Business Operations & Labour Markets - Year 2 Microeconomics Flashcards
1
Q
term
A
definition
2
Q
Why do firms grow in size?
A
- Experience economies of scale (cost cuts)2. Generate greater revenue and supernormal profits which can be used to re-invest into research and development3. Gain larger market share increasing their influence on prices and contestability, can lead to monopoly power4. Have more security by raising reserve cash in case of financial difficulties and diversifying risk by selling larger range of goods in more countries
3
Q
Explain what is meant divorce of ownership and control.
A
As firms growth there is a seperation of ownership and control because firms are owned by their shareholders and seniors managers are hired to manage operations.
4
Q
Formula for Average Revenue
A
AR = TR / Q = [P x Q] / Q = P
5
Q
Why do some firms remain small (Constraints on business growth)?
A
- Market is small or is specialised and niche2. Limited access to finance, low revenue or credit crunch3. The owner may prefer to keep the business small to keep full control of the firm (P.A problem)4. Regulation may prevent large businesses from growing to allow competition to flourish ‘Competition Law’
6
Q
Define the principle-agent problem, and explain why this is a problem of firms growing.
A
Divorce of ownership and control in firms leads to owners (Principle) hiring managers (Agent). Managers may prioritise personal gain over business interests, creating conflicts due to differing objectives, leading firms to profit satisfice rather than maximise.
7
Q
What is the difference between the private and public sector?
A
The private sector is part of the economy that is owned and run by individuals or groups, usually with the aim of making a profit - includes sole traders, PLCs, LTDs etc.The public sector is part of the economy that is owned and controlled by the government. The purpose of public sector firms is to provide a service for citizens, not to make a profit.
8
Q
What is the objective of not-for-profit firms?
A
Maximise social welfare and help individuals
9
Q
Define organic growth.
A
When a firm grows by increasing their total level of output.
10
Q
State three methods of organic growth.
A
- Opening new stores2. Product diversification (R&D)3. Investing in new technology
11
Q
State two advantages to organic growth.
A
+Cheap relative to integration+Firm keeps control
12
Q
State two disadvantages to organic growth.
A
-Takes a long time-Difficult to gain new ideas-Difficult to expand into new markets
13
Q
Define external growth.
A
When a business grows through amalgamation, takeover or merger.
14
Q
State three types of external growth.
A
- Vertical Integration2. Horizontal Integration3. Conglomerate Integration
15
Q
What is horizontal integration?
A
Firms in the same industry at the same stage of production integrate.
16
Q
State three advantages to horizontal integration.
A
+Reduces competition as a firm is taken out+Increases market share, so the firm has more power to influence markets and set prices+Business grows in a market where it has expertise+Economies of scale
17
Q
State two disadvantages to horizontal integration.
A
-Increases risk for the business in case that market fails ‘Placed all their eggs in one basket’-Some admin staff will be made redundant as they will be duplicated
18
Q
What is forward vertical integration?
A
When a firm integrates with another firm in the same industry at a stage of production closer to the consumer/final good.
19
Q
State two advantages to forward vertical integration.
A
+Increased potential for profit as firm takes the potential profit from a larger chain of production+Improved coordination, communication and control over supply chain
20
Q
State three disadvantages to forward vertical integration.
A
-High initial investment costs-Reduced flexibility in responding to changing market-Firms may lack expertise in the new sector
21
Q
What is backward vertical integration?
A
When a firm integrates with another firm in the same industry at a stage of production further from the consumer/final good.
22
Q
State two advantages to backwards vertical integration.
A
+Ensure deliveries are reliable and control quality, reduces risk+Can restrict access to resources to competitors
23
Q
State three disadvantages to backwards vertical integration.
A
-High initial investment costs-Reduced flexibility in responding to changing market-Firms may lack expertise in the new sector
24
Q
What is conglomerate integration?
A
Where firms in dfferent industries with no obvious connections integrate.
25
State two advantages to conglomerate integration.
+Risk diversification (risk-bearing economies of scale)+Useful where there is no room for growth in current market
26
State two disadvantages to conglomerate integration.
-Risky as the firm has no expertise in the new industry-Lack of synergies between diverse business units leading to inefficiencies-High initial investment costs
27
What is a joint venture partnership?
A business arrangement in which two or more firms agree to pool their resources for the purpose of accomplishing a specific task
28
What is a demerger?
When a single large firms is broken into multiple smaller firms, each to operate on their own, sold or dissolved.
29
Why do demergers occur?
1. Lack of synergies2. Value of seperate parts of the company worth more than company combined3. Prevent diseconomies of scale4. Avoid attention from competition authorities5. If company is focused on individual markets they will be more efficient
30
What is the impact of demergers on workers?
+Seperate firms hire their own managers which can lead to promotions-Trying to maximise efficiency, firms may make jobs redundant
31
What is the impact of demergers on consumers?
+Gain from innovation and efficiency leading to higher quality products and cheaper goods-Demerged firms may lose economies of scale and instead raise prices, or reduce quality of goods
32
What is the impact of demergers on firms?
+Concentrating on a smaller business can make it more efficient and lead to greater innovation-Smaller business loses economies of scale and therefore reduced efficiency
33
Formula for Total Revenue
TR = P x Q
34
Formula for Marginal Revenue
MR = ΔTR/ΔQ
35
Define fixed costs and give examples
Fixed costs do not vary with output. EG: Worker salaries, rent, business license etc.
36
Explain the Law of Diminishing Marginal Returns.
As additional units of a variable input are added to a fixed input, the marginal product will eventually decrease as a result of other fixed factors of production.
37
Define variable costs and give examples.
Variable costs vary with output. EG: Wages, raw materials, delivery costs etc.
38
Formula for Total Costs
TC = TFC + TVC
39
Formula for Average Costs
AC = TC / Q
40
Explain the shape of the AC curve.
Initially, AC decreases as output increases, reaches a minimum point, and then rises due to diminishing marginal returns. Its lowest point intersects the MC curve.
41
Explain the shape of the MC curve.
Initially, as production increases, MC decreases, but it eventually rises due to diminishing marginal returns
42
Define economies of scale.
When increasing the level of production leads to a fall in average (unit) costs.
43
What is meant by Returns to Scale?
The change in output or production as a result of proportional changes in all inputs.
44
What is the Minimum Efficient Scale (MES)? How is the LRAC curve is used to demonstrate economies of scale.
The minimum level of output required to have fully minimised average costs.
45
What are the 6 Internal Economies of Scale?
1. Purchasing2. Technical3. Marketing4. Financial5. Managerial6. Risk-bearing
46
Purchasing Economies of Scale
When a firm 'bulk buys' inputs in large quantities and can negotiate lower unit costs.
47
Technical Economies of Scale
Increased technological efficiency in the production process, eg from specialisation and research and development
48
Marketing Economies of Scale
Where larger firms are able to lower the unit cost of advertising and promotion by 'bulk buying' marketing
49
Financial Economies of Scale
Large firms have greater security and therefore it is easier to borrow and can negotiate lower interest rates on loans.
50
Managerial Economies of Scale
Larger businesses can afford to hire specialist functional managers, thus improving the organisation's efficiency and productivity.
51
Risk-bearing Economies of Scale
Large firms can operate in various markets and diversify their risk, meaning if one area of the business or a market collapses they would still be able to operate
52
What are the 3 External Economies of Scale?
1. Increase in skilled labour influx2. Better and most cost-efficient transportation infrastructure3. Suppliers, R&D firms move closer to firm
53
Define diseconomies of scale
When increaing the level of production leads to an increase in average (unit) costs.
54
What are the 3 Internal Diseconomies of Scale?
1. Lack of control2. Lack of communication3. Lack of coordination
55
Lack of Control Diseconomies of Scale
As the firm grows, owners lose control of their business as they hire managers. Due to the Principle-Agent problem, this can cause diseconomies of scale as managers may operate for self-gain, which may increase average costs as a result.
56
Lack of Communication Diseconomies of Scale
As the firm grows, it becomes more difficult for areas of the business to communicate effectively and efficiently, which can increase average costs.
57
Lack of Coordination Diseconomies of Scale
As the firm grows, workers may begin to feel less motivated, and less valued. As a result, they may begin to slack as managers are less likely to notice, resulting in decreasing returns to scale.
58
What are the 4 External Diseconomies of Scale?
1. Increasing land prices2. Increasing unit labour costs3. Tranport issues and geographical immobility4. Price of raw materials rising
59
What is the condition for profit maximisation?
MR = MC
60
Define supernormal profit.
Supernormal profit = TR - TC
61
Define normal profit.
Normal profit is when TR = TC or AR = AC
62
How would you diagrammatically show profit maximisation?
1. Plot MR, AR, MC, AC curves on a costs/revenues diagram.2. Draw a dot where MR = MC, then extrapolate vertically until it intersects both the AR and the AC curves.3. Draw a horizontal line from these curves and label P1 and C14. Shade in the rectangle between Q1P1C1 as the net supernormal profit.
63
When does a business make a loss?
When TR < TC or AR < AC
64
When does a business's Shut-Down Point Occur?
When increasing output leads to a greater loss than already incurred. This is when AVC > ARTherefore, the short-run shut-down point is when AVC = AR
65
Explain the business objective of revenue maximisation.
Many firms may aim to revenue maximise as a growth in revenue a justifies to shareholders greater managerial rewards, as long as they provide some profits to the owners - Principle Agent Problem. Also, firms who wish to gain capital for reinvestment purposes may choose to revenue maximise in the short run so they can maximise profits in the long run.
66
How would you diagrammatically show revenue maximisation?
MR = 0
67
Explain the business objective of sales maximisation.
Firms wishing to exploit economies of scale, or quickly gain market share may temporarily choose to sales maximise to increase output. Companies working in airline industry may opt for sales maximisation since there are high total fixed costs associated with it so they want to maximise 'bums on seats' to spread out these costs over a larger customer base
68
How would you diagrammatically show sales maximisation?
AC = AR
69
Explain the business objective of profit satisficing.
Due to the principal-agent problem, managers may prioritise personal benefits over profit maximisation, leading to profit satisficing where they aim to make enough profit to satisfy owners while pursuing other objectives like their own incomes.
70
What are some alternate objectives businesses may have besides profit, revenue and sales maximisation and profit satisficing?
1. Survival2. Allocative efficiency (P = MC)3. Minimise environmental impact4. Corporate social responsibility
71
What are the 4 types of business efficiency?
1. Allocative efficiency2. Productive efficiency3. X-efficiency4. Dynamic efficiency
72
Explain what is meant by allocative efficiency.
When resources follow consumer demand, and net social welfare is maximised. This is where MSC = MSB, and supply = demand. Therefore it is shown where AR = MC
73
How would you diagrammatically show allocative efficiency?
AR = MC
74
Explain what is meant by productive efficiency.
When a firm operates at the lowest point on their AR curve, and they fully exploit economies of scale.
75
How would you diagrammatically show productive efficiency?
AC = MC
76
Explain what is meant by X-efficiency.
When a business minimises their waste meaning there are no excess costs.
77
What can lead to X-inefficiencies in a market?
1. Monopolies have no incentive to further enhance their efficiency as there is no competitive incentive2. Public sector firms have no incentive to further enhance efficiency as there is no competitive incentive
78
How would you diagrammatically show X-efficiency?
Production is anywhere on the AC curve, or on the PPF curve.X-inefficiency is shown by operating inside of the PPF or above the AC curve.
79
Explain what is meant by dynamic efficiency.
Reinvestment of long-run accumulation of supernormal profits into the business in the form of new capital, technology, innovation, research and development etc. leading to a downwards shift of the LRAC curve.
80
How would you diagrammatically show dynamic efficiency?
Downwards shift of LRAC
81
Define labour demand.
The quantity of labour that employers would wish to employ at each possible wage rate.
82
Why is labour demand a derived demand?
Firms hire workers to produce goods, so labour demand is derived from the demand for these goods and services, as businesses will only hire workers so long that the final product is demanded.
83
What factors affect the level of labour demand?
1. Demand for the final product2. Price of other factors of production3. Wages in other countries4. Technological advancements (capital-labour substitution)5. Labour market regulations6. State of the economy
84
What factors affect the wage elasticity of labour demand?
1. Price elasticity of demand for the final product2. Proportion of wages to the total cost of production3. Substitutes to labour4. Time frame
85
Define Marginal Physical Product of Labour (MPP)
The extra output produced from employing an extra worker
86
How do you calculate the Marginal Physical Product of Labour (MPP)?
Δ (total output) / Δ (labour input)
87
Define Marginal Revenue Product of Labour (MRPL)
The extra revenue a firm earns from employing an extra worker
88
How do you calculate the Marginal Revenue Product of Labour (MRPL)?
MPL * Marginal Revenue= Δ (total output) / Δ (labour input) * Δ (total revenue) / Δ (total output) = Δ (total revenue) / Δ (labour input)
89
What does Marginal Revenue Product Theory state?
The MRP curve is the labour demand curve. The MCL curve is the supply curve for workers at a wage rate set by the perfectly competitive labour market (S = MCL, perfectly elastic). Firms will hire additional workers until MRP = MCL, meaning when the marginal revenue product of labour is equal to the wage rate, as this means that firms maximise revenue for a given number of employees.
90
What is one major assumption made in MRP Theory?
Firms are in Perfect Competition, meaning that they are price takers leading to P = MR = AR.
91
State some criticisms of MRP theory.
-How do you measure productivity. hence MRP?-Teamwork makes it difficult to measure individual productivity-Imperfect labour markets involving trade unions?-Self employed?
92
Explain the shape of the MRP curve in a labour market.
MRP initially increases because each worker bring in extra revenue that the last due to specilisation gains and excess capital that can be utilised by workers, until the point of Diminishing Marginal Returns, where the fixed factors of production constrain MRP - can also be because of productivity.
93
Define labour supply.
The ability and willingness of people to make themselves available to work at different wage rates
94
What factors affect the level of labour supply within an economy?
1. Population and age demographics2. Non-pecuniary benefits3. Education, training and qualifications4. Trade unions and barriers to entry (eg. MBBS for doctor)5. Wages and conditions of other jobs6. Legislation
95
What factors affect the wage elasticity of labour supply?
1. Level of qualifications and training2. Available of suitable labour in other industries3. Time frame
96
Why is the supply curve of an individual worker backward bending?
Originally increases due to the substitution effect, then there is a vertical section where the income effect = substitution effect. The curve bends back on itself due to the income effect as individual workers choose to work less and relax more because of a higher income.
97
What is meant by the income effect?
The change in hours worked as wages rise due to the potential of individuals reaching a target income, can be positive or negative.
98
What is meant by the substitution effect?
As wages rise, the opportunity cost of leisure time increases, providing an incentive to work, always positive.
99
Objectives of trade unions
-Wage bargaining to achieve higher wages-Improved working conditions-Greater job security
100
What are the causes of wage differentials in labour markets?
1. Labour is non-homogenous (different MRP, MCLs, discrimination)2. Non-monetary considerations (eg. fringe benefits etc.)3. Geographically immobility of labour4. Occupational immobility of labour5. Lack of perfect knowledge6. Trade unions and supply restrictions7. Monopsonies and wage setting ability
101
Examples of market failure in labour markets.
1. Labour suffers from geographical immobility2. Labour suffers from occupational immobility
102
Advantages of wage differentials.
+Incentive to gain skills, training and qualifications to improve incomes+Trickle down effect as high wage earners cause a multiplier effect in the economy leading to job creation+Encourages enterprise+Encourages work instead of welfare benefits+Efficient resource allocation: Workers feel rewarded by wages based on the value of their work
103
Disadvantages of wage differentials.
-Income inequality-May require more government finance on welfare spending-Can reduce long run growth and those on lower incomes have a high MPC-Social costs: Crime, depression, divorce, drug abuse etc. - More government finance on policing externalities-Trickle down effect may not occur-Government solutions are limited if they are the monopsonist employer
104
Define a labour market monopsony.
When there is a single dominant employer in a labour market that has significant wage-setting power and can push wages down - wage makers.For example, the state is a monopsony for public sector goods. They will maximise revenue from marginal labour by hiring until MRP = MCL, and reducing employment and wages since MCL is not equal to ACL.
105
Advantages of National Minimum Wage
+Increases an incentive to work+Reduces wage differentials+Fiscal benefit to the government as less people are on benefits and people pay more tax+Increased productivity from morale boost+Incentive for firms to boost human capital+Counter monopsonist employers
106
Disadvantages of National Minimum Wage
-Leads to real-wage unemployment (depends on elasticity)-Youth lose out the most-Those with wages above NMW may ask for higher wages as well (Wage-price spiral?)-Costly to businesses, may relocate or shut down due to lack of competitiveness-Does not account for regional costs of living differences
107
What are the policies to redistribute income and wealth?
1. Increase progressive tax rate bands2. Reduce level of regressive tax3. Raise welfare benefits4. Raise minimum wages5. Impose maximum wage or cap bonuses6. Legislation like anti-discrimination or paternal leave7. Supply side policies like Government spending on education/training/healthcare
108
Evaluation of Taxation as a policy to redistribute income and wealth.
1. Raise progressive tax rates: Laffer curve, distorts incentive to becomes more productively efficienct and take more risks, etc. - less Government revenue2. Reduce regressive tax rates: Government earns less money may lead to increased long-run borrowing or austerity in the future
109
Evaluation of Benefits as a policy to redistribute income and wealth.
1. Poverty trap as it reduces to the incentive to find work2. Strenuous on government finances can lead to fiscal austerity
110
Evaluation of Minimum/Maximum Wages as a policy to redistribute income and wealth.
1. Minimum wages are costly to businesses and can cause unemployment2. Maximum wages may reduce the incentive to be entrepreneurial
111
Evaluation of Legislation as a policy to redistribute income and wealth.
1. Costly to businesses - shut down or reduced competitiveness2. Costly for the government to enforce3. May lead to government failure if businesses shut down or relocate as unintended consequences
112
Evaluation of Government Spending as a policy to redistribute income and wealth.
1. Expensive on government finances2. Can take a long time for it to take effect in the economy
