Micro - Market Structures and Competitive Behaviour in Leisure Markets

Question 1

Fixed Costs

Answer 1

Costs that do not change with short-run changes in output, e.g. insurance, pensions for former employees, rent for premises.

Question 2

Variable Costs

Answer 2

Costs that change in conjunction with output, e.g. raw materials, wages

Question 3

Economies of Scale

Answer 3

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.

Question 4

Diseconomies of Scale

Answer 4

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.

Question 5

Internal Economies of Scale

Answer 5

Economies of scale that occur within a firm as a result of its growth

Question 6

Internal Economies of Scale - Purchasing

Answer 6

When a firm buys in bulk, it will often enjoy lower costs per unit purchased

Question 7

Internal Economies of Scale - Selling

Answer 7

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

Question 8

Internal Economies of Scale - Technical

Answer 8

Large firms can afford to efficiently use high-tech equipment

Question 9

Internal Economies of Scale - Managerial

Answer 9

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

Question 10

Internal Economies of Scale - Financial

Answer 10

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

Question 11

Internal Economies of Scale - Risk-Bearing

Answer 11

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

Question 12

External Economies of Scale

Answer 12

Economies of scale resulting from the growth of an industry, benefiting firms within the industry

Question 13

External Economies of Scale - Talent Pool

Answer 13

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.

Question 14

External Economies of Scale - Specialism

Answer 14

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.

Question 15

External Economies of Scale - Reputation

Answer 15

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.

Question 16

External Economies of Scale - Infrastructure

Answer 16

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.

Question 17

Internal Diseconomies of Scale

Answer 17

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.

Question 18

External Diseconomies of Scale

Answer 18

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.

Question 19

Conditions of Perfect Competition

Answer 19

• 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

Question 20

Predatory Pricing

Answer 20

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.

Question 21

Sunk Costs

Answer 21

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.

Question 22

Normal Profit

Answer 22

The level of profit necessary to keep a firm in the market in the long run - occurs at AR=AC.

Question 23

Supernormal Profits

Answer 23

Any profits made by a firm in excess of normal - occur when AR>AC.

Question 24

Shut-Down Price

Answer 24

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.

Question 25

Natural Monopoly

Answer 25

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.

Question 26

Dangers of Natural Monopolies

Answer 26

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.

Question 27

Legal Monopoly

Answer 27

Any market where one firm holds a share of 25% or more, e.g. Tesco.

Question 28

Dominant Monopoly

Answer 28

Any market where one firm holds a market share of 40% or more.

Question 29

Dynamic Efficiency

Answer 29

Efficiency in terms of developing new products and production techniques.

Question 30

Productive Efficiency

Answer 30

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.

Question 31

Allocative Efficiency

Answer 31

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.

Question 32

Distributive Efficiency

Answer 32

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.

Question 33

Benefits of Perfect Competition

Answer 33

• 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

Question 34

Problems of Perfect Competition

Answer 34

• 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

Question 35

Equilibrium in perfect competition

Answer 35

MC intersects AC at the minimum point on the AC curve. MR=AR intersects both at that same point.

Question 36

Disadvantages of monopoly

Answer 36

• 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