micro

Question 1

pros of organic growth and what it is

Answer 1

Organic growth- a firm increasing their output by increasing investment or labour
Organic growth is cheaper than merging or takeovers (which are better suited for larger firms) and is far easier

Question 2

cons of organic growth

Answer 2

Somethings you cannot gain from organic growth e.g. Wanting to get into an Asian market from a European one, you will have to merge, organic growth will not suffice
Organic growth may be too slow for directors and managers who want to maximise salaries and bonuses

Question 3

what us vertical integration and its pros

Answer 3

Vertical integration- a merger between 2 firms in the same industry but at different stages of production e.g. Car manufacturer buying a car dealership
Possible cost savings to make firm more efficient
May reduce risk if one industry goes into decline then they still have something
Firm would have more control over the market and dictate prices etc

Question 4

cons of vertical integration

Answer 4

If both firms are very good at what they do, if one buys the other the quality of the smaller one may lower because the management is not as good or efficient
Some firms may pay too much to take over and the market share may actually decrease
May be very expensive to merge
Experienced and skilled workers may leave, making the firm worse off

Question 5

cons of horizontal integration and what it is

Answer 5

Horizontal integration- merger of two firms in the same industry at the same point of production e.g. Two bakeries
May be poorly managed

Question 6

pros of horizontal integration

Answer 6

Reduced average costs bc of economies of scale
Reach economies of scale
Give more negotiating power, allowing for larger profit margins
Benefits of diversity, cross subsidisation
Job security
Higher consumer surplus
Greater tax revenue
Reduce competition by taking out a competitor
Can allow one firm to buy unique assets owned by another company
Allows a business to grow in a market where they already have knowledge and expertise, making the merger more likely to be successful

Question 7

eval for horizontal integration

Answer 7

May experience diseconomies of scale
Will be very expensive in short term
Revenue may not necessarily increase
People don't like big conglomerates, people do like artisan, increasing trend lately
Monopsony
Contestability
Legal costs, X-efficiency costs

Question 8

what us conglomerate integration

Answer 8

Conglomerate integration- merging of two firms with no common interest
Reduces risks bc then the firm is not so dependent on the one market, but two
Size makes it easier for conglomerates to get finance to expand
Opportunity for asset stripping which is bad for the firm being bought over though and the locals
But they do not have expertise in the market of the firm they buy into

Question 9

constraints of business growth

Answer 9

Size of market- depends on the industry and the opportunity for expansion there e.g. Vegan product industry is growing but vintage records is not
Access for finance- how willing the banks are to give them a loan, usually they will out profit towards funding but banks too
Owner objectives- not every owner wants to expand
Regulation- maybe a firm cannot output more because of pollution permits

Question 10

why demerge

Answer 10

Diseconomies of scale- no effect on profitability
They may be worth more separately
Management did not have time or skills to make that part of the company flourish

Question 11

impact of demergers on businesses, workers and conumsers

Answer 11

Businesses- will benefit if demerging means greater efficiency and profit, depends on the firm and how innovative they are etc
Workers- senior managers will gain a promotion but workers may lose their jobs, especially if the firm becomes more efficient
Consumers- will gain if the demerger means they become more efficient but will lose out if they become focussed on increasing profits by raising prices

Question 12

allocative efficiency

Answer 12

Allocative efficiency- or economic efficiency measures whether resources are allocated to the goods and services demanded by consumers. Allocative efficiency when marginal benefit of consumption = marginal cost of production P=MC or AR=MC, price is to maximise consumer/producer welfare. Private costs differ to social costs and this affects allocative efficiency

Question 13

productive efficiency

Answer 13

Productive efficiency- when production is achieved at the lowest cost and only exists if there is technical efficiency. This is when given input produces max output or a given output is produced by min input
MC=AC

Question 14

dynamic efficiency

Answer 14

Dynamic efficiency- concerns how resources are allocated over a period of time, think long term and opportunity cost. E.g. Rate of investment and where that investment is spent, or sustainable growth- not dynamically efficient if they leave future generation worse off

Question 15

x-inefficiency

Answer 15

X-inefficiency- or organisational slack is when a firm is not producing and lowest possible cost, firm operating within average cost curve, but not at the boundary. Could be because of managers, trade unions, environmental pressures

Question 16

in/efficiency in differeent market structures

Answer 16

In/efficiency in different market structures- production must take place on boundary to be allocatively efficient. Dynamic efficiencies shown by shifts in curve

Question 17

characteristics of perfect competition

Answer 17

• Many buyers and sellers but none of whom are large enough to dictate price. Many sellers sell to different small groups of buyers
  
  • Freedom of entry and exit- barriers are low so a firm can come and establish itself
  • Buyers and sellers have perfect knowledge- of prices so if one firm charges slightly higher, its demand will be 0, so the firm bust accept the market price, they are price takers
  • Allocatively and productively efficient
  • Homogeneous products- no branding and products are identical e.g. Agriculture
  • Profit maximisation is the goal

Question 18

characteristics of monopolistic competition

Answer 18

Large number of buyers and sellers in the market
No/low barriers to entry of exit
Firms are short run profit maximisers
Firms produce differentiated goods, to some extent

Question 19

characteristics of an oligopoly

Answer 19

• High barriers to entry and exit
  
  • High concentration ratio- three largest firms produce around 80pc of output would be considered monopolistic or if five or fewer firms have 50% market share.
  • Interdependence of firms- what one firm does will influence what other firms do e.g. If one firms increases efficiency and output then another firm will follow. Uncertainty because you don’t know how firms will change their competitive strategy
  • Product differentiation- where you cannot buy the same product elsewhere
  • Non price competition

Question 20

characteristics of a monopoly

Answer 20

Only one firm in the industry
Barriers to entry prevent new firms from entering the market- legal barriers, sunk costs, capital costs, marketing costs etc
The monopolist is a short run profit maximiser where MC=MR
High degree of product differentiation

Question 21

characteristics of a monopsony

Answer 21

Only one buyer in the market
Same conditions as a monopolistic market (apart from the number of buyers and sellers)
Assumed they are profit maximisers

Question 22

costs and benefits in a monopsony

Answer 22

The monopsonist- gains higher profit by being able to buy at low prices, reduces cost and leads to increase in overall output because the marginal cost curve shifted downwards
Suppliers- likely to be the losers, their prices fall therefore their wages will fall. Some suppliers may switch products or leave the market altogether
Customers- part of the lower cost for the monopsonist should be passed on to the consumer. There may also be restrictions on supply, this depends on the price elasticity of supply of the good the monopsonist is the buyer of. If there is high price inelasticity then there will be little fall in supply
Employees- the seller will sell less therefore they will employ less, the other is unknown

Question 23

assumptions of contestable markets

Answer 23

Number of firms in an industry varies- could be monopolistic or it may be that no firm has monopoly power
Freedom of entry and exit
Firms compete and do not collude on prices
Firms are short run profit maximisers where MC=MR
branded goods
Perfect knowledge in the industry

Question 24

what shifts labour demand curve

Answer 24

• Changes in demand for the product labour makes
  
  • Changes in labour productivity
  • Changes in relative international wages
  • Changes in regulation
  • Eg, climate change policy
  • Minimum wage, immigration laws, health and safety trade union laws and zero hour contracts

Question 25

what determines elasticity of labour

Answer 25

• Time
  
  • Availability of substitutes
  • Elasticity of demand for the product
  • Proportion of labour cost to total cost

Question 26

effect of time of elasticity of labour

Answer 26

Time: in the short run it is usually hard to replace labour. So demand for labour will be inelastic. In the long run, labour can be replaced e.g. through capital. Therefore, demand for labour will be elastic (or less inelastic).

Question 27

effect of substitutes of elasticity of labour

Answer 27

The ease and cost of factor substitution: the easier it is to replace labour with machines the more elastic demand for labour will be e.g. checkout operators can be fairly easily replaced by self-service machines, but the machinery may be expensive.

Question 28

effect of lbaour costs of elasticity of labour

Answer 28

The proportion of labour costs in the total costs of a business: if wages are a small proportion of a firm’s total costs then the demand for labour will be more inelastic – this is because a wage increase will have little impact on total costs.

Question 29

effect of PED of elasticity of labour

Answer 29

The PED of the product being made: if inelastic then the elasticity of demand for labour is also likely to be inelastic. This is because firms will be able to pass on a large proportion of their increased costs to consumers in the form of higher prices.

Question 30

what affects supply of labour to a particular occupation

Answer 30

• Time
  
  • Extent of under/unemployment
  • Availability of suitable labour in other industries

Question 31

what affects supply of labour to the whole economy

Answer 31

• If real wages rose
  
  • Retired people could be bought back provided there were incentives
  • Immigration
  • Cutting tax and unemployment benefits
  • Education and training in long term
  • Trade unions
  • Part time work
  • People who are self employed
  • Hours of woke work and holiday
  • Quality of labour force

Question 32

what affects the elasticity of labour supply

Answer 32

• The nature of the skills required in the job: the higher the skills required the more inelastic labour supply will be.
• Length of the training period: the longer the training period the less likely it is that people will enter the profession even if wages rise.
• Vocation: if wages fell it is unlikely that (many) workers would leave a profession with a strong vocational element to it e.g. teaching or nursing. This depends on the extent of the cut in wages.
Time: if wages fall (some) workers will want to leave the industry/profession. In the short run this may be difficult because workers need to give notice and/or they wait to see if wages return to previous levels.

Question 33

a market where all workers are paid the same

Answer 33

• Labour is homogenous
  
  • There is perfect knowledge in the labour market
  • Perfect mobility of labour
  • All workers and employers are price takers- there are no monopsonists or trade unions
  • No barriers which prevent wages falling and rising
  • Firms aims to maximise profit and minimise costs

Question 34

how can gov intervene in labour markets

Answer 34

• Maximum and minimum wages
	• Public sector wage setting
		○ Depends on private wages
	• Policies to tackle labour market immobility, as a result people
		○ Are underemployed
		○ in temp or self employment
		○ Gov makes education better
		○ Subsidising workers]relocation subsidies w housing
		○ Increase knowledge of job opportunities
		○ Helping workers with applications
		○ Tax reformation
		○ Less discrimination

Question 35

Problems a regulator might face:

Answer 35

• Asymmetric info
	• Regulatory capture
	• Regulatory lag
	• Hard to prove illegal behaviour
	• Cost of regulation
	• Weak power of regulators
	• Fines are not deterrents
		○ Evaluation
		○ Regulatory capture may be overcome
		○ Not much need for reg if the market is efficient
		○ Over regulation
		○ Threat of regulation may work
		○ Market may be volatile so how do you know its because of unfair practice

Question 36

controlling monopolies

Answer 36

• Price controls or regulation
• Profit regulation- so companies make no more profit than if the industry was perfectly competitive
○ No incentive to cut costs, incentive to employ too much capital
○ Customer will pay for it all anyway
• Quality standards- so the monopolist isnt only concerned about making the profit
• Performance targets- punctuality of trains
• Breaking up the monopolist
• Lowering entry barriers
• Taxes
• Privatisation
• Deregulation
• Subsidies- MC with a subsidy shifts the MC curve lower
• Self-regulation

Question 37

what is competition policy and its aim

Answer 37

Competition policy: measures designed to promote competition, protect consumers and enhance efficiency of markets
Aim: restore and maintain competition in markets to ensure efficient working of markets and improve customer welfare

Question 38

how to reach aim of competition policy

Answer 38

• Ensure any action that prevents, restricts or distorts competition is blocked
• Enforce fair trading
• Competition and markets authority
○ They investigate mergers
○ Conducts market studies
○ Investigates anti competitive behaviour e.g. cartels

Question 39

what is first degree price discrimination

Answer 39

firms charge maximum that consumers are willing to pay

Question 40

what is second degree price discrimination

Answer 40

firms charge different prices based on the amount sold

Question 41

what is third degree price discrimination

Answer 41

when different groups of consumers are charged different prices for the same good or service

Question 42

benefits of privatisation

Answer 42

more efficient bc they have profit motive to cut costs
lack of political influence
dont have a short term view
pressure from sareholders to be efficient
more competition and innovation- but depends on the market structure
one off benefit- gov recieve selling money

Question 43

disads of privatisation

Answer 43

natural monopoly- water and electricity providers
not in public interest
hard to regulate private monopolies
fragmentation of industries e.g. rail so increases complexity
firms might also think short term

Question 44

eval of privatisation

Answer 44

depends on industry- in telecoms a pofit motive will increase efiiciency but in health care the motive should not be profit
depends on quality of regulation- are there standards so consumers arent being scammed
is the market contestable? if so then better to privatise

Question 45

ads of nationalisation

Answer 45

prevents exploitation of natural monopoly power
profit goes towards gov revenue
some nationalised industries have positive externalities- something private firms might not have
basic necessities can be provided without fuss
some industries need long term investment which is not profitable in ST and needs gov intervention
corrects market failure
saved the banking system
inelastic demand so gov wont raise prices

Question 46

disads/eval of nationalisation

Answer 46

ownership is separate to how the firm is managed
is it worth nationalising the industry? do we have enough money to
corruption may occur esp in developing countries
the large size means that economies of scale can be reacher otherwise not possible in small priv firms
avoids possibility of market failure

Question 47

issues in the labour market

Answer 47

skill shortages
temporary and zero hour contracts
gig economy
discrimination
youth unemployment
ageing populations

Question 48

problem/solution for the labour market

Answer 48

rising wages leads to increased production costs for firms. Profit will therefore be lower leaving less money available for investment. Dynamic efficiency and international competitiveness are both likely to suffer as a result. Increased production costs mean firms are more likely to make losses. Therefore, increasing the risk that firms will go out of business. There will be knock on effects for employment and growth as a result.

Examples

1. IT sector (software programmers, cyber security experts etc)
2. NHS (nurses and GPS)
3. Construction (builders, engineers, etc)
4. Agriculture (fruit and vegetable pickers, workers in food processing plants, etc)
5. Teaching (stem subjects mostly)

Solutions

1. Education reform e.g. programming skills on the curriculum from an early age.
2. Immigration
3. Training subsidies
4. Affordable housing in areas with employment shortages e.g. London
5. Apprenticeships in sectors hit by shortages.

Question 49

problem/solution for temp/zero hour contracts

Answer 49

1. Such contracts are lacking in job security which is likely to make these workers less willing to consume. This will impact aggregate demand and growth.
2. Workers are likely to be more stressed due to the lack of job security. This is likely to result in poorer productivity.
3. Some people on these contracts would like to work more hours. This means that there is a underutilisation of the scarce factors of production.

Benefits

1. Firms are better able to control their costs so it provides more flexibility. This may make them more competitive.
2. People with other commitments such as raising children or studying are able to work. Due to this flexibility there will be higher employment and aggregate demand.

Solutions

1. After a certain time period, workers could be given the chance to switch to a permanent contract. The government could pass a law to require firms to do this. That would mean workers who value the flexibility of such contracts could continue to use them, but workers who desire a permanent position would be granted one.
2. The general use of the legal system to prevent the exploitation of workers.

Question 50

problem/solution for the gig economy

Answer 50

1. There is increased flexibility for workers. For example, Uber drivers work when they want.
2. There is normally reduced operating costs for firms. For example, Uber does not need cars or taxi ranks because drivers use their own cars.
3. Consumers benefit due to increased competition. Therefore prices are likely to be lower and quality improved. Uber may respond by having clean our cars or more rapid response times.

Problems
1. Workers often do not have any form of contract. This makes it easier for firms to exploit them. For example, by arguing that they are self employed rather than employees of the company. This allows them to avoid holiday pay, the minimum wage and other entitlements that contracted workers have.

Solutions
1. Trade unions and the legal system could be used to ensure that workers have the same rights as other workers. In 2018, Uber last a case in court. Now as a result it has to treat its drivers as workers rather than self-employed. Therefore drivers are now entitled to holiday pay and the minimum wage.

Question 51

problem/solution for discrimination

Answer 51

Problems

1. If workers suffer from discrimination then the most suitable workers will not be hired. Firms will therefore have a less competent workforce than it could have. The result is that the economy as a whole will be less productive.
2. If people feel discriminated against in the workplace, this will breed resentment and may even lead to some people leaving formal employment. They may seek alternative options in the black market. Social tensions are likely to worsen as a result.

Solutions

1. The government could force firms to publish information on their pay gaps. Forcing firms to be transparent in this way will hopefully lead to a reduction in discrimination. This would occur through two channels: shame and reflection. Firms which were seen to be discriminatory would likely see their brand image suffer. Public opprobrium could then force them to reduce or hopefully stop discrimination altogether. Some firms may be unaware of the severity of their wage gaps. By publishing wage gaps they could then become aware of the problem and take measures to fix it.
2. Making discrimination illegal and ensuring the law is followed should help to reduce discrimination.
3. The government could make firms use blind hiring. This is when firms do not see personal information about a potential candidate, such as name or gender, in the hiring process.
4. The government could introduce a quarter system. Firms would then have to hire a minimum amount of certain groups e.g. at least 40% of the workforce be male.

Question 52

problem/solution for youth unemployment

Answer 52

Particularly in southern Europe in nations like Greece and Portugal.

Problems

1. Young people do not develop skills and experience. This makes them less productive. Lifetime earnings and economic growth is negatively impacted as a result.
2. If young people are unemployed for a long time, they are likely to become discouraged and drop out of the workforce. There is a risk that such people turn to crime in order to make a living.
3. Societal issues are likely to get worse where you find employment is persistent. For example, mental health and violence will deteriorate.

Solutions

1. The government could subsidise training to make young people more employable.
2. Education systems could be reformed to better equip young people for the workforce. For example, in demand skills such as IT or engineering could be focused on.
3. Subsidies could be given to firms that hire young workers.
4. Apprenticeships.
5. Policies to produce a stable macroeconomic environment. This would make cyclical unemployment less likely.

Question 53

problem/solution for ageing populations

Answer 53

Problems

1. Many people retire in their 50s or 60s. They then go on to live a considerable amount of time after this. Lots of state pensions struggle to afford this because they did not expect lifespans to increase as they have.
2. Some people do not retire through choice. They would be happy to continue working, but they are forced into retirement by law, social pressure or discrimination.
3. All the workers may require special facilities or allowances e.g. shorter working hours.

Solutions

1. The government could increase the state pension retirement age. This would reduce the burden on the state pension spending and increase income tax. It may also reduce or remove the prejudiced surrounding older workers as working longer would be encouraged by the state.
2. Measures could be taken to prevent age discrimination in the workplace.
3. Government could work with employers to create workplaces that are more friendly to older people.