1 Flashcards
Why do some firms remain small?
Niche market- less competition more profit, inelastic demand
Selling point for high quality good
Economies of scale is limited
Not all firms want profit Max or sales Max- keep control and close connection to consumers
Principal agent problem
The problem of making the agent act in the interests of the principal rather than in their own interests as the agent knows more- asymmetric information
Difference between public and private sector
Private-privately owned businesses not run by the government with an aim to profit max due to competition so are efficient and give good service
Public-government owned that does not aim to profit max as they use tax money to fund them so are not as efficient
Profit and non-profit organisations
Profit- generate income for entrepreneurs and their employees. Taxed on many things eg. Income
Non-profit- use their income from donations or grants to go into programmes and services to meet people’s needs such as education. can be exempted from tax
How do businesses grow?
Expansion to another location
Franchising- people recognise the franchise and go there because they know the quality and service is good
Merger
Diversify- go into different markets to gain more than one source of income
Use technology (Internet)
Government contracts
Organic growth
Increasing output and enhancing sales but no profit or growth from takeovers,mergers or acquisitions as they are not organic
Backward intergration
Purchasing or merging with a supplier up the supply chain. Company owns a supplier.
Forwards integration
Purchasing down the supply chain to increase market power eg. Manufacturers sell electronics on the internet straight to consumers cutting out a retail store
Conglomerate integration
Merger between two firms that are totally unrelated in business activities.
Pure- nothing in common
Mixed- firms looking for product extensions or markets extensions
Horizontal integration
Companies in the same market merge to gain market share. Eg. Hewlett Packard and compaq in 2002
Vertical integration
A company expands its business operations into different steps on the same production path.
Advantages and disadvantages of horizontal integration
Increased market power, larger economies of scale, cost reduction
Reduction in value of the firm-high cost paid for nothing in return, legal problems if it turns into a monopoly
Advantages disadvantages of conglomerate integration
Gives the company a backup plan if they fail in one market they have another foothold, increased amount of customers so they can sell products to both groups
The company has no experience working in the new market, service and quality may decline as you are not focusing in one market, difficult to merge employees who work in different markets
Constraints to business growth
Inflation, rising interest rates, labour wages, supply chain problems, demand for goods
Demergers and why they occur
A single business is broken down into components to invite or prevent acquisition, raise money by selling components not essential to the core product line, and to create a more focuses firm eg. Bt sold Bt wireless due to high debts
Impact of de-mergers
Business- allows focus on core business, raising funds, the loss making parts are sold off
Workers- reduced conflict between cultures, increased job security if loss making parts are de-merged as less chance of bankrupt
Consumer- lower prices, better service
Profit max
Marginal cost= marginal revenue
Total revenue formula
Price x quantity
Average revenue formula
Total revenue\ quantity
Marginal revenue
The extra revenue gained from selling an extra unit
Price elasticity of demand
Measures The responsiveness of demand to a change in price
Revenue max
Marginal revenue=0
Sales max
Average cost= ar/demand
Types of economies of scale- internal- growth within a business
technology, specialising workforce, marketing (advertising), financial- large firms more trustworthy so higher loans, managerial using managers to supervise production
Types of economies of scale- external- within an industry
Research and development facilities in local universities that everyone can benefit from, local council improves transport network, relocation of suppliers closer to the main manufacturing factory
Minimum efficient scale
The Lowest point where a firm can produce such that it’s long run average cost curve is minimised -achieving productive efficiency
Diseconomies of scale
Less efficient the bigger it gets due to;
Needs more machinery to cover fixed cost so unless the machines are very efficient they make a loss
Poor communication as it is so large
Principal agent problem
X-inefficiency- paying managers higher wages than needed meaning average cost is higher than if the firm was in a more competitive market,
Productive efficiency
Maximum number of goods are produced with s given amount of input. Found on the ppf line
Allocative efficiency
Goods and services are distributed based on consumers needs.
Occurs when the price of the good= the mc of production
Dynamic efficiency
Introduction of new tech and working practises to reduce costs over time
X-inefficiency
Firms do not have incentives to cut costs as there is little competition and so average cost is higher than needed
Characteristics of perfect competition
Competition is at its highest level.
Profit maximisers, many suppliers, many buyers, price takers as there is no one dominant firm, homogeneous products, perfect knowledge, no barriers to entry or exit
Monopolistic competition
When characteristics of perfect competition do not hold.
Large number of firms in the industry, may have some control over price as they can change their product to match rivals to be a close substitute, few barriers, imperfect knowledge for consumer and producer
Economies of scale
Reducing average cost by increasing output
Natural monopoly
Type of monopoly that arises when there are extremely high fixed costs of distribution. Eg. BT due cables underground
If competition came into the industry it would become inefficient
Monopsony
High barriers to entry
One buyer many sellers
Eg. The government buys teachers, nurses
Problems with a monopsony
Monopsony can lead to lower wages for workers. This increases inequality in society
Workers are paid less than their marginal revenue product.
Firms with monopsony power often have a degree of monopoly selling power. This enables them to make high profits at the expense of consumers and workers.
Firms with monopsony power may also care less about working conditions because workers don’t have many alternatives to the main firm.
Advantages of a monopsony
Firms- you can pick from a range of sellers and lower the prices
Consumer- potential lower prices, constant supply as there are many places to get the product
Characteristics of an oligopoly
- Supply is concentrated in a few companies eg. Three firms control 80% of output in that market( broadband- Bt, Virgin)
- high barriers to entry and exit
- firms must be interdependent eg. If prices in one form goes down the other two big ones must do the same to keep consumers
What is a collusive oligopoly
The dominant firms make an agreement to restrict competition and maximise their own benefits
What is a cartel
A wide ranging agreement amongst several firms in a market where typically firms limit output to raise prices. ( an example is OPEC)
Types of price competition
- Price wars occur where non price competition is weak, drive prices down to loss making
- predatory pricing is when an established firm is threatened by a new entrant, they set low prices so the new firm cannot make profit and have to leave
- limit pricing is when the prices are low enough to deter new firms entering
Types of non price competition
- product innovation
- advertisement
- branding
- quality of good/service
Characteristics of a monopoly
- only one firm in the industry
- high barriers to entry
- short run profit maximisers
How does a monopoly develop
- due to horizontal integration as two firms merge or through vertical as the firm controls the stages of production
- legal monopoly a monopoly run under the government eg. Royal Mail
- being the first firm in that market
What are the barriers to entry
- High set up costs
- patents
- natural monopoly
- lack of knowledge
- pricing strategies
What is a natural monopoly
A monopoly where there are extremely high fixed costs of distribution such as needing large scale infrastructure like pipelines.
Railways are a natural monopoly as large amounts of money are needed to lay track, they are often heavily regulated
Advantages of monopolies for consumers and producers
- regular supply of the good
- quality of product may improve due to high profits
- abnormal profit
Disadvantages of monopolies for consumers and producers
- high prices for consumers as they can only buy from one firm
- firms are less efficient as they have no competition
- lack of choice for consumers
- X-inefficiency less incentive to cut costs as they have no competition
- diseconomies of scale for a large monopoly
internal economies of scale
- purchasing- buying in greater quantities results in lower prices
- technical - use of specialist machinery or processes to boost output
- marketing- spreading a fixed marketing cost over larger range of products, customers and stores
- network- adding extra customers to an already established network
- Financial- firms benefit from access to more and cheaper finance
What is a Discriminating monopoly
A monopoly that can split the market for the same product and price discriminate between different buyers.
How will a monopoly discriminate
Time- different prices at different times eg. Rail tickets
Place- the same car can be bought at different prices in different countries
Income- split consumers into income groups charging a higher price for high income earners
Three conditions for a price discrimination in a monopoly
- different demand curves from separate groups of buyers (elasticity of demand of buyers must differ)
- split market distinctly otherwise they cannot distinguish between consumers prepared to pay higher prices
- markets must be kept separate at low cost eg. Preventing buyers from high price market. Buying in a low price market
Benefits of price discrimination for consumers and producers
- firms get increase profits
- some consumers may benefit eg. Before the rate was £10 but now there is a rate of £15 and £8 do the people paying £8 save £2
Disadvantages of price discrimination for consumers and producers
- costs of production may be higher
- consumers have to pay higher prices
Evaluation of price discrimination
- degree of discrimination
- no supply curve
- a monopoly will only produce where demand is elastic as a fall in price will only increase revenue where demand is elastic
- a monopoly will operate in short run if revenue is greater than variable cost but not in the long run
