Theme 3 (Micro) Flashcards
(262 cards)
1
Q
5 reasons why firms might wish to grow
3.1.1
Size and Types of firms
A
- Profits – to generate more profits to give shareholders a better return (dividends and share price).
- Costs – to benefit from economies of scale, resulting in lower unit costs of production.
- Market power – to become a more dominant force in their market; if a firm dominates the market it can increase its prices.
- Reducing risk – firms might want to diversify so that if sales drop in one market they have another market to generate sales.
- Managerial motives – senior managers may wish to grow in order to control a larger business
2
Q
Why might a firm choose to stay small
3.1.1
Size and Types of firms
A
Lack of finance for expansion
Avoiding diseconomies of scale
Providing niche products which have a low PED or high YED
Offering a more personal service as they get to know customers and their needs
3
Q
When does the divorce between control and ownership occur
3.1.1
Size and Types of firms
A
The principal agent problem.
4
Q
What is the principal agent problem
3.1.1
Size and Type of firms
A
Where there is asymmetric information between the owner and manager. Managers may have different motives such as sales max. Therefore, the firm may grow larger than the profit max quantity, harming shareholder returns.
5
Q
What is the difference between public sector and private sector organisations?
3.1.1
Size and Type of firms
A
Public sector= employed by the government eg doctors, police, teachers
Private sector= private enterprises eg retail, manufacturing
6
Q
Difference between for profit and not for profit organisations
3.1.1
Size and Types of firms
A
Generally, for-profit companies seek to provide a product or service to consumers and make a profit by doing so. A nonprofit organization’s purpose is to provide a service or benefit to the community with no intention of earning a profit
7
Q
Difference between organic and inorganic growth?
3.1.2
Business Growth
A
Organic Growth is where a business grows from within eg increasing it’s product range
Inorganic is growth from outside the business ie a merger
8
Q
Advantages of organic growth
3.1.2
Business Growth
A
Less expensive
Mergers and takeovers can be extremely expensive in contrast to organic growth.
This is because the M&A often expects a premium price to be paid for the business as they are aware of the financial benefits you’ll be receiving.
Less risky – The majority of mergers and takeovers end up failing.
Organic growth allows for more control and can happen at a slower pace, planning the change in produce, promotion or place
9
Q
Disadvantages of organic growth
3.1.2
Business Growth
A
Organic growth is often slow which can reduce the business’s ability to react to its competitors.
This may result in the business losing market share as other competitors grow inorganically at a faster rate
There can also be a long period of time between the original investment and the return from it.
R&D can take years before a product is ready to take to market. This can cause cash flow problems.
10
Q
What is vertical integration
3.1.2
Business Growth
A
When you acquire a business on a different level of the supply chain (can be forwards or backwards)
11
Q
What is forward integration?
3.1.2
Business Growth
A
When you acquire a business further up the supply chain eg Ebay bought PayPal
12
Q
What is backwards integration?
3.1.2
Business Growth
A
When you acquire another firm behind you on the supply chain eg Ikea buying a forest
13
Q
Advantages of vertical integration
3.1.2
Business Growth
A
Can increase your market share, acting as a barrier to entry (generic)
Can increase the quality of output eg Netflix acquiring rights for Roald Dahl films
14
Q
Disadvantages of vertical integration
3.1.2
Business Growth
A
Culture conflict and problems with communication and coordination.
This can lead to diseconomies of scale.
If staff leave this was part of the asset that you’ve bought.
Also Vertical mergers will have fewer economies of scale because production is at different stages of supply.
Yet a hostile takeover might expect a premium price to be paid
15
Q
What is horizontal integration?
3.1.2
Business Growth
A
When a firm acquires another firm on the same level of the supply chain ie a rival.
16
Q
Advantages of horizontal integration
3.1.2
Business Growth
A
Growth
Economies of scale/synergy
Less competition
Higher SNP
CMA – concerned about choice and higher prices from a monopoly market structure that could result
17
Q
Disadvantages of vertcal integration
3.1.2
Business Growth
A
Diseconomies of scale/inefficiency
Cultural conflict & asymmetric information
Possibly pay a premium for the company
18
Q
What is conglomeration?
3.1.2
Business Growth
A
Where separate and diverse firms merge together to form a large corporation
19
Q
Advantages of conglomeration
3.1.2
Business Growth
A
Risk bearing economies of scale as if one market fails, better performing businesses can compensate for the losses.
Larger customer base= shift AR outwards
Increased efficiency linked to managerial economies of scale.
20
Q
Disadvantages of conglomeration
3.1.2
Business Growth
A
Diversification can shift focus and resources away from core operations, contributing to poor performance.
Poor culture can be linked to dis-economies of scale as it can harm productivity if staff are demotivated and unsure of what to do (norms and values)
21
Q
4 factors which constrain growth of a firm which wants to grow
3.1.2
Business Growth
A
- Regulation ie CMA
- Size of the market ie demand reaching its peak
- Access to finance
- Owners objectives ie satisficing
22
Q
What is a demerger?
3.1.3
Demergers
A
Where a firm splits of into 2 smaller firms eg Ebay and Paypal
23
Q
reasons for demergers
3.1.3
Demergers
A
- Raising money from asset sales and retrun to shareholders
- Create more focused firms
- May be forced to by CMA
- Cultural differences which may cause diseconomies of scale
24
Q
3 impacts of demergers to the business
3.1.3
Demergers
A
Focus on the core business,
Raising funds from selling part of the business,
Removing loss-making parts of the business
25
3 impacts of demergers to workers
| 3.1.3
## Footnote
Demergers
Increased job security if loss-making parts of the business are demerged
Reduced conflict between cultures
Increased focus on the business to enable workers to become more productive
26
2 impacts of demergers to customers
| 3.1.3
## Footnote
Demergers
Greater competition & efficiency improvements lead to lower prices
More focused businesses are able to better meet consumer needs
27
Why might a firm wish to profit maximise?
| 3,2
## Footnote
Business Objectives
1 – Reward for shareholders
Profits determine dividends
Profits influence D for shares and the share price
Create both income and wealth for shareholders
2 – Profit (internal source of finance)
Re-I into growth
Act as a barrier to entry (Eco of scale)
Reduce contestability (I into Tech)
Support higher profits in the future
28
Why might firms not want to profit maximise?
| 3.2
## Footnote
Business Objectives
Hard/ impossible to identify MC=MR
Rapid price changes may affect a firm's position in the market. Therefore, they will keep the same price, harming profits in short term but making long term gains.
29
What is the formula for profit maximisation
| 3.2
## Footnote
Business objectives
MC=MR
30
Illustrate profit max on a diagram
| 3.2
## Footnote
Business Objectives
31
Why might a firm wish to revenue max?
| 3.2
## Footnote
Business Objectives
If a firm is able to cut prices and gain more customers, it will gain bigger exposure and brand loyalty.
32
What is the formula for revenue max?
| 3.2
## Footnote
Business Objectives
MR=0
33
Illustrate revenue max on a diagram
| 3,2
## Footnote
Business objectives
34
Why might firms wish to sales max
| 3.2
## Footnote
Business Objectives
Sell excess stock
Increase sales of complementary goods
External reasons eg generate better atmoshpere in stadium.
35
What is the formula for sales max
| 3.2
## Footnote
Business Objetives
AR=AC
36
Illustrate sales max on a diagram
| 3,2
## Footnote
Business Objectives
37
What is satisficing?
| 3.2
## Footnote
Business Objectives
Linked to the principal agent problem.
It means a business is making enough profit to keep shareholders happy or it's sufficient for investors to maintain confidence in the management they appoint but not profit maximising.
38
What is revenue?
| 3.3
## Footnote
Revenue
total money generated from sales
39
How is revenue calculated
| 3.3.1
## Footnote
Revenue
Selling price X quantity sold
40
Draw a typical TR curve
| 3.3.1
## Footnote
Revenue
41
What is the relationship between price and total revenue when PED is elastic?
| 3.3.1
## Footnote
Revenue
As price increases, revenue decreases as demand falls less than proportionately
42
Relationship between price and revenue when PED is inelastic
| 3.3.1
## Footnote
Revenue
As price increases, revenue increases as demand falls less than proportionately.
43
What is average revenue?
| 3.3.1
## Footnote
Revenue
How much money is generated from each sale ie the selling price
44
How is average revenue calculated
| 3.3.1
## Footnote
Revenue
Total revenue divided by quantity
45
Why is average revenue equal to price?
| 3.3.1
## Footnote
Revenue
since price is charged the same for all units
46
Draw a typical AR curve
Same as demand curve
47
What is marginal revenue?
| 3.3.1
## Footnote
Revenue
The change in total revenue from each additional unit
48
Draw a typical MR curve
| 3.3.1
## Footnote
Revenue
48
How is marginal revenue calculated?
| 3.3.1
## Footnote
Revenue
change in revenue divided by change in quantity
49
What is the economic definition of the short run?
| 3.3.1
## Footnote
Production
At least one FOP is fixed
50
Draw a total product curve
| 3.3.1
## Footnote
Production
51
Draw a marginal product curve
| 3.3.1
## Footnote
Production
52
What is the law of diminishing marginal productivity?
Where employing more staff past a certain amount will lead to a reduction in productivity
53
Why does diminishing marginal productivity only happen in the short run
| 3.3.1
## Footnote
Productivity
Because in the long run all factors of production are variable.
54
What is the difference between accounting costs and economic costs?
| 3.3.2
## Footnote
Costs
Accounting costs only take the explicit costs into account ie the actual figure.
Economic cost includes the opportunity cost.
55
Difference between fixed and variable costs
| 3.3.2
## Footnote
Costs
Fixed costs do not change depending on the level of output eg rent.
Variable costs change depending on level of output eg raw materials.
56
What is total cost?
| 3.3.2
## Footnote
Costs
Fixed + variable costs
57
Draw a typical total cost curve
| 3.3.2
## Footnote
Costs
58
How is total variable cost claculated
variable cost per unit x quantity
59
Draw a total variable cost curve
| 3.3.2
## Footnote
Costs
60
How is average (total) cost calculated
| 3.3.2
## Footnote
Costs
Total cost divided by quantity
61
Draw a typical average cost curve
| 3.3.2
## Footnote
Costs
62
How is average fixed cost claculated?
| 3.3.2
## Footnote
Costs
Total fixed cost divided by quantity
63
Draw a typical average fixed cost curve
| 3.3.2
## Footnote
Costs
64
How is average variable cost calculated?
| 3.3.2
## Footnote
Costs
Total variable cost divided by quantity
65
Draw an average variable cost curve
| 3.3.2
## Footnote
Costs
66
Why are short run costs different from long run costs?
| 3.3.2
## Footnote
Costs
In the S/R due to the law of diminishing returns the SRAC will increase at lower levels of output.
In the L/R all FOP are variable so the law of diminishing returns would not set it.
This means the business can continue to benefit from economies of scale i.e. a fall in average cost as output increases.
The S/R cost curves can make up the LRAC as it reflects the increase the in the previous fixed FOP.
SRAC1 inside a factory, SRAC2 factory after expansion to elevate the problem of a lack of K meaning the division of labour can continue.
67
Illustrate relationship between short run AC and LRAC
| 3.3.2
## Footnote
Costs
68
What is an economy of scale
| 3.3.3
## Footnote
Economies of scale
Increased output = lower average unit cost
69
What is diseconomies of scale?
| 3.3.3
## Footnote
Economies of scale
Increased output = increased avg unit cost
70
Explain whether economies of scale are a short run or long run concept
| 3.3.3
## Footnote
Economies of scale
Long run concept:
The increase in costs are when all FOP are variable.
Therefore not linked to the law of diminishing returns = S/R concept
71
Explain the 6 types of economies of scale
| 3.3.3
## Footnote
Economies of scale
Purchasing- Ordering stock in large amounts allows the firm to negotiate a bigger discount = lower average cost
Marketing- A larger firm can use mass marketing campaigns on TV/radio which reach a wider audience. The cost is then spread over a larger product portfolio which makes the unit cost fall.
Financial- Bigger firms are considered to have less risk of failing. Therefore when borrowing large sums of money can obtain lower interest rates which reduces the average cost of a loan.
Technological/capital- Higher output allows for flow production and greater use of automation. This will be more productive/efficient which helps reduce average cost.
Logistical- Transporting more goods at once lowers the average cost
Managerial- Smaller firms are often unable to afford managers with specialist expertise (e.g. in finance, HR, marketing). As a firm grows it is better able to bring in specialist managerial expertise which should enable it to be more efficiently run.
72
Give an example of each of the 6 economies of scale
| 3.3.3
## Footnote
Economies of scale
Purchasing- Starbucks use 8 mill cups a day
Marketing- Superbowl ad =$5.5 mill
Financial- Tottenham stadium = £850 mill
Tech- Flow production eg coke bottles
Logistical- doubling people in taxi doesn't double price
Managerial- eg Richard Branson/ Pep Guardiola
73
What is minimum efficient scale?
| 3.3.3
## Footnote
Economies of scale
Minimum point of output necessary to reach the lowest possible average cost.
74
Illustrate eco of scale, diseco of scale, constant returns to scale and minimum efficient scale
| 3.3.3
## Footnote
Economies of scale
75
Difference between internal and external eco of scale
| 3.3.3
## Footnote
Economies of scale
Internal- arise from the increased output of the business itself.
External- arise from growth of the whole market ie all competitors benefit.
76
What is normal profit?
| 3.3.4
## Footnote
Profit
Where average rev = avg costs
Is not the same as break even as profits are included as a cost eg dividends/ salaries
77
What is supernormal profit?
| 3.3.4
## Footnote
Profit
where avg rev > avg costs
78
why might a firm continue to operate in s/r when making a loss?
| 3.3.4
## Footnote
Profit
Because average revenue is greater than average variable costs therefore each additional unit sold will reduce the loss and can be used for covering fixed costs.
However will shut down in long term as average total costs > average revenue
79
Where does the short run shut down point occur?
| 3.3.4
## Footnote
Profit
Where average variable costs are equal or greater than average rev
80
Where does the long run shut down point occur?
| 3.3.4
## Footnote
Profit
Where average total costs > average rev
81
What is allocative efficiency?
| 3.4.1
## Footnote
Efficiency
Occurs when ther is an optimal distribution of g/s, taking into account consumer's preferences.
82
What does allocative efficiency maximise?
| 3.4.1
## Footnote
Efficiency
Total welfare of consumers and producers ie occurs at equilibrium.
83
Wher is allocative efficiency achieved? (Year 12 version and year 13 version)
| 3.4.1
## Footnote
Efficiency
Year 12 = when market is in equilibrium
Year 13 = where price is equal to marginal revenue
84
Show allocative efficiency on a demand and supply diagram
| 3.4.1
## Footnote
Efficiency
85
Show allocative efficiency on a theory of the firm diagram
| 3.4.1
## Footnote
Efficiency
86
Is allocative efficiency a static concept?
| 3.4.1
## Footnote
Efficiency
allocative efficiency is itself a static concept and its function is to allocate resources at a point in time, the manner and method by which those resources are allocated over time changes as the modes of production and the methods of distribution change
87
What is productive efficiency?
| 3.4.1
## Footnote
Efficiency
Productive efficiency is concerned with producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost.
88
When is productive efficiency achieved?
| 3.4.1
## Footnote
Efficiency
Year 12 = when you operate on a PPF curve
Year 13 = when marginal costs are equal to average costs
89
Show productive efficiency on a PPF curve
| 3.4.1
## Footnote
Efficiency
90
Show productive efficiency on a theory of the firm diagram
| 3.4.1
## Footnote
Efficiency
91
Why might productive efficiency differ in the short and long run?
| 3.4.1
## Footnote
Efficiency
Formula MC=AC
Firm can operate in the S/R where MC>AC = illustrate diseconomies of scale
In L/R profit act beacon which would increase firms into the market as there are no barriers to entry
92
What is dynamic efficiency?
| 3.4.1
## Footnote
Efficiency
Where SNP is re-invested into R&D
93
what is innovation?
| 3.4.1
## Footnote
Efficiency
new technology and productive techniques can increase the productive potential of firms.
94
What is x-inefficiency?
| 3.4.1
## Footnote
Efficiency
X Inefficiency occurs when a firm lacks the incentive to control costs.
This causes the average cost of production to be higher than necessary.
95
Show x-inefficiency on an AC diagram
| 3.4.1
## Footnote
Efficiency
96
What market structure is most likely to display x-inefficiency?
Monopoly
97
What are the 5 market structures?
| 3.4.2
## Footnote
Market structures
Monopoly
Perfect competition
Monopolistic
Oligopoly
Monopsony
98
What is a barrier to entry/ exit?
| 3.4.2
## Footnote
Market structures
Something that prevents a firm from joining/ leaving the market
99
Name 8 barriers to entry/ exit?
| 3.4.2
## Footnote
Market structures
Eco of scale
Brand loyalty
Geographical factors
Limit pricing
Predatory pricing
Vertical Integration
Legal patents
Knowledge/ expertise
100
What is interdependance?
Where the actions of one firm impact another
101
What is homogenity?
| 3.4.2
## Footnote
Market structures
Where the same goods are sold
102
How is concentration ratio calculated?
| 3.4.2
## Footnote
Market structures
Market share of the top x amount of firms divided by whole market
103
Criticisms of concentration ratio to define a market
The concentration ratio tends not to be affected by mergers among the top market incumbents. If there exists a merger between the largest and second-largest companies, their combined pricing power is most likely to be larger than that of the two pre-existing companies, which the concentration ratio will not accurately represent
Also, market share doesn't necessarily = market power.
104
What are the 4 characteristics of perfect competition
| 3.4.2
## Footnote
Perfect competition
Many buyers and sellers
None of whom is large enough to influence price
No barriers to entry and exit from the industry
Buyers and sellers possess perfect knowledge of prices
Products are homogenous
105
Draw an industry demand curve for perfect competition
| 3.4.2
## Footnote
Perfect competition
106
Draw a firm demand curve for perfect competition
| 3.4.2
## Footnote
Perfect competition
107
Why does D=AR=MR in perfect competition?
| 3.4.2
## Footnote
Perfect competition
PED is perfectly elastic meaning;
Firm is a price taker from the market
If price was increased by 0.0001% then demand would fall by 100%
This is due to the product being homogenous and perfect knowledge
This is why the firm is to small to influence price
108
Why is perfect comp PED perfectly elastic
Firms sell homogenous goods at the same price (lowest possible)
Therefore, they if they increase price, demand falls to 0 due the same goods and consumers having perfect knowledge
109
Illustrate a perfectly competitive firm making normal profit
| 3.4.2
## Footnote
Perfect competition
110
Illustrate a perfectly competitive firm making a short run loss
| 3.4.2
## Footnote
Perfect competition
111
Illustrate a perfectly competitive firm making short run abnormal profit
| 3.4.2
## Footnote
Perfect competition
112
Why can't perfectly competitive firms maintain supernormal profit in the short run?
If SNP caused by increased D in the industry, the SNP act as a beacon to other firms meaning new firms enter market due to no barriers to entry
Because firms have perfect knowledge so can copy the production methods etc which allowed SNP
113
Does perfect competition result in allocative efficiency?
Yes
114
Does perfect competition result in productive efficiency?
Yes
115
Does perfect competition result in dynamic efficiency?
| 3.4.2
## Footnote
Perfect competition
No as no SNP is earned
116
Does perfect competition result in x ineffiency
No
117
2 example Industries close to perfectly competitive
| 3.4.2
## Footnote
Perfect competition
Foreign exchange market
Crop farming
118
Characteristics of monopolistic competition
| 3.4.3
## Footnote
Monopolistic
There are a large number of small firms
Low barriers to entry and exit
Firms produce similar but differentiated products
119
Draw an industry demand curve for perfect competition
| 3.4.3
## Footnote
Monopolistic
120
Draw an industry demand curve for perfect competition
| 3.4.3
## Footnote
Monopolistic
121
Draw an industry demand curve for perfect competition
| 3.4.3
## Footnote
Monopolistic
122
Draw an industry demand curve for perfect competition
| 3.4.3
## Footnote
Monopolistic
123
Why does MR
Because the price remains constant over varying levels of output
124
To what extent do monopolistically competitive firms have control over the price?
| 3.4.3
## Footnote
Monopolistic
They have some control as products are differentiated
125
Why is a monopolistically competitive firm’s AR curve downward sloping?
| 3.4.3
## Footnote
Monopolistic
A firm competing in a monopolistically competitive market sells a differentiated product. Therefore, unlike a firm in a per- fectly competitive market, it faces a downward-sloping demand curve. When a monopolistically competitive firm cuts the price of its product, it sells more units but must accept a lower price on the units it could have sold at the higher price. As a result, its marginal revenue curve is downward sloping. Every firm that has the ability to affect the price of the good or service it sells will have a marginal revenue curve that is below its demand curve
126
Illustrate a monopolistic firm making normal profit
| 3.4.3
## Footnote
Monopolistic
127
Illustrate a monopolistic firm making SNP in short run
| 3.4.3
## Footnote
Monopolistic
128
Illustrate a monopolistic firm making a short run loss
| 3.4.3
## Footnote
Monopolistic
129
Why are monopolistic firms unlikely to maintain short term SNP?
| 3.4.3
## Footnote
Monopolistic
SNP act as a beacon to other firms= enter due to low barriers to entry= increased substitutes = less demand = AR contratcs back to AC =make normal profit again
130
Explain why a firm may operate at excess capacity in the short run
| 3.4.3
## Footnote
Monopolistic
It can happen when there is a market recession or increased competition, where demand declines and firms are forced to reduce capacity to decrease costs
131
Does monopolistic competition result in allocative efficiency
| 3.4.3
## Footnote
Monopolistic
No as price is > MC
132
Does monopolistic competition result in productive efficiency?
| 3.4.3
## Footnote
Monopolistic
No
133
Does monopolistic competition result in dynamic efficiency?
| 3.4.3
## Footnote
Monopolistic
No as they operate at normal profit in the long run
134
Does monopolistic competition result in x-inefficiency?
| 3.4.3
## Footnote
Monopolistic
No
135
Adv of monopolistic comp
| 3.4.3
## Footnote
Monopolistic
The main advantages of monopolistic competition are: (1) it encourages firms to be innovative and to offer new and improved products; (2) it provides consumers with a greater choice of products; and (3) it typically leads to lower prices than either monopoly or perfect competition.
136
Disadv of monopolistic comp
| 3.4.3
## Footnote
Monopolistic
Excess resource waste
Not efficient
Focus on advertising rather than product quality
137
2 examples of monopolistic industry
| 3.4.3
## Footnote
Monopolistic
Hairdresser/ Barbers
Bakery
138
Characteristics of Oligopoly
| 3.4.4
## Footnote
Oligopoly
High barriers to entry/exit
High concentration ratio
Interdependance
Products are Differentiated
139
How can an oligopoly be identified
| 3.4.4
## Footnote
Oligopoly
When there are multiple firms with high market share eg supermarkets
140
Explain why oligopolies are often formed through mergers
| 3.4.4
## Footnote
Oligopoly
Mergers allow greater economies of scale by increasing their market share
141
What is collusion?
| 3.4.4
## Footnote
Oligopoly
Where two rival firms work together to keep prices high
142
What is the difference between overt and tacit collusion?
| 3.4.4
## Footnote
Oligopoly
Overt has a formal agreement between the 2 firms whereas tacit means there is no formal agreement but firms undertake actions to keep prices high
143
What is price leadership?
| 3.4.4
## Footnote
Oligopoly
Where other firms follow the pricing strategy of one dominant firm
144
What is a cartel
| 3.4.4
## Footnote
Oligopoly
Where multiple firms act as one monopoly power by controlling price or quantity eg OPEC
145
Draw a sample two firm, two outcome model to show possible outcomes when firms decide whether to a)
raise price or lower price b) compete or collude?
| 3.4.4
## Footnote
Oligopoly
146
Explain 3 forms of price competition
| 3.4.4
## Footnote
Oligopoly
1. Price rigidity- prices remain stable to prevent a price war
2. Price leadership
3. Predatory/limit pricing
147
Why might firms want to engage in non-price competition?
| 3.4.4
## Footnote
Oligopoly
To allow them to keep prices high and therefore prevent a price war due to interdependance
148
4 forms of non price competition
| 3.4.4
## Footnote
Oligopoly
Customer service
Free/faster delivery
Extended warranties
Credit facilities
Longer opening hours
149
Does oligopoly result in allocative efficiency
| 3.4.4
## Footnote
Oligopoly
No
150
Do oligopolies result in productive efficiency
| 3.4.4
## Footnote
Oligopoly
no
151
Do oligopolies result in dynamic efficiency
| 3.4.4
## Footnote
oligopoly
Yes
152
Do oligopolies result in x-inefficiency?
| 3.4.4
## Footnote
Oligopoly
153
Advantages of an oligopoly
| 3.4.4
## Footnote
Oligopoly
Dynamic efficiency= increased quality
Non price competition = increased customer satisfaction (increased quality)
154
Disadv of oligopoly
| 3.4.4
## Footnote
Oligopoly
Productively and allocatively inefficient
Price rigidity = harm consumer welfare
155
2 example industries of oligopoly
| 3.4.4
## Footnote
Oligopoly
Supermarket
Cars
156
What are the characteristics of a monopoly?
| 3.4.5
## Footnote
Monopoly
Only 1 firm
High barriers to entry
Short run profit maximiser
157
Why is the price curve for a monopolist downwards sloping?
| 3.4.5
## Footnote
Monopoly
Because they are a price maker
158
Why is AR not equal to MR for a monopolist?
| 3.4.5
## Footnote
Monopoly
Because the price remains constant over varying levels of output
159
Illustrate a monopolist making normal profit
| 3.4.5
## Footnote
Monopoly
160
Illustrate a monopolist making a short run loss
| 3.4.5
## Footnote
Monopoly
161
Illustrate a momonopolist making super normal profit
| 3.4.5
## Footnote
Monopoly
162
Why can a monopoly maintain super normal profits?
| 3.4.5
## Footnote
Monopoly
Large market control and high barriers to entry
163
What is third degree price discrimination
| 3.4.5
## Footnote
Monopoly
Where one group of customers is charged a different price from another
164
Why would a monopoly want to use price discrimination?
| 3.4.5
## Footnote
Monopoly
Leads to higher supernormal profits
165
Illustrate third degree price discrimination
| 3.4.5
## Footnote
Monopoly
166
What are the 3 conditions necessary for price discrimination?
| 3.4.5
## Footnote
Monopoly
1.Market power to separate the market
2.Information- need to be able to distinguish differences in what customers are willing to pay
3.Ability to prevent reselling
167
Why is 3rd degree price discrimination assosciated with monopoly
| 3.4.5
## Footnote
Monopoly
Because there is little/ no competition so they have the market power to do so
168
What is a natural monopoly?
| 3.4.5
## Footnote
Monopoly
Where the minimum efficient scale occurs at very high levels of output, meaning monopolies are needed due to large economies of scale
169
Does a monopoly result in allocative efficiency
| 3.4.5
## Footnote
Monopoly
No as price > marginal costs
170
Does a monopoly result in productive efficiency
| 3.4.5
## Footnote
Monopoly
No as MC is not equal to AC
171
Does a monopoly result in dynamic efficiency?
| 3.4.5
## Footnote
Monopoly
Yes as SNP can be earned in the long run
172
Does a monopoly result in x-inefficiency?
| 3.4.5
## Footnote
Monopoly
Yes
173
Advantages of monopoly to consumers
| 3.4.5
## Footnote
Monopoly
Dynamic efficiency= better quality
Cross-subsidisation may lead to increased range of g/s available to consumer
174
Disadvantages of monopoly to consumers?
| 3.4.5
## Footnote
Monopoly
1. Monopoly power means higher prices and lower output for domestic consumers
2. Price discrimination= reduces consumer surplus
175
Advantages of monopoly to employees
| 3.4.5
## Footnote
Monopoly
1. SNP could allow for increased remuneration ie wages, bonus
2. SNP suggests high job security
176
Disadvantages of monopoly to employees
| 3.4.5
## Footnote
Monopoly
1. Monopsony buyer= wages kept low
2. Large staff numbers could leave workers feeling isolated
177
Advantages of monopoly to firms
| 3.4.5
## Footnote
Monopoly
1. SNP allow for reinvestment into growth/R&D increase the barriers to entry and maintain market dominance
2. Size & eco of scale can allow for international competiveness and becoming an MNC = increase SNP
3. Monopolists can take advantage of economies of scale, which means that average costs may still be lower than the most efficient average of a small competitive firm
178
Disadvantages of monopoly to firm
| 3.4.5
## Footnote
Monopoly
1. SNP less incentive to be efficient and to develop new products. This could encourage inertia which could be fatal in the L/R i.e. Kodak
2. Monopolies may waste resources by undertaking cross-subsidisation, using profits from one sector to finance losses in another sector.
3. Greater Government regulation
179
Advantages of monopoly to supplier
| 3.4.5
## Footnote
Monopoly
Orders significant in size = allow supplier to grow
Dealing with a single buyer may be simpler than multiple which can aid efficiency
180
Disadvantages of monopoly to supplier
| 3.4.5
## Footnote
Monopoly
1. Monopoly become a monopsony buyer then could force prices down causing shut down or low profits for the supplier.
2. Inter-dependence whereby poor performance of the monopoly could effect the supplier i.e. Tesco’s losses in USA impacting the price they are willing to pay for milk.
181
2 examples of monopolies
Apple
Google
182
What is a monopsony?
| 3.4.6
## Footnote
Monopsony
Where there is one buyer in the market
183
How do monopsonists typically profit maximise?
| 3.4.6
## Footnote
Monopsony
Minimising costs by paying suppliers as little as possible
184
Benefit of being a monopsony to the firm
| 3.4.6
## Footnote
Monopsony
Purchasing economies of scale and bargaining power= lower costs = increase profits
185
Drawback of being a monopsony
| 3.4.6
## Footnote
Monopsony
Abuse of power = deteriorate relationship with supplier
Supplier may shut down = disrupt supply chain
186
Benefit of monopsony to the consumers
| 3.4.6
## Footnote
Monopsony
The reduction in average costs can be passed down in lower prices = increase consumer surplus
187
Drawback of monopsony to the consumer
| 3.4.6
## Footnote
Monopsony
Suppliers may need to reduce costs to stay profitable = decrease quality of products
188
Advantage of monopsony to employees
| 3.4.6
## Footnote
Monopsony
Size of monopsony = job security
Increased profits could be used to reward employees
189
Disadvantage of monopsony to employees
| 3.4.6
## Footnote
Monopsony
Some employees may not agree with the practise of squeezing the supply chain
190
Advantage of monopsony to suppliers
| 3.4.6
## Footnote
Monopsony
Orders may be significant in quantity. If MES occurs at high levels of output, there is potential for suppliers to grow.
This can be ussed to counteract the monopsony
191
Disadv of monopsony to suppliers
| 3.4.6
## Footnote
Monopsony
Price they sell at is reduced
The monopsonist may abuse its power by paying late or less
Suppliers may be driven out of the market due to low profitbaility
192
what is a contestable market
| 3.4.7
## Footnote
Contestability
No barriers to entry/exit
No sunk costs
New firms have no competitive disadvantage to incumbent firms
Access to the same technology
193
Difference between contestable market and perfect competition
| 3.4.7
## Footnote
Contestability
Contestability is not the same word as competition
Markets can either be contestable in a market with just one firm as long as the previous characteristics exist
However it is highly unlikely to be the case as a singular firm (monopoly) is likely to happen due to barriers to entry and having a competitive advantage over rivals
Key – ensure your definition does NOT relate to the number of firms
194
Why do firms in a contestable market avoid setting price above AC
| 3.4.7
## Footnote
Contestability
If businesses makes SNP = act as a beacon
Given there is NO BARIERS TO ENTRY & ACCESS TO THE SAME TECHNOLOGY this would make them vulnerable to a ‘hit and run’ entry by a new firm
Whereby a new firm would come into the market, take some profits and then exit again.
To avoid this, the incumbent firm may charge where P=AC where there are normal profits and no incentive for entry to the market.
195
What is limit pricing
| 3.4.7
## Footnote
Contestability
Setting prices low enough to deter new entrants
196
What are sunk costs + 2 examples
| 3.4.7
## Footnote
Contestability
Costs that can't be retrieved
eg advertising expenditure, R+D
197
What is the demand for labour as a derived demand?
| 3.5.1
## Footnote
Demand for labour
The demand for labour is dependant on the demand for the g/s itself
198
Why is the demand for labour downward sloping
| 3.5.1
## Footnote
Demand for labour
Because as the price of labour (wages) goes up the demand for labour will be less.
199
3 factors that shift demand for labour
| 3.5.1
## Footnote
Demand for labour
Change in demand of output
Changes in productivity
Changes in the cost of capital relative to labour
200
6 factors which determine the supply of labour
| 3.5.2
## Footnote
Supply of labour
Migration
Tax
Benefits
Skills/quals
Social trends
Trade unions
201
What factors cause geographic immobility
| 3.5.2
## Footnote
Supply of labour
House prices
Social attachments
Transport links
202
What can be done to improve geo immobility
| 3.5.2
## Footnote
Supply of labour
Increase supply of houses in the south east + bring down price = reduce geo immbolity
Improve transport infrastructure eg HS2 = this allows L to access jobs further from their homes
Regional development of the north with subsidies, tax breaks, new infrastructure etc
203
What is occupational immbolity
| 3.5.2
## Footnote
Supply of labour
Workers unable to move between jobs as they lack appropriate kills/ training.
204
What factors cause occupational immobility
Economy advancing from secondary to tertiary sector = many manufacturing workers do not have the required skills
This risk is increased as automation improvements will replace more jobs in the future
205
What can be done to improve occupational immobility
| 3.5.2
## Footnote
Supply of labour
Training programmes- subsidise private firms to undertake vocational training = more skilled and flexible workforce
education ie further regulation/fines. Also focus on STEM/ big maths/ coding
206
Illustrate how equilibrium wage and quantity are displayed on a diagram
| 3.5.3
## Footnote
Wage determination
207
What skills are in/ expected to be in shortage in the UK
| 3.5.3
## Footnote
Wage determination
Teachers, doctors, electricians
208
What impact will Brexit likely have on the labour market?
| 3.5.3
## Footnote
Wage determination
Reduce it's size as it was a common market so people can no longer freely move (lower immigration)
209
What is the current level of youth unemployment?
| 3.5.3
## Footnote
Wage determination
2020 = 13.4%
210
What are the problems assosciated with zero hour contracts?
| 3.5.3
## Footnote
Wage determination
Provides firms with the flexibility but no securoty for workers
Causes underemployment = opertaing inside the PPF curve = inefficient
211
Benefits of zero hour contracts
| 3.5.3
## Footnote
Wage determination
Provides firms flexibility = reduces costs = more productively efficient
Some workers may wish to be on zero hour contracts = improve their standard of living
212
Benefits of working in the gig economy
| 3.5.3
## Footnote
Wage determination
Flexibility
Independance
Pay
213
What is a maximum wage
| 3.5.3
## Footnote
Wage determination
A ceiling that a firm can't pay more than to a worker eg CEO
214
Draw a maximum wage diagram
| 3.5.3
## Footnote
Wage determination
215
Why would governments want to use a max wage?
| 3.5.3
## Footnote
Wage determination
To regulate markets where workers have excess monopoly power
It reduces income inequality and the EC attached. This is linked to Marx whereby the high pay of a CEO is a reflection of the wrokers output rather than his own skillset
In some labour markets workers have the ability due to WES & WED to extract high economic rent (salary above the minimum needed to complete the job).
216
Disadvantages of implementing a max wage
| 3.5.3
## Footnote
Wage determination
Disincentives to work (movement along the supply curve) = workers emigrate. Firms = find a shortage of skilled workers or top executives. This could harm economic prospects. = EC = risk of Govt failure.
Profit max firm operate where MRP = MCL. Therefore wage reflects market forces. Adam Smith = efficient allocation of resources as its based upon positive statements of fact over normative statements i.e. a value judgement of what someone’s job is worth.
Increasing Y tax is more effective = reduce income inequality whilst also collecting tax receipts = spent on public G/S. Therefore raise the MRT for millionaires for example.
217
What is a minimum wage
| 3.5.3
## Footnote
Wage determination
A wage that a firm cannot legally pay workers below
218
Draw a minimum wage diagram
| 3.5.3
## Footnote
Wage determination
219
Why would governments want to use a min wage?
| 3.5.3
## Footnote
Wage determination
1 - Reduces poverty/inequality – increases W of lowest earners. TIIB the existence of poverty/inequality = EC & slows economic growth.
1b - 4 – Prevent exploitation of workers. Marx argument that the value of output comes from the hands of workers which should therefore be the main group to benefit from it.
2 – Increased productivity – provide an incentive to work harder for L and firms have more incentive to invest into L if they are more expensive i.e. training and education.
3 – Increase size labour force – higher NMW increases the OC of economic inactivity and relying on benefits. An increase in NMW can help overcome the U trap whereby the income from work > income from benefits – the cost to work.
4 - The higher C from increased Y will also increase GDP/productivity i.e. chef at a restaurant.
220
Disadv of min wage?
| 3.5.3
## Footnote
Wage determination
1 – Real W/classical U = increase NMW = increase MCL. If MCL>MRP, then demand for labour will fall. Combined with the increase in supply = surplus of L = inefficient = example of Government failure i.e. increased U
2 – Labour intensive industry = L = high % of TC i.e. care homes. These will have a more elastic WED and see a more than proportional fall in demand. Where possible firms will seek to substitute L for K = U, or relocate abroad where labour laws less strict
3- National rather than regional. Cost of living variations are not accounted for. Therefore in certain locations that already suffer from regional high inequality and poverty could see a significant increase in U if the increase in NMW not reflective of costs in the local area. In some low pay areas 30% workers on NMW.
4 – Higher costs = higher prices = reduce real income. Therefore may be no better off when also consider tax brackets and NIC’s (fiscal drag).
221
What % of gov spending is public sector pay?
| 3.5.3
## Footnote
Wage determination
Over 20%
222
Comparison between public sector pay and private sector pay?
| 3.5.3
## Footnote
Wage determination
Public sector workers are paid less as govt is monopsony buyer = marginal cost of labour increases drastically even if wages barely increased.
Public sector workers are paid less than MRP which is considered exploitative (Marx)
223
Explain why market failure occurs in labour markets such as doctors and teachers
| 3.5.3
## Footnote
wage determination
Because these jobs have a large external benefit so are undersupplied and not at the socially desirable quilibrium as the wage reflected does not attract enough workers
224
What is the elasticity of demand for labour?
| 3.5.3
## Footnote
Wage determination
Responsiveness of demand for labour to a change in wage
225
3 factors which influence elasticity of demand for labour
| 3.5.3
## Footnote
Wage determination
Ease and cost of factor substitution eg footballer cannot be replaced with capital meaning an increase in wage will cause a less than proportional decrease in demand for labour
PED of the output- increase in wages = cost can be passed onto consumer if inelastic = increase in wage = less than proportional decrease in demand for labour
Proportion of labour costs as total costs- labour intensive industry = increase in wages = less than proportional fall in demand for labour
226
What is the elasticity of supply of labour?
| 3.5.3
## Footnote
Wage determination
The responsiveness of the supply of labour to a change in wage
227
What is the board that regulates the level of competition in markets
| 3.6.1
## Footnote
Government intervention
CMA (competition and markets authority)
228
How can governments control mergers?
| 3.6.1
## Footnote
Government intervention
Forced sale of assets
Blocking them
229
factors which influence the elasticity supply of labour
| 3.5.3
## Footnote
Wage determination
The skill/ qualifications required. Low skilled jobs will have a more elastic WES because a pool of labour is available to take the job eg cleaner compared to footballer which is more inelastic
230
Who is the board responsible for controlling mergers and acquisitions
| 3.6
## Footnote
Government intervention
Competition and markets authority (CMA)
231
How can mergers be controllled?
| 3.6
## Footnote
Govt intervention
Forced sale of assets
Blocking it
232
How can price regulations be used to control monopolies?
| 3.6
## Footnote
Govt intervention
Maximum pricing
Aim is to increase CS
Risk of shortage = inefficient = form of market (Govt) failure
233
Adv of using price regulation to control monopolies
| 3.6
## Footnote
Gov intervention
total profit is lower, prices down and output higher than under a single price profit maximising monopoly.
234
Disadv of using price regulation to control monopolies
| 3.6
## Footnote
Gov intervention
Deadweight welfare loss = some consumers who were willing to pay the equilibrium price now no longer have access to the g/s due to shortage (shown by year 12 max price diagram)
Lower quality/ choice as less profits = less dynamic efficiency
235
How can profit regulations be used to control monopolies
| 3.6
## Footnote
Gov intervention
Windfall tax = tax on SNP
Fear of a tax based upon degree of SNP
Monopoly operates beyond Q
Still earns SNP but not profit max
Avoids the windfall tax
Increased output will mean lower prices and increased efficiency
236
Adv of profit regulation
| 3.6
## Footnote
Gov intervention
Change behaviour = lower prices and increased efficiency
237
Disadv of profit regulation to control monopolies
| 3.6
## Footnote
Gov intervention
Reduced dynamic efficiency
Encourage tax avoidance and firm remains at MC=MR
238
How can quality standards be used to control monopolies?
| 3.6
## Footnote
Gov intervention
Additionally, regulators can observe the quality of the goods and services of the firm.
For example, in the gas and electricity markets, regulators ensure the elderly are treated fairly, especially in the colder months.
Governments ensure minimum standards are met.
239
Adv of quality standards used to control monopolies
| 3.6
## Footnote
Gov intervention
The government sets targets on organisations, such as schools, to ensure a minimum target is being met.
This aims to regulate their quality. The NHS, which has monopoly power, also has performance targets, such as reducing waiting times.
It helps the firm to focus on increasing social welfare.
Create increased quality efficiency and prevents x-inefficiency
240
Disadv of quality standards to control monopolies
| 3.6
## Footnote
Gov intervention
Asymmetric info = impact ability to measure given amount of info and dynamic nature.
Realistic/ high standard given resources = govt body set normative value
241
How can promotion of small businesses improve contestability in a market
| 3.6
## Footnote
Gov intervention
SME = small to medium enterprises
Can offer advice = overcome info failure and increase confidence. This reduces barriers to entry and therefore increases competition
Also done through financuial grant/ subsidy.
242
Benefits of increasing conestability through promoting SMEs
| 3.6
## Footnote
Gov intervention
Increased efficiency (productive and allocative)
Reduced prices
243
Disadv of using SMEs to increase contestability
| 3.6
## Footnote
Gov intervention
Intervention has to be big enough to pressure monopoly
Cost to government = opportunity cost. Potential budget deficit and crowding out effect
244
How can deregulation enhance competition and contestability in markets
| 3.6
## Footnote
Gov intervention
Lower red tape
Less laws eg environmental, H&S, employment
Decrease MRT for SMEs compared to monopoly
245
Advantages of nationalising monopolies
| 3.6
## Footnote
Govt intervention
1. Natural Monopoly
Many key industries nationalised were natural monopolies. This means the most efficient number of firms in the industry is one. This is because fixed costs are so high in creating a network of water pipes, there is no sense in having any competition. A private natural monopoly could easily exploit its monopoly power and set higher prices to consumers. Government ownership of a natural monopoly prevents this exploitation of monopoly power
2. Profit shared with taxpayer
If Virgin Trains set high ticket prices, you know the profit margin will go to a small number of wealthy shareholders. If the same service was run by a nationalised British Rail, any profit from profitable train services would go to government revenues and enable lower tax rates.
2. Externalities
Some of the nationalised industries had significant positive externalities. For example, public transport plays a key role in reducing pollution and congestion. A private firm would ignore the positive externalities, but a government run public transport system could invest in public transport to help improve the economic infrastructure.
3. Welfare Issues
Some industries play a key role in the welfare of consumers and citizens. For example, gas and water could be considered necessities for basic living standards and not luxuries. Government provision means that needy groups can be looked after and provided with basic necessities.
246
Disadvantages of nationalisation
| 3.6
## Footnote
Govt intervention
1. Low productivity and inefficiency
2. Corruption and mismanagement
3. Monopsony L buyer = lower wages
247
Disadvantages of nationalisation
| 3.6
## Footnote
Govt intervention
1. Low productivity and inefficiency
2. Corruption and mismanagement
3. Monopsony L buyer = lower wages
248
Disadvantages of nationalisation
| 3.6
## Footnote
Govt intervention
1. Low productivity and inefficiency
2. Corruption and mismanagement
3. Monopsony L buyer = lower wages
249
Advantages of deregulation to enhance competition and contestability in markets?
| 3.6
## Footnote
Govt intervention
monopoly likely to undertake limit pricing = lower prices and mpre efficient
250
disadv deregulation to promote comp/ contestability
| 3.6
## Footnote
gov intervention
less laws = unintended consequences = market failure
251
how can competitive tendering for gov contracts enhance competition
| 3.6
## Footnote
gov intervention
Competitive tendering for government contracts
The government provides some goods and services because they are public or merit goods, and they are underprovided in the free market.
The government could contract out this provision, so that private firms operate things such as roads or hospital.
The firm which offers the lowest price and best quality of provision wins the government contract.
This saves the government money, since the public sector can be bureaucratic and inefficient.
The private sector has an incentive to reduce their costs, since they operate in a competitive market
252
Adv of competitive tendering
| 3.6
## Footnote
Gov intervention
frees the government of maintenance, since the private sector might have the expertise and knowledge to fulfil the project and maintain the infrastructure.
It can also help with Government issues – monopsony buyer & pension deficit in the public sector
253
Drawback of competitive tendering to increase comp/ contestability
| 3.6
## Footnote
Gov intervention
profit incentive = cost cutting = lower quality
Risk firm collapse = require cost subsidy
254
How can privatisation enhance competition and contestability in a market?
| 3.6
## Footnote
Government intervention
Selling a gov run business = increased efficiency due to profit motive:
- Free market
- increased competition
255
Adv of privatisation to enhance competition
| 3.6
## Footnote
Government intervention
Increased efficiency due to free market principles
Hayek argument = gov run = cannot understand needs of everyone = resources distributed inefficiently
256
Disadv of privatisation to increase competition/ contestability
| 3.6
## Footnote
Government intervention
- private monopoly = abuse power
- X-inefficiency from private monopoly/ diseco of scale
- Profit motive is prioritised over social objective = market failure (externalities)
257
How can governments restrict the power of a monopsony
| 3.6
## Footnote
Govt intervention
Regulation - CMA provide a code of conduct. Therefore, behaviour is investigated and intervene in markets = fine, name and shame, recommend behaviour
TWE = asymmetric info
257
How can governments protect employees
| 3.6
## Footnote
Govt intervention
Labour laws eg NMW, Health and safety, holiday pay
TWE = asymmetric info
257
How might nationalisation protect suppliers and employees
| 3.6
## Footnote
Govt intervention
Govt take ownership of private firm eg railways
Adv = private firm at operate at profit max due to profit incentive but gov have own objective = operate at larger quantity where prices are lower.
this increases consumer surplus, allocative efficiency and productive efficiency
Adv 2 = impact externalitites eg can make public transport more affordable = lower demand for car jpurneys = less pollution
TWE = Hayek
258
What is regulatory capture
| 3.6
## Footnote
Govt intervention
Government failure where the regulatory body becomes sympathetic to the busines they are supposed to be regulating. Occurs due to:
1. Regulator is friends with firms they are dealing with
2. Regulator is bribed
259
Why might asymmetric info exist between a firm and a regulator
| 3.6
## Footnote
Gov intervention
1. Inefficiencies of public sector
2. Under resourced
