PPE Flashcards
Types of external economies of scale (4)
1- economies of concentration- transport networks, education
2- Agglomeration economies- businesses cluster together leading to an influx of skilled labour
3- Economies of information- local university research focuses on particular industry so firms save
4- Economies of disintegration- specialist suppliers set up nearby
Types of external diseconomies of scale (3)
1- Human resource competition, driving wages up
2- Physical resource competition, driving raw material prices up
3- infrastructure competition eg transport congestion
How does the divorce of ownership and control mean that firms don’t necessarily maximise profits?
1- Most shareholders in a PLC cannot exercise day-to-day control over the decisions of managers due to information asymmetry (managers know more than shareholders)
2- Managers may have different motivations than owners
3- Managers may want to maximise their own utility, not profits
Therefore firms don’t necessarily maximise profits
Solutions to the principle agent-problem (4)
1- a legal contract is drawn up, specifying the exact duties of the agent
2- Share-ownership schemes synchronise incentives
3- Performance related pay
4- Long-term employment contracts for senior management to increase loyalty
Example of firms having gaining market share as their main objective
Amazon aimed to increase their market share in the e-reader market, by trying to sell as many Kindles as possible. They did this at a loss in the short run, but they gained customer loyalty and now they are a leading e-reader producer.
Veblen goods
a good where demand rises as price rises because people feel that a higher price reflects greater status. May have a backwards bending demand curve.
eg. vintage wine, modern art, designer clothes
Real life examples of external economies of scale
- New technology firms have concentrated along the M4 motorway, partly because of access the Heathrow airport, but also because of agglomeration economies
- Silicon Valley outside San Francisco has become a hotspot for IT related industries. This attracts skilled workers. Firms have to spend less on recruiting skilled labour
- Ruhr valley in Germany has many chemical firms, meaning that are supplies and transport links related to the industry
what is creative destruction, and give a real life example
- First introduced by economist Joseph Schumpeter
- It describes the continuous process of innovation and change in a capitalist economy, where new technologies and business models disrupt and replace older ones, leading to the destruction of existing companies and industries.
- For example, the rise of online retailers like Amazon has led to the closure of many brick-and-mortar stores, but has also created new jobs and consumer benefits such as lower prices and greater convenience.
Examples of collusion
In 2002/3 supermarkets such as Sainsbury’s and Asda colluded with diary supplies to raise the price of diary products in supermarkets. Fined a total of £116m. Prices of milk in supermarkets went up by three pence per pint of milk, but the income received by farmers did not go up. Tried to justify that higher prices were needed in order to prevent firms going out of business, as foot and mouth disease had lead to falling farm incomes
Examples of a cartel
Quebec maple syrup producers- regulates the production and marketing of maple syrup from Quebec. They control around 70% of world maple syrup production.
One of the most famous cartels in the world is OPEC who control the production of oil. In the 1970s, OPEC was able to triple the price of oil in response to events in the Middle East. They could do this because they controlled over 70% of the world’s oil supply.
