Theory Flashcards

Question

price mech local scale context

Answer 1

COVID in UK, trade stopped so virus didnt spread. decreased supply on store shelves, but ↑ demand, so price ↑ **rationing function** - only those who can afford/really want it will buy it

Answer 2

- housing north vs south UK, **rationing function** in London, houses price up so only wealthy/ who need most will buy. - high house prices offer incentive for firms to allocate resources to this market, **incentive function**, as profit to be made

Answer 3

- 1973, OPEC restricted supply of oil on MASSIVE scale due to geopolitical factors. - prices of oil ↑ ↑ ↑ globally, due to high value. - **rationing function**, high prices deferred consumers who didnt value oil as highly. - allowed those who needed most to access, market therefore returned to equilibrium

Answer 4

supplier pays all the tax

Answer 5

all tax passed onto consumer

Answer 6

- influences of other people - habitual behaviour - consumer weakness at computation (do things they know they shouldn't e.g soda) (don't make comparisons of prices so buy more expensive, e.g. multipack not always cheaper but ppl assume it is)

Answer 7

- non rivalrous non excludable, so underprovided by private sector due to free rider problem - market cant make sure enough of these are produced - e.g streetlamps

Answer 8

- economic agents dont always have perfect info, dont always make rational decisions, so resources not allocated to maximise welfare - consumers dk quality of used cars

Answer 9

+ internalises externality, market produces closer to/at social equi, social welfare maximised + raises govt rev, can be used to solve externality in other ways - hard to know size of externality, so hard to target tax (imperfect info) - black market creation - if inelastic, tax wont reduce output

Answer 10

+ welfare maximised, closer to social optimum output + other positive impacts like encouraging small businesses, ↑ equality, encourage exports - govt have to spend lots, high opportunity cost - hard to work out size of externality (imperfect info) - once implemented, hard to remove

Answer 11

- max price put on +ve ext goods, like food. lack of food will have bad effect on NHS - min price on -ve ext goods, like cigarettes. higher price will discourage consumption

Answer 12

+ max price means goods will be affordable, min price means producers get good price. help to reduce poverty, can ↑ equality - can lead to black markets. max prices may lead to illegal bribes etc - hard for govt to know where to set prices

Answer 13

manhattan rent controls, so that rent is affordable for all price caps on milk, toilet paper, medicine, petrol etc in venezuela (EVAL: caused black market, goods no longer in supermarkets as firms cant make profit)

Answer 14

- scotland, min price on alchohol. targets cheapest drinks aiming to cut down binge drinking. (EVAL - bad effect on poverty for ppl who are addicted)

Answer 15

+ as govt limits number of permits, guaranteed pollution fall + govt can ↑ rev by selling permits, and fining firms who exceed + encouraged investment to green tech + encourages efficiency, firms choose whether to cut pollution/buy permits

Answer 16

- expensive to monitor and price - raised costs for businesses, likely passed onto consumers

Answer 17

+ corrects market failure by providing important goods which wouldn't have been provided otherwise + benefits for themselves, e.g. providing healthcare means healthy workforce so improved econ growth - expensive, high opportunity cost - may produce wrong combo of goods - corruption / conflicting objectives

Answer 18

+ helps consumers act rationally + best if used alongside other policies, e.g. demand ↑ elastic in LR so help find taxes become ↑ effective at reducing output - expensive for govt to do, opportunity cost - govt may not have all info - consumers may not listen

Answer 19

+ helps overcome market failure + prevents exploitation of consumers, ensures symmetric info - expensive to monitor, opportunity cost - firms may pass on costs to consumers

Answer 20

- any decisions the govt makes will be based on some data, but wont always have perfect info. - cost and benefit forecasts are often wrong, so govt invests in system where costs higher than benefits, = welfare loss - usually impossible for govt to get all info they need

Answer 21

- lot of money allocated by govt it used on admin costs - social costs may outweigh social benefits once admin costs taken into account - e.g. lot of money given to NHS spent on organisational admin instead of on medical care

Answer 22

- some interventions cause unintended effects. consumers + producers may react to new policies in unexpected ways so may have diff effect - e.g targets for treating patients in NHS led to a reduction in quality of care. - black markets may be formed (from tax, regs, min prices, for cigs, alcohol) - minimum prices impact on poor, regressive taxes. - firms may shut down, over strict regs and tax, lead to shut down/decrease in size/relocate ---> employment ↓ - subsidy, firms may become too dependant and so less productive, more wasteful

Answer 23

- some types of govt failure change price signals, distort free market mechanism. - leads to keeping some firms when inefficient, so resources SHOULD be switched elsewhere but aren't - e.g. subsidies keep farmers in employment when they cant produce cheap enough to be competitive. means that govt helps them stay in business when they shld close down and find other uses for resources.

Answer 24

when govt try regulate monopoly power. - occurs when interests of society are overlooked for interests of CEOs and managers etc. - when CEOs/managers influence the regulator, due to close contact/used to work in industry before so knows CEOs in that industry. - means CEOs can influence regulator to reduce extent of the regulation - working in interest of firm not of society. - regulatory authority are expensive to maintain so if not regulating properly, can be a very large cost which outweighs benefits

Answer 25

- access to economies of scale, = ↓ costs of production. sell ↑ goods = ↑ revenue. leads to ↑ ↑ ↑ profit, so ↑ motivation to achieve - larger market share, so can influence prices and restrict other firms from entering market. monopoly power often means monopsony power, so can ↓ costs by lowering prices of raw materials - more security, can build up assets. likely to sell goods in multiple markets, so less susceptible to changes to individual markets

Answer 26

constraints on growth: - size of market - access to finance - owner objectives - regulation

Answer 27

- in large firms, separation of ownership and control - firms owned by shareholders who have no part in day to day running - CEO + senior managers control decision making - shareholders represented by board, who decide how run. can vote people on/off. little difference as more power through buying/selling shares, i.e. if prices ↓ significantly, board encouraged to change strat - separation = problems, differing aims - owners want to max RoI, so SR profit max - directors/managers want to max own benefits THEREFORE - one group (agent) makes decisions on behalf of another group (principal). - in theory, agent shld try max benefits for principle, but in practise, **agents tempted to max own benefits**. - therefore, firms not able to profit max, but profit satisfice - e.g. Enron Scandal - executives hid billions in debt from Board. Shareholders filed lawsuit to firm + executives when share value went from $100 to $1 in a year

Answer 28

+ integration is expensive, time consuming and high risk + can keep control over whole business - opportunities missed (other firm may have something they cant get) - organic growth too slow? - hard to get new ideas

Answer 29

+ increased potential for profit + less risks as same marketplace so supply/demand guaranteed + backwards, can control quality of supplies, ensure reliable deliver + forwards, can secure retail outlets, restrict access for competitors - may lack expertise, e.g. car manufacturing vs car sales

Answer 30

+ reduces comp, increased market share = more power to influence market + able to specialise + rationalise, reducing duplicate areas + business grows in market where already has expertise, more likely to be successful - increased risk if that market fails

Answer 31

+ useful if firms have no room for growth in current market + range of products reduces risk for firm if an industry fails - going into markets with NO experience, damaging

Answer 32

**size of market**: - not all firms able to mass produce as not all goods would be bought by consumers (mainly niche markets, but can happen on any) **access to finance**: - 2 ways to finance: loans + retained profits - if firms dont have enough profit / have to give out too much to shareholders, wont be able to use retained profits to grow - banks unwilling to lend to smaller businesses as high risk **owner objectives**: - some owners may not want business to grow, happy w current profits + don't want extra work **regulation**: - some markets, govt introduce regulation 9prevents growing) - e.g. UK govt regulates no. of pharmacies in an area, existing can only expand by buying another - comp law (prevents monopolies) can restrict growth as mergers which make company > 25% market share can be forbidden

Answer 33

avoid attention from **competition authorities** **lack of synergies**: - dont impact each other and make more efficient. leads to diseconomies of scale. **value of company/share price**: - value of separate companies > combined - some parts of business operating well, but overall value brought down by areas with lack of success/ potential for growth. - therefore 'creating value' if split **focused companies**: - if focused on one individual market = ↑ efficient and successful, so ↑ profits - managers can improve skills + knowledge, more successful, by spending more time

Answer 34

**workers**: - separate firms need own managers, so promotion BUT making firm more efficient may = job losses **businesses**: - ↑ efficiency from focusing on smaller core, ↑ innovation. BUT smaller size = loss of econ of scale so ↓ efficient **consumers**: - better products, cheaper prices (↑ efficiency) BUT loss of econ of scale, so ↓ efficient so prices up/decrease quality

Answer 35

- interests of owners/shareholders are most important, so goal of firms = profit max in SR (maximise returns) - can generate funds for investment, and to help survive slowdown in a recession e.g. Apple need to profit max so they can reinvest

Answer 36

- managers interested on rev as their salary based on it - growth in rev always positive for business, so even if not connected to salary managers want it. increases their prestige, used as justification for managerial rewards - fall in rev wld decrease salary and signal start of downward spiral for company - rev max AS LONG AS some profit for owners e.g. amazon, rev £120bn in 2015 but profit stable. aim to dominate market

Answer 37

- when starting out, sales max helps grow business - market share ↑, more market power, control of prices - larger firm = ↑ secure - managers salary based on growth (size of company), so sales max leads to ↑ growth e.g. netflix + spotify sales max to try to ↑ size

Answer 38

- due to principal agent problem, owners and managers have diff goals - therefore managers likely to profit satisfice: make enough profit that owners are happy, while following other objectives. - other objectives e.g. own benefits, so may increase salary which ↑ costs, and therefore ↓ profit - amount of profit will change yearly, depends on other firms profits. if everyone making loss, normal profit is good. if everyone making SNP, shareholders will want SNP

Answer 39

- **when MR is +ve**, when the firm increases output by selling @ lower price, TR still goes up so demand curve is **elastic** - **if MR is -ve** TR decreases as quantity increases/price decreases, so curve is **inelastic** - **when MR = 0**, TR is maximised and demand curve is **unitary elastic**

Answer 40

**AFC** - starts high as FC divided by small output. as output ↑, AFC↓ as same FC / by ↑ number **ATC** - U shaped, initially costs fall due to ↑ efficient use but as production expands, efficiency ↓ as too many workers so get in the way + have no machines to use **AVC** - U shaped, gets closer to ATC as output ↑ as AFC smaller **MC** - u shaped, initially fall as machines used ↑ efficiently, will rise as production rises

Answer 41

- movement along is due to change in output, which changes avg. cost of production due to internal economics/diseconomies of scale - shift due to external economies/diseconomies, taxes or tech (affect cost of production for given level of output)

Answer 42

**TECHNICAL ECONOMIES** Specialisation: - large firms appoint specialist workers + buy specialist machines, do jobs ↑ quickly and better than unspecialised machines/workers Balanced Teams of Machines: - large firms can afford many machines at each stage, so can run each machine at optimal level. - smaller firms only afford one of each stage, so if one goes faster than another, will spend time not being used (inefficient) increased dimensions: - if double size of walls, can increase area by 4 times. double size of container = more than double amount it can carry, without x2 cost Indivisibility of capital: - some processes need large machinery + investment, only possible on large scale R+D: - large firms can do large scale R+D, gain advantage over competitor **FINANCIAL ECONOMIES** - greater security, more assets, less likely forced out of business. therefore lower int rates as low risk, easier investment **RISK BEARING ECONOMIES** - large firms operate in many markets, so if one area fails, whole business doesn't fail **MANAGERIAL ECONOMIES** - large firms can appoint specialist managers, specialised so ↑ knowledge = better job. **MARKETING+PURCHASING ECONOMIES** bulk buying: - large firms buy large numbers, so cheaper raw materials specialisation: - big firms can do specialist buyers/sellers, more efficient as extra time + knowledge

Answer 43

**LABOUR** - businesses established in an area with other firms from same industry find labour comes to that area (e.g. silicon valley) - local education and training providers more likely to develop courses to prep people to take up jobs in these businesses - firms can hire staff trained by other businesses, cheaper and ↑efficient for the firm **SUPPORT SERVICES** - businesses who provide products/services for large businesses will naturally move to area, ↓ transport cost/time delays.

Answer 44

**workers** - in large business, ppl may think effort goes unnoticed, so less chance of promotion, so lose motivation and work less hard. **geography** - firm may have to transport finished products large distances, harder to control parts of business which are miles away. **change** - much longer and more difficult for large firm to respond to change (trend/demand) **prices of materials** - as business grows, so does prices of raw materials and equipment. can increase bargaining power as buy in bulk, but increasing demand = prices rise, so CoP rise. - also occurs if whole industry increases, so firms bid up prices **management** - coordination+control: more difficult to coordinate and control as business grows. could lead to poorer quality work and business decisions which don't work well together - comms: comms can be slow in large business, can lose accuracy due to distance and number of ppl it been passed through.

Answer 45

- when TR and TC furthest apart - OR when MC=MR, as if producing one more adds more to rev than cost, must have increased profit. vice versa, if producing one more cost > rev, decreases profit.

Answer 46

- normal profit is the sufficient return to keep the FoP committed to the business. if firm covers costs, it earns normal profit. AC=AR or TC=TR - if the profit is greater than normal profit, earning SNP. when AR>AC or TR>TC - loss is where firm fails to cover costs, AR

Answer 47

AVC = AR - if AR any lower, shut down

Answer 48

anything below normal profits

Answer 49

- many buyers and sellers - homogenous goods - no barriers to entry or exit - perfect information - have to be price **takers** (take market price)

Answer 50

- in SR, not productively efficient but allocatively efficient - in LR, productively efficient, as produced where MC = AC, AND allocative efficient as produce at P=MC (therefore **static efficient**) - NOT dynamic efficient, as no single firm has enough for R+D, and small firms don't have finance. perf info also means others will copy one firm's invention, so investment won't competitively help. - comp keeps costs and prices low, BUT firms unable to benefit from economies of scale, so costs higher than cld be.

Answer 51

- large numbers of buyers and sellers - no barriers to entry/exit - differentiated goods, therefore some price setting power (downward sloping demand)

Answer 52

- since only normal profit in LR, AC=AR - since profit max, MR=MC - therefore, not all. efficient or prod. efficient - likely dynamically efficient, diff products so innovation will give edge over comp. but since small firms, may struggle w/ finance - less sold @ high price in monop comp, but market offers better variety, maybe slight econ of scale

Answer 53

- differentiated products - high barriers to entry - very few competitors - imperfect information - firms are interdependent - one firm's actions will impact others, esp abt price

Answer 54

- if dont collude, lowering prices to gain new customers will likely mean other firms lower too, = low profits. however, if collude, maximise profits - collusion reduces uncertainty, and fear of engaging in price wars (will reduce profits) - some fims won't, as illegal and risks of colluding e.g. other firms breaking cartel - firm w/ strong business model + somt that sets apart won't collude if they think they can increase market share / can charge higher - collusion best when: a few firms all well known, firms not secretive abt costs + production methods similar, produce similar goods, dominant firm which others happy to follow, market stable, high barriers to entry e.g. UK energy market suspected of collusion

Answer 55

- small number of firms in market - market demand not too variable - demand fairly inelastic w/ respect to price (= cartel price up, total rev to suppliers up) - easy monitorable output, allows cartel to control supply and see whose cheating output quotas

Answer 56

- **advertising**: awareness of product, increased sales and market share, LR increased profits - **loyalty cards**: encourage repeat purchases, data on consumer habits which can be used to increase sales - **branding**: can increase loyalty and repeat purchases, ppl will trust brand and quality so keep buying - **quality**: if known for gd quality, maybe higher prices, good rep etc - **customer service**: encourages loyalty, gives good rep - **R+D to develop products**: advantage over rivals, if release somt new increased sales etc **HOWEVER**, - expensive (opportunity cost) - not guaranteed to work

Answer 57

- not AE or PE, so static efficient - likely dynamic efficient, as makes SNP so have funds to invest. BUT some j share profits w/ shareholders/decide not to invest - economies of scale, lowering costs

Answer 58

- differentiated goods - high barriers to entry - one big seller - imperfect info - price setters - high economies of scale

Answer 59

- firms benefit as increased profits, can go into R+D/improving dynamic efficiency - ppl in elastic market gain as get lower price, decreased ineq as might not have been able to access if not price discriminated - consumers lose consumer surplus to producers, and some have to pay higher price

Answer 60

- most efficient for there to only be one firm in industry (national rail) - typically v high fixed cost (e.g. the railways - wld cost billions to build another set, and lack of space) (high barriers entry) - pointless to encourage comp, as new firms' costs wld be so much higher they wld have no business, wasted resources - maximises econ of scale, with one large business producing high quantity, cost lower than 3 firms producing 1/3 each

Answer 61

+ monopolists have potential to make huge profits for shareholders, profit max + monopoly has money for investments as SNP, so build reserves to overcome short-term shocks + can compete against big overseas firms + monop can max econ of scale - in LR, lack of comp may mean complacent so less efficient, x-inefficiency, may not max profits

Answer 62

- monop produces at lower output, so employ fewer + inefficiency of monop mean employees receive higher wages, mainly high ups (profit satisficing) + sales/rev max mean output higher so more employees

Answer 63

- depends on extent to which monopolist is monopsonist - if monopolist buys all of suppliers goods (monopsonist), reduces supplier's profit as monopolist will decrease prices

Answer 64

+ Natural monop better than if comp + Econ of scale means more efficient, so consumers get higher surplus + monopolist may make range of goods due to cross-subsidization - lack of comp means higher prices and decreased quality/service - less choice for consumers

Answer 65

- productively and allocatively inefficient - dynamically efficient as SNP, BUT if no comp, no incentive to invest - lack of comp, so X inefficiency, AC=MC rises. decreased consumer surplus - large monop may see big econ of scale, so AC=MC falls - monopoly avoids duplication of services an prevents misallocation of resources

Answer 66

- only one buyer in the market - food retailers when buying from farmers (can sell all @ low price, or risk not selling at all) - will pay suppliers lowest possible price, to minimise costs, maximise being only buyer (max profits) - same other basic characteristics as monopoly

Answer 67

- Uk paying less for cancer drugs than other HIC, bargaining pwr of NHS - Tata steel warned suppliers if supplies weren't 30% cheaper, they wld lose tata's business.

Answer 68

- higher profits for monopsony as lower prices - purchasing economies of scale, more they buy the cheaper is it

Answer 69

+ lower prices as reduced costs are passed on + better products as profit, so R+D, investment - fall in supply, as business buys fewer inputs - counterweight to monopolists?

Answer 70

- supplier will sell less, so employ less - monopsonists may pay higher as higher profits

Answer 71

- lose out as receive lower prices, so less supplied, so some firms may leave market

Answer 72

- perfect knowledge - freedom of entry and exit into market, low barriers - low product loyalty (consumers willing to change suppliers) - low sunk costs

Answer 73

- firms enter market if see other firms making SNP - stay in market until comp means no profit - in perfectly contestible, firms only make normal profits + produce AC=AR - firms likely to be PE and AE. if not PE (AC = MC), new firms can come and undercut by offering lower prices. as can only make normal profits, AC = AR. therefore, MC = AC = AR, so value to society =cost

Answer 74

- legal barriers prevent firms from entering industry e.g. taxi industry (licenses needed for firms to operate) - marketing barriers build loyalty, so demand price inelastic. new firms unlikely to have finances to undertake large-scale advertising - some industries have high capital start up costs - economies of scale means new firms cant produce w/ same AC curve as large

Answer 75

- wages - demand for product - prices of FoP (if machinery etc becomes cheap, ppl will increase machinery and decrease labour, so demand for labour falls) - wages in other countries (if cheap in one country and expensive in UK, ppl will be employed in other countries as relatively cheap, so UK demand is low) - tech: better tech means less demand for labour

Answer 76

- directly linked to PED of good. if good is elastic, rise in wages so rise in prices for consumers will impact quantity sold. so firm will decrease employment to help make profit - % of wages to total cost of production, if wages large %, then increase in wages means large increase cost. - if lots of subs like machinery and labour, demand elastic. therefore, high skilled jobs more inelastic as cant be replaced as easy - time (machinery takes time to build etc)

Answer 77

- wages - population and age distribution - non-monetary benefits - education/training/qualification - wages/conditions of other jobs

Answer 78

**immobility:** - occupational immobility where workers find it hard to transfer due to lack of transferrable skills. v hard in SR, LR possible but high cost - geographical immobility where workers find hard to move from one place to another due to cost of movement/family etc. - immobility means excess supply of labour in one area/occupation and excess demand in another

Answer 79

- depends on level of training, if high skill level required, ppl won't be able to occupy job quickly. if low skilled job, elastic supply, can be easy replaced - availability of labour in other industries, workers may be able to be poached, so supply more elastic

Answer 80

in **perfect comp**, wages determined purely by demand/supply (industry) in **monopsony**, employ fewer ppl @ lower wage rates. as monopsony only buyer of labour, if want to increase labour force they have to increase wages for all in **monopoly**, trade unions means can operate as only seller of labour. can barrier entry, so decreased supply, so increased wages. or can set wages @ specific wage and make sure workers not prepared to work for less (kinked supply curve) - supply perf elastic until supply line, if firm wanted more employed, wages would have to increase

Answer 81

skills shortages: - occupational and geographical immobility mean that even if there are enough engineers in the UK, there aren't enough in the locations they are needed in young workers: - workers who join in recession, lower lifetime earnings. during hard times, firms likely to not employ new, and reluctant to let go current, so young don't get job - increasing LE, more ppl reaching retirement age, so lots of money on pensions (over 50% of welfare spending) - wage inequality: rich get richer, wages of rich grow by bigger % than poor - zero hour contract: uncertainties for workers who don't know how much they will earn in a week and have v little notice of when they need to work

Answer 82

+ reduces poverty, and wage differentials (women more likely to take up vocational job, more flexible hours) + can lead to more content workforce, more motivated (by money) so more productive business - ^ assumes all people motivated by money + min wage prevents unemployment trap (where benefits > the wage they would get) - raise costs for companies, increased prices, fall in profits - wage spirals: ppl will try to keep a gap between them and lowest price workers, so if lowest price workers wage means everyone else will want a wage increase

Answer 83

will lead to excess demand as people won't put themselves forward for jobs if they don't think salary matches the stress/responsibilities, or know they cld get higher wages abroad - loss of best workers, so quality of businesses decreases, competitiveness decrease

Answer 84

- UK trade unions weak, in SR, the govt can effectively do anything with public sector wages - 2010-2015, pub sector wage freeze, causing downward pressure on wages in priv sector as unlikely to leave priv, so firms could use this to limit pay. - in LR, if priv wages rise, and pub don't, all will move to priv so pub wages will have to be risen by govt - therefore in LR, rise by same amount, but in SR can vary

Answer 85

**geo:** - improve supply of houses and reduce price of property, makes easier to move. or make renting cheaper for ppl working temp job - improve transport links, allows ppl to live further away - national advertising so ppl know about jobs all over country - subsidies on houses in areas where labour shortages **occupational:** - vocational training - encouraged further study at uni, e.g. engineering - encourage spending on training within work - education cld be targeted at improving skills shortages and helping job applications, e.g. interview skills

Answer 86

- merger investigated if market share over 25%, or if combined turnover is £70 million or more - so they don't exploit customers by raising price/poorer quality/reduced choice - regulatory capture, few firms investigated yearly - tesco and booker allowed as CMA believed impact on comp would be minimal

Answer 87

- can use price ceiling (p max) - RPI is retail price index (inflation) - regulator set price at RPI - X, where X is expected efficiency gains of firm, with aim to ensure firms pass on efficiency gains to consumers - if inflation 5% and X is 2%, firms only allowed raise by 3% - airport industry + encourages firms to be efficient + lower real prices for consumers (inflation 5%, prices up by 3%) - regulatory capture - hard to know how realistic, arbitrarily saying 2%?

Answer 88

- firms only allowed to make certain rate of profit based on capital stock + encouraged investment (reivnest profits over limit, gain more capital stock, gain more profit than last time, repeat) + keeps prices down - discourages productive efficiency, as costs wont change firms situation

Answer 89

- monopolists will produce high qual goods if best way to max profits. - govt can do qual standards, so firms don't exploit customers by offering poor quality (cheaper) -ve: requires political will and understanding to introduce

Answer 90

- can set targets over price, quality, consumer choice and costs of production - helps firms improve service, = gains for customers -ve: firms will resist targets, and will attempt to find loopholes e.g. changing train timetables so not officially 'arriving late' -ve: some firms fail to meet performance targets, so no improvement. govt needs to fine/impose deterrents so firms at least try to meet targets

Answer 91

- training and grants to new entrepreneurs - subsidies/tax incentives for small businesses - increase comp as more firms in market, increases innovation and efficiency, firms no longer able to be x inefficient

Answer 92

- removal of legal barriers to entry to a previously protected market - increased efficiency in market as greater comp, more firms can enter. - can lead to poor business behaviour

Answer 93

- where govt gets priv sector firms to bid out contracted public sector work - competition introduced where firms are invited to bid for the contract to deliver the work. lowest price wins - helps minimise costs, ensures efficiency, and allows for market comp. - priv sector will have more experience so likely better managed - costly and time-consuming to collect bids - priv sector may not max social welfare, so cost-cutting methods, so reduced quality

Answer 94

- returning public industries to private sector, e.g. BA - allows for competition in the market

Answer 95

- minimum prices to stop price being dropped too low - fines put in place for anyone who exploits power

Answer 96

- health and safety laws, employment contracts, max hours, right to be in a trade union - HOWEVER, if workers rights too strong, employers unwilling to employ as extra cost is too much

Answer 97

sale of govt equity in nationalised industries to private investors + greater comp encouraged, reduces X inefficiency, ensures low prices + managers more accountable as know poor performance means decreased share prices and/or shareholders wanting them gone + puts utilities into hands of ppl, can own shares. workers more motivated as their hard work rewarded with dividends - natural monopolies, better for govt to own - elec, water, transport better for govt to own as they affect other industries

Answer 98

investment needed for LR, private company only SR as shareholders see no point investing LR, may = poor service quality + govt considers externalities + govt guarantees min level of service - principle agent problem, moral hazard, managers know any losses made will be covered - X inefficiency, higher prices for consumers

Answer 99

- better for consumers if nationalised, will max social welfare (allo. efficient) - private would profit max, higher prices for SNP - nationalised would produce at AE, lower price higher quanity, make loss and govt cover it

Answer 100

- govt can prevent monop charging excessive prices, limit their profit - ensure consumers pay fair prices, receive good service + lots of choice - increase efficiency by increasing comp - ensure business costs low by regulating price - increase dynamic efficiency by encouraging investment - if govt runs business, reduce prices and increase quality as aim to benefit society (AE) - govt may suffer from X inefficiency as no incentive to be efficient as lack of comp

Answer 101

- when regulator captured by firm/industry. regulator will often meet with employees, so will be more **empathetic** and **see things from their perspective**. removes fairness, weakens ability to regulate - large firms can invest lots to learn how to 'play the system'. likely regulator will have worked in the sector for years, may have **connections** in the industry, biased - an example of govt failure

Answer 102

- regulatory bodies havw to use info provided by industries - industries may provide incorrect/limited info so they can max profits, so regs cant set correct targets etc - govt failure, wont be able to regulate firms accurately

Answer 103

- price control (max price, profit limit etc) - quality standards - nationalisation

Answer 104

- don't follow normal demand curve, backwards bending demand curve (snob effect) - normal good for first half - as the good goes up in price, the perception of the good increases so societal value increases and so more is demanded - designer clothes

Answer 105

normal good to a certain point then becomes inferior - if income rises by small amount, will buy a tiny bit more baked beans. but if income increases a lot, will buy fresh veg instead