Edexcel A Economics - Theme 3 Flashcards
What is a sole trader?
A person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses
What is a partnership?
A legal form of business operation between two or more individuals who share management and profits
What is a Public Limited Company?
It is a limited liability company whose shares may be freely sold and traded to the public
What is a Private Limited Company?
A private limited company (ltd) is often a small business such as an independent retailer in a market town. Shares do not trade on the stock exchange.
What are the factor that affect a firms size?
Economies of scale Diseconomies of scale Niche marker Profit motive Market power Diversification Owners
What is the principal agent problem?
The owner (known as the principal) of a company may pass responsibilities onto a manger (the agent). This is when the agent makes decision for the principal, the agent’s acts in theirs own interests, rather than those of the principal.
What is a public sector organisation?
Under government control, forms natural monopoly and aims to maximise social welfare.
What is a private sector organisation?
Firm is left to the free market and private individuals. Aim to maximise profits.
What is a profit organisation?
Aims to maximise the financial benefit of its shareholders and owners. The goal of the organisation is to earn maximum profits
What is a not for profit organisation?
Aims to maximise social welfare
What is organic growth?
A firm grows by expanding their production and developing new products. They may invest in R and D. They increase sales and volume of output.
What are the strengths of organic growth?
Less risky than inorganic growth.
Firms grow by building on their lengths and using their own funds, they are less likely to build up debts and it is more sustainable.
Current shareholders retain their control.
What are the weaknesses of organic growth?
It is slow growth, meaning competitors gain more market power in the meantime.
Shareholders might be unhappy if they want faster growth.
What is forwards vertical integration?
When the firm integrates with another firm in the same industry but in a different stage of production, closer to the consumer
What is backwards vertical integration?
When a firm integrates with a firm in the same industry but in a different stage of production, closer to the producer.
What are the strengths of vertical integration?
Increase efficiency though economies of scale.
More control over the market. Cost advantage against competitors.
Firms have certainty over their production (quality, quantity, price)
What are the weaknesses of vertical integration?
Diseconomies of scale (lack of coordination, control and communication).
Create barriers to entry, less efficient market.
What is horizontal integration?
A merger of two firms in the same industry and the same stage of production.
What are the strengths of horizontal integration?
Firms grow quickly, they can gain a competitive advantage over competitors.
Increase outputs, taking advantage of economies of scale.
What are the weaknesses of horizontal integration?
Conflicts of objectives
Can lead to monopoly power.
What is conglomerate integration?
A merger between 2 firms who are not connected and are in different industries.
What are the strengths of conglomerate integration?
Both firms can become stronger in the market. Greater access to finance.
Reach a wider customer base.
Economies of scale, risk baring.
What are the weaknesses of conglomerate integration?
Product range may be spread too thinly. Reduction in quality and increase production costs.
What are the constraints on business growth?
Size of market
Access to finance
Owners objectives
Regulation
What is a demerger?
A demerger is when a large firm is separated into multiple smaller firms.
What is the impact of demerges on businesses?
Eliminate diseconomies of scale.
Gain profit from selling off a part of the company, source of finance.
What is the impact of demerges on workers?
Workers might become confused, there roles might be shifted and could be job cuts.
What is the impact of demerges on consumers?
Lower prices for consumers, net welfare gain.
Greater choice for consumers.
What is profit maximisation?
MC = MR, each extra unit produced gives no extra loss or no
extra revenue.
What is revenue maximisation?
MR = 0, each extra unit sold generates no extra
revenue.
What is sales maximisation?
AC = AR, when the firm sell as much of their goods and services as possible
without making a loss.
What is satisficing?
A firm is profit satisficing when it
is earning just enough profits to keep its shareholders happy.
What is total revenue?
TR = quantity x price
What is average revenue?
AR = TR / quantitiy
What is marginal revenue?
The extra revenue a firm earns from the sale of one extra unit.
What are total costs?
Total costs = total variable costs + total fixed
costs
What are total fixed costs?
Fixed costs do not vary with output.
What are total fixed costs?
In the short run, at least one factor of production cannot change. This means there
are some fixed costs. Fixed costs do not vary with output.
What are total varible costs?
In the long run, all factor inputs can change. The costs that vary depending on the level of output.
What does a firm not shut down when making losses?
In the short run, there are some fixed costs. In the long run, all costs are variable.
What are the examples of economies of scale?
Really Fun Mums Try Making Pies
- risk baring
- financial
- managerial
- technological
- marketing
- purchasing
What are diseconomies of scale?
Control
Coordination
Communication
What is normal profit?
Normal profit is the minimum reward required to keep entrepreneurs
supply their enterprise. It covers the opportunity cost of investing funds into the firm
and not elsewhere
What is supernormal profit?
profit above normal profit
What is a loss
A firm makes a loss when they fail to cover their total costs.
What are short run shutdown points?
A firm will continue to produce in the short run as long as variably costs are covered.
What is allocative efficiency and draw a graph to represent this
Resources are distributed to the goods and services
that consumers want, maximising utility.
P = MC
What is utility?
The satisfaction gained from consuming a good or service.
What is productive efficiency and draw a graph to represent this
This is when firms produce at the lowest point on the average cost curve.
MC = AC
What is productive efficiency and draw a graph to represent this
This is when firms produce at the lowest point on the average cost curve.
MC = AC
What is dynamic efficiency?
When all resources are allocated efficiently over time, and the rate of
innovation is at the optimum level, which leads to falling long run average costs.
What is x-inefficiency and draw a graph to represent this.
A firm is x-inefficient when it is producing within the AC boundary. Costs are higher
than they would be with competition in the market.
What are the characteristics of perfect competition?
Many buyers and sellers
Sellers are price takers
Free entry to and exit from the market
Perfect knowledge
Homogeneous goods (all the same good)
Firms are short run profit maximisers
Factors of production are perfectly mobile
What is a monopoly?
A firm’s that has a market share of over 25%
What are the characteristics of a monopoly?
Profit maximisation
A monopolist earns supernormal profits in both the short run and the long run
Sole seller in a market (a pure monopoly)
High barriers to entry
Price maker
Price discrimination
What are the characteristics of a oligopoly?
A few large firms
High barriers to entry and exit (brand loyalty, high sunk cost and high startup/capital costs.
Product differentiation (price setting power)
Interdependence (price rigidity)
Non-price competition
Profit max and look for market share
What is an oligopoly and draw a kinked demand curve
When there are two or more large firms within a market which have a large proportion of the market share.
What are the characteristics of monopolistic competition?
Slight productive differentiation
Many buyers and sellers
Low barriers to entry and exit
Non price competition
(branding/advertising)
Profit maximisers
What are the characteristics of a contestable market?
No barriers to entry or exit (no sunk costs)
Large pool of new entrants
Perfect information (technology)
Hit and run competition
Low consumer loyalty
Examples: fast food industry, private education and book selling
What are the characteristics of a contestable market?
No barriers to entry or exit (no sunk costs)
Large pool of new entrants
Perfect information (technology)
Hit and run competition
Low consumer loyalty
What is derived demand in labour?
The demand for labour comes from the
demand for what it produces.
What is the demand for labour affect by?
Wage rate
Demand for products
Productivity of labour
Substitutes for labour
How profitable the firm is
The number of firms in the market
What is the supply of labour affect by?
Wage rate
Demographics of population
Migration
Advantages of work
Leisure time
Trade unions
Taxes and benefits
Training
What is mobility of labour
The mobility of labour is the ability of workers to change between jobs.
What is geographically immobility of labour?
Prevent labour moving to where the work is, such as family, social ties, costs of moving
What is occupational immobility?
The occupational immobility of the factors of production refers to the
obstacles which prevent the factors of production changing their use.
What are the wage differentials? Wage discrimination?
Formal education
Skills, qualifications and training
Pay gaps
Wage and skills
Gender
Disrimination
What is the impact of migration on labour markets?
Greater competition to get a job.
Bring high quality skills, increase productivity.
Outline government intervention to control mergers.
Competition and Markets Authority the main competition regulator in the UK.
Investigate potential mergers.
What government intervention can be used to control monopolies?
Price regulation
Profit regulation
Quality standards
Performance targets
What is RPI - X and RPI +/- K
The value of X is the amount in real terms that the price has to be cut by.
K represents how much
investment the firm needs to undertake.
What government intervention can be applied to promote competition and contestability?
Enhancing competition between firms though promotion of small businesses
Deregulation and privatisation
Competitive tendering for government contracts
What are the benefits and problems with deregulation and privatisation?
Increase competition. Economic efficiency.
Incentives to operate efficiently, profit motive.
Competition may lower prices
However lower quality
What government intervention can be used to protect suppliers and employees?
Restriction on monopsony power
Nationalisation
What is the impact of government intervention on price.
Can prevent monopolies charging consumers excessive prices, which
might result in a loss of allocative efficiency.
Services from utility companies more affordable
If corporation tax is high, firms might pass the extra cost onto consumers
What is the impact of government intervention on price?
Can prevent monopolies charging consumers excessive prices, which
might result in a loss of allocative efficiency.
Services from utility companies more affordable
If corporation tax is high, firms might pass the extra cost onto consumers
What is the impact of government intervention on profit?
If governments impose strict price caps, investment could be limited
What is the impact of government intervention on qualitiy?
Governments can ensure firms are meeting minimum targets
Firms which profit maximise might compromise on quality
What is the impact of government intervention on quality?
Governments can ensure firms are meeting minimum targets
Firms which profit maximise might compromise on quality
What is the impact of government intervention on choice?
If governments regulate monopolies and encourage the start-up and growth of
SMEs, consumer choice in the market widens, since there are more firms competing.
A stringent price ceiling might force some suppliers out of the markets, which
reduces the quantity supplied and narrows choice for consumers.
Limits to government intervention
Regulatory capture
Asymmetric information
