Micro - Market Structures and Competitive Behaviour in Leisure Markets Flashcards
Fixed Costs
Costs that do not change with short-run changes in output, e.g. insurance, pensions for former employees, rent for premises.
Variable Costs
Costs that change in conjunction with output, e.g. raw materials, wages
Economies of Scale
Reductions in long-run AC resulting from an increase in the firm’s scale of output. Represented by the downward-sloping portion of the AC curve.
Diseconomies of Scale
Increases in long-run AC resulting from an increase in the firm’s scale of output. Represented by the upward-sloping portion of the AC curve.
Internal Economies of Scale
Economies of scale that occur within a firm as a result of its growth
Internal Economies of Scale - Purchasing
When a firm buys in bulk, it will often enjoy lower costs per unit purchased
Internal Economies of Scale - Selling
A larger firm can make fuller use of sales/distribution facilities, e.g. it does not cost twice as much to use an HGV that is twice the size of a lorry. May also be able to use more efficient advertising techniques
Internal Economies of Scale - Technical
Large firms can afford to efficiently use high-tech equipment
Internal Economies of Scale - Managerial
As a firm grows, it becomes viable to employ more specialised workers, which is more efficient - in a smaller firm, a few workers will have to cover a range of tasks
Internal Economies of Scale - Financial
Banks are more willing to lend to larger firms, and at a lower interest rate, as they are perceived to be more reliable in paying back their debt
Internal Economies of Scale - Risk-Bearing
As a firm’s output increases, it can diversify into other relevant markets. In this case, harmful changes in the conditions of a particular market are less likely to be terminal to the firm, as it only affects one portion of its operations
External Economies of Scale
Economies of scale resulting from the growth of an industry, benefiting firms within the industry
External Economies of Scale - Talent Pool
Growth of a particular industry may give rise to increased availability of training for relevant skills - e.g. growth of UK tourism has given rise to unis offering courses in tourism/travel - firms have a larger pool of skilled workers from which to choose.
External Economies of Scale - Specialism
A large industry will allow a firm to specialise and gain advantageous expertise in a particular area of said market - e.g. enormity of global tourism market has allowed firms to specialise in holidays to particular regions, allowing it to gain expertise as to the best accommodation, restaurants, etc in the area - firm becomes more attractive to consumers.
External Economies of Scale - Reputation
The growth of an industry in a particular country/area may give rise to a good reputation (in terms of quality) for firms operating in that area, e.g. German manufacturing, Silicon Valley technology. Allows these firms to charge a higher price for their product.
External Economies of Scale - Infrastructure
The government may opt to improve infrastructure in order to foster growth in a particular expanding industry - e.g. expansion of UK airports in response to growing tourism industry.
Internal Diseconomies of Scale
Diseconomies of scale that occur when a firm grows too large. For example, can worsen industrial relations problems, as there is more potential for disagreement. Top-level management may become more difficult, as there is more to oversee - firm may be slower in responding to changing market conditions.
External Diseconomies of Scale
The expansion of an industry may result in increased costs for firms within that industry, especially if they are concentrated in the same area. For example, increased competition for scarce resources drives up prices that firms must pay for raw materials, traffic congestion, pollution.
Conditions of Perfect Competition
- A large number of firms, all of which are price takers
- Identical product
- Perfect information
- Many individual buyers, none of whom have control over the market price
- Perfect freedom of entry and exit from the market
- No externalities arising from production or consumption
- Perfect mobility of factors of production
Predatory Pricing
Setting an unsustainably low price in order to force rival firms out of the market, in order to increase long-run revenues. Is technically illegal, but difficult to police.
Sunk Costs
Costs to a firm that are non-recoverable should the firm opt to leave the market, such as advertising expenditure. These constitute a barrier to exit.
Normal Profit
The level of profit necessary to keep a firm in the market in the long run - occurs at AR=AC.
Supernormal Profits
Any profits made by a firm in excess of normal - occur when AR>AC.
Shut-Down Price
A price which will cause a firm to stop producing in the short-run - occurs when revenues do not cover variable costs, i.e. when AR<AVC.
Natural Monopoly
A market where LRAC falls continuously over a large range of output, and consequently, there is only room for one firm to fully exploit the available economies of scale. In such a market, competition may actually serve to increase costs and prices. Reasons for the existence of such a market include the necessity of high R+D costs or sunk costs.
Dangers of Natural Monopolies
Natural monopolies enjoy the same market power as any other monopolistic firm, and as such have the potential to charge a price in excess of equilibrium in an effort to make huge supernormal profits. A solution to this problem is nationalisation - e.g. National Rail, a prime example of a natural monopoly, is run by the state as a not-for-profit. This allows for the minimisation of costs, whilst passing the benefits of such low costs on to consumers.
Legal Monopoly
Any market where one firm holds a share of 25% or more, e.g. Tesco.
Dominant Monopoly
Any market where one firm holds a market share of 40% or more.
Dynamic Efficiency
Efficiency in terms of developing new products and production techniques.
Productive Efficiency
Maximum output is achieved from the available resources - i.e. the firm is operating at the minimum point on the lowest possible AC curve - economies of scale are fully exploited.
Allocative Efficiency
The allocation of resources reflects the changing wants and needs of consumers. Occurs where P=MC - if P>MC, consumers value the good being produced more highly than the producing firm - more should be produced. The opposite is also true.
Distributive Efficiency
Goods and services are distributed to those who will benefit most from their provision - in a free market, in which distribution is determined by ability to pay, this relies on an equitable distribution of income. A utilitarian concept - no reference to justice.
Benefits of Perfect Competition
- Productively efficient
- Allocatively efficient
- Necessity of loss avoidance incentivises R+D
- No wasteful advertising as products are homogeneous - lower AC
- Consumers get the lowest poss. price
- Consumer sovreignty
Problems of Perfect Competition
- Distributive efficiency cannot be guaranteed
- Market failure is allowed to remain
- Profits are competed away, so there is no funding for R+D - AC curve may not be at its lowest possible position in the long run
- Lack of consumer choice
Equilibrium in perfect competition
MC intersects AC at the minimum point on the AC curve. MR=AR intersects both at that same point.
Disadvantages of monopoly
- Output does not occur at the minimum point on AC - not productively efficient
- P does not equal MC - not allocatively efficient
- No competitive pressure on inefficiency - X-inefficiency and technical inefficiency are allowed to continue
- Less choice for consumers
- No repercussions for poor quality output
- Firms are able to price discriminate, thus eroding consumer surplus
- Consumers pay more and enjoy less than under perfect competition
