Theme 3 Flashcards
why do firms choose to grow?
- earn monopoly power
-experience economies of scale
-build up assets
-create barriers to entry
-larger profit
why do firms choose to stay small?
- financial problems
-owners objectives
-size of the market
what is the principle agent problem?
this is when there is a divorce of ownership from control meaning there is a manager and a CEO where the agent ( manager ) decides the mundane tasks and choices and the principle only brings profit maximising ideas. Therefore there can be a issues due to pursuing different interests.
what is satisfycing?
this is when the principle agent problem is fixed through finding common ground between both to help achieve similar interest. EG giving the manager shares so they can also focus on earning a dividend
what is the public sector?
the government owns the industry and uses this sector to better social welfare
What is the private sector?
run by private individuals and left to the forces of supply and demand
what is non profit organisation
an organisation that doesnt give out dividends and uses the money they make through profits back into the organisation to achieve welfare
What are the methods used to grow a company?
internal/ organic growth
external growth
What is internal growth?
when firms use in house ways to grow such as branching out, retaining profit or increasing investment into capital
What are the 3 external growth ways?
horizontal integration —–> acquiring business in the same industry with the same stage of production
forward vertical integration ——> acquiring a business that is in the same industry but later stage of production
Backward vertical integration ——> acquiring a business that is in the same industry but earlier stage of production
give an example of all the external growth ways
horizontal integration —-> facebook buys instagram
vertical forward —–> tata buys lambourgini
vertical backward ——> tesco buys a farm
what is conglomerate integration
when an business acquires another business that isnt in the same industry. EG virgin broadband buys an airline
What are factors that influence business growth?
-access to finance
- size of the market
-owners objectives
-regulations
What is a demerger
this occurs when a business sells off a division of their company or splits it off to be its own brand
why do demergers occur?
due to lack of synergy
better growth if its an individual division
diseconomies of scale
focus on fewer parts in depth
govt preventing undesired monopoly forming
what is revenue?
money earnt from the sales of goods and services
Revenue = price x quantity
what is AR?
Average revenue shows price of units being sold.
AR=TR/Q
What is MR?
marginal revenue is revenue produced when adding an additional unit to be sold
mr = 0 is when its at its peak/ maximum after it is falling
MR=ΔTR/ΔQ
Relationship between revenue and PED?
increase in price level :
When elastic ped —-> revenue falls
when inelsatic ped —-> revenue rises
what are costs?
economic cost of producing an output this includes both monetary cost and opportunity costs
what are the types of costs ?
total fixed cost —-> one factor of production is set and doesnt change in the short term
total variable cost —-> when all factors of production are variable and in the long run its changed from fixed to variable
sunk costs —-> costs that are paid but can not be retrieved
formulae for costs
Total fixed cost + total variable cost = total cost
what is the formula for AC and MC?
AC = TC/Q
MC = ΔTC/ΔQ
what is the assumption of diminishing marginal productivity?
when adding an additional unit of a variable factor to one fixed factor it can lead to inefficiency and productivity will decrease. Eg adding another worker to manage a coffee machine where there are already 3 workers using it.
what is economies of scale?
this is when a firm manages to lower average cost per unit while increasing output
what are the internal economies of scale?
purchasing —> bulk buying raw materials
managerial —>workforce being shared
technical —> firms sharing resources
Marketing —> advertisement being shared
financial —> lower interest rates for larger firms
What is external economies of scale?
when an industry growths thus making a company within the industry lower average cost without having to change how they operate. EG better infrastructure like roads help reduce delivery time and reduce costs
what are diseconomies of scale?
When the company isnt working at the minimum efficiency scale because it becomes so large and loses control, coordination and communication.
What is profit?
this is when total revenue >total cost and increasing sales can be used for other things than to pay off the costs
What is normal profit?
this is when tr=tc meaning the company is creating the amount of profit needed to remain competitive
What is supernormal profit?
this is the profit made after the break even point is reached and exceeded.
what is loss?
loss is made when costs can be covered by revenue tr<tc and can still operate in the short term if variable costs are paid for
what is shutting down?
when a company cant cover its costs with normal profit and cant cover any costs in the long term
where on the diagram can you see a loss and a shutting down point?
loss —> the difference between AVC and AC
shutting down —> AVC=MC and everything below that point
where can you see revenue maximising on the diagram?
where MR=0 draw a line up to AR and across to get P
Where can you see sales maximising on the diagram?
where AC=AR if AR< AC its making a loss
Where can you see profit maximising on the diagram?
where MC=MR and supernormal profit is the difference between AC and AR
what is allocative efficiency?
When resources are distributed according to consumer preferences it shows HOW resources are allocated.
what is productive efficiency?
when the company is working at its minimum efficiency scale and cant operate with any lower costs at all
what is dynamic efficiency?
this is when a firm improves its quality and products overtime through profit maximising. The profit can help discover/ innovate different products which in the long run can lower costs of production
what is X- inefficiency?
this is when firms arent incentivised to innovate or create or be efficient due to factors like little competition.
where are the efficiencies shown on the diagram?
Allocative —> MC=AR
Productivity —> MC=AC
X - inefficiency —> difference between actual AC and potential AC
What is perfect competition?
this is theoretical and it shows the market being perfect for consumers as there are large number of buyers and sellers with identical products
diagram for perfect competition?
AC AND MC being normal. AR and MR being the same—> a straight line
characteristics of perfect competition?
- homogenous products
- no barriers to entry
=perfect information
many buyers and sellers
+ and - of perfect competition
+
short run —-> snp can be made
firms produce at MES
low price —> allocative efficiency
-
long run —> only normal profit
no economies of scale since firms are small
cant be dynamically efficiency
What is monopolistic competition?
imperfect competition since there is product differentiation so its not homogenous, low barriers to entry and a more realistic market structure since they can make SNP rather than only normal profit by consistently differentiating
+ and - of monopolistic competition?
+
dynamic efficient
consumers get wide variety of choice
-
leads firms being X inefficient
what is an oligopoly?
this is when there are a few dominating firms and the rest are small firms being price takers there are also high barriers to entry. the market is measured through concentration ratio
how do you find out concentration ratio?
add the X amount of firms together then divide by total size of market then x100
what is collusion?
this is when firms agree to set prices high so they all benefit from high profits rather than being competitive.
It can be overt collusion where they have a formal agreement to do so
or it is tacit where its more subtle and they just do it through signals in the market
what is game theory?
its used to predict how firms behave and can be used to detect collusion regarding increasing or decreasing price and how both companies can benefit from it.
how to show game theory in a diagram
draw a grid with firm A at the top and firm B at the side then create two options for both Increase price and decrease price then add numbers
what is uncertainty in an oligopoly
its created because firms dont know how rivals will react therefore they may lower prices to identify the reaction from rivals
what are the types of pricing in oligopolistic markets?
predatory pricing —> when a firm cuts prices so low that it forces new entrants to stay out the market then increase pricing
price wars —> firms repeating to lower prices to seem more affordable against their competition
types non price competition
advertising
loyalty schemes
branding
packaging
better quality customer service
What is a monopoly?
a market structure where there is only one company in the entire market industry that provides a certain good or service
what is a pure monopoly?
this is when there is one company that sells a service because the cost of setting up deters competitors since its too expensive
what is a natural monopoly?
this is when there are no competitors in the market since its less efficient to have resources wasted on a rival company and instead all money is spent on one company.
what are the pros and cons of a monopoly?
-they can earn SNP easily since they are the only ones that provide that good
-price differentiation may help different consumers
-job security
-greater career progression
-The lack of competition can lead to X inefficiency
-higher prices for consumers
-less choice for consumers
what is price discrimination?
this is when a company that is a monopoly charges different prices to different demographics for the same good or service
what is arbitrage market seepage?
this is when another consumer who pays less for a good purchases that good for someone who pays more.
what is transferring prices?
this is when firms set up companies in locations with lower corporation tax and sell more there than in areas with higher corporation tax
what is a monopsony?
this is when there is only one seller in the market with many suppliers
what are the characteristics of a monopsony?
-They pay low prices to suppliers as they are the only ones buying. —They aim to maximise profit
what is an example for a monopsony?
the NHS buying doctors and nurses
what is contestability?
this is a model where the possibility of new entrants in the market keep firms competitive regardless of them being small, monopoly or dominating firms
what are the factors of contestability?
-no barriers to entry
- firms profit maximise
-no collusion between firms
-no existence of sunk costs
why are there no existence of sunk costs in contestable markets?
due to sunk costs not being able to be retrieved, therefore creating a problem in the freedom of entering and leaving the market thus not showing the characteristic of a contestable market
what is hit and run competition?
this is when new entrants enter the market as current firms are earning SNP, this causes prices to drop to remain competitive and still earn revenue but drops SNP to normal profit which then causes the new entrants to leave the market.
what is the degree of contestability?
the lower the barriers to entry to an industry, the higher the contestability.
what are labour markets?
Labour is a derived demand meaning if the demand for a certain good or service is high so will the demand for the labour within the market.
what is the wage rate?
this determines the price of labour in the market. Its the amount of money a worker earns per unit of time EG per hour/day/week
what factors influence demand for labour?
-productivity
-price of the product manufactured
what is the supply of labour?
this is the number of workers that are willing and able to work for the current wage rate and number of hours
what are the factors that affect labour supply?
-demographic of population
-migration
-leisure time
-trade unions
-taxes and benefits
-training
what is elasticity of supply and demand for labour?
shows how the demand and supply changes in response to changes in the wage rate.
what are the influences of elasticity of demand and supply for labour?
time
training
level of qualification
level of unemployment
what are the market failures in labour?
occupational immobility —> this is when the current workers cant continue working when there is a technological advancement since they dont have the skill set
Geographical immobility —> this is when there are issues regarding commuting to work or moving to another place for work.
what is wage determination?
this is when workers wages are determined through the forces of supply and demand since workers with high skill set and qualification can demand higher wages.
what can cause wage differences?
this is when workers have the same job but different pay due to:
- formal education requirement
-skills and qualification
-gender
-discrimination
what are current labour market issues?
- gender pay gap —> women being paid less than men
-executive pay —> debate whether executives like CEOs should have wage caps since it eats into regular workers pay
- automation and future employment —> robots threatening traditional types of employment
what are the government interventions for labour market failures?
minimum wage —> to avoid exploitation
maximum wage—> to distribute wealth equally for less inequality
training and education subsidies —> reduce occupational immobility and pay gaps
trade union power
increased infrastructure
how do governments help reduce monopoly labour failure?
price regulation —> maximum price
quality standard—> a minimum requirement to ensure consumers aren’t left disadvantaged
profit regulation —> a max on profit made
performance target —> a set timing on a fixture or different performance
how do governments improve competition in the market?
deregulation
privatisation
competitive tendering
encouraging growth
what is deregulation?
removing control the government had from a market through removing policiesw
what is privatisation?
the process of transferring assets from the public sector to the private sector
what is competitive tendering?
this is when the govt invites private companies to bid on contracts to produce a public service through bidding the lowest while delivering the most quality in a certain period of time EG 5 years
what is nationalisation?
this is when the government provides goods that where underfunded in the private sector and turns them into a public owned industry
what are the impacts of the government interventions to keep markets fair?
- reduces prices for consumers
- reduces SNP for firms
- increases consumer choice
- improves quality of products
-increases efficiency in markets
what are the limitations to government interventions?
Asymmetric information —> imperfect information exists in a market where the government doesnt have full information in the functioning of the market therefore potentially reducing efficiency with interventions
Regulatory capture —> this is when firms in an industry manipulate the regulator by through creating information gaps and therefore benefiting slightly while regulations are put into place
