Theme 3 - Business Behaviour And The Labour Market Flashcards
The demand for labour … when demand increases
Increases
What is derived demand?
Demand that comes as a result from demand for something else
What is marginal revenue product of labour?
The extra revenue generated when an additional worker is employed
Firms only employ up to where …
Revenue generated = Wage costs
Formula for MRPL (Marginal Revenue Product of Labour)?
MRPL = Marginal product of labour x Marginal Revenue
Firms are assumed to be … and they will choose a level of employment that maximises profit
Profit maximisers
Describe the Marginal Revenue Product Curve
Y-axis - wage rate
X-axis - quantity of labour
Line increases steeply at first, peaks, then decreases at a less steep gradient (lablled MRP)
Describe the Demand Curve for Labour
Y-axis - wage rate
X-axis - quantity of labour
Straight line, negative gradient (labelled D)
MRPL is taken as the basis for the … curve
Labour Demand
Problems with the MRPL (5)
- measuring labour efficiency/productivity can be difficult
- hard to measure in consultancy and education sectors
- hard to measure individual productivity in terms of collaborative work
- many products are the result of inputs drawn from different countries - each contributing to value added
- many people have the ability to set their own pay
In the competitive labour market, it is assumed there is … and … …
Occupational and geographical mobility
Factors influencing the demand for labour (6)
- the wage rate (move along curve)
- demand for products (shift along curve)
- productivity of labour
- profitability of firms
- substitutes
- the number of ‘buyers’ of labour
Elasticity of supple for changes in wage rates for low skilled jobs is quite …
Elastic (and wage rate is lower)
High paid jobs are relatively …
Inelastic (and wage rate is higher)
What is the supply of labour?
The number of workers willing and able to work, multiplied by the hours they are willing and able to work
Factors effecting the supply of labour (10)
- wage rate
- the size of the working population
- migration
- people’s preferences for work
- tax and benefit incentives and disincentives
- net advantages of work
- work and leisure
- length of training
- barriers to entry (qualifications)
- labour subsidies
Where is the profit maximisation point on the MPRL curve?
Where MC = MR
Describe the backwards bending supply of labour
Y-axis - wage rate
X-axis - quantity of labour
Gradual increase then sharp increase before it bends back on itself (like a candy cane)
As real wages … , beyond a certain level, people will substitute leisure for paid work and so higher wages lead to a decrease in the labour supply and so less labour because the time being offered for sale, income and there will be … demand
Increae / Lower
What is the substitution effect?
When wages increase, workers will give up leisure to do more hours of work because work now has higher rewards.
What is the income effect?
When wages increase, workers reduce the amount of hours they work because they can maintain a target level of income through fewer hours.
What is the Equilibrium Wage Rate?
The wage that brings the demand and supply of labour into equilibrium
Where is unemployment on the Minimum Wage diagram?
Q2 to Q3 - total unemployment
Q1 to Q2 - the unemployment as a result of the minimum wage
Q1 to Q3 - those who are unemployed and looking for work
At low wage rates, demand tends to be more …
Elastic
When demand is very … , the greater the unemployment is
Elastic
Benefits of the Minimum Wage (5)
- reduces poverty
- increases productivity
- increases the incentives to accept a job
- increase investment
- counterbalance the effect of monopsony employers
Drawbacks of the Minimum Wage (9)
- increases unemployment
- higher costs
- some industries become vulnerable - not able to afford
- cost-push inflation
- regional variations in wages
- workers get stuck on the lowest pay band
- black market
- poorest don’t benefit
- limited impact on relative poverty
What is monopsony in the labour market?
Occurs when a firm has market power in employing factors of production
One buyer and many sellers
Describe the monopsony diagram
Y-axis - wages
X-axis - quantity of labour
Negative gradient for D=MRP
Positive gradient for MC L
Positive gradient for S=AC
MC L is steeper than S=AC
A monopsony can pay … wages and employ …
Lower / Fewer workers
What happens in the market when wage rates increase?
More people enter the market
In a competitive labour market, the firm would be a wage … and can’t dictate the …
Taker / Wage rate
In a monopsony, a minimum wage can therefore increase wages without …
Causing unemployment
Reasons why some businesses may choose to remain small (6)
- don’t want to increase costs (marketing + recruitment)
- if they grow they might have less control
- profits spread out over more staff
- need less space if they remain small
- less work
- possibly limited demand for their good/service
What is organic/internal growth?
The firm grows from “within”
What is external growth?
The firm grows via a merger/takeover
Reasons why some firms may want to grow (6)
- more profits to reinvest and upgrade
- can recruit better quality staff
- more customers
- lower costs (economies of scale)
- reduce the threat of competition
- meet customer demand
- attract investors (dividends)
Where on the monopsony diagram is there a transfer of income from workers to owners
Between W and W1 and up to L
Trade Unions can cause … wages and … productivity
Higher/increased
Trade Unions can lead to … and …
Unemployment/strikes
Define geographical mobility
How easy it is for workers to move between different regions and countries to seek new work.
Define occupational mobility
How easy it is for workers to move from one occupation to another.
Government measures to help improve the mobility of labour (9)
- improving education and training programs
- reducing visa restrictions
- promoting language training
- improving the recognition of qualifications
- support transportation options
- help raise the standard of living
- make information more available to workers
- recruit skilled workers from overseas
- work from home/online schemes
Demand may … if there is an increase in inward migration
Increase
Definition of “merger”
When 2 firms agree to join together
Definition of “takeover”
When 1 firm buys another firm on the stock exchange
Definition of “horizontal merger”
Merging with a firm at the same stage of production
Definition of “vertical merger/integration”
Merging with a firm backwards or forwards in the stages of production
Definition of “demerger”
The separation of a large company into 2 or more smaller firms (it’s often as of a result of an earlier merger)
Reasons why a company may choose to demerge (5)
- focusing on core businesses
- reduce the risk of diseconomies of scale
- raise money from asset sales
- a defensive tactic (CMA)
- disappointed at the success of the original merger
What is the concentration ratio?
The % of market share taken up by the largest firms (used to determine the market structure and competitiveness)
What is an oligopoly?
When there is a 5 firm concentration ratio of 50% or more
What is profit?
Measures the return to risk when committing scarce resources to a market
What is “normal-profit”?
The minimum profit required to keep factors of production in their current use in the long run
What is “supernormal/abnormal profit”?
Profit that exceeds the profit-normal
What is “sub-normal profit”?
Profit which is less than the profit-normal
MC = ?
MC = MR
What are the characteristics of perfect competition (competitive markets)? (6)
- large number of firms
- products are homogeneous (the same)
- freedom of entry into and exit out of the industry
- firms are price takers
- each producer supplies a small proportion of the total industry output
- comsumers and producers have perfect knowledge of the market
What does the Short-Run Profit Maximisation diagram look like?
X-axis - output
Y-axis - cost/revenue
“U” shaped AC curve
“Candy-cane” shaped MC curve that crosses the AC curve at the lowest point
Horizontal line called “P=MR=AR” at lowest value on AC curve
Horizontal line called “D=MR=AR=P” above the lowest point
Why are the D and P lines horizontal?
Because there is no control over market price
At what point on the Short-Run Profit Maximisation Diagram do producers produce at (and why)?
Where the MC curve crosses the D=MR=AR=P line
Because firms are profit maximisers so produce when MC=MR
Where is the super-normal profit area on the Short-Run Profit Maximisation Diagram?
Between the “D=MR=AR=P” and “P=MR=AR” lines
And left of the Q2 line (where firms produce)
What are economies of scale?
When your average costs start to fall
Types of economics of scale (6)
- production/technological (best machinery)
- purchasing (discount)
- financial (low interest rates)
- marketing (brand name)
- managerial (the best specialised staff)
- risk bearing (taking risks)
What are diseconomies of scale?
When average costs start rising again
Examples of why there might be diseconomies of scale (10)
- staff aren’t well trained or supervised
- managers aren’t supervising staff
- lack of communication or miscommunication
- old machines
- hard to manage business of large size
- if there aren’t enough staff, they get overworked
- increase in costs if too many supplies are being brought
- poor staff morale
- office politics
- poor co-ordination
Definition of corporate cannibalisation
When a product sees a decrease in sales volume or market share due to the release of some new product that has been introduced by the same company
What are external economies of scale?
When the entire industry sees its average costs falling
Examples of external economies of scale (6)
- better colleges/universities
- road infrastructure
- airports and sea ports
- communication networks
- highly skilled population
- good quality immigration
Examples of diseconomies of scale (4)
- traffic delays
- wifi gets jammed
- wages go up
- demand pushes up prices
What are the 2 types of costs?
- capital costs (assets ie machines)
- labour costs (workers)
Are capital and labour costs fixed or variable?
Capital - fixed in ST, variable in LT
Labour - variable in ST + LT
Types of firm objectives (3)
Revenue maximise - as much cash sales as possible
Sales maximise - as many physical sales as possible
Profit maximise - the most profit possible
Where on a monopoly graph are the profit, revenue and sales maximisation points?
Revenue - MR = 0
Sales - AR = AC
Profit - MR = MC
Definition of efficiency
Efficiency is concerned with the optimal production and distribution of scarce resources
Technical efficiency
When a firm is producing the maximum output from the minimum quantity of inputs, such as labour, capital and technology
Productive efficiency
The ability of a firm to produce goods/services at the lowest possible cost, given the level of output and the available technology
X-inefficiency
Happens when a lack of effective/real competition in a market or industry means that average costs are higher than they would be with competition
Allocative efficiency
When there is an optimal distribution of goods/services, taking into account consumers’ preferences
Dynamic efficiency
A firm’s ability to adapt and improve (innovate) it’s productivity over time in response to changing markets, technologies and customer preferences
Static efficiency
Producing at both productive and allocative efficiency
Sectors of the economy (3)
- private sector - firms which are owned by shareholders and generally aim to make a profit
- public sector - firms owned, funded and ran by the government on behalf of the public
- third sector - the “not for profit”, “social enterprises” and “charities”
What’s the principal agent theory?
When there is a conflict in priorities between the owner of an asset and the person to whom control of the asset has been delegated (aka owners vs managers)
What is a natural monopoly?
Where there is realistically only room for one firm in the market
Examples of natural monopolies (4)
- London Underground
- the National Grid
- the National Rail
- British Airport Authority
What is a sunk cost?
A massive cost that the firm will never get back (e.g. CEO’s salary)
Examples of the London Underground’s sunken costs (7)
- cost of trains
- cost of rails
- salaries of CEOs
- advertisement
- train platforms
- security systems and ITC
- train station buildings
What is the reason to do with the number of customers as to why there is just 1 firm?
If there were more than 1 firm, the same number of customers would be split across more firms. This means the average cost per customer is higher because the sunken cost is spread across fewer people.
Firms will continue to produce in the SR as long as their … covers at least their …
Revenue / variable costs
What is pure monopoly?
When only 1 producer exists in the industry
What are the characteristics of a pure monopoly? (5)
- firms are price setters
- 1 firm, lots of buyers
- huge barriers to entry and exit
- not homogenous products (different)
- imperfect knowledge/information
What are the characteristics of a pure monopoly? (5)
- firms are price setters
- 1 firm, lots of buyers
- huge barriers to entry and exit
- not homogenous products (different)
- imperfect knowledge/information
Monopolies are more inelastic because…
There is only 1 firm in the industry
What is price discrimination?
Involves charging different prices to different groups for the same good
What is 1st degree price discrimination?
Charging consumers the maximum price they are willing to pay
What is 2nd degree price discrimination?
Charging different prices according to the amount consumed (economies of scale)
What is 3rd degree price discrimination?
Charging different prices to different people for the same product
Example of price discrimination
Train tickets (cost more at rush-hour, cost less at quieter times)
Example of price discrimination
Train tickets (cost more at rush-hour, cost less at quieter times)
Definition of oligopoly
An imperfectly competitive industry with a high level of market concentration
Characteristics of oligopolies (9)
- price setters
- barriers to entry
- similar prices
- lots of non-price competition
- homogeneous products (or slightly different)
- large number of firms in the market but dominated by a few
- interdependence of firms
- potential for collusion
- brand loyalty increases the difficulty of market entry
In oligopolies, the AC curve may be … shaped
Basin
What can the “kinked demand curve graph” be used for?
To prove the stability of prices in oligopoly markets
Explain the “kinked demand curve”
(If the price is raised or lowered)
If the price is raised - highly inelastic demand curve so there’s no incentive to raise the price because other firms keep their prices the same.
If the price is lowered - highly inelastic so everyone else will also lower their prices so there is no incentive.
Therefore price is very stable in oligopolies.
Examples of oligopoly industries (10)
- airlines
- supermarkets
- coffee shops
- fast food
- petrol retail
- car industry
- pharmaceutical industry
- broadbands
- banks
- phone manufacturers
Barriers to entry in an oligopoly market (6)
- economies of scale
- vertical integration
- brand loyalty
- control of important platforms
- reputation
- patent protection
What is monopolistic competition?
A type of market structure where many companies are present in an industry and they produce similar, but differentiated products
Characteristics of monopolistic competition (4)
- large number of firms
- may have choice over price because they are able to differentiate their product in some way from their rivals
- easy entry and exit into and out of the market but a few, slight barriers
- imperfect knowledge (buyers and sellers don’t have all the informed necessary to make an informed decision)
- imperfect competition
- industry concentration is low
Why does the monopolistic competition diagram return to normal profit (from super-normal profit) in the long-run?
More firms enter the market and copy the firm that differentiated because they are encouraged by the super-normal profit they received in the short-run
What are regulators?
Independent bodies set up to police natural monopolies
What things can regulators enforce? (4)
- price caps
- fines
- enforce laws
- quality standards
What does “RPI + X” mean?
Retail price index + agreed amount = the % price increase
(used for performance targets)
What is deregulation?
The reduction or elimination of government power in an industry in order to allow other firms to enter the market to increase competition
What are Public Private Initiatives?
A partnership between the government and private firms, often to collaborate on large infrastructure projects that the government needs and pays back with profits and the private partner may fund, plan, and execute
What are examples of PPPs? (Public Private Partnerships/Initiatives)
- HMP Featherstone
- NHS healthcare
- M6 toll
- M25 motorway
What is the benefit to the government as a result of being part of a PPP?
- the private firms fund the initial costs while the government is able to pay the firm back in smaller amounts
- the government doesn’t have to run the prison/hospital/toll/motorway etc as the private firm does it for them
What is the benefit to the private firm as a result of being part of a PPP?
- the government will pay them back with profits
- have the funding which attracts investments that can be reinvested into the infrastructure to improve it in the future
Contestants markets are a development of…
Oligopoly
Characteristics of contestable markets (7)
- firms’ behaviour influenced by the threat of new entrants to the industry
- no/low barriers to entry or exit
- no/low sunk costs
- entry limit pricing - firms may deliberately limit profits made to discourage new entrants
- firms may attempt to erect artificial barriers to entry (eg lower prices for a short time)
- access to all available technology
- low existing consumer loyalty
What are “hit and run” tactics?
When a firm enters the industry, takes the profit and then gets out quickly (due to freedom of entry and exit to the market)
What is “cream-skimming”?
Identifying parts of the market that are high in value added and then exploiting those markets
Examples of contestable markets (6)
- coffee shops
- city transport services
- fast food industry
- hotel/room sharing sectot
- energy suppliers
- financial services
What is a contestable market?
Where an entrant has access to all production techniques available to incumbents and entry decisions can be reversed without cost
What is a monopsony?
A market in which there is only 1 buyer
Monopsonies can exploit… with a supplier to negotiate…
Bargaining power / lower prices
Examples of monopsony markets (5)
- supermarkets
- health services
- energy generators
- british sugar
- amazon
Benefits to firms of monopsonies (3)
- purchasing economies of scale (lower LR ACs)
- higher supernormal profits - leads to increased returns for shareholders
- producer surplus due to extra profit
Why is the MC=AC line linear and horizontal in monopsony diagrams?
The firm has a large buying power so can pay the same price to the supplier no matter how much they buy
Benefits to consumers of monopsonies (5)
- may lead to lower prices when the MC=AC line moves downwards
- improved quality of products due to supernornal profits received by firms
- value for money
- real incomes - consumer surplus
How and why does the government break up a monopoly?
Forces it to sell off part of its business because the government has decided it has gotten “too big”
Breaking up a monopoly leads to…
Increased competition
How might monopsony damage welfare? (4)
- squeeze lower prices out of suppliers - reduces suppliers’ supply and wages
- less choice
- higher prices
- monopsony employers drive wages down throughout the supply chain
Strategies to limit monopsony power (5)
- new regulators
- using technology for suppliers to sell direct to consumers
- producer co-operatives
- tougher laws
- block some mergers or takeovers
What is nationalisation?
When a privately owned firm is taken into state ownership
Measures to reduce losses (6)
- make staff redundant
- increase prices
- close some parts of the firm
- stop producing loss-making products
- work with cheaper suppliers
- improve technology to increase efficiency
Reasons for nationalising (7)
- money is reinvested back in
- less focus on making profits
- increases efficiency
- more jobs
- lower prices
- better working conditions
- helps modernise
Reasons against nationalising (4)
- less competition as it becomes a natural monopoly
- higher costs
- takes a long time to nationalise, so can only be for the long term
- may be more x-inefficient as they don’t aim to maximise profits anymore
What is a natural monopoly?
A type of market structure where it is more efficient for 1 firm to be the sole provider of a specific goo/service due to economies of scale
Examples of natural monopolies
- web search
- messaging platforms
- air traffic control
- London underground
- rail networks
What is collusion?
When 2 or more firms ‘agree’ to manipulate the market for their own self interest
3 ways/things firms may do to collude
- charge the exact same amount (rise prices together)
- agree not to compete against each other with advertising
- agree not to compete on location
Reasons firms may collude (6)
- rise prices together so both receive more revenue
- more revenue to reinvest (R&D)
- reduces labour, R&D and advertising costs
- increases investments
- reduces sunk costs
- maintains number of customers/firms don’t fight over customers
What are the 3 types of collusion?
- tacit (“unofficial”)
- formal (sit down and agree/write it down)
- price leadership (follow each other’s prices)
