Theme 3

Question 1

What is profit maximisation?

Answer 1

A firm profit maximises when they are operating at the price and output which derives the greatest profit. Profit maximisation occurs where
marginal cost (MC) = marginal revenue (MR)

Question 2

Where does revenue maximisation occur?

Answer 2

This occurs when MR = 0. In other words, each extra unit sold generates no extra revenue.

Question 3

What is a price taker? Ar curve?

Answer 3

A price taker is a participant in a market who has no influence over the market price and must accept the prevailing price as given

AR curve is horizontal - This is because the price received for the good is constant

Question 4

What is the law of diminishing marginal productivity?

Answer 4

Increasing a production input will result in smaller increases in output after a certain point

Question 5

What is an external economy of scale?

Answer 5

These occur within an industry when it gets larger.

Question 6

What are normal profits?

Answer 6

Normal profit is the minimum reward required to keep entrepreneurs
supplying their enterprise in the long run.

Question 7

When will a profit maxing firm stop producing in the short run?

Answer 7

A firm which profit maximises continues to operate in the short run if P > AVC

Not fixed costs as they are variable.

Question 8

Where is the shut down point for a profit maxing firm?

Answer 8

The shut-down point is P < AVC, when variable costs cannot be covered. This is at the lowest point on the AVC curve.

Question 9

What happens in the long run to all factors of production?

Answer 9

They become variable.

Question 10

Why might a firm want to grow?

Answer 10

Economies of scale which helps them to decrease their costs of production.

They will also be able to sell more goods and therefore make more revenue.

A larger firm will hold a greater share of their market. This will give them the ability to influence prices and restrict the ability of other firms to enter the market.

A larger firm will have more security as they will be able to build up assets and
cash which can be used in financial difficulties. Moreover, they are likely to sell a
bigger range of goods in more than one local/national market and so they will be
less affected by changes to individual products or places.

Question 11

What is the principal agent problem?

Answer 11

Workers will want to max there own benefit
Owners/shareholders want to max ROI / short run profit max.

Question 12

What is organic growth?

Answer 12

Organic growth is where the firm grows by increasing their output.

Organic growth may be too slow for directors who wish to maximise their salaries.

Question 13

What is Forward and Backword vertical intergration?

Answer 13

Integration is growth through amalgamation, merger or takeover.

VERTICAL = same industry different level
FORWARD = towards supplying consumer
BACKWARD = towards the supplier of a good.

Question 14

What is horizontal intergration?

Answer 14

This is where firms in the same industry at the same stage of production integrate.

ASTRA ZENECA + ZS PHARMACY for 2.7BN in 2015
CURRY PC + ARCADIA
DISNEY + FOX 2019

This helps to reduce competition as a competitor is taken out and increases
market share

The problem is that it will increase risk for the business as if that particular market
fails

Question 15

What is a demerger?

Answer 15

A demerger is a business strategy in which a single business is broken into two or more components

pepsi -> pizza hut

Question 16

What is allocative efficiency?

Answer 16

This is achieved when resources are used to produce goods and services which consumers want and value most highly and social welfare is maximised.

Question 17

What is productive efficiency?

Answer 17

A firm has productive efficiency when its products are produced at the lowest average cost so the fewest resources are used to produce each product.

Bottom of AC curve.

Question 18

What is Dynamic efficiency?

Answer 18

This is achieved when resources are allocated efficiently over
time. - closeley related to innovation.

Question 19

What is X - innefficiency?

Answer 19

When a large firm fails to minimise its average costs, organisational slack.

Question 20

What happens in a perfectly competitive market?

Answer 20

AR = MR
firms are price takers
lots of buyers and sellers
no barriers to entry exit
perfect knowledge
The product must be homogenous (wheat, milk)

ie agriculture

Question 21

What is monopolositc competition?

Answer 21

Monopolistic competition is a form of imperfect competition.
Many buyers and sellers
no barriers to entry or exit
Non homogeneous goods

IE hairdresser.

Question 22

What is collusion?

Answer 22

Collusion is when firms make collective agreements that reduce competition.
Illegal.
Maximise industry profits.

Question 23

What is a formal collusion agreement called?

Answer 23

Cartel
Tactic = not formal
Over = formal

Question 24

Problem with cartels?

Answer 24

Constant temptation to break the cartel.

Question 25

What is nash equilibrium?

Answer 25

Nash Equilibrium where neither player is able to improve their position

Question 26

What is Predatory Pricing?

Answer 26

When one larger firm is threatened by a smaller/new one so sets prices really low so other price taker firms cant make a profit and are driven out the market. This is illegal.

Question 27

What is limit pricing?

Answer 27

In order to prevent new entrants, firms will set prices low (the limit price). The price needs to be high enough for them to make at least normal profit but low enough to discourage any other firm from entering the market.

Question 28

What are the characteristics of a monopoly?

Answer 28

UK = 25% market share GOOGLE 88% of the market High barriers to entry

Question 29

What is third degree price discrimination?

Answer 29

When monopolits charge different prices to different people for the same good or service. Firm must be able to seperate buyers and elasticity of demand and control supply. Train tickets off peak / peak. ## Footnote Triple inelastic/elastic/combined diagram.

Question 30

What is monopsony?

Answer 30

This is where there is only one buyer in the market NHS cancer drugs. They will pay their suppliers the lowest price possible The monopsony gains higher profits by being able to buy at lower prices achieve purchasing economies of scale.

Question 31

What is a contenstable market?

Answer 31

Perfect knowledge - when one firm makes SNP other firms will enter the NO BARRIERS OF ENTRY market. UBER AIRBNB

Question 32

What is the demand for labour?

Answer 32

The demand curve for labour shows the quantity of labour that employers would wish to hire at each possible wage rate.

Question 33

What affects the PED of labour?

Answer 33

directly correlated to the price elasticity of demand for the product Proportion of wages to the TC of production subsititues for labour

Question 34

Factors affecting the supply of labour?

Answer 34

Wages Population and wokring age Non - monetary benefits Education Trade unions Wages of other jobs Legislation.

Question 35

What are the 2 immobilities of labour?

Answer 35

Occupational immobility where workers find it difficult to move from one job to another because of a lack of transferable skills Geographical immobility where they find it difficult to move from one place to another. ## Footnote There are four million too few high skilled people but six million too many low skilled people in the UK after brexit.

Question 36

what is the elasticity of supply of labour?

Answer 36

responsiveness of supply to a change in wage rates.

Question 37

Describe a graph for wage detirmination in perfect competition?

Answer 37

Demand = Supply qty of labour on X Wage rate on Y

Question 38

Describe a graph for wage detirmination in a monopsopy?

Answer 38

Only one buyer of labour so business must increase wage to increase labour force. MC curve is above AC curve (supply) for labour, pvioted.

Question 39

What is an internal economy of scale?

Answer 39

These occur when a firm becomes larger. Average costs of production fall as output increases

Question 40

What is AR?

Answer 40

this is the price each unit is sold for.

Question 41

What is marginal revenue?

Answer 41

This is the extra revenue a firm earns from the sale of one extra unit. When marginal revenue is 0, total revenue is maximised.

Question 42

What is a price maker? AR?

Answer 42

A price maker is a participant in a market who has the ability to influence or set the price of a good. AR curve is downward sloping

Question 43

Where does sales maximisation occur?

Answer 43

**average costs (AC) = average revenue (AR). **