Theme 3 Flashcards
giver reasons why firms decide to stay small instead of grow
it keeps the cost of running the business low
lowers costs like staff and rent
less costs on equipment
explain the public sector
organisations that are controlled/owned by the government
explain the private sector
the part of the economy that isn’t controlled by the government
distinguish between profit and not-for-profit organisations
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
explain organic growth
growth from within the business like expanding the product range or the number of business units or locations
explain forward vertical integration
acquiring a business further up the supply chain
explain backward vertical integration
acquiring a business further down the supply chain
explain horizontal integration
acquiring a business at the same stage of the supply chain as you
explain conglomerate integration (diversification)
acquiring or merging with a business that is in a different industry or market to yourself
explain advantages of organic growth
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
explain disadvantages of organic growth
its slow growth and shareholders may prefer quicker growth
its a slower process to acquire new customers and expand business with existing customers
Explain advantages of vertical / horizontal integration
Reduced competition
Increased market share and power
You already know how the function of the business works
Revenue growth
Improved efficiencies
Disadvantages of horizontal / vertical integration
Less flexibility
Job duplication
Less efficiency
Explain advantages of conglomerate integration (diversification)
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
Explain disadvantages of conglomerate integration (diversification)
Losing focus
Diluting your brand identity
Increasing your costs
Facing more competition
Failing to meet customer expectations
give reasons for demergers
a change in the overall objective for the business could lead to conflict between the two business
explain efficiency
the optimal production and distribution of scarce resources
explain reasons for inefficiency
lack of motivation
lack of knowledge
outdated technology
wasted stock
explain allocative efficiency
allocating goods and services to meet customer needs and wants, the marker dictates price and quantity supplied
explain productive efficiency
operating at the lowest point on the average cost curve
explain x-inefficiency
occurs when firms don’t have incentives to cut costs so costs end up higher than they should be a
explain technical efficiency
when a firms producing the maximum output from the minimum quantity inputs, such as labour capital and technology
explain dynamic efficiency
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
identify characteristics of perfect competition
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)
explain normal profit
the minimum profit required to keep factors of production in their current use in the long run
explain supernormal profit
the profit achieved in excess of normal profit
explain sub-normal profit
the profit that’s less then normal
explain concentration ratios
measures the percentage share taken. up by the largest firms
identify characteristics of a monopoly market
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
explain drawbacks of monopolies
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
explain advantages of monopolies
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
explain natural monopoly
one with high barriers to enter because of high start up costs
explain price discrimination
charging a different price to different groups of people for the same good
explain first degree price discrimination
charge consumers the maximum they’re willing to pay
explain second degree price discrimination
charging different prices depending on. the amount consumed
explain third degree price discrimination
charging different prices to different groups of people
explain the conditions necessary for price discrimination
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
explain advantages of price discrimination
firms will be able to increase revenue
increased revenue can be used for research and development some consumers benefit from lower fares
explain disadvantages of price discrimination
some consumers end up paying higher prices
decline in consumer surplus
may be administration costs
profits could be used to finance predatory pricing
identify characteristics of oligopolistic markets
high barriers to enter and exit
high concentration ratio
interdependence firms
product differentiation
potential for collusion
give reasons for collusive behaviour
lower consumer surplus, higher prices and greater profits
they can maximise their own benefit and restrict their output to cause market price increases
explain overt collusion
when a formal agreement is made between firms to collude
explain tacit collusion
when there is no formal agreement but collusion is implied
explain game theory
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
explain price wars
firms constantly cutting their prices below their competitors
explain predatory pricing
firms setting low prices to drive out firms already in the industry - its illegal
explain limit pricing
firms lower prices to discourage the entry of new firms but it lowers their profits
identify types of non-price competition
opening hours
car parking availability
location
staff
customer service
convenience
products on sale
explain demand for labour
shows how many workers an employer is willing and able to hire at a given wage rate in a given time period
explain derived demand
the demand that comes from the demand for something else
explain factors influencing demand for labour
wage rate
demand for the product
productivity of labour
profitability of firms
number of substitutes
explain supply of labour
the number of workers willing and able to work multiplied by the hours they’re willing and able to work
explain factors influencing labour supply
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
explain income effect (on employment)
higher wages can lead to a decline in labour supply because it encourages workers to work less and enjoy more leisure time
explain substitution effect (on employment)
a rise in the real wage increases the opportunity cost of leisure
explain occupational mobility
changes in individual occupational status
explain geographical mobility
the measure of how the population and goods move around over time
explain occupational immobility
people can’t do certain jobs because of lack of training skills or experience
explain equilibrium wage rate
the market wage is the wage that brings the demand and supply of labour into. equilibrium
explain the minimum wage
the minimum amount an employee can be paid per hour
explain the benefits of the minimum wage
reduces poverty
increases productivity
increases investment
increases the incentive to accept a job
counterbalances the effect of monopsony employers
explain the drawbacks of the minimum wage
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
explain monopsony
a market condition where their is only one buyer
explain problems of monopsony’s
can lead to lower wages for workers
works are paid less than their marginal revenue product
explain trade unions
can cause higher wages which can have the effect of causing unemployment
explain profit maximisation
firms ensure the best output and and price levels are achieved in order to maximise its returns
explain revenue maximisation
focuses on increasing market share which increase the total revenue generated by a company
explain sales maximisation
supplying the largest output possible consistent with earning at least normal profits where AR=AC
explain satisficing
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
total revenue formula
total amount of money coming into the business x price
average revenue formula
output
marginal revenue formula
change in total output
explain total costs
the total costs in a business, the variable and fixed costs added together
explain marginal costs
the additional costs
explain fixed costs
ones that don’t change in relation to output
explain variable costs
ones that do change in relation to output
explain economies of scale
the advantages of large scale of production that enables a business to produce at a lower average cost than smaller businesses
explain diseconomies of scale
disadvantages that arise in a large business that reduces efficiency and causes costs to rise
explain minimum efficient scale
the minimum level of output needed for a business to fully exploit economies of scale
explain internal economies of scale
measures a companies efficiency
explain external economies of scale
Economies of scale that benefits the whole industry not just one business
explain managerial economies of scale
large companies can afford specialist managers who have better knowledge and are more efficient
explain marketing economies of scale
a large firm can spread its advertising and marketing costs more than smaller firms
explain financial economies of scale
larger firms have greater security because they have more assets so are less likely to be forced out of business overnight
explain purchasing economies of scale
larger firms can buy more products at once so are able to agree a cheaper price per unit than smaller firms
explain technological economies of scale
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
Explain contestable market
Occurs when theirs freedom of entry and exit into the market, so there will be low sunk costs
Explain sunk costs
Those that can’t be recovered when leaving the market (rent and advertising)
Explain features of contestable markets
Absence of sunk costs
Access to all available technology
Lack of consumer loyalty
Low barriers to entry
Explain hit and run entry
A business enters an industry to take advantage of temporarily high (supernormal) profits
How do you judge contestability
The level of profit in an industry
The number of firms
Explain methods to increase contestability
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
Explain characteristics of monopolistic competition markets
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
What do the CMA do
Work to promote competition for the benefit of consumers and investigate mergers and breaches of UK and EU competition law
Explain controlling mergers
A merger is investigated if their market share is greater than 25% or if their turnover is £70 million or more
Explain controlling monopolies
Monopolies are allocative,y inefficient and so it’s argued they need to be controlled
Explain price regulation
Gives an incentive for firms to be as efficient as possible and it also prevents firms charging excessive prices and making supernormal profits
Explain profit regulation
This aims to encourage investment and prevent firms setting high prices
Explain quality standards
Firms have to have their products of a sufficient standard and that they don’t exploit their customers by offering ooor quality
Explain performance targets
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
Explain promotion of small businesses
The government can give training and grants to new entrepreneurs and encourage small businesses through tax incentive or subsidies. It increases. Innovation and efficiency
Explain deregulation
The removal of legal barriers to entry to increase efficiency
Explain restrictions on monopsony power
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
Explain workers rights
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
Explain privatisation
The sale of government equity in nationalised industries or other firms to private investors
Explain nationalisation
When a private sector company or industry is bought under state control to be owned and managed by the government
Advantages and disadvantages of privatisation
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
Advantages and disadvantages of nationalisation
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
