sept - dec Flashcards
what is the principle agent problem
divorce between ownership and control
how do you overcome the principle agent problem
offer long term contracts- employees may make decisions which will benefit the firm in the LR
what are the constraints of business growth
skilled staff shortage
size of poential markets(hard to grwo in a niche)
controlling costs - costs arise from LR success
what are the reasons for demerges
reduce the risk of diseconomies of scale
raise money from assets - sell capital
what are the benefits of horizontal integration
reduce competition
creat a wider range of products
what are the disadvantages of horizontal integration
risk of diseconomies of scale
what are the advantages of vertical integration
control of supply chain - reduce unit costs
improved access to raw material - increased quality
what are the disadvantages of vertical integration
problems with coordination and communication(diseconomies of scale)
what are the disadvantages of demerges
loss of jobs - reputation damage
market becomes more competitive - less control of price
what is economies of scope
decrease in AC that a business gains when they expand their product range
what are examples of fixed costs
rent
salaries
interest
what are examples of variable costs
wages
utility bills
raw materials costs
what does MC mean
extra cost of producing additional output
why does the AC rise
because MC is higher than AC
explain the shape of the TC and TVC
as extra labour is added to increase output the curve flattens out
DMR kick in so FOP become a constraint so costs increase
explain the shape of the LRAC curve
increasing reurns to scale = by output > input
constant return to scale
decreasing returns to scale = input > output(percentage change)
what is perfect competition(4)
many buyers and sellers
homogenous goods(same)
fims are price takers
perfect information
what is imperfect competition
few buyers and sellers
different goods
high barriers to entry
firms are price makers
explain the shape of the demand curve
for the top half the consumers are elestic
and for the bottom half consumers are inelastic
when is the total revenue maximised when the gradient of the demand curve is -1
only maximised at the midpoint
in perfect competition why shouldn’t a firm increase or decrease prices
if then increase prices then consumers will find another seller
if they decrease then they will lose out on potential revenue
what is the definition of price discrimination
when firms charge different prices to different customers for the same good/service
what is 3rd degree price discrimination
customers are charged a different price depending on their elasticity
what services does a natural monopoly supply
tends to supply utilities
what are the characteristics of a natural monopoly
huge fixed costs
high potential for E of S
rational for 1 firm to supply the entire market
why isnt competition good for natural monopolies
it would result in a wasteful duplication of resources
what is the problem with natural monopolies profit maximising
quantity decreases which leads toallocative inefficiencies
why cant natural monopolies make supernormal profits
this is because regulators force them to DECREASE PRICE and INCREASE OUTPUT
what are the consequences that can arise fom making subnormal profit
the quality of the poduct may decease
how do natual monopolies start making normal pofits after regulators come in
they are provided with subsidies in order to cover the costs
what are the characteristics of monopolistic competition
many buyers and sellers
slightly differentiated goods
low barriers to enty/exit
good infomation
non-price competition
profit maximisers
what happpens to firms in the LR compared to the SR in monopolistic competition
the AC curve shifts to the left to the point where firms only make normal profit(where MC = MR)
oligopolies compete through …(2)
- non- price strategies
- pricing strategies
the pricing strategies that oligopolies use are ..(2)
- predatory pricing (getting rid of incumbant firms)
- limit pricing (getting rid of potential competitors)
however the success of priciung strategies will depend on ..(3)
- stock
- financial reserves
- regulation (if strict = impossible for predatory/ limit)
collusion is when …
firms decide to fix a higher price or lower output
a cartel is a …
group of firms that are taking part in a collusion
overt collusion is collusion ..
that has been agreed by firms openly
tacit collusion is collusion that ..
isn’t openly agreed but both firms are aware that they are doing it
