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Economics > Theme 3 > Flashcards

Theme 3 Flashcards

1
Q

What are the reasons a firm might grow big or stay small?

A

Growing big: maximise profit, increase market power and to diversify

Staying small: lack the finances to expand, profit-satisfice, regulations limit growth, niche market/ offer a personalised service

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2
Q

What is the divorce of ownership and control?

A

when the owners of a business do not control the day-to-day decisions made in the business

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3
Q

The divorce of ownership and control can lead to the principal-agent problem. Define the principal agent problem.

A

The principal-agent problem is when the agent (the managers and directors) pursue different objectives to the principal (the shareholders who own the business)

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4
Q

Differentiate between private sector firms and public sector firms

A

Private sector firms are firms owned by private individuals e.g apple and barclays whereas public sector firms are owned by the government e.g NHS, BBC, TFL

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5
Q

Define average revenue (AR)

A

what a business receives on average from each sale

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6
Q

What is the formula for average revenue (AR)

A

AR = total revenue (TR) / Quantity
AR = P x Q / Q

AR = Price

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7
Q

Define total revenue (TR)

A

How much in total a business has received from sales

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8
Q

Describe how to draw the average revenue (AR) curve

A

same as the demand curve
line must start as the price axis

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9
Q

Define marginal revenue (MR)

A

additional revenue a firm makes selling one extra unit

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10
Q

When marginal revenue is positive what happens to total revenue?

A

When marginal revenue is positive total revenue increases with quantity

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11
Q

What is the formula for marginal revenue (MR)

A

change in TR / change in Q

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12
Q

Define Conglomerate integration

A

The merger of firms with no common connection

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13
Q

Define Demergers

A

A single business is broken into two or more businesses to operate on their own, to be sold or to be dissolved

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14
Q

Define Diseconomies of scale

A

The disadvantages that arise in large businesses that reduce
efficiency and cause long run average costs to rise

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15
Q

Define Horizontal integration

A

The merger of firms in the same industry at the same stage of
production

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16
Q

Define Not-for-profit business

A

Where firms are run in order to maximise social welfare and help individuals and groups; any profit they do make is used to support their aims

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17
Q

Define Vertical integration

A

When a firm merges or takes over another firm in the same industry, but at a different stage of production

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18
Q

Define organic (internal) growth

A

Growth that is driven by internal expansion

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19
Q

Define inorganic (external) growth

A

Growth that occurs as a result of mergers or takeovers

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20
Q

Examples of organic (internal) growth include:

A
  • gaining greater market share
  • product diversification
  • opening a new store
  • international expansion
  • Investing in new technology/production machinery
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21
Q

Define Forward vertical integration

A

a merger or takeover with a firm further forward in the supply chain

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22
Q

Define Backward vertical integration

A

a merger/takeover with a firm further backward in the supply chain

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23
Q

Who influences a firm’s business decisions?

A

A firm is influenced by its: owners, shareholders, directors/managers, workers and consumers.

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24
Q

What are the Shareholders objectives?

A

Shareholders usually look to maximise profit.

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25
Q

What are the Directors/managers objectives?

A

Directors and managers usually look to maximise sales or revenue.

Maximising sales increases their sales bonus and maximising revenue increases company size, boosting their prestige.

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26
Q

What do workers want out of a firm firm?

A

Workers want higher wages, job security and improved working conditions.

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27
Q

What are the Consumers objectives?

A

Consumers want lower prices, better customer service and quality, and they also care about social and environmental causes (e.g. homeless people and polar bears).

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28
Q

Define Sales Maximisation

A

Sales maximisation is when a firm maximises its sales without making a loss. The condition for sales maximisation is AR = AC.

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29
Q

Draw a costs and revenue diagram for a profit-maximising firm.

A

check on google.

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30
Q

Draw a costs and revenue diagram for a sales-maximising firm.

A

check on google.

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31
Q

Draw a costs and revenue diagram for a revenue-maximising firm.

A

check on google

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32
Q

What are the five market structures?

A
  • Perfect competition
  • Monopoly
  • Monopolistic competition
  • Oligopoly
  • Monopsony
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33
Q

What is a monopoly market?

A

When one firm dominates the market. There are high barriers to entry.

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34
Q

What is a perfect competition market?

A

A market with many buyers and sellers selling homogenous goods
with perfect information and freedom of entry and exit

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35
Q

What is an oligopoly market?

A

Where a few firms dominate the market and have the majority of
market share, they act interdependently

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36
Q

What is a monopolistic competition market?

A

Where there are a large number of buyers and sellers who are
relatively small and act independently, selling non-homogeneous goods.
Low barriers to entry.

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37
Q

What is the N-firm concentration ratio?

A

measures how much market share the N largest firms in the market have.

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38
Q

Describe the relationship between Marginal Revenue (MR) and Total Revenue (TR)

A

When MR is positive, TR will increase as quantity increases.

When MR is negative, TR will decrease as quantity increases.

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39
Q

What are fixed costs

A

Costs which do not vary with output e.g. rent and salaries

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40
Q

What are variable costs

A

Costs which vary with output e.g. raw materials and wages

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41
Q

What type of costs are there in the long and short run

A

short run is where at least one factor of production is fixed therefore in the short run costs are fixed and variable costs

long run is where all factors of production are variable therefore there is only variable costs in the long run

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42
Q

What is the formula for total costs

A

Total fixed costs + Total variable costs

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43
Q

Define Collusion

A

Collusion refers to the cooperation between firms in order to manipulate market conditions, often aimed at increasing prices and reducing competition.

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44
Q

Define Constant returns to
scale

A

Output increases by the same proportion that the inputs increase by

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45
Q

Define Decreasing returns to
scale

A

An increase in inputs by a certain proportion will lead to output
increasing by a smaller proportion

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46
Q

Define Game theory

A

Used to predict the outcome of a decision made by one firm, when it
has incomplete information about the other firm

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47
Q

Define Increasing returns to
scale

A

An increase in inputs by a certain proportion will lead to an increase in output by a larger proportion

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48
Q

Define Non-price competition

A

When firms compete on factors other than price, for example customer service or quality

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49
Q

Define Normal profit

A

where TC=TR
Normal profit is when the company makes sufficient revenues to cover the overall cost of production and remain competitive in its respective industry.

50
Q

Define Interdependent

A

The actions of one firm directly affects another firm

51
Q

Define a monopsony market structure

A

A monopsony is a market condition in which there is only one buyer.

52
Q

Define a perfectly contestable
market

A

A market with no barriers to entry, where a new firm can easily enter
and compete against incumbent firms completely equally.

53
Q

Define Predatory pricing

A

When a large, established firm is threatened by new entrants so sets
such a low price that other firms make losses and are driven out the
market.

54
Q

Define Price leadership

A

Where one firm sets prices and other firms tend to follow this firm as they are fearful of engaging in a price war

55
Q

Define Price Wars

A

A price war is a type of price competition, which involves firms constantly cutting their prices below that of its competitors with the goal of stealing customers from their competitors or gaining market share.

56
Q

Define Supernormal profit

A

When TR>TC

57
Q

Define Third degree price discrimination

A

Third degree price discrimination refers to the practice of charging different prices for the same product or service to different groups of consumers.

58
Q

Define internal economies of scale

A

Internal economies of scale are when long run average cost falls, as a firm expands.

59
Q

Define First Degree Price Discrimination

A

This involves charging consumers the maximum price that they are willing to pay. There will be no consumer surplus.

60
Q

Define marginal cost

A

The additional cost of selling one extra unit

61
Q

What is the formula for marginal cost

A

change in total cost / change in quantity

62
Q

What is the formula for average variable cost

A

total variable cost / quantity

63
Q

What is the formula for total variable cost

A

average variable cost x quantity

64
Q

What is the Law of diminishing marginal returns.

A

In the short run, as more factors are employed, the marginal returns from these factors will eventually decrease.

65
Q

Explain why the Marginal Cost curve takes that shape.

A

Marginal cost initially decreases because as output increases and more workers are hired, they can specialise, increasing productivity and decreasing marginal cost.

However, marginal cost will then increase because diminishing marginal returns will decrease productivity thus increasing marginal cost.

66
Q

What are the two formulas for Average Total Cost

A

ATC = TC / Q
ATC = AVC + AFC

67
Q

What are the two formulas for Total Cost

A

TC = TFC + TFC
TC = AC x Q

68
Q

What is the formula for Average Fixed Cost

A

AFC = TFC / Q

69
Q

What is the formula for Average Variable Cost

A

AVC = TVC / Q

70
Q

Why is the Average Fixed Cost curve known as the Always Falling Curve?

A

Average fixed costs equal total fixed costs divided by quantity. As total fixed costs remain the same, an increase in quantity will always decrease average fixed costs.

71
Q

What are the 6 types of internal economies of scale?

A
  1. Purchasing economies
  2. Technological economies
  3. Managerial economies
  4. Marketing economies
  5. Financial economies
  6. Risk bearing economies

REMEMBER: (RMFPTM)
Richard’s Mum Flies Past The Moon

72
Q

What is meant by Risk bearing economies

A

When big firms use their profits to diversify into new areas, reducing the cost of failure in one sector.

73
Q

What is meant by Managerial economies

A

When big firms hire highly skilled specialist managers increasing a firms productivity and decreasing their LRAC.

74
Q

What is meant by Financial economies of scale

A

Large firms are able to benefit from financial economies of scale as larger firms are seen as less risky, so they can secure cheaper loans from the bank, reducing their long run average costs.

75
Q

What is meant by Purchasing economies

A

Bigger firms can bulk-buy and negotiate lower prices, reducing their long run average costs.

76
Q

What is meant by Technical economies

A

When big firms invest in specialist capital, to increase their productivity and decrease their long run average costs.

77
Q

What is meant by Marketing economies

A

When big firms spread their marketing costs across many units, decreasing their long run average costs.

78
Q

What are the three main reasons a firm might experience internal diseconomies of scale?

A

Alienation
Bureaucracy
Communication.

79
Q

What is meant by alienation?

A

Alienation is when workers feel isolated and disconnected in very large business which leads to demotivation and decreased productivity, increasing LRAC

80
Q

What is meant by bureaucracy?

A

Bureaucracy is all the paperwork, managers, filing and secretaries that a firm has to pay for when it expands, increasing LRAC.

81
Q

Why is communication a reason firms may experience diseconomies of scale?

A

In big firms, employees may argue with each other and communication will be slow because big firms have so many layers. These factors will reduce productivity, increasing LRAC.

82
Q

Define minimum efficient scale

A

The minimum efficient scale is where a firm first reaches its lowest LRAC.

83
Q

Define External economies of scale

A

External economies of scale are when a firm’s long run average costs fall, as industry output increases.

84
Q

Illustrate External economies of scale on a diagram

A

External economies of scale will shift the entire long run average cost curve downwards, from LRAC to LRAC1.

85
Q

What are the four types of efficiencies?

A
  1. Productive efficiency
  2. Allocative efficiency
  3. X efficiency
  4. Dynamic efficiency
86
Q

At what point is a firm productively efficient?

A

Lowest point on AC curve
where MC = AC

87
Q

At what point is a firm allocatively efficient?

A

Where P=MC

88
Q

Define Productive efficiency

A

Where MC=AC
When a firm is producing at its lowest average cost.

89
Q

Define allocative efficiency

A

where MC=AR (P) and welfare is maximised

90
Q

Define Dynamic efficiency

A

Dynamic efficiency is how changing technology improves a firm’s output potential over time.

91
Q

Define X inefficiency

A

X-inefficiency is when a firm is producing above its average cost curve for a given level of output.

92
Q

Illustrate productive efficiency on a diagram

A

where MC = AC

93
Q

Illustrate allocative efficiency on a diagram

A

where MC = AR (P)

94
Q

What are the characteristics of perfect competition?

A

Many small buyers and sellers

No barriers to entry or exit

Homogeneous products

Perfect information

95
Q

Explain what happens as a monopolistically competitive market moves to its long run equilibrium. (4 marks)

A

In the short run, if a monopolistically competitive firm is making supernormal profit, it will incentivise new firms to enter the market.

There are low barriers to entry, so new firms will enter the market, stealing customers from existing (or incumbent) firms.

This will decrease their demand (or AR), shifting AR and MR down, until AR just touches the firm’s AC curve - so only normal profit will be left and all the supernormal profit is gone,.

Potential suppliers outside the market will no longer enter the market because they can no longer make supernormal profit, so we have reached the long run equilibrium.

96
Q

What are sunk costs

A

Sunk costs are costs that cannot be recovered, like advertising, research and development, salaries etc.

97
Q

What are the characteristics of an oligopoly?

A
  • few firms dominate the market
  • firms are interdependent
  • high barriers to entry
  • differentiated goods
98
Q

What are the two types of collusion

A
  • overt collusion
  • tacit collusion
99
Q

What is overt collusion

A

Overt collusion is when there’s a formal agreement between firms to collude.

100
Q

What is collusion

A

When two or more firms agree to limit competition

101
Q

What is tacit collusion

A

An unspoken agreement between firms to collude.

102
Q

what are the three types of price competition?

A
  • price wars
  • predatory pricing
  • limit pricing
103
Q

What are prices wars?

A

Price wars are when firms try to undercut each other with lower prices to steal their competitor’s consumers.

104
Q

Give an example of a price war

A

the 1990s baked bean wars, when supermarkets undercut each other and drove the price of baked beans down to just 3p.

105
Q

What is predatory pricing?

A
106
Q

Discuss the short run and long run effects of predatory pricing.

A

Short run - firms make a loss as firms decrease their prices below their average variable cost below their short run shut down point

Long run - firms get rid of the competition as their competitors are unable to compete with such low prices, therefore they can increase their prices and take over the market.

107
Q

What is limit pricing?

A

Limit pricing is when an incumbent firm uses its economies of scale to decrease their prices thus limiting new firms from entering the market.

108
Q

What are the four types of non price competition?

A
  1. advertising
  2. loyalty cards
  3. branding
  4. quality
109
Q

What are the four barriers to entry

A
  • sunk costs
  • economies of scale
  • brand loyalty
  • anti competitive/ restrictive practices e.g. vertical integration
110
Q

What is meant by legal barriers as a barrier to entry?

A

Legal barriers to entry refer to laws and regulations that make it difficult for new businesses to enter a market and compete with existing firms e.g. copyright, patents and trademarks.

111
Q

Why are sunk costs a barrier to entry?

A

Sunk costs are costs that cannot be recovered (e.g. advertising). High sunk costs are a barrier to entry as they deter new firms from entering because firms know that if they fail, they won’t be able to recover any of their sunk costs.

112
Q

What is a contestable market?

A

A market with low barriers to enter and exit. Low sunk costs.

113
Q

What is meant by Elasticity of Demand for Labour?

A

Elasticity of Demand for Labour is how responsive demand for labour is to a change in wages.

114
Q

What is meant by re-nationalisation?

A

Re-nationalisation refers to the process of transferring privately-owned assets or industries back into public ownership, typically through government intervention or legislation.

115
Q

What are trade unions?

A

Trade unions are organisations formed by workers to represent their interests and negotiate with employers on issues such as wages, working conditions, and benefits.

116
Q

What is meant by occupational immobility

A

Occupational immobility refers to the inability of labour to move from one type of job to another. Occupational immobility is caused by insufficient education, skills and training.

117
Q

What is meant by geographical immobility

A

Geographical immobility refers to barriers people moving from one area to another to find work.

118
Q

What is meant by compensating wage differentials

A

The idea that wages tend to be higher in professions that are not so attractive to work in.

119
Q

What is meant by a natural monopoly?

A

A natural monopoly is a type of monopoly in an industry or sector with high barriers to entry and start-up costs that prevent any rivals from competing.

120
Q
A

Economics (9 decks)

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