Theme 3 Flashcards
How can the size of a firm be measured (3)
Number of employees
Revenue/volume output
Capital stock and assets
advantages of large firms 3
Economies of scale
can create barriers to entry
monopoly power
Advantages of small firms 3
exploit diseconomies of scale
can be better organised for local monopolies and market niches
Can gain cost advantages by using internet and tech
What is it called when the owners don’t run the business?
Divorce of ownership from control
e.g of principle agent problem
Why is the divorce of ownership from control an issue
Director may not profit maximise for owner and may have other obkjectives
What is the public sector
state controlled
social objective - provide a service to citizens
What is the sector called where it is owned by individuals?
Private sector
Name some not-for-profit organisations
charities churches food banks
Two main types of growth
Internal and external
External growth is primarily
merger & takeoevers
types of integration
Vertical
horizontal
conglomerate
PLC
Public limited company - anyone can own shares
Ltd
private limited company - shareholders have to agree to sell
Forward vs backward integration
Forward is towards the consumer
backwards is away from
What are often the key issues with integration
Firms pay too much
Often poorly managed
may lack knowledge
Advantages of integration
economies of scale
less competition
spreads risk
more control
What is it called when two firms collaborate
joint venture
What is key for successful integration?
Synergy
Types of synergy
Cost (higher efficiency, better deals)
Revenue (more customers etc)
what constrains business growth? 4
Size of market
Access to finance
Owners objectives
Regulation
Whats it called when a firm splits into multiple parts?
demerger
Why demerge?
Can focus companies
integration costs were too high
clash of cultures
lack of synergies
formula for TR
P*Q
Formula for average revenue
TR/Q (i.e. price)
Formula for marginal revenue
TRx - TRx-1 - difference in adjacent levels of output
- addition to TR when one more unit is sold
What is MR when TR is at max
MR=0
Why does TR change?
Inelasticity changes as prices become smaller proportions of income
What is the short run
at least one factor of productoin is fixed
What is long run
all factors of production are variable
Very long run
state of technology can also change
What is it called when marginal gains of total output starts to decrease
Law of diminishing returns/law of variable proportions/law of diminishing marginal productivity
What is average product
total product/variable factor
what is marginal product
change in ouput from one level of the variable factor to the next
When TP is at max what is MP
mp=0
In the long run, there are potential returns to scale - what are these three?
Increasing - more out than what is in
Constant - proportionate growth
decreasing - more in than out
What is economic cost?
The opportunity cost of production plus accounting costs
Inputted cost
- economic cost of the factors of production the firm owns
TC =?
TVC + TFC
AC = ?
TC/Q
MC =
change in total costs/change in output (MP)
What is MC and AC a reflection of?
MP AP
What is the long run made up of?
short runs
Name for a fall of average costs when output increases in the long run
Economies of Scale
What is the minimum efficient scale?
First output where average costs are minimised
What are two types of economies of scale?
Internal and external
Types of economies of scale
Risk breaking financial marketing technical managerial purchasing (bulk buy)
What is a managerial economy of scale?
specialism increases productivity, bigger firms can attract better managers (reducing downtime)
What is an external economy of scale
All firms benefit from industry growth
What causes the external economy of scale
Locally trained workers
Specialist suppliers
Government-funded infrastructure
What are the benefits of a fall in LRAC
rise in abnormal profit
more funds to reinvest
can do limit pricing
what is a long run rise in average costs called?
Diseconomies of scale
4 Cs that are the reasons for Diseconomies of scale
Control
Coordination
Communication
Co-operation
What is crowding out
Rise in demand causes a rise in prices (can lose monopsony power)
What is the difference between economic profit and accounting profit
economic costs minuses opportunity costs
Why is profit important?
reward
signal
incentive
investment
Name 4 market structures
perfect competition
Monopolistic competition
oligopoly
monopoly
What factors affect the type of market
Barriers to entry/exit
Homogeneity
knowledge
market relationships
Name some barriers to entry
capital costs sunk costs scale economies natural cost advantages legal barriers marketing limit pricing Anti-competition
What are the perfect competition
large numbers of buyers and sellers homogenous product perfect information firms are price takers freedom of entry and exitt perfectly mobile factors of production
Long run of perfect competition
normal profit as abnormal acts as an incentive
whats special about perfect competition diagrams
D=AR=MR
profit maximising condition
MC=MR
SR loss condition to survive
PRICE is above AVC
Conditions for monopolistic competition
Large number of independent firms
The products are differentiable (heterogeneous)
Perfect information
No barriers to entry or exit
What happens in LR monopolistic competition?
No barriers to entry so businesses enter and leave creating normal profits, where AR=AC
What are the charactereistics of oligopoly?
Interdependence
Barriers to entry and exit
sometimes Differentiation
Market dominated by a few firms
What is the N-firm ratio
combined market share of the N largest firms
Types of collusion
Formal/overt
Tacit
Covert