theme three Flashcards
(92 cards)
1
Q
production
A
output
2
Q
productivity
A
output per unit of input
3
Q
in the short run…
A
at least one is fixed
4
Q
long run
A
all factors of production are variable
5
Q
average product
A
total output / total input
6
Q
marginal product
A
change in total product / change in quantity
7
Q
costs
A
amounts that a business incurs in order to make goods and/ or provide services
8
Q
variable costs
A
costs that change as output changes
9
Q
variable costs examples
A
-raw materials
-hourly wages
-commisions
10
Q
fixed costs
A
costs which do not change with output
11
Q
fixed costs examples
A
-rent
-advertising
-salaries
12
Q
total costs
A
fixed costs + variable costs
13
Q
law of diminishing return
A
-after some optimal level of capacity is reached, adding an additional factor of production will eventually lead to smaller increases in output.
14
Q
diminishing marginal returns
A
-after some optimal level of capacity is reached
-adding an additional factor of production
-results in smaller increases in output
15
Q
marginal costs
A
change in cost / change in quantity
16
Q
profit maximisation occurs when
A
MC = MR
17
Q
productive efficiency
A
lowest point on AC
18
Q
allocative efficiency
A
-price = MC
-where benefits do not occur at the expense of another party
19
Q
dynamic efficiency
A
-productive efficiency over a long period of time
-reducing cost curves by implementing new production processes
-concerned with the optimal rate of innovation and investment
-enables reduction in both SRAC and LRAC
20
Q
natural monopoly
A
-most efficient no. of firms in the market is one.
-typically have very high fixed costs
-impractical to have more than one firm producing the good
21
Q
x-inefficiency
A
-firm lacks the incentive to control costs
-causing the average cost of production to be higher
22
Q
causes of x-inefficiency
A
-monopoly power = easy to make SNP, wont try to control costs
-state control = nationalised firms no incentive to make profit
-principle agent problem = shareholders want high profits, minimise costs. workers want costs low enough only to protect jobs
-lack of motivation = wont want to control costs. eg. taking extra long breaks
23
Q
average product of capital
A
output produced per unit of capital used
24
Q
natural monopoly
A
economies of scale are so large (relative to demand) dominant producer in industry enjoy lower costs of production
25
limit pricing
when the incumbent firm sets price below the AC of the potential new entrants to deter them from entering the market
26
predatory pricing
when the dominant firm sets the price level such the competitors/ smaller firms can no longer remains in the market.
P
27
price discrimination
seller charges consumers different prices for the same product/ service
28
price skimming
when a firm releases a new product, it initially sets a high price to take advantage of those consumers with inelastic demand. over time, the price is reduced to attract those with a more elastic demand
29
premium pricing
firms makes a good more expensive to try to give the impression that it is a better quality
30
loss leaders + EVAL?
setting a low price on some products to entice customers into the shop, where hopefully they will also buy other goods as well
EVAL - illegal to sell goods below cost, so firms could be investigated by OFT
31
reference pricing
setting an srticially high price to be able to later offer discounts
32
price matching
promise to match any price cuts by your competitors = discourages your competitors from cutting prices
33
game theory
suggests that firms are able to collude by sharing pricing methods. collusion = harder to detect, and difficult for regulators to penalise
34
three business objectives
-profit max
-sales max
-revenue max
35
profit maximisation - where does it occur, and who does it benefit?
-MC=MR
-shareholders in dividends
36
revenue maximisation - where does it occur, and who does it benefit
-MR=0
-managers = they get payed in bonuses, linking to revenue
37
sales maximisation, where does it occur, and who does it benefit?
-AC=AR
-commission based employers who earn based on how much they sell
OR
-firms to increase exposure of their business, not prioritising revenue/ profit.
38
internal economies of scale
-reductions in cost per unit due to an increase in the quantity produced by the firm.
39
internal economies of scale types (7)
-financial
-risk bearing
-purchasing
-technical
-managerial
-marketing
-research and development
40
external economies of scale
beneficiary of the industry you’re in expanding
41
diseconomies of scale
increase in the cost per unit due to to an increase in the quantity by the firm
42
causes of diseconomies
-poor communication
-lack of motivation
-loss coordination
-loss of control
43
internal diseconomies of scale causes
-lack of effective communication
-principe agent problem
-wide scale changes -> hard to implement
44
types of external economies of scale
-labour / education = highly skilled workers
-technology development
-taxation decrease
-tariffs = less international competition
45
monopsony
single buyer substantially controls the market as the sole purchaser of goods and services
46
how does a firm gain monopsony power?
-low trade unions
-lower regulation
-high market share as a buyer
47
contestable market
-entrant has access to all production techniques available to the incumbents
-not prohibited from wooing incumbents customers
-entry decisions can be reversed without without loss
48
assumptions of contestable markets
-freedom of entry/ exit
-firms profit maximise
-perfect knowledge
49
how to judge contestability
BRASIL
-barriers to entry and exit
-research and development
-advertising
-sunk costs
-innovation
-legal barriers
50
owners of a firm
-AKA shareholders = earn profits through dividends on their shares
-make key decisions about the firm, such as it’s objectives, who the directors are, and whether to release new shares
-owning more than 50% of shares = controlling stake, one person makes these decisions
51
directors/ managers
-people in charge of running the firm, but can be hired and fired by the owners
-make other decisions, eg. what products to make, how many workers to hire, prices of goods
-directors = executive officers, chair of directors is the chief executive officer, or CEO
52
workers/ employees
peoples employed by the firm
53
why might the owners of a firm sell their shares?
to raise capital for the firm
54
why might somebody buy shares in a firm?
the profit made by the firm is paid to shareholders
55
types of integration
-backward vertical integration
-conglomerate integration
-forward vertical integration
-horizontal integration
56
main four causes for why firms grow
-economies of scale
-monopoly power
-reduced risk (conglomerate integration)
-increased demand
57
merger
two firms joining to become one
58
acquisition
one firm purchasing another
59
moral hazard
economic agent has an incentive to increase exposure to risk, but doesn’t bear the full costs of the risk.
60
integration
multiple firms combining
61
backward vertical integration
acquiring a business operating earlier in the supply chain
eg. bakery buys a farm
62
conglomerate integration
involves the combination of firms that are involved in unrelated business activities
63
forward vertical integration
involves acquiring a business further up in the supply chain
eg. a farm buys a bakery
64
horizontal integration
businesses in the same industry and which operate at the same stage of the production process combine
65
reasons for a demerger
1. benefit from specialisation
2. raise finances
3. to avoid diseconomies of scale
4. forced to demerge
66
impacts of a demerger
-increased efficiency
-prevents diseconomies of scale
-lower costs
-more competition
-higher sales
-higher profits
-loses economies of scale
67
CMA
-competition and markets authority
-uk’s primary competition and consumer authority
-carry out investigations into mergers, markets and regulated industries and enforcing competition and consumer law
-promote competition (prevent anti-competitive behaviour)
-prevent firms from exceeding 25% market share (forced to demerge)
-prevent collusion
68
turnover test
merger
1. will merger result in >25% market share?
2. will merger lead to >70m turnover
3. will merger lead to a SLC? (substantial lessening of competition)
69
how do monopsonists exert buying power?
1. setting prices lower than in a competitive market with many competing buyers
2. requiring suppliers to cover costs which typically the buyer might pay (such as packaging, labelling)
3. forcing suppliers to make lump sum payment to the monopsonist (eg. to access particulate positions in stores
4. delaying payments to suppliers to improve the monopsonists cash flow
70
government measures to protect suppliers
1. setting up specific regulator
2. fines
3. controlling prices (minimum prices)
4. subsidising firms that are adversely affected by the exertion of monopsony power
5. legislate against late payments
6. blocking mergers
7. encourage new entrants into the industry
71
competition vs. contestability
competition = refers to firms behaviour either in terms of price or non-price methods to increase their sales & profits
contestability = refers to a situation where the fear of competition leads firms to behave more like they would under perfect competition, even when operating in a monopoly or oligopoly
72
RPI - X
-used for natural monopolies as a price cap
-used to control the rising price of consumer prices by a dominant/ monopoly supplier
73
what does X represent in RPI - X
-the expected efficiency gains (cost savings) the regulator expects to be reflected in lower consumer prices
74
what does K represent in RPI - X + K
-the unavoidable costs needed for LR investment
75
profit regulation 'method'
based on the amount of capital stock
the higher the capital - the higher the profit 'allowed'
76
what is MRP?
the value of the physical addition to output of an extra unit of labour
77
what shifts the demand curve for labour?
physical productivity and price of the good
78
factors that affect the elasticity of demand for labour?
time
availability of substitutes
elasticity of the product
proportion of labour costs to total costs
79
factors affecting elasticity of supply of labour
-time
-availability of skilled workers
-level of unemployed workers
80
shut down in short run
AVC>P
81
shutdown down in the long run
AC>AR
82
monopsony employer define
-labour market structure in which there is a single powerful buyer of a particular type of labour
83
difference between monopolistic competition and oligopoly
monopolistic = lots of sellers -> products = slightly differentiated
oligopolistic = few sellers -> less barriers
84
kinked demand curve -> what happens when you raise price
quantity will fall proportionality more than the price, firms will keep their original price, and undercut the firm -> no point
85
kinked demand curve -> what happens when you decrease the price
small increase in quantity -> other firms will follow you, meaning you've jut made the market equilibrium higher -> no one gains
86
when to draw one/ two diagrams for monopolistic competition in the long run
one - if it asks why normal profits are made in LR
two - if it asks you to compare LR and SR
87
perfect competition in the long run
will make normal profits
88
bilateral economies example
phone systems -> iOS and android
89
natural monopoly example
the London Underground
90
oligopoly examples
phone industry and car industry
91
apple 2022 profit
$100 billion
92
apple 2022 total revenue
$394 billion
