Theme 3 and intro to market structures Flashcards
Niche market
A small segment of a market
Divorce of ownership from control
Occurs when owners of a business are not part of the staff who run the business from day to day
What are public sector organisations
Organisations that are owned or controlled by the state
What are private sector organisations
Organisations owned by individuals or companies
What are non profit organisations
Organisations that don’t have profit as a goal, but generate profits to support their aims
What is meant by organic/internal growth
A firm increasing its size through investment in capital equipment or an increased labour force
What is meant by external growth
The joining together of 2 or more firms under common ownership
Takeover/acquisition and mergers
What is meant by a horizontal integration/merger
Firms in the same industry and at the same stage of production
What is meant by vertical integration/Merger
Between 2 firms at different stages of production in the same industry
What is meant by forward vertical integration
Supplier merging with buyer
What is meant by backward vertical integration
Buyer merging with supplier
What is meant by a conglomerate
Between 2 unrelated firms
What are some reasons for growth
- Gain EOS
- Reduce competition
- Spread risk
What are some constraints on growth
- Size of market
- Access to finance
- Owner objectives
- Regulation
What is meant by a demerger
When a firm splits into 2 or more independent firms
What are some reasons for demergers
- Price of business (May be more if 2 independent firms)
- Increase efficiency and focus on specific operations
- Lack of synergies
- Diseconomies of scale
What is meant by synergy
Where 2 or more activities/teams/firms put together can obtain greater outcomes than the sum of individual parts
What is a benefit of demergers to the businesses
specialisation causing greater efficiency
What is a negative of demergers to businesses
May not benefit from economies of scale
What is an advantage to workers of demergers
Chance for promotion or new roles
What is a negative of demergers for workers
May lead to redundancies
What are two benefits to consumers of demergers
- Lower prices due to efficiency
- More efficient so more investment into research and development for quality
What are negative of demergers to consumers
- Firms May focus on increasing profits so don’t lower prices
- Firms May reduce product ranges to be more efficient
What is meant by total revenue
Money received from the sale of any given quantity of output
What is meant by average revenue
Money received per unit sold
What is meant by marginal revenue
The addition to total revenue of an extra unit sold
What is meant by the short run
The period of time when at least on factor input to the production can’t be varied
Eg manufacturers can buy new machines and get new employees but remain in same factory
What is meant by the long run
The period of time where all factor inputs can be varied, but the state of technology remains constant
What is meant by the very long run
Period of time when the state of technology may change
What is meant by the law of diminishing returns
Exists when increasing quantities of a variable input (eg labour) combine with a fixed input.
Eventually the marginal product of that variable input will decline
What does the law of diminishing returns assume
That firms operate in the short run
What is meant by total product
The quantity of output measured in physical units produced by a given number of inputs over a period of time
What is meant by average product
The quantity of output per unit of factor input
What is meant by marginal product
The addition to output produced by an extremely unit of input
What is meant by returns to scale
The change in percentage output resulting from a change in all the factors of production (long run)
What is meant by increasing returns to scale
When the percentage increase in output is greater than the percentage increase in factors employed
What is meant by constant returns to scale
When the percentage increase in output is the same as the percentage increase in factors employed
What is meant by decreasing returns to scale
When the percentage increase in output is less than the percentage increase in factors employed
What is meant by economic cost
The opportunity cost of an input to the production process
What are fixed costs also known as
Indirect or overhead
What is meant by fixed costs
Costs which do not vary as output changes
What are variable costs also known as
Direct or prime
What is meant by variable costs
Costs which change as output does
What is meant by total cost
The cost of production at any given level of output
Total fixed + total variable costs
What is average cost
Total cost/output
What is meant by marginal cost
The cost of producing an extra unit of output
What is meant by optimum level of production
Where average costs are at their lowest point (bottom of AC curve)
What is meant by minimum efficient scale
The lowest quantity of output where average costs are lowest
What is meant by economies of scale
A fall in average costs as output rises
What is meant by diseconomies of scale
A rise in average costs of production as output rises
What is meant by internal economies of scale
Economies of scale that arise due to a growth in the scale of production with a firm, causing a movement along AC curve
What are examples of types of internal economies of scale
- Technical economies
- Managerial economies
- Purchasing
- Marketing
- Financial
What is meant by technical economies
Exists when there is an increasing or decreasing returns to scale, and leads to an indivisibility
What is meant by managerial economies
A larger firm can employ better/more efficient staff
What is meant by purchasing economies
Buying in bulk
What is meant by marketing economies
Advertising is easier for a larger firm with a recognisable brand
What is meant by financial economies
Larger firms have more choice when obtaining finance and can do so more cheaply
What are some examples of how internal diseconomies of scale may occur
- more difficult management
- Conflict in a larger team
- Difficult communication due to more people
- Difficult communication due to geography
- Higher transport costs due to geography
What is meant by external economies of scale
EOS which arise from a growth in the size of the industry within which the firm operates, causing a downward shift in AC curve in long run
What are examples of external EOS
- Lower training costs as can poach workers due to training
- Government provide free training for large industry
- Government exports contracts in a large industry but not a small one
- Better networks eg phones or transport
- Improvements in technology leading to greater efficiency
What is meant by external diseconomies of scale
Diseconomies of scale which arise from a growth in the size of the industry, causing an upward shift in the long run
What are examples of diseconomies of scale
- Taxation eg smoking
- Increasing cost of labour due to more power (trade unions)
- Need to be more competitive through innovation so higher costs
Draw the long run average cost curve envelope
-
What is meant by normal profit
When revenues are equal to costs
What is meant by abnormal profit
Difference between revenue and costs, above normal profit
What is meant by break-even point
The level of output where total revenue equals total costs
What is meant by loss
Difference between revenue and costs, below normal profit
What is meant by profit maximisation
Where MC = MR
The point a firm will produce up to
What is meant by a short-run shut down point
The point of output at which a firm will shut down production because marginal revenue fails to cover average variable costs
What is meant by the long run shut down point
Point at which marginal revenue fails to cover average costs, in the long run all costs are variable so ATC=AVC
What are market structures
The characteristics of a market which determine the behaviour of firms within the markets
What are the characteristics that make up a market structure
- The number of firms in the market and their relative size
- Barriers to entry
- The extent you which goods are similar
- Extent to which all firms in the market share the same knowledge
- Extent to which the actions of one firm will affect another firm
What is meant by market concentration
The degree to which the output of an industry is dominated by its largest producers
What is meant by concentration ratio
The market share of the largest firms in an industry
What is meant by barriers to entry
Factors which make it difficult or impossible for firms to enter an industry and compete with existing producers
Examples of barriers to entry
- Capital costs
- Sunk costs
- Scale economies
- Legal barriers
- Marketing barriers
What is meant by sunk costs
Costs of production which are not recoverable if a firm leaves the industry
Eg advertising costs
Due to cost of failure being high
What is meant by scale economies
Established firms have lower unit costs due to higher output eg monopoly
What is meant by legal barriers
- Patents
- Government give a firm exclusive rights to production eg broadcasting
- Make nationalised industries into monopolies by legally forbidding private firms to set up in the industry
What is meant by marketing barriers
Ability of larger established firms to be more competitive through its brand
What are examples of deliberate barriers to entry
- Limit pricing
- Predatory pricing
- Anti competitive practices
What is meant by limit pricing
When a firm sets a price lower than a rival firms costs in short term, to deter new entrants
What is meant by predatory pricing
When a firm sets a price lower than its own costs (loss leader) to be more competitive
What are examples anti-competitive practices
- Limit and predatory pricing
- Suppliers won’t supply to a rival firm or will only do so at a higher price
What is meant by barriers to exit
Factors which make it difficult or impossible for firms to cease production and leave an industry
What is meant by market share
The proportion of sales in a market that a firm is responsible for
What are examples of barriers to exit
- Cost and time of redundancies
- Selling assets and stock
- Notifying customers and suppliers
- Current contracts
- Imperfect knowledge
What is meant by homogeneous goods
Goods made by different firms but which are identical
What is meant by non-homogeneous goods
Goods which are similar but not identical, such as branded goods
What is meant by product differentiation
Aspects of a good or service which distinguish one from another
What is meant by perfect knowledge or information
Exists if all buyer in a market are fully informed of prices and quantities for sale, while producers have equal access to information about production
What is meant by imperfect knowledge or information
Where there are industrial secrets, eg individual firms don’t know what technology a rival is using
What is meant by asymmetric information
When there is imperfect knowledge in a market and some firms know more than others
What are the 2 possible relations between firms in an industry
- Independence
- Interdependence
What is meant by independence
When the actions of one firm will have no significant impact on any other single firm in the market
What is meant by interdependence
When the actions of one firm will have an impact on other firms in the market
When are firms more likely to be independent
When there is a large number of firms in the market, eg farming
What is meant by Uncertainty
When one firm does not know how other firms in the market will react if it changes its strategy such as changing its price
When are firms more likely to be interdependent
When there are few firms
What does interdependence imply about a market
That there is uncertainty
What are examples of business objectives
Profit maximisation
Profit satisficing
Revenue maximisation
Sales maximisation
What factor impacts the business objectives of a firm
Who controls the firm
What are examples of people who may control a firm
Owners/shareholders Directors and managers Workers The state The consumer Pressure groups
How do firms achieve profit maximisation in short term
Produce at MC=MR
How may firms achieve profit maximisation in the long run which is different to the short run
Using cost plus pricing
What is meant by cost plus pricing
The technique adopted by firms of fixing a price for their products by adding a fixed percentage profit margin to the long-run average cost of production
What is meant by profit satisficing
Making sufficient profit to satisfy the demands of owners such as shareholders
Why may directors of a business aim to achieve profit satisficing rather than profit maximisation
They may have a profits target and be under pressure to achieve this from shareholders, but after that may benefit from personal bonuses for achieving a sales target for example
Usually when there is a divorce of ownership of control
What is meant by revenue maximisation
When total revenue is highest and when marginal revenue equals zero
Why may firms revenue maximise
Increase market share
What is meant by sales maximisation
Occurs when the volume of sales is greatest
Why would a firm sales maximise
To increase brand awareness
What is meant by consumer sovereignty
When the economic system allocated resources totally according to the preferences of consumers
What is meant by static efficiency
More efficient allocation of resources in a specific point in time eg using more labour
What are examples of static efficieny
Productive and allocative
What is meant by dynamic efficiency
efficient allocation of resources over time eg investment may be inefficient in short term as you make a loss, but in long term may be most efficient choice
What is meant by productive efficiency
When production is achieved at lowest average cost (lowest point on AC curve)
When does productive inefficiency occur
When the cost of production is above the minimum possible
What is the only state of the economy in which firms can acheive productive efficiency
When the economy is operating on its PPF
What other efficiency must a firm achieve to achieve productive efficiency
Technical efficiency
What is meant by technical efficiency
When a given quantity of output is produced with the minimum number of inputs
What is meant by X-inefficiency or organisational slack
When a firm operates within it’s AC curve, so fails to minimise it’s average costs of production at the given level of output
Why can a firm not be X-inefficient but also not productively efficient
It may be producing at the lowest average cost for that level of output, but that may not be the lowest possible average cost (pg304)
What is meant by allocative or economic efficiency
When scarce resources are used to produce goods which satisfy consumer preferences and maximise their welfare
At what point is allocative efficiency
When price is equal to marginal cost
Because price represents the value a consumer places on a product, and marginal cost is the cost of producing the last unit (can be to the firm or to society)
Why may dynamic inefficiency occur
If firms fail to take into account the future costs and benefits of the investment, eg you may train workers who then leave in the future
What is an example of dynamic inefficiency
Investment in short term that is unsustainable and bad for the environment in long term
Where on a PPF curve is productively efficient
Anywhere on curve
Where on a PPF curve is allocative you efficient
On the curve, but the point where consumer utility is maximised
Can’t be anywhere on the curve because if one of the factors is 0 it is unlikely this will maximise consumer utility
(Pg306)
How is dynamic efficiency shown on a PPF curve
A shift to the right
What is meant by creative destruction
A process where firms produce or create innovative new products that replace or destroy existing products
What is meant by a multi-plant monopolist
A monopolist where production takes place at a number of different sites, each of which could be sold off to provide private competition in industry
What is the purpose of government intervention on monopolies
To control natural monopolies who may abuse their power, and promote competition in monopolies that are not totally natural
What is the purpose of price control or price regulation in a monopoly
To set the maximum price that they can charge so that it is equal to marginal social cost of production, therefore achieving allocative efficiency
What industries is price regulation used for
Privatised monopolies eg water, train
What are evaluation points of price regulation
- Government May not know what costs and revenues the firm has
- Can lead to dynamic inefficiency (if firm can’t maximise profits in short run then can’t invest for future)
- Has to be adjusted for inflation
What is meant by profit regulation
Setting a maximum level of profit a monopolist can earn, by calculating what should be the operating costs and adding a rate of return on capital employed
What are three problems with profit regulation
- There is often asymmetric information between firm and regulator, so firm has an incentive to predict that future costs will be higher
- Firm has little incentive to minimise costs as this will be covered by the consumer
- Firm has incentive to employ too much capital, as they are allowed to earn a rate of return on capital employed so more capital means higher return
What is meant by quality standards
Regulators set standards for quality to monopolists
Why is quality standards needed for monopolists
Monopolists are motivated by profit, so may produce low-quality if this option is most profitable
Example of an industry that has quality standards
Post office has to deliver to rural areas everyday even at a loss
What is meant by performance targets
Similar to quality standards, but where government may set standards for a variety of outputs of the firm
Examples of performance targets
- Setting price
- Offering choice to consumer
- Quality of product
- Environmentally friendly
What is meant by breaking up the monopolist as government intervention
Dividing a monopolist into competing units, most effective for a multi-plant monopolist
When is breaking up a monopolist ineffective
In a natural monopoly
What is meant by removing barriers to entry
Making it easier for a new firm to enter an industry and compete with a monopoly
What are examples of how government can reduce barriers to entry
- Deregulation
- Restrict current firms ability to market
- Monitor existing firm for predatory pricing etc
When is lowering barriers to entry ineffective
In a natural monopoly
What are windfall taxes
A tax imposed after an event has occurred, usually due to large abnormal profits of a firm
Why may windfall taxes be ineffective
They are not a long term solution to reducing monopoly power
What is privatisation
Transfer of ownership from the state to the private sector
Why is privatisation likely to lead to greater efficiency
Greater incentive to reduce costs to maximise profits
Why may privatisation have a negative effect
The firm may abuse their power and so charge high prices, offer little choice
Why is privatisation beneficial to consumer
Lower prices, better dynamic efficiency of firm if higher profits
What is nationalisation
Transfer of ownership from private sector to state
Why does nationalisation have a positive effect
Operates to maximise allocative efficiency and therefore benefit consumer, not maximise profit for shareholders
Why may nationalisation be ineffective
May be less efficient due to lack of incentive to to maximise profit
Management may have little industry experience
What is meant by deregulation
The process of removing government control from markets
What does deregulation attempt to improve
Efficiency through promotion of competition
Why may deregulation be ineffective
- If natural monopoly, competition will be non-existent and monopolist May abuse power
- Non-profitable service/products won’t be provided, eg rural buses
How do subsidies improve industry
Shifts marginal cost curve right, and therefore allows firm to increase level of output and therefore allocative efficiency
Draw a graph showing how a subsidy increase output, shade subsidy area
Pg 323
Why are subsidies often ineffective
- Costly to government
- Requires an accurate knowledge of industry costs and revenues to set subsidy
- Reduces chance for dynamic efficiency is future as no abnormal profit at price=marginal cost
What is meant by self-regulation
When firms establish their own standards or codes of practice and promise to keep to them
Why is self regulation often ineffective
Staff regulating firm are likely to be employed by them so will be biased
Why is self regulation good
There is no cost to the government
How can monopolies be controlled by preventing their creation
Merger policy
What is merger policy
Government stop any mergers if they believe it will dramatically reduces competition in the industry, or a merger may be forced to sell off assets
How can the government encourage growth of small business (examples)
Offering training, grants, subsidies and tax incentives
What is meant by competitive tendering
Government invites private sector firms to bid for the contract to deliver a good or service that is provided by the state, eg to manufacture tanks, or manufacture paper used by the NHS
Why does the government use competitive tendering
To introduce competition so there is not one seller of goods to the state, which would effectively be a monopoly
What is meant by contracting out
Getting private sector firms to procure goods and service which are then provided by the state
What are the main purposes of government intervention
- Reduce prices for consumers
- Increase all efficiencies
- Increase quality
- Increase customers choice
- Protect employees (employment legislation)
What is the term used to describe a situation where government intervention causes a negative impact
Government failure
What is meant by regulatory capture
An example of government failure, occurs when firms in an industry are able to influence a regulatory body to their advantage
What are examples of how regulatory capture can be achieved
- Bribes
- Bullying (eg threatening to take them to court)
- Asymmetric information, because firms release the minimum amount of information to regulators
- Regulators May favour firms, especially if they used to work there
Why may people be able to predict revenues and costs of an industry accurately in the short term to impose a subsidy, but not in the long term
Subsidies in the short term will distort the market so that in the long term it is difficult to know what the actual figures are
What is an example of where performance targets may be ineffective
When firms ‘game the system’
Eg train companies may have a target for a percentage of trains to arrive on time, to avoid missing this they may adjust the timetable so that trains have longer to do this
Why is there a demand for labour
It derives from the demand for the firms product/service
What is meant by total physical product
Total output
What is meant by marginal physical product
The number of extra units of output a worker produces
What is meant by marginal revenue product
The extra revenue a worker is responsible for
Marginal physical product x price
What is meant by contribution
The difference between the cost of a unit of labour and that workers marginal revenue product
When will a firm stop employing more workers
When the contribution is 0
What is the impact of a rise in the unit cost of labour
Reduced demand
Why may demand for labour not fall in the short term if wage rate increases
Redundancies
Can’t replace them with capital eg machinery
What factors can cause shifts in the demand curve for labour
- Change in physical productivity (output per worker and therefore unit labour costs)
- Market price of good may change
What is meant by unit labour costs
The cost of employing labour per unit of output
What is the demand curve for labour the same as
The marginal revenue product curve
What is meant by elasticity of demand for labour
The responsiveness of the quantity demanded of labour to change in the wage rate
What is the formula for elasticity of demand for labour
%change QD of labour/%change in wage rate
What are the determinants of the elasticity of demand for labour
Time
Availability of substitutes
Elasticity of demand for product
Proportion of labour cost to total costs
Why is time a determinant of elasticity of demand for labour
Longer time period, easier for adjustment of labour eg redundancies, machinery
Why does the elasticity of demand for the product effect the elasticity of demand for labour
Demand for labour derives from demand for product
How can the proportion of labour costs to total costs effect the elasticity of demand for labour
If proportion is tiny, change in cost will barely effect total costs and therefore profit
Explain the backward bending supply of labour curve
Y axis has wage rate
X axis has hours worked
Worker will want to increase hours worked if wage rate rises, so curve goes up
Reaches a point where substitution effect takes place, so worker reduces hours worked for increase leisure time due to higher wage rates
What is meant by the substitution effect
Workers prefer to change one for the other
Eg increase hours if wage rate increases slightly
Increase leisure time if wage rate increases massively
What is the backward bending area of the supply curve an example of
Opportunity cost
What is meant by the income effect
Demand for leisure time increases as income does
What factors, other than wage rate, can effect supply of labour and therefore shift the curve
- Job satisfaction
- Location of job
- Commute time/distance/cost
- Friends and family (who you work with)
Why is the marginal cost curve of labour upward sloping
If a firm employs an extra worker at a higher wage rate, they have to increase wage rate of all employees
How can an industry increase the number of hours worked by its labour force
Increase number of hours worked by current labour force
Recruit new workers
What is meant by the elasticity of supply of labour
The responsiveness of quantity supplied of labour to changes in price (wage rate)
What are some factors that effect the elasticity of supply of labour
Availability of suitable labour in other industries
Time
Extent of underemployment/unemployment
How does the availability of suitable labour in other industries effect the elasticity of supply of labour
In some industries, workers can be replaced by many workers in other industries especially if they are low skilled
However, there are few other industries that school can employ teachers from for example, as they will not have relevant skills and qualifications
How does time effect the elasticity of supply of labour
In the short term the elasticity of supply is likely to be lower
Example is that in short term the education service can’t recruit large number of teachers, but can over a 20 year period
How does the extent of underemployment and unemployment effect elasticity of supply of labour
Higher level of unemployment, the higher the likelihood of elasticity of supply of labour
This is because with high unemployment firms are more able to recruit workers at the existing wage rate
Why does neo-classical theory suggest that supply of labour is perfectly inelastic
Because supply of labour in an economy is fixed to the number of people in it
What are some reasons that supply of labour is not inelastic and is often elastic
- People are in education, retired, prefer luxury time , look after children (social trends)
- Immigration and emigration
- in long term education and training can increase supply of skilled labour
What are the 2 types of mobility of labour
Geographical
Occupational
What is meant by geographical mobility of labour
Refers to the ability or inability of labour to move to a different area to work
What are examples of why geographical immobility of labour occurs
People unaware of jobs available
People can’t afford to move
Don’t want to leave family and friends
What is meant by occupational mobility
The ability of workers to transfer from one occupation to another
Why does occupational immobility exist
Jobs in specific industries require qualifications and experience, that can not be used to get a job in another industry
What is meant by activity or participation rates
The percentage or proportion of any given population in the labour force
What is net migration
Immigration - emigration
What is meant by workforce, labour force, working population, and economically active
Those who are In a job or seeking work
What are some reasons that wage differentials exist
- Age
- Gender
- Ethnic background
- Education, training and work experience
- Ability to perform tasks
- The marginal revenue product of the worker
- Location
What is meant by a perfectly competitive labour market
Where there is a large number of small firms hiring a large number of individual workers
What are the 3 reasons an Imperfectly competitive labour market will exist
- When a firm is a monopsonist eg government employing 90% of teachers
- When a firm is faced with a monopoly supplier of labour, such as a trade union
- Or both together (bilateral monopoly)
What is meant by a bilateral monopoly
When a single buyer faces a single seller in a market
What is an example of a bilateral monopoly in the labour market
When the government is a single employer in a market, and the workforce is unionised so there is a single seller
What factors can impact the power of trade unions
- Proportion of workforce that is unionised
- The elasticity of demand for labour
- The profitability of the employer
Find booklet about wage differentials
In steeds book
What are examples of government intervention in labour markets
- Minimum/living wage
- Maximum wage
- Public sector wage setting
- Policies to increase labour mobility
What is meant by the minimum wage
A legal wage rate per hour that employer must pay
What does a minimum wage do to the supply of labour
Increase it
Why may the minimum wage not increase supply of labour
- Poverty trap
- People are working less due to demand for leisure time rather than low wage rate
- Wage rate is too low to incentivise people to work
What are the purpose of maximum wage
- Control inflation
- Reduce government spending if in public sector
What is meant by public sector wage setting
Similar to maximum wage but just in the public sector
Therefore used to control government spending and inflation
What are examples of government policy that increase mobility of labour
- Improve education and training
- provide relocation subsidies
- Increase knowledge of job opportunities eg job centres
- Help workers with job applications
- Reduce discrimination in the labour market and society
What is meant by the poverty trap
A situation where someone is no better off from working as their income is offset by a loss of state benefits and leisure time
