Slatman Theme 3 Flashcards
What is the difference between private sector businesses and public sector businesses?
Private sector businesses are profit making firms where as public sector businesses are government funded
Benefits to being a small business
Remains a high-quality service
Keeps costs low (capital and labour)
What are the two ways businesses can grow
Organic and external
Give reasons as to why businesses want to be big
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)
Ways of growing organically
Open more buildings
Building more in other countries
Offer other services
Increasing prices and using the profits to reinvest
Benefits of mergers
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
Negatives of mergers
Job losses
Possible diseconomies of scale
Store closures
Reasons behind backwards vertical integration
Reduce costs so more profits
Guarantees consistent supply
Insures quality supply
Why do forwards vertical integration?
Guarantees a place to sell
What is a demerger?
The separation of a large company into two or more smaller firms. It’s often as a result of an earlier merger
Impacts of the demerger on the employees and the consumers
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
Reasons behind demergers
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)
Define economies of scale
The more produced the cheaper each product becomes
What are the different versions of economies of scale?
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)
What is diseconomies of scale and where is it showing on an AC diagram?
When average costs rise again.
Shown after the midpoint on an AC diagram
What would cause diseconomies of scale
Miscommunication as firm is so big (so unproductive)
Unproductive stuff
Issues with machinery, which slows down production
Overworked staff
Organisational management issues
What benefits will be derived if the entire industry sees its average cost falling?
Better colleges and universities (less spent on training)
Road infrastructure (Better transport links)
Highly skilled population
Examples of external diseconomies of scale
Higher wages
Traffic delays
Demand for raw materials increases prices
What are the three objectives for firms?
Revenue maximisation
Profit maximisation
Sales maximisation
Benefits of revenue maximisation
Increase market share to attract more investment
Increased innovation
Better bargaining power due to economies of scale
Long-term profit maximisation
Brand recognition
Benefits of sales maximisation
Drives out competition
Greater market share
More customers for when the price increases again
Benefits of profit maximisation
Businesses can reinvest in the business to grow
Attract shareholders / investors
Where on a monopoly diagram, would you identify: profit maximisation, revenue maximisation, sales maximisation
Profit maximisation: MC = MR
Revenue maximisation: MR = 0 (go up to and from there)
Sales maximisation: AC = AR
What is technical efficiency?
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
What is productive efficiency and where is it on the monopoly diagram
The ability of a firm to produce at the lowest possible cost
At the lowest point on the AC curve
Define x-inefficiency
The inefficiencies within a company that result in higher production, costs the necessary for a given output
What is allocative efficiency? Where on the monopoly diagram where do you find it?
An efficient market whereby all goods and services meet the needs and wants of society. Resources are allocated efficiently. P =mc
What is dynamic efficiency?
Involves adapting and innovating to maintain efficiency in the face of changing market conditions, consumer preferences and technology
Benefits of a firm being privately owned as opposed to publicly owned
- 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.
Positives of public sector goods
No free rider problem
Allows access to low-income families
Benefits from economies of scale
Not profit incentivised, so makes decisions to benefit everyone
Negatives of public sector goods
Opportunity cost
Some pay without using it
No incentive to reduce costs so inefficient
What is the principal agent problem?
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
What is a principal agent?
An arrangement in which one entity legally appoint another to act on his behalf
How do the government intervene to control monopolies?
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
What factors do the government take into account when deciding what to provide?
Cost/opportunity cost
Level of economic development
Level of poverty /inequality
Why would the government break up a monopoly?
Enhances competition
What is privatisation?
Moving something from the public sector into the private sector
What is nationalisation?
Making a private firm, a public firm
Why is self-regulation good?
Quicker than government intervention
They have more knowledge of the market
They don’t have the power so they refer the issues to others
How do the government support small businesses?
Grants, finance and loans
Business support e.g mentoring
Why do the government encourage small businesses?
To encourage innovation
Local jobs
To increase competition
Negatives of the government, encouraging small businesses
Opportunity cost
What is a natural monopoly?
Where there is realistically only room for one firm in the market e.g National Grid
This is due to sunk costs and efficiencies
What is a sunk cost?
A massive cost that you will never get back
Benefits of natural monopolies
Innovation
Reinvestment from huge profits, so better quality
Sunk costs shared across large number of customers
Problems with natural monopolies
- 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
What are regulators and what can they do?
They are independent bodies set up to police natural monopolies
They can:
- Set price caps
- Fines
- Enforce quality standards
what is the formula for how much firms can charge? This is what regulators set.
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)
Criticisms of regulators
Regulators goes against principles of a free-market
Firms should be allowed to make supernormal profit
Regulatory capture
What is regulatory capture?
A process by which regulatory agencies may come to be dominated by the interest they regulate and not by the public interest
Define deregulation
The process of removing or reducing government, rules, laws, and restrictions in an industry
This creates competition
Benefits of deregulation
More efficient firms so lower costs (AC curve goes down) X - efficient
Better service
Enhance productivity and innovation (dynamically efficient)
Problems of deregulation
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
What is public-private initiative?
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.
Why does public-private initiative work well?
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
Problems with public-private initiative
Tendency to cut corners to save costs
What is breaking up a monopoly?
When the government decides the monopoly has become too big and forces it to sell off part of its business
Why may the government break up a monopoly
- 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
Criticisms of breaking up monopolies
Forms an oligopoly
Benefits of nationalisation
All money earned his reinvested as government aren’t profit maximising
Quality of service is good as this is the focus
More affordable
Against nationalisation
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
What is collusion and how do they do it
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
Reasons for collusion
- 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
What are the different types of collusion?
Tacit - unofficial (e.g. speak at golf club)
Formal (sit down and agree)
Price leadership - they follow each other’s price
