Micro - How do firms operate in competitive markets Flashcards
What are some business objectives(6)
Maximising profit
Increasing sales
Growth
Diversifying into new markets/expanding oversees
Survival
Providing a good quality customer service
What is total revenue and how to calculate it(2)
The amount of money earned from selling your product.
Total Revenue = Price x Quantity Sold
What is average revenue and how to calculate it(2)
Amount earned on average per product made.
AR = TR/Output
(AR is the same as price)
What is total cost and how to calculate it(2)
Total out-goings that a firm faces in order to produce its good or service
TC = Fixed Costs + Variable Costs
What is average cost and how to calculate it(2)
The cost of making one unit of a good
AC = TC/Output
What is fixed cost
Costs which do not vary directly with output
What is variable cost
Costs which vary directly with output
What is profit(2)
The amount of money earned once costs have been deducted
Profit = Total Revenue – Total Costs
What is production
The process by which a firm converts inputs (factors of production) into outputs (goods and services)
What is productivity
Output per worker per period of time
What can a rise in productivity consist of(2)
A firm can produce more output with its existing resources
A firm can produce its existing output with less resources
How can a firm increase its productivity(5)
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
Why is high productivity so important to a business(9)
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
Why do firms want to grow in size(5)
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
How do firms grow in size(3+3)
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
Understand and explain the role and operation of the product market
Ensures that consumers get more of those products for which demand rises(they have consumer sovereignty)
(check)
Evaluate the benefits and limitations of the product market(1+1)
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)
What are the 4 different types of merges
Horizontal merge, forward vertical merge, backward vertical merge, conglomerate merge
Describe the advantages of a horizontal merge(4)
Increase market share
Reduces competition
Increased output means greater economies of scale
Can rationalise- take the best bits from the two companies
Describe the advantages of a forward vertical merge(2)
Can take control of the distribution network
May contribute to a degree of monopoly power by acting as a barrier to entry for rivals
Describe the advantages of a backward vertical merge(2)
Can take control of suppliers- ensure that they get resources/inputs at cost price
Can prevent rivals from having access to resources
Describe the advantages of a conglomerate merge
Complete diversification and risk spreading
Describe internal economies of scale
The reduction in average costs that a firm experiences as a result of increased output by the firm
Describe internal diseconomies of scale
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
What can cause internal diseconomies of scale(3)
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
Describe external economies of scale
Occur when a firm experiences lower average costs because the whole industry has
grown larger
State the costs and benefits of growth for a business(4+4)
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
How is wage determined in a free market
Wages are determined by the interaction of the demand for labour and the supply of labour
What causes wage differentials within and between occupations(6)
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
What causes the demand for labour to be elastic(3)
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)
What causes the demand for labour to be inelastic(3)
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)
What can cause in a shift in demand for labour(1+3)
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.
What causes the supply of labour to be elastic
Unskilled jobs where lots of education and training are not required and there is no need for any natural skill/talent
What causes the supply of labour to be inelastic
High barriers to entry for getting into the job e.g. lots of qualifications, training or unique talents
What can cause in a shift in supply of labour(2+2+2+2)
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.
What is gross income
Total income before taxes are removed.
What is net income
Total income after taxes are removed
What is real income
Money income is adjusted to take account of inflation.
What is nominal income
Money income, not taking into account inflation
What are the advantages of a national minimum wage(1+1+1)
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
What are the disadvantages of a national minimum wage(6)
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
What can cause internal economies of scale(4)
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
How to evaluate whether national minimum wage is beneficial or not(6)
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
