microeconomics theme 3

Question 1

What is Organic growth?

Answer 1

Growth as a result of a firm increasing the levels of the factor of production it uses

Question 2

What is inorganic growth?

Answer 2

growth as a result of a takeover (one firm buys another firm) or/and mergers (two firms unite to form a new company

Question 3

what are some advantages and disadvantages of Organic growth?

Answer 3

Advantages: Involves less risk than external growth, firm has control over exactly how this growth occurs by building up on their existing strengths & allow the business to growth at a more sensible rate in the long run.
Disadvantages: depends on growth of overall market (market fast growing>easier to grow), usually slow and shareholders prefer rapid growth & hard to build market share if there is already a present leader in the market

Question 4

What is a horizontal integration? give a example

Answer 4

combining firms that are at the same stage of the production process of similar products. Horizontal merger can increase economies of sale, decrease competition and increase market share.
Example: two airlines may merge.

Question 5

What is a vertical integration?

Answer 5

Combining firms at different stages of production process of the same product

Question 6

what is forward and backward vertical integration? give examples.

Answer 6

forward vertical integration: firm takes over another firm that is further forward in the production process. e.g.: leather manufacture buying a shoe factory
Backward vertical integration: firm takes over another firm that is further that is further backwards in the production process (further from customer end). e.g.: Netflix (a streaming service) creating Netflix originals shows.

Question 7

What is conglomerate? give a example.

Answer 7

Process of combining firms which operate in completely different markets.
Example: Samsung makes phones and military hardware & ships.

Question 8

What are some advantages and disadvantages of vertical integration?

Answer 8

ADVANTAGES: control of the supply chain- help to reduce costs which allows firms to lower prices while improving quality, Improve access to raw materials ( also allows you to limit access to rival firms), freedom of entry and exit so less competition give acquiring firms more market power.
DISADVANTAGES: create problems of communication and coordination which can lead to diseconomies of scale and make firms more inefficient. (because their are too many workers)

Question 9

What are some advantages and disadvantages of horizontal integration?

Answer 9

ADVANTAGES: exploit internal economies of scale (lower long run average cost= high profits), greater opportunity to diversify and create a wider range of products, reduces competition by removing one or more key rivals- increases market share which allows greater price making power in the LR.
DISADVATAGES: risk of diseconomies of scale if the firm grows beyond the optimum level of efficiency (too many works in limited space leads to poor communication), risk of attracting scrutiny from competition authorities as they might be concerned of the outcome which leads to decline in consumer welfare (one firm can’t have too much market share).

Question 10

What is a demerger and why might firms do it?

Answer 10

demerger is the breaking up of firm into separate firms. Firms might take part in demerger to pay off business loans or to reinvest in the firm

Question 11

How might demergers impact businesses?

Answer 11

demerged firms may become more efficient, firms market value is likely to increase, selling off an unprofitable part of the business can be difficult and may have to be sold at a loss

Question 12

What is revenue?

Answer 12

the money firms receive from selling their goods and services.

Question 13

What is the definition and equation for total revenue?

Answer 13

The total amount of money received from the sale of any given level of output.
calculation: total revenue= price x quantity

Question 14

What is the definition and equation for average revenue?

Answer 14

the average revenue per unit sold.
calculation: average revenue= total revenue/quantity
Average revenue=price

Question 15

What is the definition of marginal revenue and the equation?

Answer 15

the extra revenue received as a result of selling an additional unit of output.
calculation: MR= change in total revenue/change in total output

Question 16

what are the characteristics of a price taking firm? give a example.

Answer 16

• doesn’t have absolute control over the price that they can sell their good/services.
• perfectly elastic demand associated with these firms so if they increase price, demand will usually be completely removed.
• many substitutes available for the good/service firm sells at the same price. (lots of competition)
  Example: 3 chicken and chip shops right next to eachother.

Question 17

what are the characteristics of a price making firm?

Answer 17

• only firm selling the product (monopoly firm)
• have some power to set the price they sell at
• law of demand still applies
• downward slopping demand curve
  Example: Apple, TFL

Question 18

What is production?

Answer 18

involves converting input into output.

input can be factor of production.

Question 19

what is the difference between short run and long run production? (e.g: elasticity of supply)

Answer 19

short run: time period where at least one factor of production (input) is fixed. Elasticity of supply is low as there is limited spare capacity.

long run: there are no fixed factor of production (input). Elasticity of supply likely to be higher as there is more flexibility.

Question 20

what is the definition and equation of total product?

Answer 20

the quantity of output measured in physical units produced by a given number of inputs.
calculation: total product= product/output x factor input

Question 21

What is the equation for average product?

Answer 21

average product= total product/ quantity of input

Question 22

what is the equation for marginal product?

Answer 22

marginal product= change in total product/ change in quantity of input

Question 23

what is law of diminishing return?

Answer 23

occurs when one variable factor of production increases while other factor of production are fixed, eventually the marginal return (increase in output) from the variable factors will begin to decrease. e.g: capital, land and enterprise are all fixed but labour increases workplace gets overcrowded leading to diminishing marginal return

Question 24

what is a increasing returns to scale?

Answer 24

increase in all F of P lead to a more than proportional increase in output Example: doubling of F of P leads to a tripling of output

Question 25

What is economies of scale?

Answer 25

a reduction in long run average cost as output increases.

Question 26

when does internal economies of scale occur?

Answer 26

occurs within the a businesses control, business can exploit them as they get larger

Question 27

what is productive efficiency and how is it shown on the diagram?

Answer 27

when production is achieved at the lowest average cost. full exploitation of economics of scale. When MC crosses AC at the lowest point.

Question 28

what is allocative efficiency and how is it shown on the diagram?

Answer 28

when consumer preference is taken into consideration and social welfare is maximised.
demand=supply AR=MC

Question 29

what is dynamic efficiency and how is it shown on the diagram?

Answer 29

re-investment of long run supernormal profit back into the business.
where LR supernormal profit exists

Question 30

what is X-efficiency and how is it shown on the diagram?

Answer 30

business minimises their waste.
Production takes places of AC curve

Question 31

what is static efficiency?

Answer 31

productive and allocative efficiency takes place together.

Question 32

what are the key assumptions in prefect competition?

Answer 32

(1) infinite number of supplier and consumers (0 concentration ratio), (2) consumers have perfect information, (3) homogenous goods and service, no barriers to entry and exit (4) firms are price takers (5) perfectly elastic demand curve (5) firms are profit maximisers (producing where MC=MR at all times)

Question 33

draw the diagram of perfect competition?

Answer 33

refer to diagram book

Question 34

perfect competition is and isn’t which efficiencies?
give reasons.

Answer 34

productive efficiency (firms are trying to maximise their profits), allocatively efficiency (price takers so market is set the price according to consumer preference),
static efficient (both productive and allocatively efficient)
NOT dynamic efficiency (do not earn supernormal profit in LR)