Theme 3 Flashcards
Derived demand
The demand that comes from the demand for something else
When does the profit maximisation occur
When MC=MR
Evaluation points for marginal revenue product
- MRPL is taken as the basis for the labour demand curve
- measuring labour efficiency
- relatively easy to measure productivity in construction industry and in-call-centres
- much harder to measure productivity in consultancy
Factors influencing marginal revenue
- the wage rate (the lower the demand)
- the demand of products
-productivity of labour - profitability of firms
- substitutes
- number of ‘buyers’ of labour
Labour of supply
Defined as the number of workers willing and able to work, multiplied by the hour they are willing and able to work
Factors influencing the supply of labour
- wage rate
- size of the working population
- migration
- people’s preferences for work
- net advantages of work
- work and leisure
Income effect ?
The ride in income as wages rise but with the potential of individuals reaching a target income
Substitution effect?
As wage rises the opportunity cost of leisure time increase providing an initiative to work
What’s the type of demand in labour market
Derived demand for a product or service
Monopsony
One buyer, multiple sellers
Has buying or bargaining power in one or more markets
Maximise profit by negotiating lower prices from suppliers
What might monopsony power be used to do
Bring down the average and marginal costs for a firm
Results in a lower equilibrium price
Increases supernormal profit
Strategies to counter monopsony power
New regulators - grocery adjudicator
Competition policy - block mergers and takeovers
Producer co-operatives as a counter balance to monopsony buyers
Tougher laws on standards
What are big businesses told to do (payments)
Speed up their payments to smaller firms as they are more dependant on this income
How to calculate the concentration ratio
Top 3 / Total Number x 100
What can trade unions do?
They can bargain wages above the competitive equilibrium
Reasons not to move ( geographic immobility)
Transport
Family and social ties
Financial costs
Cultural and language barriers
What has the government done to increase geographic mobility?
Housing subsidies- the government offers subsidies to key workers
Increase transport e.g. trains
Move jobs outside of London
Work from home
What are some barriers to geographic mobility
Skills
Training
Qualification
Education
General factors of labour mobility
Minimum wage
Labour market regulation
Trade unions
Zero-hour contact
Normal profit
The minimum profit required to keep factors of production in their current use in the long run
Subnormal profit
The profit which is less than normal
Supernormal profit
Profit achieved in excess of normal profit
Characteristics of perfect competition
Large number of firms
Products are homogeneous (identical) - consumer has no reason to express a preference for any firm
Freedom of entry and exit into and out of the industry
Firms are price takers
Consumers and producers have perfect knowledge about the market
Examples of near perfect competition
Food markets
Agriculture
Betting (horse racing)
Monopoly -pure
Where only one producer exits the industry
Origins of monopoly
Through growth of firms
Through merger or takeover
Through acquiring patent or license
Through legal means
Critisms of monopoly
Higher prices
Quality gets worse
Lower output
supernormal profit - long run
Productive inefficiency is always at the lowest point of the AC curve. Lowest average curve
X-inefficiency
Allocative efficiency - where price = marginal cost
Dynamic efficiency
Evaluation for monopoly
Some companies produce high quality e.g. apple
Economies of scale
Benefits of a monopoly
Economies of scale
Research and development- investment
A firm may gain monopoly power if more efficient
Price discrimination
Involved charging a different price to different groups of people for the same groupn
First degree price discrimination
Involves charging consumers the maximum price they are willing to pay
Second degree price discrimination
Involves charging different prices presenting of the quality used
Third degree price discrimination
Involves charging different prices to different groups of people
Benefits of inequality
Creates incentives for people
Encourages risk and investment
What are the conditions necessary for price discrimination
A firm must operate in imperfect competition, must be a price maker with downwardly sloping demand curve
The firm must be able to separate markets and prevent resale
Must have different elasticities
Costs of inequality
Underconsumption of merit goods, overconsumption of de-merit goods
Decreased quality of life
Increased rates of crime
Disadvantages of price discrimination
Some consumers will pay higher prices - might be the poorest
Define in consumer surplus
How to reduce inequality
Progressive tax system
Benefit system
Greater investment in education
Disadvantages of price discrimination
Some consumers will pay higher prices - might be the poorest
Define in consumer surplus
Advantages of price discrimination
Firms will be able to increase revenue
-> can be used for research and development
Oligopoly
Competition between few
-> may be a large number of firms in the industry but is dominated by a small number of very large firms
-> concentration ratios - the proportion of total market sales held by the top 3,4,5 firms
Features of an oligopoly
Prices may be relatively stable across the industry -kinked demand curve
Potential for collusion
Behaviour of firms affected by what they believe their rivals might do - interdependence of firms
Good could be homogenous or highly differentiated
Branding and brand loyalty may be potential source of competitive advantage
Non price competition may be prevalent
Game theory can be used to explain same behaviour
AC curve may be saucer shaped - minimum efficient scale could occur over large range output
High barriers to entry
Concentration ratio for an oligopoly
As a rule of thumb an oligopoly exists when the 5 firm concentration ratio
Barriers to entry in a oligopoly
Economies of scale
Vertical integration
Brand loyalty
Set up costs
Control of important platforms
Expertise, good will and reputation
Patent protection
Problems with economic sustainability
Subsidies will run out
Opportunity costs
Time lags
More costs
Unknown
An example of external growth
Merger or takeover
Advantages of becoming a bigger firm
More money to reinvest
Opportunities for more innovation
Increased demand for products or services
Can influence market price
Attract investors
The types of mergers
Backward vertical
Forward vertical
Horizontal
Conglomerate
What’s backwards vertical integration
When a company buys another company that supplies the products or services needed for production
Forward vertical integration
Involves acquiring a business further up the supply chain, guaranteeing a place to sell your products
Characteristics of monopolistic competition
Large number of the firms in the industry
May have some element of control over price due to the fact that they are able to differentiate their product in some way from their rivals - products are therefore close but not perfect substitutes
Entry and exit from the industry is relatively easy - few barriers to entry and exit
Consumer and producer knowledge is imperfect
Demergers
The separation of a large company into two or more smaller firms, often the result of an earlier merger
Reasons to merge
Less money spent on paying employees
Invest more money into other things
Greater market share (clients)
Increasing revenue
Characteristics of oligopoly
Few dominant firms
Interdependence
Barriers to entry
Non price competition
Why would you choose to de merge
So you don’t have to share profit
Discourages a takeover
Doesn’t work culturally
Better off returning to organic growth
Monopolistic competition
Products are differentiated
Imperfect competition
Branding
Conglomerates
When a firm has a merger or takeover with another firm whom they have nothing in common with
Economies of scale
When your average costs start to fall
What are differentiated products
Product quality
Product performance
Branding
Functioning/reliability
Provenance of product
Quality of after sales service
Internal economies of scale
The more you produce the cheaper the product becomes
Production/ technological
Purchasing
Financial
Marketing
Managerial
Risk bearing
What the different scales on the economies of scale graph mean
Return to scale - AC is falling
Minimum efficient scale - lowest point on ac curve
Diseconomies of scale - when average costs rise again
Contestable markets
Firms behaviour influenced by the threat of new entrants to the industry
What can cause average costs to go up in large firms
Too many employees
Machines breaking down
Poor quality staff / managers
Availability and raw materials cost
Poor co-ordination and communication
Office politics
What can cause average costs to go up in large firms
Too many employees
Machines breaking down
Poor quality staff / managers
Availability and raw materials cost
Poor co-ordination and communication
Office politics
Characteristics of contestable markets
No barriers to entry or exit
No sunk costs
Firms may deliberately limit profits made to discourage new entrants - entry limit pricing
Firms may attempt to erect artificial barriers to entry
Over capacity
Aggressive marketing and branding strategies to tighten up the markets
Potential for predatory pricing
Solutions for average costs increasing in large firms
Better communication- more meetings
Smaller groups - easy to manage
Levels of output - have better supervisors
New machinery
Characteristics of monopsony
Multiple sellers and one buyer
Has buying or bargaining power in one or more markets
Means they can exploit bargaining power with suppliers to negotiate lower price
The reduces costs of purchasing power reduces costs and maximises profits
Characteristics of monopsony
Multiple sellers and one buyer
Has buying or bargaining power in one or more markets
Means they can exploit bargaining power with suppliers to negotiate lower price
The reduces costs of purchasing power reduces costs and maximises profits
Benefits to firms (monopsony’s)
Allows firms to achieve purchasing economies of scale leading to lower long run average cost
Lower purchasing costs bring about height per supernormal profits and increased returns for shareholders
Extra profit (producer surplus)
How might monopsony damage consumer welfare?
Businesses may use their buying power to squeeze lower prices out of supplies
Example was battle of milk farmers - covers the average cost of milk
Not paying a ‘fair price’
Consumers may have less choice or higher prices in long run
Monopsony employers
Strategies to counter monopsony power
Creating new regulator such as the grocery adjudicator
Competition policy might block some mergers and takeovers
Establishing producer co operatives as a counter balance to monopsony buyers
Tougher laws
Using technology for suppliers
Natural monopoly
It is more efficient for one firm to be the sole provider of a specific good or service due to economies of scale
Natural monopoly
It is more efficient for one firm to be the sole provider of a specific good or service due to economies of scale
