entering the market
115
Demand for labour
Quantity of labour that employers would wish to hire at each possible wage rate
116
Derived demand
Demand for a factor of production or a resource that occurs as a result of the demand for the final goods or services that the resource helps to produce
117
Factors influencing the demand for labour
1. Wage rates
2. Demand for the product
3. Prices of other factors of production
4. Wages in other countries
5. Technology
6. Regulation
118
Factors affecting Price Elasticity of Demand for labour
1. Price elasticity of demand for the product, if the good is elastic then a rise in wages and hence a rise in prices for consumers will have a large impact on the quantity the business sells
2. Proportion of wages to the total cost of production
3. Amount of substitutes, such as machinery and labour in other countries
4. Time, in the long run, it is more elastic as machinery can be developed and jobs can be moved whilst in the short run firms have to employ workers and redundancy payments can be expensive
119
Supply of labour
Ability and willingness of people to make themselves available to work at different wage rates
120
Factors influencing supply of labour
1. Wages
2. Population and distribution of age
3. Non-monetary benefits
4. Education, training and qualifications
5. Trade unions and barriers to entry
6. Wages and conditions of other jobs
7. Legislation
121
Occupational immobility
Difficulty or inability of workers to move between different types of jobs or industries due to a lack of necessary skills, qualifications, or experience. This can occur for various reasons, such as limited education, training, or specific industry experience, preventing individuals from transitioning to different types of work or sectors
122
Geographical immobility
Difficulty or inability of workers to move from one location to another in search of employment opportunities. This can occur due to personal, economic, or social reasons that prevent individuals from relocating to areas where jobs are available
123
Wage differentials
Variations in wages or salaries that exist between different workers, jobs, industries, regions, or countries. These differences are often due to various factors such as skills, experience, education, occupation, and location, as well as supply and demand for labour in different markets
124
Bilateral monopoly
Market situation in which there is only one seller (monopoly) and one buyer (monopsony) of a particular good or service
125
Labour market issues
1. Skills shortages
2. Young workers
3. Retirement
4. Wage inequality
5. Zero-hour contracts
6. Migration
126
National minimum wage
Legally mandated minimum hourly wage rate that employers must pay their workers. It is set by the government to ensure that workers are compensated fairly for their labour and to prevent exploitation by employers who might otherwise offer wages that are too low for workers to meet basic living standards
127
Arguments for the national minimum wage
1. Able to reduce poverty as it mainly impacts the lowest wages and ensures that these people have enough to live on
2. Can reduce male/female wage differentials as women are more likely to take up lower paid jobs (because they are vocational, offer more flexible hours etc.) and so a minimum wage is able to decrease the gaps between men and women
3. May make employees less likely to leave their job as they feel more loyal to the businesses, which will decrease labour turnover, and therefore recruitment and training costs
4. Can create a more content workforce who will be more motivated, thus making the business more productive and increasing its profits
5. Provides an incentive to work and prevents the ‘unemployment trap’, when benefits are higher than the wage people would otherwise receive
128
Arguments against the national minimum wage
1. Potential loss of jobs in the industry
2. Will raise costs for the companies and so may increase their prices, which is liking to lead to a fall in profit
3. Wage spiral as individuals will try to protect wage differentials between them and the lowest price workers. An increase in the wage of the lowest paid will mean that others expect theirs to rise too. This will reduce profit and further reduce competitiveness
129
Maximum wage
Legal limit on the amount of income an individual can earn, which is set by the government. The idea is to prevent excessive income inequality by capping the wages of the highest-paid individuals in a society, often to address concerns about social justice and fairness
130
Potential strategies the government can use to improve geographical mobility of labour
1. Improve the supply of houses and reduce the price of properties making it easier for people to move
2. Improve transport links which will allow people to work further away from where they live and if they do move, it will be easier for them to visit family and get to job interviews
3. Introduce subsidies on houses, taxes etc. in areas where there are labour shortages to encourage people to move to the area and take up jobs
131
Potential strategies the government can use to improve occupational mobility of labour
1. Vocational training can be increased, particularly for younger students
2. Encourage further study, such as university or technical courses at college
3. Encourage greater spending on training within work
4. Education could be targeted at improving skills shortages and helping with job applications, for example interview skills
5. Investment in education to help to make the workforce more employable and better at a wider range of jobs
132
Competition and Markets Authority (CMA)
Works to promote competition for the benefit of consumers and investigate mergers and breaches of UK and EU competition law, enforce consumer protection law and bring criminal cases against individuals who participate in cartels. They are able to impose financial penalties, prevent mergers taking place and force businesses to reverse actions already taken
133
Competition and Markets Authority controlling mergers
1. A merger is investigated if it will result in market share greater than 25% or if it meets the turnover test of a combined turnover of £70 million or more
2. Aim of preventing two large companies merging is so they do not exploit their customers by raising prices, offering poorer quality services and reducing choice
3. Problem is that very few mergers are investigated each year. The CMA can suffer from regulatory capture and may not have all the information necessary to make a decision
134
Types of government intervention to control monopolies
1. Price regulation
2. Profit regulation
3. Quality standards
4. Performance targets
135
Competition and Markets Authority using price regulation to control monopolies
Regulators can set price controls to force monopolists to charge a price below profit maximising price, using the RPI-X formula. Gives an incentive for firms to be as efficient as possible as if they can lower costs by more than X they will enjoy increased profit. It prevents excessive prices and ensures that gains are passed onto the consumer, but difficult to know where to set X due to rapid technology improvements and asymmetric information
136
RPI-X
Form of price regulation used to control prices in industries with limited competition, such as utilities (e.g., water, electricity, and rail transport). It allows firms to increase their prices in line with inflation (measured by the Retail Price Index) but forces them to reduce prices by an efficiency factor (X), which represents expected efficiency improvements
137
Competition and Markets Authority using profit regulation to control monopolies
Aims to encourage investment and prevents firms from setting high prices. However, it gives firms an incentive to employ too much capital in order to increase their profits
138
Competition and Markets Authority using quality standards to control monopolies
Monopolists will only produce high quality goods if this is the best way to maximise profits. The government can introduce quality standards, which will ensure that firms do not exploit their customers by offering poor quality
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Competition and Markets Authority using performance targets to control monopolies
They could set targets over price, quality, consumer choice and costs of production. It will help firms to improve their service and lead to gains for customers. Problem is that firms will resist the introduction of targets
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Ways to promote competition and contestability
1. Promotion of small businesses
2. Deregulation
3. Competitive tendering
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Promotion of small businesses to promote competition and contestability
Government can give training and grants to new entrepreneurs and encourage small businesses through tax incentives or subsidies . This will increase competition since there will be more firms within the market, and will offer a chance for more firms to join. Will increase innovation and efficiency
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Deregulation to promote competition and contestability
Removal of legal barriers to entry to a previously protected market to allow private enterprises to compete. This will increase efficiency in the market by allowing greater competition as more firms can enter and conduct more activities than they could before. However, this can lead to poor business behaviour
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Competitive tendering to promote competition and contestability
Competition can be introduced into the market as the government will request competitive tenders by drawing up a specification for the good or service and inviting private firms to bid for the contract to deliver it. The firm offering the lowest price wins the contract, subject to quality guarantees. This helps to minimise costs for the government and ensures efficiency
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Restrictions on monopsony power to protect employees
1. Government can pass anti-monopsony laws which will make certain practices illegal and can introduce an independent regulator who will force monopsonists to buy fairly
2. Government can protect employees through health and safety laws, employment contracts, redundancy processes, maximum hours at work and the right to be in a trade union.
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Restrictions on monopsony power to protect suppliers
Fines can be put in place for those who exploit their power and minimum prices may be introduced to ensure suppliers are paid a fair amount. Self-regulation can also be used, but this is weak
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Privatisation
Sale of government equity in nationalised industries or other firms to private investors. The aim is to revitalise inefficient industries but can sometimes lead to higher prices and poor services
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Nationalisation
When a private sector company or industry is brought under state control, to be owned and managed by the government
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Advantages of privatisation
1. Encourages greater competition, which reduces X-inefficiency and ensures low prices and high quality as firms realise they need to be competitive
2. Reduces government interference which means that firms can invest with greater certainty instead of worrying about change when a government is elected every 5 years
3. Puts utilities into the hands of the people , since they can own shares. Workers will be more motivated as they know their hard-work will be rewarded by high dividends
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Disadvantages of privatisation
1. Natural monopolies could abuse their monopoly position
2. Problems over externalities and inequality
3. Argued that industries such as electricity, water and transport are important because they directly affect the success of other industries, and so therefore it makes more sense for the government to own them in order to coordinate them properly
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Advantages of nationalisation
1. Better for a monopoly to be run by the state as they aim to maximise social welfare rather than a private business who will maximise profits
2. Government will consider externalities
3. Government will guarantee a minimum level of service for people who suffer the risk of being cut off from the service, due to the lack of potential profit from providing for them
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Disadvantages of nationalisation
1. Nationalised industries suffer from the principal-agent problem and moral hazard, as managers know that any loss they make will be covered by the government
2. Will experience X-inefficiency and this could cause higher prices for consumers, especially since the industry will become a monopoly
3. Will be influenced by government’s decisions and the government may not have enough money to invest
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Impacts of government intervention
1. Can prevent monopolies charging excessive prices and aim to limit their profit. They try to ensure that consumers pay fair prices, receive a good quality service and have a lot of choice but high regulation may force some firms out of the industry, which would reduce choice
2. Can increase efficiency in a market by increasing competition and contestability. However, if the government regulates too strongly, they can push costs up and led to inefficiency
3. A public sector business is likely to be allocatively efficient, as they aim to maximise social welfare. They will see lower costs due to economies of scale. However, the government may suffer from X-inefficiency as they have no incentive to be efficient due to the lack of competition
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Limits of government intervention
1. Regulatory capture
2. Asymmetric information
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Regulatory capture as a limit of government intervention
Large corporations can invest huge amounts in learning how to play the system and in gaining the support of their regulator. It also is likely that the regulator will have worked in the sector for many years, as these people will have experience and knowledge of the industry. As a result, they will have personal connections with those that they are regulating and this makes it difficult for them to be unbiased
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Asymmetric information as a limit of government intervention
Government failure may occur if regulation such as RPI-X or quality standards are not set correctly. The government will be unable to regulate the companies accurately
