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A Level Economics > Slatman Theme 3 > Flashcards

Slatman Theme 3 Flashcards

1
Q

What is the difference between private sector businesses and public sector businesses?

A

Private sector businesses are profit making firms where as public sector businesses are government funded

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2
Q

Benefits to being a small business

A

Remains a high-quality service
Keeps costs low (capital and labour)

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3
Q

What are the two ways businesses can grow

A

Organic and external

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4
Q

Give reasons as to why businesses want to be big

A

More profit so can grow even more and reinvest
Can recruit better quality staff as can pay higher wages
Reinvestment and other buildings and labour/machinery
Greater market share to attract more investment
Large firms can negotiate lower costs (economies of scale)

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5
Q

Ways of growing organically

A

Open more buildings
Building more in other countries
Offer other services
Increasing prices and using the profits to reinvest

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6
Q

Benefits of mergers

A

New ideas/products
Greater market share so attracts more investment
Increased revenue for investment
Can attract the best staff as can afford higher wages
Benefits from economies of scale

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7
Q

Negatives of mergers

A

Job losses
Possible diseconomies of scale
Store closures

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8
Q

Reasons behind backwards vertical integration

A

Reduce costs so more profits
Guarantees consistent supply
Insures quality supply

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9
Q

Why do forwards vertical integration?

A

Guarantees a place to sell

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10
Q

What is a demerger?

A

The separation of a large company into two or more smaller firms. It’s often as a result of an earlier merger

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11
Q

Impacts of the demerger on the employees and the consumers

A

Employees - could lose their job, social clashes
Consumers - better service as more focus on consumers, the removal of diseconomies of scale could lead to lower prices for consumers

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12
Q

Reasons behind demergers

A

Reduce the risk of diseconomies scale
Disappointed at the success of the original merger
Raise money from asset sales which you don’t need anymore
A defensive tactic - affirm become so big, the government investigate them (CMA)

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13
Q

Define economies of scale

A

The more produced the cheaper each product becomes

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14
Q

What are the different versions of economies of scale?

A

Production - best machinery
Purchasing - big firms can negotiate discounts
Financial - better relations with banks, so can negotiate lower interest rates
Marketing - brand name (well-known brand name, so low costs on advertising)

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15
Q

What is diseconomies of scale and where is it showing on an AC diagram?

A

When average costs rise again.
Shown after the midpoint on an AC diagram

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16
Q

What would cause diseconomies of scale

A

Miscommunication as firm is so big (so unproductive)
Unproductive stuff
Issues with machinery, which slows down production
Overworked staff
Organisational management issues

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17
Q

What benefits will be derived if the entire industry sees its average cost falling?

A

Better colleges and universities (less spent on training)
Road infrastructure (Better transport links)
Highly skilled population

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18
Q

Examples of external diseconomies of scale

A

Higher wages
Traffic delays
Demand for raw materials increases prices

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19
Q

What are the three objectives for firms?

A

Revenue maximisation
Profit maximisation
Sales maximisation

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20
Q

Benefits of revenue maximisation

A

Increase market share to attract more investment
Increased innovation
Better bargaining power due to economies of scale
Long-term profit maximisation
Brand recognition

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21
Q

Benefits of sales maximisation

A

Drives out competition
Greater market share
More customers for when the price increases again

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22
Q

Benefits of profit maximisation

A

Businesses can reinvest in the business to grow
Attract shareholders / investors

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23
Q

Where on a monopoly diagram, would you identify: profit maximisation, revenue maximisation, sales maximisation

A

Profit maximisation: MC = MR
Revenue maximisation: MR = 0 (go up to and from there)
Sales maximisation: AC = AR

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24
Q

What is technical efficiency?

A

Where the firm is producing the maximum output from the minimum quantity of inputs
E.g would be technically efficient if a firm employed the exact amount of workers needed

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25
Q

What is productive efficiency and where is it on the monopoly diagram

A

The ability of a firm to produce at the lowest possible cost
At the lowest point on the AC curve

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26
Q

Define x-inefficiency

A

The inefficiencies within a company that result in higher production, costs the necessary for a given output

27
Q

What is allocative efficiency? Where on the monopoly diagram where do you find it?

A

An efficient market whereby all goods and services meet the needs and wants of society. Resources are allocated efficiently. P =mc

28
Q

What is dynamic efficiency?

A

Involves adapting and innovating to maintain efficiency in the face of changing market conditions, consumer preferences and technology

29
Q

Benefits of a firm being privately owned as opposed to publicly owned

A
  • Help to grow the economy - more competition, so more productivity, more profits which means more money in the circular flow which means more jobs available so more spending
  • Improve the balance of payments as more exports
  • Improve the unemployment figures
  • Reduce the levels of inflation within the economy - incentivised to keep costs low to maximise their outputs and generate more profits. If costs are low prices can be kept low so you can keep competitive.
30
Q

Positives of public sector goods

A

No free rider problem
Allows access to low-income families
Benefits from economies of scale
Not profit incentivised, so makes decisions to benefit everyone

31
Q

Negatives of public sector goods

A

Opportunity cost
Some pay without using it
No incentive to reduce costs so inefficient

32
Q

What is the principal agent problem?

A

When there is a conflict in priorities between the owner of an asset, and the person to whom control of the asset has been delegated
E.g owners versus managers

33
Q

What is a principal agent?

A

An arrangement in which one entity legally appoint another to act on his behalf

34
Q

How do the government intervene to control monopolies?

A

Price capping
Profit capping
Breaking up a monopoly
Windfall taxes
Privatisation and nationalisation
Performance targets and natural monopolies
Deregulation
Subsidies
Self regulation
Encouraging small businesses

35
Q

What factors do the government take into account when deciding what to provide?

A

Cost/opportunity cost
Level of economic development
Level of poverty /inequality

36
Q

Why would the government break up a monopoly?

A

Enhances competition

37
Q

What is privatisation?

A

Moving something from the public sector into the private sector

38
Q

What is nationalisation?

A

Making a private firm, a public firm

39
Q

Why is self-regulation good?

A

Quicker than government intervention
They have more knowledge of the market
They don’t have the power so they refer the issues to others

40
Q

How do the government support small businesses?

A

Grants, finance and loans
Business support e.g mentoring

41
Q

Why do the government encourage small businesses?

A

To encourage innovation
Local jobs
To increase competition

42
Q

Negatives of the government, encouraging small businesses

A

Opportunity cost

43
Q

What is a natural monopoly?

A

Where there is realistically only room for one firm in the market e.g National Grid
This is due to sunk costs and efficiencies

44
Q

What is a sunk cost?

A

A massive cost that you will never get back

45
Q

Benefits of natural monopolies

A

Innovation
Reinvestment from huge profits, so better quality
Sunk costs shared across large number of customers

46
Q

Problems with natural monopolies

A
  • Allocatively inefficient so higher prices
  • Opportunity cost for government as monopoly already has huge profits so don’t need the subsidy
  • X-inefficient
  • Worst quality if they don’t reinvest
47
Q

What are regulators and what can they do?

A

They are independent bodies set up to police natural monopolies
They can:
- Set price caps
- Fines
- Enforce quality standards

48
Q

what is the formula for how much firms can charge? This is what regulators set.

A

RPI + X
RPI = inflation
They can put prices up by the retail price index
They can also put it up by an agreed amount (X)

49
Q

Criticisms of regulators

A

Regulators goes against principles of a free-market
Firms should be allowed to make supernormal profit
Regulatory capture

50
Q

What is regulatory capture?

A

A process by which regulatory agencies may come to be dominated by the interest they regulate and not by the public interest

51
Q

Define deregulation

A

The process of removing or reducing government, rules, laws, and restrictions in an industry
This creates competition

52
Q

Benefits of deregulation

A

More efficient firms so lower costs (AC curve goes down) X - efficient
Better service
Enhance productivity and innovation (dynamically efficient)

53
Q

Problems of deregulation

A

Firms may not enter the market due to the large sunk costs
Small firms make sure to compete, so still only a few firms donate

54
Q

What is public-private initiative?

A

Contractors paid for the construction costs. They then rent the finish project back to the public sector. E.g a prison. The government pays £5 million a year.

55
Q

Why does public-private initiative work well?

A

These partnerships work well when private-sector technology and innovation combine with public-sector incentives to complete work on time and within budget.
Allocative efficiency
Better skills as they specialise in it
More effective at using resources
X-efficient

56
Q

Problems with public-private initiative

A

Tendency to cut corners to save costs

57
Q

What is breaking up a monopoly?

A

When the government decides the monopoly has become too big and forces it to sell off part of its business

58
Q

Why may the government break up a monopoly

A
  • Too much power, so no competition, so no strive for quality or lower pricing as not efficient
  • diseconomies of scale, so costs pushed onto the consumer
59
Q

Criticisms of breaking up monopolies

A

Forms an oligopoly

60
Q

Benefits of nationalisation

A

All money earned his reinvested as government aren’t profit maximising
Quality of service is good as this is the focus
More affordable

61
Q

Against nationalisation

A

Privatisation is more competitive so should be better quality and they also understand the market better
Long-term project, not short term , takes time to be put in place
Opportunity cost

62
Q

What is collusion and how do they do it

A

When two or more firms agree to manipulate the market for their own self interest
They do this by:
- Charging the exact same amounts, and then raising the price together
- They agree to not compete against each other with advertising your location

63
Q

Reasons for collusion

A
  • Increase revenue and profits which can be used for further investment
  • Not spending as much on the advertisement as you aren’t competing for customers
  • Maintains customers
  • Priced ability is not in competition
64
Q

What are the different types of collusion?

A

Tacit - unofficial (e.g. speak at golf club)
Formal (sit down and agree)
Price leadership - they follow each other’s price

A Level Economics (6 decks)

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