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Economics A level Edexcel > Theme 3 > Flashcards

Theme 3 Flashcards

1
Q

How can the size of a firm be measured (3)

A

Number of employees
Revenue/volume output
Capital stock and assets

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2
Q

advantages of large firms 3

A

Economies of scale
can create barriers to entry
monopoly power

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3
Q

Advantages of small firms 3

A

exploit diseconomies of scale
can be better organised for local monopolies and market niches
Can gain cost advantages by using internet and tech

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4
Q

What is it called when the owners don’t run the business?

A

Divorce of ownership from control
e.g of principle agent problem

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5
Q

Why is the divorce of ownership from control an issue

A

Director may not profit maximise for owner and may have other obkjectives

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6
Q

What is the public sector

A

state controlled
social objective - provide a service to citizens

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7
Q

What is the sector called where it is owned by individuals?

A

Private sector

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8
Q

Name some not-for-profit organisations

A

charities churches food banks

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9
Q

Two main types of growth

A

Internal and external

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10
Q

External growth is primarily

A

merger & takeoevers

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11
Q

types of integration

A

Vertical
horizontal
conglomerate

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12
Q

PLC

A

Public limited company - anyone can own shares

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13
Q

Ltd

A

private limited company - shareholders have to agree to sell

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14
Q

Forward vs backward integration

A

Forward is towards the consumer
backwards is away from

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15
Q

What are often the key issues with integration (3)

A

Firms pay too much
Often poorly managed
may lack knowledge

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16
Q

Advantages of integration

A

economies of scale
less competition
spreads risk
more control

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17
Q

What is it called when two firms collaborate

A

joint venture

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18
Q

What is key for successful integration?

A

Synergy

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19
Q

What are the 2 Types of synergy

A

Cost (higher efficiency, better deals)
Revenue (more customers etc)

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20
Q

What two types of synergy did Facebooks takeover of Instagram have?

A
  • 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
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21
Q

what constrains business growth? 4

A

Size of market
Access to finance
Owners objectives
Regulation

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22
Q

Whats it called when a firm splits into multiple parts?

A

demerger

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23
Q

Why demerge? (4)

A

Can focus companies
integration costs were too high
clash of cultures
lack of synergies

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24
Q

formula for TR

A

P*Q

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25
Q

Formula for average revenue

A

TR/Q (i.e. price)

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26
Q

Formula for marginal revenue

A

TRx - TRx-1 - difference in adjacent levels of output
- addition to TR when one more unit is sold

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27
Q

What is MR when TR is at max

A

MR=0

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28
Q

Why does TR change?

A

Inelasticity changes as prices become smaller proportions of income

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29
Q

What is the short run

A

at least one factor of productoin is fixed

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30
Q

What is long run

A

all factors of production are variable

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31
Q

Very long run

A

state of technology can also change

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32
Q

What is it called when marginal gains of total output starts to decrease

A

Law of diminishing returns/law of variable proportions/law of diminishing marginal productivity

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33
Q

What is average product

A

total product/variable factor

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34
Q

what is marginal product

A

change in ouput from one level of the variable factor to the next

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35
Q

When TP is at max what is MP

A

mp=0

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36
Q

In the long run, there are potential affects of economies of scale - what are these three?

A

Increasing - more out than what is in
Constant - proportionate growth
decreasing - more in than out

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37
Q

What is economic cost?

A

The opportunity cost of production plus accounting costs

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38
Q

Inputted cost

A
  • economic cost of the factors of production the firm owns
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39
Q

TC =?

A

TVC + TFC

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40
Q

AC = ?

A

TC/Q

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41
Q

MC =

A

change in total costs/change in output (MP)

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42
Q

What is MC and AC a reflection of?

A

MP AP

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43
Q

What is the long run made up of?

A

short runs

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44
Q

Name for a fall of average costs when output increases in the long run

A

Economies of Scale

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45
Q

What is the minimum efficient scale?

A

First output where average costs are minimised

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46
Q

What are two types of economies of scale?

A

Internal and external

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47
Q

Types of economies of scale (6)

A

Risk breaking
financial
marketing
technical
managerial
purchasing (bulk buy)

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48
Q

What is a managerial economy of scale?

A

specialism increases productivity, bigger firms can attract better managers (reducing downtime)

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49
Q

What is an external economy of scale

A

All firms benefit from industry growth

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50
Q

What are examples of three external economies of scale

A

Locally trained workers
Specialist suppliers
Government-funded infrastructure

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51
Q

What are the benefits of a fall in LRAC (3)

A

rise in abnormal profit
more funds to reinvest
can do limit pricing

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52
Q

what is a long run rise in average costs called?

A

Diseconomies of scale

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53
Q

What are the reasons for Diseconomies of scale (2)

A

Harder coordination, workers lack motivation

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54
Q

What is crowding out in terms of monopsony

A

Rise in demand causes a rise in prices (can lose monopsony power)

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55
Q

What is the difference between economic profit and accounting profit

A

economic costs minuses opportunity costs

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56
Q

Why is profit important? (4)

A

reward
signal
incentive
investment

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57
Q

Name 4 market structures

A

perfect competition
Monopolistic competition
oligopoly
monopoly

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58
Q

What factors affect the type of market (4)

A

Barriers to entry/exit
Homogeneity
knowledge
market relationships

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59
Q

Name some barriers to entry (8)

A

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)

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60
Q

What are the characteristics of perfect competition (6)

A

large numbers of buyers and sellers
homogenous product
perfect information
firms are price takers
freedom of entry and exitt
perfectly mobile factors of production

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61
Q

Long run of perfect competition

A

normal profit as abnormal acts as an incentive

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62
Q

whats special about perfect competition diagrams

A

D=AR=MR

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63
Q

profit maximising condition

A

MC=MR

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64
Q

SR loss condition to survive

A

PRICE is above AVC

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65
Q

Conditions for monopolistic competition

A

Large number of independent firms
The products are differentiable (heterogeneous)
Perfect information
No barriers to entry or exit

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66
Q

What happens in LR monopolistic competition?

A

No barriers to entry so businesses enter and leave creating normal profits, where AR=AC

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67
Q

What are the charactereistics of oligopoly? (4)

A

Interdependence
Barriers to entry and exit
sometimes Differentiation
Market dominated by a few firms

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68
Q

What is the N-firm ratio

A

combined market share of the N largest firms

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69
Q

Types of collusion

A

Formal/overt
Tacit
Covert

70
Q

What are the conditions for successful cartel

A

An agreement
No cheating
No potential competition

71
Q

What can be used to analyse whether price should be changed?

A

Payoff Matrix - game theory

72
Q

Types of price competition

A

Price war
Predatory pricing
limit pricing

73
Q

Types of non-price competition (3)

A

Marketing
quality/product differentiation
Brands

74
Q

Why might price competition be favoured over non-price?

A

Collusion may be difficult and product differentiation may be difficult

75
Q

How are monopolies maintained? (6)

A

Patents
Pricing strategies
Advertising/branding
Vertical integration
High sunk costs
High capital expenditure

76
Q

What are the disadvantages of monopoly power? (4)

A

Higher prices and lower output
Less choice
Inefficiency
Inequity

77
Q

What are the necesssary conditions for price discrimination

A

market dominance
different submarkets with different PEDs
No arbitrage

78
Q

What is arbitrage?

A

Buying and selling the product to the different markets to take advantage of the price differences

79
Q

What is the objective of the CMA and other regulators

A

to maximise benefit for consumers

80
Q

What is a monopsony

A

single buyer of a good (consumer version of a monopoly)

81
Q

How can firms create monopsonistic pressure

A

collusion - act as one buyer

82
Q

How do you determine how much power a buyer has?

A

can other firms buy the suppliers produce
how accessible are other markets

83
Q

Why do firms want to be monopsonistic

A

can lower costs and therefore increase profits

84
Q

What is a bilateral monopoly

A

when a monopoly (single seller) meets a monopsonist (single buyer)

85
Q

Benefits of a monopsonist

A

lower prices
efficient suppliers
bigger abnormal profits

86
Q

Negatives of a monopsonist (4)

A

suppliers profits reduced
externalities
reduces incentive to supply
can cause unemployment (in supplier)

87
Q

What is contestability

A

how easy it is to enter and exit a market

88
Q

what is a sunk cost

A

unrecoverable set up cost

89
Q

Profit in SR and LR in contestable market

A

SR abnormal profits
LR normal profits

90
Q

What is a “hit and run competitor”

A

this is where a firm can enter a market to get high profits and then leave when profits fall

91
Q

Innocent entry barrier

A

natural due to the type of industry (e.g. may be resource intensive)

92
Q

5 ways contestability changes (5)

A

Entrepeneaurs
recession
de-regulation
competition policy
technological change

93
Q

What is limit pricing

A

when an incumbent firm lowers price, so not to profit maximise but to be below another firms AC

94
Q

What can be said to evaluate contestable markets

A

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

95
Q

Who controls a business

A

Owners/shareholders
Directors/managers
workers
consumers
pressure groups

96
Q

What will firms try and maximise in neo-classical theory

A

profit

97
Q

What is economic profit

A

TR - costs - opportunity cost

98
Q

what are the functions of profit

A

reward for risk
signal
incentive
source of investment/finance

99
Q

what objectives may a firm have (4)

A

profit max
sales max
revenue max
social objective

100
Q

define cost plus pricing

A

a method of pricing which is costs to the business plus a profit margin

101
Q

Why do prices not necessarily change when a market or firms costs/revenues change 3

A

price cuts may give distress signal
menu costs
may make the decision to improve market position rather than SR maximise profit

102
Q

What is it called consumers have the power to shape firms through their demand for products

A

consumer sovereignty

103
Q

Where does a business have to operate

A

where TC are less or equal to TR

104
Q

What is profit satisficing

A

When they don’t maximise profits but rather earn “just enough”

105
Q

What are non profit objectives

A

managerial satisfaction
sales max
rev max

106
Q

Two types of efficiency

A

Static efficiency
Dynamic efficiency

107
Q

Key difference between economies of scale and law of diminishing marginal returns

A

EoS is LR, LDMR is SR

108
Q

What is the minimum efficient scale

A

the LR output where minimum costs start

109
Q

Formula for allocatively efficient

A

AR = MC

110
Q

What is productive efficiency

A

When average costs are minimised (SR)

111
Q

The efficiency of a firm in perfect competition in the LR

A

productively and allocatively efficient

112
Q

What is X-inefficiency

A

When a firm fails to minimise costs at a given output

113
Q

When is consumer utility maximised

A

allocatively efficient

114
Q

What can firms compete on

A

4 Ps
Price, product, place, promotion

115
Q

Which three structures have competition

A

Perfect, monopolistic comp, oligolpoly

116
Q

What is the benefit of a contestable market

A

firms must compete on price to prevent new entrents

117
Q

What determines price in perfect competition

A

Supply and demand of market

118
Q

What happens to a monopolistic competition in the LR

A

Businesses enter/leave causing AR to shift such that AC = AR

119
Q

How does a firm in perfect competition become dynamically efficient

A

Innovation

120
Q

What is the key issue with perfect competition

A

No profit and perfect info, so no incentive to innovate

121
Q

Where is the deadweight loss from a monopoly

A

triangle between MC=AR point and MC=MR line

122
Q

What is a natural monopoly

A

One that arises from economies of scale and large capital costs

123
Q

What is an advantage of monopolies

A

They can acheive very large economies of scale

124
Q

What is the key 2 issues with competition laws

A

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

125
Q

What is a surrogate competitors

A

when regulators act like competitors to keep an eye prices

126
Q

What is the aim of competition authorities

A

Protect and improve consumer welfare

127
Q

Key method of price control

A

Price capping/freezing

128
Q

What are the three ways that a price cap can be varied?

A

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

129
Q

2 negatives of price control

A 
Government failure (Asymmetric info and reg. capture) 
Profit constraints (reduces I)
130
Q

What is regulatory capture

A

When regulators are misled to benefit those be regulated

131
Q

What is a common profit control

A

When the % return on capital employed is capped at say 150%

132
Q

What are the advantages of Profit controls?

A

Allows certain level of abnormal profit
Lowers prices because less profit is made on higher prices (shifts towards allocative efficiency)

133
Q

Whats an issue with profit controls? (2)

A

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

134
Q

Name 4 ways governments intervene to deal with monopolies

A

Price regulation
Profit regulation
Quality controls
Performance targets

135
Q

Name 4 ways governments promote contestability and competition

A

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

136
Q

Benefit of quality controls

A

shifts focus from profit to quality

137
Q

What’s a negative of quality control?

A
138
Q

What is the name of taxes on large abnormal profits

A

Windfall taxes

139
Q

What is privatisation

A

State owned firm sold to private sector

140
Q

What is nationalisation

A

Transfer of assets to state from private sector

141
Q

How can subsidies be used to improve monopolies

A

Can create allocative efficiency when used to lower costs

142
Q

What is the disadvantage of self-regulation

A

Codes of practice made by firms can be cheated or may be too weak

143
Q

What is the point of merger policy

A

investigates mergers of large firms to protect consumers

144
Q

Name 6 anti-competitive policies

A

Cartels/collusion
Restricting supply
Predatory pricing
Limit pricing
Price discrimination
High advertisign

145
Q

What is full-line forcing

A

When firms force retailers to stock full range

146
Q

What is competitive tendering

A

State owned industries sells contracts to private firms (contracting out) allowing them to compete for the contract

147
Q

What is a PFI

A

Private Finance Initiative
Govt rents/hires and gets private firm to mantain

148
Q

3 ways intervene to protect suppliers

A

Pass anti-monopsony laws
Independent regualtors
Encourage self regulation

149
Q

How do goverments protect employees 3

A

healh/safety regs
Trade unions
Encourage self regulation

150
Q

Term when a producer takes consumer surplus

A

Expropriating

151
Q

Name of regulation in UK

A

CMA competition and markets authority

152
Q

Why is demand for labour downward sloping

A

SR - diminishing marginal returns (utility decreases as quantity increases)
LR- As wages increase, demand for machines to replace increases, reducing quantity

153
Q

What is MRP

A

Value of MPP
marginal revenue product

154
Q

Who demands labour

A

firms

155
Q

Key thing to remember about labour

A

DERIVED DEMAND

156
Q

Remeber about shifts in PED(L) or D(L)

A

Same as regular D

157
Q

What is special about supply for labour

A

Backward bending

158
Q

D substitution effect

A

As wages increase so do hours (leisure is substituted)

159
Q

D Income effect

A

Hours work decreases as wage rate increase higher

160
Q

2 types of concerns for supply of labour

A

pecuniary
non-pecuniary

161
Q

What does a small firm trying to employ notice

A

S is perfectly elastic (wage rate is set price taker)

162
Q

2 types of labour mobility

A

Geographical
occupational

163
Q

5 ways to reduce immobility

A

Points based immigatration
apprenticeships
education
changing marginal tax rates
zero hour contracts

164
Q

What is the outcome in a perfect labour market

A

constant wage rate for all professions as people would switch to any with higher rates

165
Q

Name some reasons for differing wage rates

A

Different skills available
Trade union
Discrimination (age, race, experience)
May not seek to maximise wage rates

166
Q

What 4 things determine trade union power

A

Membership/size
Militancy
Elasticity of demand (is labour a necessity)
Profitablity of employer

167
Q

Where will a monopoly buy labour at

A

MC=MRP=D

168
Q

What can a government do to intervene in labour market

A

Max/min wage
Public sector wage controls
Policies to tackle labour immobility

169
Q

Good NMW evaluation

A

elasticity

170
Q

Short run shut down price

A

AR = AVC

Economics A level Edexcel (18 decks)

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