Micro - How do firms operate in competitive markets

Question 1

What are some business objectives(6)

Answer 1

Maximising profit

Increasing sales

Growth

Diversifying into new markets/expanding oversees

Survival

Providing a good quality customer service

Question 2

What is total revenue and how to calculate it(2)

Answer 2

The amount of money earned from selling your product.

Total Revenue = Price x Quantity Sold

Question 3

What is average revenue and how to calculate it(2)

Answer 3

Amount earned on average per product made.

AR = TR/Output

(AR is the same as price)

Question 4

What is total cost and how to calculate it(2)

Answer 4

Total out-goings that a firm faces in order to produce its good or service

TC = Fixed Costs + Variable Costs

Question 5

What is average cost and how to calculate it(2)

Answer 5

The cost of making one unit of a good

AC = TC/Output

Question 6

What is fixed cost

Answer 6

Costs which do not vary directly with output

Question 7

What is variable cost

Answer 7

Costs which vary directly with output

Question 8

What is profit(2)

Answer 8

The amount of money earned once costs have been deducted

Profit = Total Revenue – Total Costs

Question 9

What is production

Answer 9

The process by which a firm converts inputs (factors of production) into outputs (goods and services)

Question 10

What is productivity

Answer 10

Output per worker per period of time

Question 11

What can a rise in productivity consist of(2)

Answer 11

A firm can produce more output with its existing resources

A firm can produce its existing output with less resources

Question 12

How can a firm increase its productivity(5)

Answer 12

Invest in more/better quality capital

Improved training for workers

Offer clear reward systems and opportunities for promotion, which improves incentive to work harder

Improved management

Use more specialisation of labour

Question 13

Why is high productivity so important to a business(9)

Answer 13

It produces more output. If sold, this will contribute to more revenue and profit

Rising productivity allows firms to operate at lower average costs. This MAY allow them to reduce prices and become more competitive, thus increasing demand and market share

If a firm is producing at a lower average cost, it will be increasing its profit per unit. -
-This will provide more funds for re-investment and growth

Rising productivity may allow a firm to finance wage increases

• This will secure worker morale and further productivity
• It will also allow the firm to attract the best quality workers

In the globalised economy, UK firms are competing with firms from economies which have very low costs and high productivity.
-If UK firms cannot match this, they will be uncompetitive and lose sales/market share

Question 14

Why do firms want to grow in size(5)

Answer 14

To tap into emerging markets

To take advantage of changing market conditions

To take advantage of economies of scale

To take advantage of globalisation and expand into overseas markets

To increase market share and develop greater monopoly power

Question 15

How do firms grow in size(3+3)

Answer 15

Internal Growth

• When a firm increases its output on its own
• e.g. through taking on more workers, taking on a new shop or buying new capital

External growth

• When a firm increases its output by joining with another firm
• through merges and intergrations

Question 16

Understand and explain the role and operation of the product market

Answer 16

Ensures that consumers get more of those products for which demand rises(they have consumer sovereignty)

(check)

Question 17

Evaluate the benefits and limitations of the product market(1+1)

Answer 17

Benefits:
-Ensures that consumers get more of those products for which demand rises(they have consumer sovereignty)

Limitations:
-Some there could be limitations on the firms’ ability to supply more products if some factors of production are immobile(e.g. specialised workers, lack of available labour, lack of capital)

Question 18

What are the 4 different types of merges

Answer 18

Horizontal merge, forward vertical merge, backward vertical merge, conglomerate merge

Question 19

Describe the advantages of a horizontal merge(4)

Answer 19

Increase market share

Reduces competition

Increased output means greater economies of scale

Can rationalise- take the best bits from the two companies

Question 20

Describe the advantages of a forward vertical merge(2)

Answer 20

Can take control of the distribution network

May contribute to a degree of monopoly power by acting as a barrier to entry for rivals

Question 21

Describe the advantages of a backward vertical merge(2)

Answer 21

Can take control of suppliers- ensure that they get resources/inputs at cost price

Can prevent rivals from having access to resources

Question 22

Describe the advantages of a conglomerate merge

Answer 22

Complete diversification and risk spreading

Question 23

Describe internal economies of scale

Answer 23

The reduction in average costs that a firm experiences as a result of increased output by the firm

Question 24

Describe internal diseconomies of scale

Answer 24

It is possible for some firms to become TOO large, such that a rise in output begins to lead to an increase in average costs

Question 25

What can cause internal diseconomies of scale(3)

Answer 25

As the firm increases, factor inputs (resources) become more scarce and hence more expensive

As the firm grows, communication and decision making becomes more difficult, contributing to inefficiencies and rising costs

As the firm grows, worker morale and motivation declines as they feel like a “small cog in a big wheel”. This may contribute to reduced productivity and higher average costs

Question 26

Describe external economies of scale

Answer 26

Occur when a firm experiences lower average costs because the whole industry has
grown larger

Question 27

State the costs and benefits of growth for a business(4+4)

Answer 27

Benefits:

• increased profits
• increased market share
• less competition
• economies of scale

Costs:

• two sets of managers may not be able to agree
• businesses may have different objectives
• diseconomies of scale
• high costs

Question 28

How is wage determined in a free market

Answer 28

Wages are determined by the interaction of the demand for labour and the supply of labour

Question 29

What causes wage differentials within and between occupations(6)

Answer 29

Differences in the productivity of workers

Elasticity of supply for labour

Trade union power

Differences in the final demand for the product

Compensating for risk taking in certain jobs(e.g. poor working conditions)

Employer discrimination

Question 30

What causes the demand for labour to be elastic(3)

Answer 30

when labour costs contribute to a high proportion of the firms costs

Where it is easy to substitute capital for labour

when the product has price elastic demand (making it difficult to simply pass on the wage increase to consumers in the form of higher prices)

Question 31

What causes the demand for labour to be inelastic(3)

Answer 31

When labour costs are a small proportion of total costs

When labour cannot be easily replaced by capital

When the price of the product is price inelastic (making it possible for the employer to pass on the wage increases in the form of higher prices so not reducing profits)

Question 32

What can cause in a shift in demand for labour(1+3)

Answer 32

The demand of the product that labour produces - labour is a derived demand

Productivity

• The higher labour productivity, the more workers that employers want to take on.
• This is because workers are contributing to increased rates of production which become increased revenue and profit.

Question 33

What causes the supply of labour to be elastic

Answer 33

Unskilled jobs where lots of education and training are not required and there is no need for any natural skill/talent

Question 34

What causes the supply of labour to be inelastic

Answer 34

High barriers to entry for getting into the job e.g. lots of qualifications, training or unique talents

Question 35

What can cause in a shift in supply of labour(2+2+2+2)

Answer 35

Education and Training
-The more education and training required, the lower the supply of labour will be (and the more inelastic it will be)

Natural talents and abilities
-Some jobs have very low (and wage inelastic) supply because they require specialist talents that are unique/rare/hard to learn e.g. top fashion models and premiership footballers

Danger
-If a job is perceived as dangerous the supply of labour is likely to be lower.

Working conditions/hours/flexibility of the job
-If working conditions are poor and hours are unsociable, this may reduce the number of workers who are willing and able to do the job.

Question 36

What is gross income

Answer 36

Total income before taxes are removed.

Question 37

What is net income

Answer 37

Total income after taxes are removed

Question 38

What is real income

Answer 38

Money income is adjusted to take account of inflation.

Question 39

What is nominal income

Answer 39

Money income, not taking into account inflation

Question 40

What are the advantages of a national minimum wage(1+1+1)

Answer 40

Low paid workers achieve a higher wage, thus reducing relative poverty and increasing living standards

If workers have higher incomes as a result of the minimum wage, there may be a rise in demand for the firms goods

Higher tax revenue is increased from the increased earnings from those in low paid jobs

Less spending on state benefits

Question 41

What are the disadvantages of a national minimum wage(6)

Answer 41

The worker may lose his/her job if the employer responds to the minimum wage by laying off workers

Even if the worker earns a higher wage, they will be no better off in real terms if minimum wages lead to higher prices and inflation

Higher costs lead to lower profits and less funds for re investment
-May be less new product development/reduced quality product because firms have less profit to re-invest

May have to compensate by putting prices up- this will make them less competitive compared to foreign competitors

May face higher prices as firms pass on wage increases

Question 42

What can cause internal economies of scale(4)

Answer 42

Purchasing - Larger firms can buy in bulk so the average cost of the resources are cheaper

Technical - Larger firms can afford to employ specialist labour and capital to increase productivity and reduce average costs

Managerial - Larger firms can hire efficient managers who make efficient business decisions and improve efficiency over time

Risk-bearing - Larger firms are better able to withstand the fall in demand for one product as they tend to have a large product range

Question 43

How to evaluate whether national minimum wage is beneficial or not(6)

Answer 43

Price elasticity of demand for and supply of workers

• if demand for workers is elastic then it will lead to a large loss of jobs
• if supply of workers is elastic the total unemployment will be greater
• if the demand and supply of labour is elastic this will cause particularly high unemployment

Does not have any effect on the poorest in the economy as they do not work

Overall effect depend on the sate of the economy at the time