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Economics > Theme 3 > Flashcards

Theme 3 Flashcards

1
Q

giver reasons why firms decide to stay small instead of grow

A

it keeps the cost of running the business low
lowers costs like staff and rent
less costs on equipment

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2
Q

explain the public sector

A

organisations that are controlled/owned by the government

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3
Q

explain the private sector

A

the part of the economy that isn’t controlled by the government

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4
Q

distinguish between profit and not-for-profit organisations

A

profit organisations aim to maximise profit whereas not-for-profit organisations would use profit to re-invest in the business or to give out to dividends

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5
Q

explain organic growth

A

growth from within the business like expanding the product range or the number of business units or locations

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6
Q

explain forward vertical integration

A

acquiring a business further up the supply chain

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7
Q

explain backward vertical integration

A

acquiring a business further down the supply chain

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8
Q

explain horizontal integration

A

acquiring a business at the same stage of the supply chain as you

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9
Q

explain conglomerate integration (diversification)

A

acquiring or merging with a business that is in a different industry or market to yourself

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10
Q

explain advantages of organic growth

A

allows the business owners to maintain control of their business
less risk than external growth
can be financed through internal funds
allows growth at a more sensible rate

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11
Q

explain disadvantages of organic growth

A

its slow growth and shareholders may prefer quicker growth
its a slower process to acquire new customers and expand business with existing customers

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12
Q

Explain advantages of vertical / horizontal integration

A

Reduced competition
Increased market share and power
You already know how the function of the business works
Revenue growth
Improved efficiencies

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13
Q

Disadvantages of horizontal / vertical integration

A

Less flexibility
Job duplication
Less efficiency

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14
Q

Explain advantages of conglomerate integration (diversification)

A

Increases business market share
Gain access to larger market potential due to lower competition in foreign markets
Reduces risk due to investments being spread across multiple areas

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15
Q

Explain disadvantages of conglomerate integration (diversification)

A

Losing focus
Diluting your brand identity
Increasing your costs
Facing more competition
Failing to meet customer expectations

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16
Q

give reasons for demergers

A

a change in the overall objective for the business could lead to conflict between the two business

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17
Q

explain efficiency

A

the optimal production and distribution of scarce resources

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18
Q

explain reasons for inefficiency

A

lack of motivation
lack of knowledge
outdated technology
wasted stock

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19
Q

explain allocative efficiency

A

allocating goods and services to meet customer needs and wants, the marker dictates price and quantity supplied

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20
Q

explain productive efficiency

A

operating at the lowest point on the average cost curve

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21
Q

explain x-inefficiency

A

occurs when firms don’t have incentives to cut costs so costs end up higher than they should be a

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22
Q

explain technical efficiency

A

when a firms producing the maximum output from the minimum quantity inputs, such as labour capital and technology

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23
Q

explain dynamic efficiency

A

when all resources are allocated efficiently over time, and the rate of innovation is at the optimum level, which leads to falling long run average costs

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24
Q

identify characteristics of perfect competition

A

large number of firms
homogenous products
freedom of entry and exit
firms have no control over price
each producer supplies a small amount into the market
perfect knowledge (consumers and producers)

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25
Q

explain normal profit

A

the minimum profit required to keep factors of production in their current use in the long run

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26
Q

explain supernormal profit

A

the profit achieved in excess of normal profit

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27
Q

explain sub-normal profit

A

the profit that’s less then normal

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28
Q

explain concentration ratios

A

measures the percentage share taken. up by the largest firms

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29
Q

identify characteristics of a monopoly market

A

one firm is the industry
only one product
high barriers to enter and exit
firms have total control over price
producers supply everything into the market
consumers have imperfect knwoledge

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30
Q

explain drawbacks of monopolies

A

higher prices
lower quality products
less output and choice
allocatively inefficient
supernormal profit in the long term so unequal distribution of income
diseconomies of scale

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31
Q

explain advantages of monopolies

A

lower AC can lead to lower prices for consumers
supernormal profit can be re-invested for research and development
gain monopoly power because they’re most efficient

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32
Q

explain natural monopoly

A

one with high barriers to enter because of high start up costs

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33
Q

explain price discrimination

A

charging a different price to different groups of people for the same good

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34
Q

explain first degree price discrimination

A

charge consumers the maximum they’re willing to pay

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35
Q

explain second degree price discrimination

A

charging different prices depending on. the amount consumed

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36
Q

explain third degree price discrimination

A

charging different prices to different groups of people

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37
Q

explain the conditions necessary for price discrimination

A

must operate in imperfect competition
must be a price maker with downward sloping demand curve
must be able to separate markets and prevent resale
different consumer groups must have elasticities of demand

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38
Q

explain advantages of price discrimination

A

firms will be able to increase revenue
increased revenue can be used for research and development some consumers benefit from lower fares

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39
Q

explain disadvantages of price discrimination

A

some consumers end up paying higher prices
decline in consumer surplus
may be administration costs
profits could be used to finance predatory pricing

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40
Q

identify characteristics of oligopolistic markets

A

high barriers to enter and exit
high concentration ratio
interdependence firms
product differentiation
potential for collusion

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41
Q

give reasons for collusive behaviour

A

lower consumer surplus, higher prices and greater profits
they can maximise their own benefit and restrict their output to cause market price increases

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42
Q

explain overt collusion

A

when a formal agreement is made between firms to collude

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43
Q

explain tacit collusion

A

when there is no formal agreement but collusion is implied

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44
Q

explain game theory

A

interdependent firms in an oligopoly use it to predict the outcome of a decision made by a firm when it has incomplete information about another firm

45
Q

explain price wars

A

firms constantly cutting their prices below their competitors

46
Q

explain predatory pricing

A

firms setting low prices to drive out firms already in the industry - its illegal

47
Q

explain limit pricing

A

firms lower prices to discourage the entry of new firms but it lowers their profits

48
Q

identify types of non-price competition

A

opening hours
car parking availability
location
staff
customer service
convenience
products on sale

49
Q

explain demand for labour

A

shows how many workers an employer is willing and able to hire at a given wage rate in a given time period

50
Q

explain derived demand

A

the demand that comes from the demand for something else

51
Q

explain factors influencing demand for labour

A

wage rate
demand for the product
productivity of labour
profitability of firms
number of substitutes

52
Q

explain supply of labour

A

the number of workers willing and able to work multiplied by the hours they’re willing and able to work

53
Q

explain factors influencing labour supply

A

wage rate
size of the working population
migration rate
peoples preferences for work
net advantages of work
relationship between work and leisure
barriers to entry (skills required)
tax and benefit incentives

54
Q

explain income effect (on employment)

A

higher wages can lead to a decline in labour supply because it encourages workers to work less and enjoy more leisure time

55
Q

explain substitution effect (on employment)

A

a rise in the real wage increases the opportunity cost of leisure

56
Q

explain occupational mobility

A

changes in individual occupational status

57
Q

explain geographical mobility

A

the measure of how the population and goods move around over time

58
Q

explain occupational immobility

A

people can’t do certain jobs because of lack of training skills or experience

59
Q

explain equilibrium wage rate

A

the market wage is the wage that brings the demand and supply of labour into. equilibrium

60
Q

explain the minimum wage

A

the minimum amount an employee can be paid per hour

61
Q

explain the benefits of the minimum wage

A

reduces poverty
increases productivity
increases investment
increases the incentive to accept a job
counterbalances the effect of monopsony employers

62
Q

explain the drawbacks of the minimum wage

A

increases unemployment
creates cost push inflation
the poorest don’t benefit
limited impact on relative poverty
regional variations in wages
higher wages passed onto consumers through price
more workers on the minimum wage

63
Q

explain monopsony

A

a market condition where their is only one buyer

64
Q

explain problems of monopsony’s

A

can lead to lower wages for workers
works are paid less than their marginal revenue product

65
Q

explain trade unions

A

can cause higher wages which can have the effect of causing unemployment

66
Q

explain profit maximisation

A

firms ensure the best output and and price levels are achieved in order to maximise its returns

67
Q

explain revenue maximisation

A

focuses on increasing market share which increase the total revenue generated by a company

68
Q

explain sales maximisation

A

supplying the largest output possible consistent with earning at least normal profits where AR=AC

69
Q

explain satisficing

A

where directors want to maximise their own benefit but need to make a certain amount of profit in order to keep their jobs, receive benefits and avoid criticism from shareholders

70
Q

total revenue formula

A

total amount of money coming into the business x price

71
Q

average revenue formula

A

output

72
Q

marginal revenue formula

A

change in total output

73
Q

explain total costs

A

the total costs in a business, the variable and fixed costs added together

74
Q

explain marginal costs

A

the additional costs

75
Q

explain fixed costs

A

ones that don’t change in relation to output

76
Q

explain variable costs

A

ones that do change in relation to output

77
Q

explain economies of scale

A

the advantages of large scale of production that enables a business to produce at a lower average cost than smaller businesses

78
Q

explain diseconomies of scale

A

disadvantages that arise in a large business that reduces efficiency and causes costs to rise

79
Q

explain minimum efficient scale

A

the minimum level of output needed for a business to fully exploit economies of scale

80
Q

explain internal economies of scale

A

measures a companies efficiency

81
Q

explain external economies of scale

A

Economies of scale that benefits the whole industry not just one business

82
Q

explain managerial economies of scale

A

large companies can afford specialist managers who have better knowledge and are more efficient

83
Q

explain marketing economies of scale

A

a large firm can spread its advertising and marketing costs more than smaller firms

84
Q

explain financial economies of scale

A

larger firms have greater security because they have more assets so are less likely to be forced out of business overnight

85
Q

explain purchasing economies of scale

A

larger firms can buy more products at once so are able to agree a cheaper price per unit than smaller firms

86
Q

explain technological economies of scale

A

larger firms can afford the latest technology so are able to buy it and it improves their efficiency but smaller firms can’t afford it

87
Q

Explain contestable market

A

Occurs when theirs freedom of entry and exit into the market, so there will be low sunk costs

88
Q

Explain sunk costs

A

Those that can’t be recovered when leaving the market (rent and advertising)

89
Q

Explain features of contestable markets

A

Absence of sunk costs
Access to all available technology
Lack of consumer loyalty
Low barriers to entry

90
Q

Explain hit and run entry

A

A business enters an industry to take advantage of temporarily high (supernormal) profits

91
Q

How do you judge contestability

A

The level of profit in an industry
The number of firms

92
Q

Explain methods to increase contestability

A

Remove legal barriers to entry
Force firms to allow competitors to use its network
Legislation against predatory pricing
CMA can legislate against abuse of monopoly power

93
Q

Explain characteristics of monopolistic competition markets

A

Large number of firms in the industry
Some control over price because they differentiate the product
Few barriers to enter and exit
Imperfect consumer and producer knowledge

94
Q

What do the CMA do

A

Work to promote competition for the benefit of consumers and investigate mergers and breaches of UK and EU competition law

95
Q

Explain controlling mergers

A

A merger is investigated if their market share is greater than 25% or if their turnover is £70 million or more

96
Q

Explain controlling monopolies

A

Monopolies are allocative,y inefficient and so it’s argued they need to be controlled

97
Q

Explain price regulation

A

Gives an incentive for firms to be as efficient as possible and it also prevents firms charging excessive prices and making supernormal profits

98
Q

Explain profit regulation

A

This aims to encourage investment and prevent firms setting high prices

99
Q

Explain quality standards

A

Firms have to have their products of a sufficient standard and that they don’t exploit their customers by offering ooor quality

100
Q

Explain performance targets

A

They could set targets over price, quality, consumer choice and costs of production. It helps firms improve their service and leads to gains for customers

101
Q

Explain promotion of small businesses

A

The government can give training and grants to new entrepreneurs and encourage small businesses through tax incentive or subsidies. It increases. Innovation and efficiency

102
Q

Explain deregulation

A

The removal of legal barriers to entry to increase efficiency

103
Q

Explain restrictions on monopsony power

A

Fines can be put in place for those who exploit their power and minimum prices may be introduced to ensure suppliers are paid a fair amount of

104
Q

Explain workers rights

A

Government protects employees through health and safety laws, employment contracts, redundancy processes, maximum hours at work and the right to be in a trade union

105
Q

Explain privatisation

A

The sale of government equity in nationalised industries or other firms to private investors

106
Q

Explain nationalisation

A

When a private sector company or industry is bought under state control to be owned and managed by the government

107
Q

Advantages and disadvantages of privatisation

A

Greater competition
Managers become more accountable
Reduces the public sector net cash requirement
Reduces government interference
Invest with great certainty
Utilities into the hands of people
Abuse their monopoly position
Problems over externalities and inequality
Negatively affects that the PSNCR

108
Q

Advantages and disadvantages of nationalisation

A

Investment is needed for the long term
Better for a monopoly to be run by the state
The government will consider externalities
The government will guarantee a minimum level of service
Nationalised industries may suffer from the principal agent problem and moral hazard
Experience x-inefficiency
Be influenced by government decisions

Economics (4 decks)

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