sept - dec

Question 1

what is the principle agent problem

Answer 1

divorce between ownership and control

Question 2

how do you overcome the principle agent problem

Answer 2

offer long term contracts- employees may make decisions which will benefit the firm in the LR

Question 3

what are the constraints of business growth

Answer 3

skilled staff shortage
size of poential markets(hard to grwo in a niche)
controlling costs - costs arise from LR success

Question 4

what are the reasons for demerges

Answer 4

reduce the risk of diseconomies of scale
raise money from assets - sell capital

Question 5

what are the benefits of horizontal integration

Answer 5

reduce competition
creat a wider range of products

Question 6

what are the disadvantages of horizontal integration

Answer 6

risk of diseconomies of scale

Question 7

what are the advantages of vertical integration

Answer 7

control of supply chain - reduce unit costs
improved access to raw material - increased quality

Question 8

what are the disadvantages of vertical integration

Answer 8

problems with coordination and communication(diseconomies of scale)

Question 9

what are the disadvantages of demerges

Answer 9

loss of jobs - reputation damage
market becomes more competitive - less control of price

Question 10

what is economies of scope

Answer 10

decrease in AC that a business gains when they expand their product range

Question 11

what are examples of fixed costs

Answer 11

rent
salaries
interest

Question 12

what are examples of variable costs

Answer 12

wages
utility bills
raw materials costs

Question 13

what does MC mean

Answer 13

extra cost of producing additional output

Question 14

why does the AC rise

Answer 14

because MC is higher than AC

Question 15

explain the shape of the TC and TVC

Answer 15

as extra labour is added to increase output the curve flattens out

DMR kick in so FOP become a constraint so costs increase

Question 16

explain the shape of the LRAC curve

Answer 16

increasing reurns to scale = by output > input
constant return to scale
decreasing returns to scale = input > output(percentage change)

Question 17

what is perfect competition(4)

Answer 17

many buyers and sellers
homogenous goods(same)
fims are price takers
perfect information

Question 18

what is imperfect competition

Answer 18

few buyers and sellers
different goods
high barriers to entry
firms are price makers

Question 19

explain the shape of the demand curve

Answer 19

for the top half the consumers are elestic
and for the bottom half consumers are inelastic

Question 20

when is the total revenue maximised when the gradient of the demand curve is -1

Answer 20

only maximised at the midpoint

Question 21

in perfect competition why shouldn’t a firm increase or decrease prices

Answer 21

if then increase prices then consumers will find another seller
if they decrease then they will lose out on potential revenue

Question 22

what is the definition of price discrimination

Answer 22

when firms charge different prices to different customers for the same good/service

Question 23

what is 3rd degree price discrimination

Answer 23

customers are charged a different price depending on their elasticity

Question 24

what services does a natural monopoly supply

Answer 24

tends to supply utilities

Question 25

what are the characteristics of a natural monopoly

Answer 25

huge fixed costs
high potential for E of S
rational for 1 firm to supply the entire market

Question 26

why isnt competition good for natural monopolies

Answer 26

it would result in a wasteful duplication of resources

Question 27

what is the problem with natural monopolies profit maximising

Answer 27

quantity decreases which leads toallocative inefficiencies

Question 28

why cant natural monopolies make supernormal profits

Answer 28

this is because regulators force them to DECREASE PRICE and INCREASE OUTPUT

Question 29

what are the consequences that can arise fom making subnormal profit

Answer 29

the quality of the poduct may decease

Question 30

how do natual monopolies start making normal pofits after regulators come in

Answer 30

they are provided with subsidies in order to cover the costs

Question 31

what are the characteristics of monopolistic competition

Answer 31

many buyers and sellers
slightly differentiated goods
low barriers to enty/exit
good infomation
non-price competition
profit maximisers

Question 32

what happpens to firms in the LR compared to the SR in monopolistic competition

Answer 32

the AC curve shifts to the left to the point where firms only make normal profit(where MC = MR)

Question 33

oligopolies compete through …(2)

Answer 33

• non- price strategies
• pricing strategies

Question 34

the pricing strategies that oligopolies use are ..(2)

Answer 34

• predatory pricing (getting rid of incumbant firms)
• limit pricing (getting rid of potential competitors)

Question 35

however the success of priciung strategies will depend on ..(3)

Answer 35

• stock
• financial reserves
• regulation (if strict = impossible for predatory/ limit)

Question 36

collusion is when …

Answer 36

firms decide to fix a higher price or lower output

Question 37

a cartel is a …

Answer 37

group of firms that are taking part in a collusion

Question 38

overt collusion is collusion ..

Answer 38

that has been agreed by firms openly

Question 39

tacit collusion is collusion that ..

Answer 39

isn’t openly agreed but both firms are aware that they are doing it