economics theme 3 Flashcards
4 reasons why small firms survive
1.economies of scale=small relative to market size-cost advantage through diseconomies of scale
2.cost of production for large scale=higher-productive inefficiency and poor organisation in large firms
3.barriers to entry=low-cost of setting up and product=simple
4.small firm=monopolistic-offer product not available from other companies
what does divorce of ownership from control mean?
larger firms appoint directors and managers creating principle agent problem. in public sector the main aim is not always profit but providing for citizens-depends on directors motivations
what are the 2 ways a business can grow?
1.organic growth- increase through capital investment or labour force
2.merger-join together 2 or more firms
5 types of mergers
1.horozontal integration- firms in the same industry and same stage of production merging
2.vertical integration- firms in the same industry but at different stages of production merging
3.forward vertical integration- where supplier merges with 1 or more of its buyers
4.backward vertical integration-purchaser merges with 1 or more suppliers
5.conglomerate integration-joining of 2 or more firms producing unrelated products
Evaluation of of organic growth
con: time consuming-too slow for director to max bonus, expensive, high risk
pro: most common with small firms
evaluation of vertical integration
pro: more cost efficient, reduce risk by gaining competitive advantage, forward=more control of the market
cons: little expertise decreases performance, firms pay to much decreasing the share price, difficulties in merging= higher cost, more management
evaluation of vertical integration
pro: reduces competition, reduces AC, businesses grow within their knowledge
cons: pay to much, poorly integrated/managed
evaluation of conglomerate integration
pro: reduce risk without dependence on market, easier to expand with more option,
cons: don’t have expertise in market reducing performance, local economy lose job and derelict space, pay too much, poorly integrated/managed
4 constraints on business growth
1.size of market-not enough customer
2.access to finance-depend on bank willingness to give loans
3.owner objective-not every owner wants growth
4.regulation-restrict mergers and number of businesses
3 reasons for demergers
1.lack of synergy-no impact on efficiency
2.price-poor performance of 1 part drags down share price
3.foccused companies- more fashionable, deliver higher profit, exploit limited market
3 impacts of demergers
businesses- increase efficiency and profit
workers- manager=promotion, loose job
consumer- gain- lower cost, higher investment means new products loose- increased profit and price
TR equation
quantity x average price
AR equation
TR / quantity
MR equation
change TR / change quantity
Relationship between economies of scale and LRAC
Economy of scale=expanding size and output leading to fall in AC
Diseconomies of scale=firms become too large so AC rises
4 sources of economies of scale
1.technical economies
2.managerial economies
3.purchasing economies
4.financial economies
Why do diseconomies of scale occur
Management problems/difficult to keep control
Tight control on major decisions
Transport=difficult to control
Why does LRAC shift
1.external economies of scale-growth in industry
2.taxation-increased cost
3.technology-efficient new technology
4.external diseconomy of scale-industry expanding so forces to compete and increase price of factor input
Why is profit max where MC=MR
Addition to TC= TR from extra unit of sales.cease production where extra unit yields loss
Why is the shit down point below AVC
Fail to cover total variable costs as between AVC and ATC the firm can make contributions to fixed costs
8 barriers to entry
1.capital cost
2.sunk cost-not recoverable
3.scale economies-few firms operate and satisfy demand
4.natural cost advantage-own factor superior to others
5.legal barriers-firm=particular privalidge
6.marketing barriers-powerful brand image
7.limit pricing-low price keeps out new entrant
8.anticompetitive prices-restrict competition
3 main types of market structure
Perfect competition
Monopoly
Imperfect competition(oligopoly)
4 characters of perfect competition
1.many buyers and sellers
2.freedom of entry and exit
3.perfect knowledge
4.homogeneous product
4 assumptions of monopolistic competition
1.large number of buyers and sellers, small and independent
2.no barriers to entry and exit
3.films=short run profit max
4.firm produce non homogeneous product
