Theme 3 Flashcards
How can the size of a firm be measured (3)
Number of employees
Revenue/volume output
Capital stock and assets
advantages of large firms 3
Economies of scale
can create barriers to entry
monopoly power
Advantages of small firms 3
exploit diseconomies of scale
can be better organised for local monopolies and market niches
Can gain cost advantages by using internet and tech
What is it called when the owners don’t run the business?
Divorce of ownership from control
e.g of principle agent problem
Why is the divorce of ownership from control an issue
Director may not profit maximise for owner and may have other obkjectives
What is the public sector
state controlled
social objective - provide a service to citizens
What is the sector called where it is owned by individuals?
Private sector
Name some not-for-profit organisations
charities churches food banks
Two main types of growth
Internal and external
External growth is primarily
merger & takeoevers
types of integration
Vertical
horizontal
conglomerate
PLC
Public limited company - anyone can own shares
Ltd
private limited company - shareholders have to agree to sell
Forward vs backward integration
Forward is towards the consumer
backwards is away from
What are often the key issues with integration (3)
Firms pay too much
Often poorly managed
may lack knowledge
Advantages of integration
economies of scale
less competition
spreads risk
more control
What is it called when two firms collaborate
joint venture
What is key for successful integration?
Synergy
What are the 2 Types of synergy
Cost (higher efficiency, better deals)
Revenue (more customers etc)
What two types of synergy did Facebooks takeover of Instagram have?
- Revenue synergy as it helped Facebook build Instragram’s users into its platform for more ad revenue
- Cost synergies as companies were similiar enough for duplicate roles to be replaced
what constrains business growth? 4
Size of market
Access to finance
Owners objectives
Regulation
Whats it called when a firm splits into multiple parts?
demerger
Why demerge? (4)
Can focus companies
integration costs were too high
clash of cultures
lack of synergies
formula for TR
P*Q
Formula for average revenue
TR/Q (i.e. price)
Formula for marginal revenue
TRx - TRx-1 - difference in adjacent levels of output
- addition to TR when one more unit is sold
What is MR when TR is at max
MR=0
Why does TR change?
Inelasticity changes as prices become smaller proportions of income
What is the short run
at least one factor of productoin is fixed
What is long run
all factors of production are variable
Very long run
state of technology can also change
What is it called when marginal gains of total output starts to decrease
Law of diminishing returns/law of variable proportions/law of diminishing marginal productivity
What is average product
total product/variable factor
what is marginal product
change in ouput from one level of the variable factor to the next
When TP is at max what is MP
mp=0
In the long run, there are potential affects of economies of scale - what are these three?
Increasing - more out than what is in
Constant - proportionate growth
decreasing - more in than out
What is economic cost?
The opportunity cost of production plus accounting costs
Inputted cost
- economic cost of the factors of production the firm owns
TC =?
TVC + TFC
AC = ?
TC/Q
MC =
change in total costs/change in output (MP)
What is MC and AC a reflection of?
MP AP
What is the long run made up of?
short runs
Name for a fall of average costs when output increases in the long run
Economies of Scale
What is the minimum efficient scale?
First output where average costs are minimised
What are two types of economies of scale?
Internal and external
Types of economies of scale (6)
Risk breaking
financial
marketing
technical
managerial
purchasing (bulk buy)
What is a managerial economy of scale?
specialism increases productivity, bigger firms can attract better managers (reducing downtime)
What is an external economy of scale
All firms benefit from industry growth
What are examples of three external economies of scale
Locally trained workers
Specialist suppliers
Government-funded infrastructure
What are the benefits of a fall in LRAC (3)
rise in abnormal profit
more funds to reinvest
can do limit pricing
what is a long run rise in average costs called?
Diseconomies of scale
What are the reasons for Diseconomies of scale (2)
Harder coordination, workers lack motivation
What is crowding out in terms of monopsony
Rise in demand causes a rise in prices (can lose monopsony power)
What is the difference between economic profit and accounting profit
economic costs minuses opportunity costs
Why is profit important? (4)
reward
signal
incentive
investment
Name 4 market structures
perfect competition
Monopolistic competition
oligopoly
monopoly
What factors affect the type of market (4)
Barriers to entry/exit
Homogeneity
knowledge
market relationships
Name some barriers to entry (8)
capital costs (capital bought at set up - could be recoverable but its still a load of money)
sunk costs (non-recoverable costs)
scale economies
natural cost advantages (the resoures available in one area is just naturally superior, or a family business just has the highest skilled workers)
legal barriers (patents)
marketing (brand identity)
limit pricing
Anti-competition (beating up employees)
What are the characteristics of perfect competition (6)
large numbers of buyers and sellers
homogenous product
perfect information
firms are price takers
freedom of entry and exitt
perfectly mobile factors of production
Long run of perfect competition
normal profit as abnormal acts as an incentive
whats special about perfect competition diagrams
D=AR=MR
profit maximising condition
MC=MR
SR loss condition to survive
PRICE is above AVC
Conditions for monopolistic competition
Large number of independent firms
The products are differentiable (heterogeneous)
Perfect information
No barriers to entry or exit
What happens in LR monopolistic competition?
No barriers to entry so businesses enter and leave creating normal profits, where AR=AC
What are the charactereistics of oligopoly? (4)
Interdependence
Barriers to entry and exit
sometimes Differentiation
Market dominated by a few firms
What is the N-firm ratio
combined market share of the N largest firms
Types of collusion
Formal/overt
Tacit
Covert
What are the conditions for successful cartel
An agreement
No cheating
No potential competition
What can be used to analyse whether price should be changed?
Payoff Matrix - game theory
Types of price competition
Price war
Predatory pricing
limit pricing
Types of non-price competition (3)
Marketing
quality/product differentiation
Brands
Why might price competition be favoured over non-price?
Collusion may be difficult and product differentiation may be difficult
How are monopolies maintained? (6)
Patents
Pricing strategies
Advertising/branding
Vertical integration
High sunk costs
High capital expenditure
What are the disadvantages of monopoly power? (4)
Higher prices and lower output
Less choice
Inefficiency
Inequity
What are the necesssary conditions for price discrimination
market dominance
different submarkets with different PEDs
No arbitrage
What is arbitrage?
Buying and selling the product to the different markets to take advantage of the price differences
What is the objective of the CMA and other regulators
to maximise benefit for consumers
What is a monopsony
single buyer of a good (consumer version of a monopoly)
How can firms create monopsonistic pressure
collusion - act as one buyer
How do you determine how much power a buyer has?
can other firms buy the suppliers produce
how accessible are other markets
Why do firms want to be monopsonistic
can lower costs and therefore increase profits
What is a bilateral monopoly
when a monopoly (single seller) meets a monopsonist (single buyer)
Benefits of a monopsonist
lower prices
efficient suppliers
bigger abnormal profits
Negatives of a monopsonist (4)
suppliers profits reduced
externalities
reduces incentive to supply
can cause unemployment (in supplier)
What is contestability
how easy it is to enter and exit a market
what is a sunk cost
unrecoverable set up cost
Profit in SR and LR in contestable market
SR abnormal profits
LR normal profits
What is a “hit and run competitor”
this is where a firm can enter a market to get high profits and then leave when profits fall
Innocent entry barrier
natural due to the type of industry (e.g. may be resource intensive)
5 ways contestability changes (5)
Entrepeneaurs
recession
de-regulation
competition policy
technological change
What is limit pricing
when an incumbent firm lowers price, so not to profit maximise but to be below another firms AC
What can be said to evaluate contestable markets
Firms may be influenced by the threat of new entrants so may act like perfect competition
Policies may open up markets, e.g. helping consumers switch banks or energy suppliers
Who controls a business
Owners/shareholders
Directors/managers
workers
consumers
pressure groups
What will firms try and maximise in neo-classical theory
profit
What is economic profit
TR - costs - opportunity cost
what are the functions of profit
reward for risk
signal
incentive
source of investment/finance
what objectives may a firm have (4)
profit max
sales max
revenue max
social objective
define cost plus pricing
a method of pricing which is costs to the business plus a profit margin
Why do prices not necessarily change when a market or firms costs/revenues change 3
price cuts may give distress signal
menu costs
may make the decision to improve market position rather than SR maximise profit
What is it called consumers have the power to shape firms through their demand for products
consumer sovereignty
Where does a business have to operate
where TC are less or equal to TR
What is profit satisficing
When they don’t maximise profits but rather earn “just enough”
What are non profit objectives
managerial satisfaction
sales max
rev max
Two types of efficiency
Static efficiency
Dynamic efficiency
Key difference between economies of scale and law of diminishing marginal returns
EoS is LR, LDMR is SR
What is the minimum efficient scale
the LR output where minimum costs start
Formula for allocatively efficient
AR = MC
What is productive efficiency
When average costs are minimised (SR)
The efficiency of a firm in perfect competition in the LR
productively and allocatively efficient
What is X-inefficiency
When a firm fails to minimise costs at a given output
When is consumer utility maximised
allocatively efficient
What can firms compete on
4 Ps
Price, product, place, promotion
Which three structures have competition
Perfect, monopolistic comp, oligolpoly
What is the benefit of a contestable market
firms must compete on price to prevent new entrents
What determines price in perfect competition
Supply and demand of market
What happens to a monopolistic competition in the LR
Businesses enter/leave causing AR to shift such that AC = AR
How does a firm in perfect competition become dynamically efficient
Innovation
What is the key issue with perfect competition
No profit and perfect info, so no incentive to innovate
Where is the deadweight loss from a monopoly
triangle between MC=AR point and MC=MR line
What is a natural monopoly
One that arises from economies of scale and large capital costs
What is an advantage of monopolies
They can acheive very large economies of scale
What is the key 2 issues with competition laws
regulatory capture
Monopoly pressur
Lack of information for regulators
Consume tax payers money
Also monopolies could introduce a lower ATC curve than a more competitive market due to economies of scale
What is a surrogate competitors
when regulators act like competitors to keep an eye prices
What is the aim of competition authorities
Protect and improve consumer welfare
Key method of price control
Price capping/freezing
What are the three ways that a price cap can be varied?
RPI - Prices rise at rates of inflation
RPI - X Prices vary with RPI but any inefficiencies will be deducted from the price
RPI - X + K Prices vary with RPI but and amount spent on capital pushes up the price
2 negatives of price control
Government failure (Asymmetric info and reg. capture) Profit constraints (reduces I)
What is regulatory capture
When regulators are misled to benefit those be regulated
What is a common profit control
When the % return on capital employed is capped at say 150%
What are the advantages of Profit controls?
Allows certain level of abnormal profit
Lowers prices because less profit is made on higher prices (shifts towards allocative efficiency)
Whats an issue with profit controls? (2)
It incentivises a firm to find a work around
It doesn’t encourage firms to find X efficiencies because they can’t make more profit above a certain price
Name 4 ways governments intervene to deal with monopolies
Price regulation
Profit regulation
Quality controls
Performance targets
Name 4 ways governments promote contestability and competition
Promotion of small businesses through subsidies
deregualtion - removes barriers to entry
Competitive tendering - allow private firms to bid for government contracts
Privatisation - breaks up government monopolies and encourages compeition
Benefit of quality controls
shifts focus from profit to quality
What’s a negative of quality control?
What is the name of taxes on large abnormal profits
Windfall taxes
What is privatisation
State owned firm sold to private sector
What is nationalisation
Transfer of assets to state from private sector
How can subsidies be used to improve monopolies
Can create allocative efficiency when used to lower costs
What is the disadvantage of self-regulation
Codes of practice made by firms can be cheated or may be too weak
What is the point of merger policy
investigates mergers of large firms to protect consumers
Name 6 anti-competitive policies
Cartels/collusion
Restricting supply
Predatory pricing
Limit pricing
Price discrimination
High advertisign
What is full-line forcing
When firms force retailers to stock full range
What is competitive tendering
State owned industries sells contracts to private firms (contracting out) allowing them to compete for the contract
What is a PFI
Private Finance Initiative
Govt rents/hires and gets private firm to mantain
3 ways intervene to protect suppliers
Pass anti-monopsony laws
Independent regualtors
Encourage self regulation
How do goverments protect employees 3
healh/safety regs
Trade unions
Encourage self regulation
Term when a producer takes consumer surplus
Expropriating
Name of regulation in UK
CMA competition and markets authority
Why is demand for labour downward sloping
SR - diminishing marginal returns (utility decreases as quantity increases)
LR- As wages increase, demand for machines to replace increases, reducing quantity
What is MRP
Value of MPP
marginal revenue product
Who demands labour
firms
Key thing to remember about labour
DERIVED DEMAND
Remeber about shifts in PED(L) or D(L)
Same as regular D
What is special about supply for labour
Backward bending
D substitution effect
As wages increase so do hours (leisure is substituted)
D Income effect
Hours work decreases as wage rate increase higher
2 types of concerns for supply of labour
pecuniary
non-pecuniary
What does a small firm trying to employ notice
S is perfectly elastic (wage rate is set price taker)
2 types of labour mobility
Geographical
occupational
5 ways to reduce immobility
Points based immigatration
apprenticeships
education
changing marginal tax rates
zero hour contracts
What is the outcome in a perfect labour market
constant wage rate for all professions as people would switch to any with higher rates
Name some reasons for differing wage rates
Different skills available
Trade union
Discrimination (age, race, experience)
May not seek to maximise wage rates
What 4 things determine trade union power
Membership/size
Militancy
Elasticity of demand (is labour a necessity)
Profitablity of employer
Where will a monopoly buy labour at
MC=MRP=D
What can a government do to intervene in labour market
Max/min wage
Public sector wage controls
Policies to tackle labour immobility
Good NMW evaluation
elasticity
Short run shut down price
AR = AVC
