Theme 3: Business behaviour and the labour market Flashcards

Question

What is profit satisficing (3.2) (3)

Answer 1

-Profit satisficing occurs where owners of a business set a minimum acceptable level of achievement in terms of profit/return -This occurs when there is separation between ownership & management, and it is an acceptable rather than a perfect amount -Firms may profit satisfice whilst setting other objectives

Answer 2

-Economic cost is the value that could've been generated had the resources been employed in their next best use (EC = Actual COP + Imputed COP) -Imputed cost is the opportunity cost incurred during the period when an asset is employed for a particular use, rather than a different use -The opportunity cost of production for financial capital is the income which could've been generated by investing elsewhere

Answer 3

-Fixed costs are costs that do not vary with the level of output (AFC = FC/O) -Variable costs are costs that do vary with the level of output (AVC = VC/O) -Total costs are the costs of producing at a given level of output (AC = TC/O) -AC = AFV + AVC = TC/O = P

Answer 4

-TVC and TC have an upwards wave-esque curved line, the difference between the two being TFC, a flat line -AC and AVC are 2 quadratic-esque curves with positive coefficents, the difference between them being AFC, a curve closening to the x-axis (TC/AC > TVC/AVC)

Answer 5

-Marginal cost is the additional cost of producing one more unit of output -Semi variable costs are costs which contain within them a fixed cost element and a variable cost element

Answer 6

-The law of diminishing returns states that in the short run, when variable factors of production (usually labour) are added to a stock of fixed factors of production, total/marginal product will initially rise then fall -Average product = total product / input -Marginal product = change in total product/change in input -Firms may experience diminishing returns as firms are unable to increase their fixed factors of production, so variable FOP's become the limiting factor

Answer 7

-AFC is a downwards sloping curve -AVC is an upwards sloping curve which initially falls -AC is a U shaped curve -MC initially falls then rises, and crosses through the lowest points of AVC and AC

Answer 8

(first four also apply to AVC) -AC>MC when AC is falling -AC

Answer 9

-When fixed costs rise, AC rises -When variable costs rise, AC and MC rise

Answer 10

-LRAC is a U shaped curve, with a flat bottom, which is the productive efficiency, and the first Quantity at productive efficiency is the minimum efficient scale -Higher FOP price = LRAC shifts up -Lower FOP price = LRAC shifts down

Answer 11

-Economies of scale are the long run average cost advantages a firm gains through increasing the scale of production, causing LRAC to fall -Internal EOS are a result of the growth of the firm itself, leading to cost saving and a fall in LRAC'S -External EOS occur when a whole industry grows larger, and firms benefit from lower average costs

Answer 12

-Technical economies of scale are when larger firms can buy better equipment, leading to greater efficiency and lower LRAC -However, will these greater firms have the labour required to utilise the tech -Dimensional economies of scale are when shipping (for example) dimensions are labelled, leading to a 4x price but an 8x volume, where the volume of what can be shipped has risen the most, reducing overall LRAC's -However, external factors (shipping limits) may limit how big these containers can be -Purchasing economies of scale are when the more a firm purchases a specific raw material, the more negotiating power they have, allowing them to lower LRAC's in the process -However, this can be quite unethical, and can harm suppliers -Division of labour economies of scale are when a greater sized firm can spread their labour out, allowing for specialisation, greater efficiency and lower LRAC's -However, if one part of the production process fails, specialised labour will be unable to fill this role

Answer 13

Financial: -Banks more willing to give out better loans to bigger firms -However, this depends on the state of the economy, willingness of bank to lend, and the increase cost of a higher loan Managerial: -Larger firms can employ specialist managers to maximise efficiency -However, these managers can lead to less cohesion, less of a family feel and lower motivation to work Marketing: -Larger firms can spend more on adverts, and can offset more advertising costs -However, there is no guarantee that the adverts will have the desired outcome on demand Risk bearing: -Larger firms are able to diversify, and take more risks, falling back on other parts of the firm if one fails -However, a risk not paying off can lead to funds being diverted from more successful sections of the firm, increasing AC's R&D: -Larger firms can afford entire R&D departments, to increase innovation -However, there is no guarantee that these R&D departments will innovate anything

Answer 14

Transport: -Better transport will enable firms to reach a wider audience at lower costs -However, this depends on what transport links firms already have, and what links they need Education: -Being close to a university/higher education will give firms a higher pool of skilled labour -However, there is a time lag as the students go through the education, and it depend son what they do Concentration: -If more firms are concentrated in an area, it is more likely the supplier will move to the area, leading to lower delivery costs -However, other firms may compete for the supplier Reputation: -If an area has a high reputation (silicon valley) is more likely to have workers go there -However, reputation changes quickly

Answer 15

-Efficiency in production makes firms more competitive in markets -Firms can now gain higher profits, or lower prices to attract consumers and increase market share -Consumers get lower prices -Consumers get high quality/highly innovative goods

Answer 16

-Diseconomies of scale are when the expansion of a firms output comes with increasing average costs -Poor communication: in a large firm, it is harder to communicate an idea to everyone -Alienation: in a highly specialised assembly line, workers may feel bored and lack motivation -Lack of control: in a large firm there is greater separation between management and labour., meaning individual workers can get away with doing less -Overcrowding: too many workers may mean some get in eachothers way, reducing efficiency -Motivation: people feel less connected, and feel less of a personal incentive to work hard, decreasing productivity

Answer 17

-Poor communication: divide the work process into separate groups, and get these groups to communicate within themselves -Alienation: have incentives (worker of the month) to encourage people to work hard -Lack of control: have separate managers for separate portions of the production process -Overcrowding: let people work from home, or have multiple workplaces -Motivation: have schemes (days out, pay incentives) to ensure people remain motivated

Answer 18

-AR = MR as a straight horizontal line, and TR is a upwards diagonal straight line, all 3 starting from the same point (Revenue on Y axis, Q of sales on X axis)

Answer 19

-AR and MR are straight lines which fall diagonally, MR being twice as steep as AR -TR is a negative curve, rising at first when demand is elastic, peaking when MR=0, then falling when demand is inelastic

Answer 20

-Revenue is the money recieved from the sale of a good/service over time -Firms usually calculate weekly, monthly ... revenues -Total revenue is the total money recieved from the sale of a good/service at a given level of output -TR = P x Q -Average revenue is the average revenue per unit of good/service sold -AR = TR/Q = P = D -Marginal revenue is the additional revenue gained from the sale of one more unit of output -MR = change in TR/change in Q

Answer 21

-Royal dutch shell acquired BG group for £47 billion in 2015 (acquisitions) -Tech advances have led to decreased demand for restaurant dining, since competitiors such as uber eats/deliveroo have improved (demand) -Electricity and water have inelastic demand, as there are very few natural alternatives (inelastic demand) -Brexit (31st Dec 2020) has led to increased costs of production all over, such as increased fruit and veg prices for supermarkets (COP's) -Housing in prime locations (central london0 may have perfectly inelastic supply, since there's no space to build houses (inelastic supply) -Energy price cap rose 54% in April 2022 (£693py), the new cap of £1971 (max prices)

Answer 22

-Market structures are the characteristics of a market which determine firms' behaviour Main characteristics: -Number of firms in market and their relative size -Number of firms which may enter/leave market -Ease of difficulty of new firms entering/leaving market -extent to which all goods/services are siilar -Extent to which all firms share the same information/knowledge -Extent to which 1 firms actions impact others

Answer 23

-Allocative efficiency = distributing resources according to consumer preference (p=mc) -Productive efficiency = producing for the lowest cost (AC = MC) -Dynamic efficiency = producing efficiently over time -X-efficiency = producing at the lowest costs at any given level of output -Efficiency of scale - achieving economies of scale -Social efficiency - taking into account external pros/cons

Answer 24

-Allocative efficiency is when resources are used to produce goods/services which consumers want and value most highly, and social welfare is maximised -Allocative efficiency is at an output level where marginal benefits = marginal costs (p=mc) -Price is the same as the marginal utility a consumer gets from each additional good/service consumed -On a diagram, allocative efficiency is where S=D, where MC = MR, or P = MC

Answer 25

-Productive efficiency is when MC=AC, when the maximum possible output is achieved with the lowest possible average costs -Productive efficiency can only occur with technical efficiencies, where the maximum output is produced with the given available factor imputs -On a diagram, productive efficiency occurs when MC=AC, the lowest point of AC

Answer 26

-X-efficiency occurs when a firm is producing at the lowest possible cost for a given level of output -When the firm is at any point on the AC curve -X-inefficiency is a specific type of productive inefficiency, when a firm is not producing at the lowest possible cost for a given level of output -Also known as organisational slack, and is present when a firm is operating within its average cost curves, and not the boundary

Answer 27

-Dynamic efficiency is efficiency in the long run -When all resources are allocated efficiently over time, with high productivity, innovation, and technology -The market is dynamically efficient if consumers needs/wants are met as time goes

Answer 28

-Perfect competition is a theoretical market structure with no monopolies, where a large number of small buyers and sellers sell homogenous goods -Homogenous products -All firms have the same access to factors of production -Large number of small firms -Free barriers to entry/exit -Profit maximisation is a key business objective for firms -Perfect knowledge -Price taking firms -Perfectly elastic demand curve

Answer 29

-Originally, the market equilibrium (S=D) leads to individual firms making a SNP, as their horizontal AR=MR=P curves > AC -This SNP leads firms to join the market, leading to market supply shifting outwards to S1=D, where now AR1 = AC = normal profits

Answer 30

+Since firms produce at lower price P=MC, it is allocatively efficient +Since firms produce at the bottom of their AC curves, it is productively efficient +Short run supernormal profits can allow firms to reinvest, being dynamically efficient -Small firms = little/no economies of scale -Lack of long run SNP increases dynamic inefficiency -Assumptions rarely hold up, perfect competition near impossible to find

Answer 31

-A monopolistic market is an industry in which many firms offer products or services that are similar, but not perfect, substitutes Assumptions/Characteristics: -Large number of small firms -Low barriers to entry/exit -Firms produce similar, but differentiated products (adverts, branding, quality) -Firms have price setting power, due to their differentiated products -Firms set profit maximising as their objective -Goods have a high elasticity of demand

Answer 32

-Draw a firm with downwards sloping AR and MR curves making supernormal profit -Firms see the SNP and enter the market, and this leads to higher competition, and lower demand -This lower demand leads to AR and MR shifting inwards, to the point where normal profit is being made (AR tangent to AC) -DRAW NORMAL PROFITS FIRST AND THEN SNP

Answer 33

-Isn't productively efficient, as MC isn't equal to AC -Isn't allocatively efficient, as P isn't equal to MC -Can be dynamically efficient, as firms have profits to reinvest and expand -Is X-efficient, as firms face competitive pressures to cut costs

Answer 34

+Market differentiation = higher prices, consumer loyalty +Flexibility in prices, due to product differentiation +Innovation, due to pressures to stay ahead +Consumer choices, as firms can cater to different preferences +Firms have the opportunity to make economic (SNP) profit -High competition leads to lower market share and profit -Advertising costs high to differentiate -Product differentiation costs are expensive -Price sensitivity, challenging to raise prices without losing consumers

Answer 35

+Product diversity leads to higher choice +Innovation and improvement in goods +Non-price competition (higher quality, more services) +Firms responsive to consumer preferences +Brnding and quality insurance -Higher prices, as firms differentiate -Confusing choices between similar but not same goods -Potentially lower quality, as firms seek lower costs -Limited bargaining power

Answer 36

-An oligopoly is when a few large firms dominate the market, and have majority market share (5-firm concentration ratio > 50%) -An example would be the supermarket industry (74%) Characteristics: -Products are generally differentiated -Firms are interdependent (actions of one firm will affect eachother) -Supply in the industry is concentrated in the hands of a relatively small number of firms, with a high concentration ratio -High barriers to entry

Answer 37

-Concentration ratios are the percentage of market share taken up by the largest firms -N-firm concentration ratio = %market share of n largest firms -Market share % = (company sales/total market sales) x100 -If the 5-firm concentration ratio > 50%, the market is a monopoly/oligopoly -UK supermarkets 5-firm CR = 74% -UK legal monopoly = 1 firm CR > 25% -If the 3 firm CR > 80%, there is scope for collusion, lower competition and higher prices, and the government may need a regulator -Government regulators for electricity (5-firm CR = 90%), gas, railways

Answer 38

-Interdependence is when firms don't make decisions independently, rather making actions based on the action/reactions of other firms -Interdependence leads to price rigidity/stickiness -Interdependence in oligopoly's leads to non-price competition Firms compete on: -Price -Quality -Branding -Advertising -Additional services

Answer 39

-The kinked demand curve is a demand curve which is elastic above price equilibrium, and inelastic below price equilibrium -Firms don't want to increase prices, as the higher price is less than the lower quantity, as other firms gain market share at their expense -Firms don't want to lower prices, as the higher quantity is less than the lower price, as this action starts a price war, so everyone loses out on profits

Answer 40

-Collusion in an oligopoly refers to an agreement or understanding, among a small number of competing firms to coordinate their actions, typically with the aim of influencing market conditions in their favour -Horizontal collusion is collusion in the same industry at the same stage of production -Vertical collusion is collusion in the same industry at different stages of production -Explicit collusion is obvious and open collusion -Tacit collusion is under the table agreements between firms -Tacit collusion includes price leadership, sticking to output quotas, bid rigging

Answer 41

Aspects: -Price fixing: firms may agree to set a common higher price -Output quotas: Firms may restrict supply, to increase scarcity and drive up prices -Market sharing: Firms may decide to split the market amongst themself, with each firm with a designated market share -Bid rigging: Firms may coordinate which firm will set the lowest bid to gain contracting rights from the government (government pays) -Coordinated advertising/promotions: To avoid aggressive competition Impacts: -Higher prices for consumers -New firms may be discouraged from entering the market -Easy profits can make firms lazy

Answer 42

-Collusion is often illegal, due to potential negative impacts on consumers and competition -1998 Competition Act prohibits agreements, practices and conduct that may have an anti-competitive effect in the UK -2008 Enterprise Act strengthened the legal framework for competition enforcement -The CMA is the primary authority in the UK for investigating and enforcing competition laws -The CMA has the power to conduct investigations, impose fines and take legal action -In 2016, the CMA fined several pharmaceutical companies £45mill, including GSK, for increasing costs and delaying entry of generic versions of an antidepressant drug

Answer 43

-A payoff matrix is a 2 by 2 square, which show if 2 firms collude they make more money than if two firms compete -Game theory can be used to illustrate tacit collusion in an oligopoly

Answer 44

+Price wars in a competitive oligopoly lead to higher consumer surplus +Greater non-price competition leads to higher R&D, increasing dynamic efficiency +Dominant firms can take advantage of EOS for lower AC's and lower prices -Tacit collusion may lead to firms setting higher prices, reducing allocative efficiency -High concentration ratio's lead to lower consumer choice, and high barriers to entry deter new firms from entering the market -Persuasive advertising can manipulate preferences Depends on: -Contestability of the market -Objectives of business -Effectiveness of industry regulation

Answer 45

-A monopoly in its purest form is when one firm dominates the market -The UK's CMA defines a working monopoly as when one firm has >25% of industry sales -A near pure monopoly is when one firm has >90% of market share -The monopoly power enjoyed by firms is dependant on the definition of the market. Some firms have local monopolies, others have regional/national -A dominant firm is one which accounts for a significant share of a market and has a significantly larger market share than its next rival -Dominant firms typically have >40% market share

Answer 46

Characteristics: -Firms are profit maximisers -Firms have market power/price setting power -Economies of scale are available to large producers -Barriers to entry high, enabling firms to maintain long run profits -Few close substitutes reduces the cross elasticity of demand Reasons: -Firms having exclusive ownership of a scarce resource (Microsoft owning Windows OS) -Governments may grant firms monopoly status (post office until 2006) -Producers may have patents over designs or copyright over ideas -A monopoly could be created following the merger of 2 or more firms

Answer 47

-First-degree/pure price discrimination is where the firm can charge different prices for every unit of the good/service sold, eliminating all consumer surplus (impossible in reality due to the information requires) -Second-degree price discrimination is charging a different price for different quantities of a good sold, such as bulk discounts -Third-degree price discrimination is charging different prices to different groups for the same G/S for third degree price discrimination to occur: -Firms must be able to separate the market into groups of different buyers -Customers must have different elasticities of demand -Firms must be able to control supply and separate the different prices

Answer 48

-We assume the industry contains constant costs at MR=MC (can also illustrate on combined) -By price discriminating and separating the markts, firms can make higher profits -On one diagram should be an inelastic AR and MR curves and the subsequent SNP with a constant AC=MC -One another diagram should be elastic AC=MC curves, and the subsequent SNP with a constant AC=MC -One a third diagram should be a combined, with an elastic curve kinking into an inelastic AR and MR curve, Mr=MC being on the inelastic section, and the subsequent SNP

Answer 49

+Firms can benefit, as they can increase their profits and reinvest more, increasing dynamic efficiency +Some consumers can now afford g/s they previously couldn't, reducing inequality +Some firms may go out of business if they couldn't set higher prices +Allows firms to regulate services (on peak vs off peak crowds) +Those in the elastic market gain consumer surplus, paying a lower price -Some consumers lose consumer surplus and have to pay higher prices -Firms need to spend administration costs ensuring the price boundarys are respected -Could go not well for firms if they do not have proper price information -Can create unfairness in society, depending what factors are used to divide (old and rich vs young and poor)

Answer 50

-A contestable market is one where firms can freely enter/exit the market -In a contestable market, there will be low sunk costs (costs that cannot be recovered when exiting the market) -In contestable markets, firms are threatened by firms' ease to enter the market, and thus keep prices close to a competitive equilibrium and profits low -In a contestable market, firms are more likely to produce at the lower price and normal profits (AC=AR) than higher priced supernormal profit (MR=MC)

Answer 51

Price discrimination can occur based on: -Demographics (age) -Time (on vs off beak, month of the year for holidays) -Income (low income discounts) -Quantity (bulk buy) -Location (postcode specific) -Geography (location/country based pricing)

Answer 52

All three diagrams are horizontal to each other -On the first diagram show where MC = kinked MR -On the second diagram show SNP with inelastic AR and MR curves, with a higher price -On the third diagram, show SNP with elastic AR and MR curves, with a lower price

Answer 53

-A contestable market occurs when there is freedom of entry/exit in the market -In a contestable market, there will be low sunk costs (costs that cannot be recovered when entering the market) -Threat of firms entering the market freely keeps prices close to a competitive equilibrium and profits low -In a contestable market, firms produce at sales maximisation AR=AC, keeping normal profits at a lower price and higher quantity

Answer 54

-Sunk costs: high sunk costs make it difficult for new firms to enter/exit the market, making it less contestable (adverts, R&D) -Advertising/brand loyalty: if an established brand has significant brand loyalty (coca cola), new firms will have to pay a lot on adverts to disrupt loyalties -Vertical integration: if a firm doesn't have access to the supply of a good, the market will be less contestable (oil firms limiting petrol supply, government regulation allowing access to the national electricity grid) -Access to technology/skilled labour: less contestable in markets if it's hard to gain access to the labour/capital required (google pays software engineers well, has a 26 acre silicon valley HQ worth $1 billion

Answer 55

-Removing legal barriers to entry: royal mail was a 360 year legal monopoly, but now other firms can enter the market for delivering letters/parcels -Force firms to allow competitors to use its network: when BT was privatised, the OFTEL (office for telecommunications) forced BT to allow other firms to use its network. This has also happened on the national grid -Legislation against predatory pricing: if firms can't engage in predatory pricing they can't force new firms out of the market, making it more contestable -OFT can legislate against abuse of monopoly power: can ensure firms don't restrict supply to certain firms -Government firm: as a last resort in banking, the government has toyed with making its own firm, to increase competition

Answer 56

+Internet has reduced setup costs and enabled new firs to enter the online banking market +Government is trying to introduce regulation to reduce the time/effort needed to switch accounts -High sunk costs in getting a network of banks set up -Brand loyalty to existing banks is high -High profits for banks indicate that hit and run profits aren't possible

Answer 57

-A monopsony is when a single buyer controls the market for a good/service, in essence setting price and quantity -Without that buyer, there would not be sufficient demand for the product -It often refers to monopsony employers, who have market power in hiring workers -Examples of dominant employers in the UK include the NHS, army and firefighters -Monopsonists in labour markets are wage setters, as they are the sole employer of labour, and therefore can offer whatever wage rates/quantity they feel

Answer 58

-On the diagram with x axis Q, and y axis WR, you have a downwards sloping D=MRP, and starting from 0 you have two upwards sloping curves, an S=ACL and a higher MCL curve, and go down from where MCL=MRP to ACL to find WR -Profit maximisers hire where the Marginal Cost of Labour = Marginal Revenue Product -Monopsonists will maximise revenue (MRP) workers produce in comparison to cost (MCL), maximising profit -Wage and quantity are lower in a monopsony (Wm + Qm) then in a competitive labour market (Wc and Qc)

Answer 59

+Firms can hire workers at lower wage rates, maximising profit +Lower COP's for firms can lead to lower prices/higher quality for consumers, increasing allocative and dynamic efficiency +Workers get a stable employer of labour +Suppliers get a stable purchaser of supply -Suppliers may cut corners to stay profitable, leading to lower quality for firms -Workers striking for wages/conditions could impact consumers -Employees get lower wages, with no alternative employer -Suppliers get exploited my monopsonist and lower prices/quantities

Answer 60

-A natural monopoly arises when there are high fixed costs, usually in the form of infrastructure -The costs of infrastructure (water pipes) are high sunk costs, thus increasing barriers to entry/exit -It is considered inefficient to try and increase competition through duplicating this infastructure, as this would mean that there is the same infrastructure twice, wasting resources

Answer 61

+Monopolies can exploit economies of scale for lower average costs +High profits can be taxed for government revenue +Monopolies' significant SNP's allow for R&D, innovation and dynamic efficiency +With a natural monopoly, it is more efficient to let them be the sole producer +Monopolies are more likely to innovate if they can protect their ideas -High prices and profits leads to misallocation of resources and inefficiency -Monopolies could exploit the consumer, charging a higher price and reducing allocative efficiency -Monopolies have no incentive to become more efficient -Losses in consumer surplus and gains in producer surplus -Little choice for consumers

Answer 62

-A product market is where final goods/services are sold from producers to consumers for consumption -A factor market is where factors of production are sold from one producer to another for use in producing a final good -The labour market is a factor market where labour is bought/sold

Answer 63

-The demand for labour represents the willingness and ability of firms to employ workers at a given wage rate at a given point in time -Demand for labour is a derived demand for the product labour is used to produce -The DoL curve is inverse, since firms will switch production to capital as wages rise (automation) -The elasticity of labour demand measures the responsiveness of labour demand o a change in wage rates Factors affecting labour demand elasticity include: -Labour costs as a % of total costs -PED of final goods -Ease/Cost/Quality of factor substitution

Answer 64

-Higher demand for product = higher demand for labour -Higher productivity of labour = higher demand for labour -Higher quality/quantity of labour substituted = lower demand for labour -Higher firm profitability = higher demand for labour -Higher number of firms in the market = higher demand for labour

Answer 65

-The supply of labour represents the willingness and ability of people to make themselves available to work at given wage rates at given points in time -The Supply of Labour curve is upwards sloping, as more workers will work at higher wages -The elasticity of supply of labour is the responsiveness of supply to a change in wage rates Factors influencing elasticity include: -Level of training/qualification required -Time -Availability of suitable labour in other industries -Levels of unemployment

Answer 66

-Wages: for an industry, wages cause movements on the upwards sloping curves -Population/age: higher WORKING AGE population leads to a higher supply of labour (migration has more of an impact than birth/death rates) -Non-monetary benefits: holidays, flexibility, hours, job satisfaction, area -Education/training: occupations which need higher levels of education will have lower, more elastic supplied of labour (also higher E&T = higher SoL) -Alternatives: supply of labour for a firm depends on other available firms -Legislation: government rules (school leaving age, retirement) can impact supply of labour -Trade unions: unions may be able to restrict supply of labour (teachers union made it so you have to have a degree to teach)

Answer 67

-An individual's supply of labour curve is a backwards bending C, with hours on the x axis, and wage rate on the y axis -Below equilibrium (max hours), the substitution effect>income effect, and above equilibrium the income effect>substitution effect -The substitution effect is giving work greater value then labour, due to higher wages -The income effect is when higher wages mean workers work less to achieve a set income

Answer 68

-Labour immobility refers to the difficulty of workers to move from one location to another, or from one occupation to another -Labour can suffer either from occupational or geographical immobility -Occupational immobility is when workers struggle to move from one job to another, due to a lack of transferable skills -This is particularly challenging in the short run, but in the long run workers can get training (but, expensive) -Geographical immobility is where people find it difficult to move from one place to another -Housing, expenses to travel to interviews, commute, all hurting low-income people more -Immobility leads to excess/shortages of labour in certain occupations/areas -Uk suffers from a skills shortage, costing £90 billion annually as there are 4 million too few skilled workers in areas such as engineering

Answer 69

-Shifting supply inwards, the lost wage income from contraction in employment is change in quantity x original wage rate, and the gained wage income from collective bargaining is the change in wage rate x new quantity -Union bargaining strength depends on the proportion of workers in an industry in a union

Answer 70

-A national minimum wage sets the minimum hourly rate that is acceptable in law -A national minimum wage aims to remove the problem of poverty pay, where the earnings from work don't result in a living wage, and fail to push people out of poverty -A national minimum wage has been in the law since 1999, where the hourly wage rate was at £3.60, and is now £6.40 for <18yr olds, and the national living wage is £11.44 for >21yr olds -On a SL and DL curve, a price level set above market equilibrium

Answer 71

+Greater equity achieved, and the distribution of income is narrowed +Poverty reduced, as the low paid gain more income and the unemployed join the labour market +Less worker exploitation by labour market monopsonists, who can pay below-market equilibrium -Price inflation, as firms pass on higher costs -Falling employment and rising employment leads to demand contracting -Workers/employers may be driven to unofficial labour markets -Inward investment + FDI deterred to avoid expensive labour -Competitiveness of UK goods abroad suffer compared to low wage economies

Answer 72

-On a regular supply and demand diagram, the union wage will be perfectly elastic supply until the supply curve, above market equilibrium -On a labour monopsony and monopoly diagram, the union wage will be perfectly elastic until D = AC, then rise up

Answer 73

-Skills shortage: the UK suffers from geographical and occupational immobility -Young workers: youth unemployment (12% for 16-24 vs 3.8% overall), as firms in recession don't hire new workers, and lower lifetime earnings follow -Retirement: higher life expectancy = higher strain on government budget and a higher retirement age (pensioners make 50% of welfare spending) -Wage inequality: higher wage inequality raises questions on relative poverty and redistributive measures (UK gini coefficient 0.28 in 1960, 0.38 now) -Zero hour contracts: 75% rise over the last 10 years, employees don't know what they'll make and have little notice of when -Gig economy: short term, unreliable self employed contracts -Migration: causes fall in wages, but helps fill skills shortages (visas for doctors)

Answer 74

-The CMA in the UK enforce competition and consumer law and take action to prevent anti-competitive behaviour and unfair business practices -The CMA protects consumer rights by investigating infringements, imposing fines and sanctions and taking action against companies -The CMA fined 4 pharmaceutical firms £35 mill in 2022, Focus receiving a £15.5m fine, for limiting the supply of an anti0-nasuea dug, causing its price to rise 700% -The CMA investigates mergers if the result is market share > 25%, or >£70m turnover, aiming to prevent a worsening competitive position -The CMA can encourage competition through forcing others to use its infrastructure network, setting price controls at RPI - X (X = efficiency gains, ensuring firms pass efficiency gains to consumers), or RPI-X+K ( K = investment, incentivising £130b in water industries)

Answer 75

-In the UK, mergers are investigated case-to-case, on whether there'll be a substantial lessening of competition (SLC), and if the pros outweigh the cons -A merger will be investigated if it'll result in market share of >25%, or if the merged firm passes the turnover test of >£70 million -The aim is to prevent 2 large companies merging, which could then exploit consumers for higher prices and lower quantities -However, very few mergers are investigated per year, the CMA suffering form regulatory capture (regulators being sympathetic) -Tesco's takeover of Booker (2017, £3.7b) was allowed to to the competitive nature of supermarkets -The European Commission blocked the merger of Ryanair and Aerlingus in 2010, as they'd control >80% of all european flights from ireland

Answer 76

-Price regulation ensures firms don't price too high -Profit regulation incentivises reinvestment, and disincentivises high prices -Quality standards ensure firms don't produce low quality goods/services -Performance targets help firms reach a certain level of quality of a number of factors -Windfall taxes are high taxes which are placed after a certain event has occured -Lowering barriers to entry and merger policy could help increase competition -Breaking up the monopolist into competing units -Subsidies could incentivise firms to lower prices -Self regulation could ensure firms follow their own codes of conduct

Answer 77

Price: -Regulators can set a price control to charge a price below profit maximising -One price control is 'RPI - X', X being expected efficiency gains which therefore are transferred to consumers -Another price control is 'RPI-X+K', K being the level of investment, this contro allowing for £130 billion investment in the water industry -These price controls disincentive high prices and incentivise innovation However: -However, it is difficult to know where to set X, due to asymmetric information and rapid changes in technology levels -It is also difficult for governments to know the allocatively efficient price, whilst increasing dynamic inefficiency Profit: -In the US, 'rate of return' regulation is used, setting prices to allow for costs and a 'fair' rate of return -This encourages investment and prevents higher prices However: -There is little incentive for efficiency gains, as firms on't win from cutting costs rather from overinvesting in too much capital

Answer 78

Quality standards: -The government can introduce quality standards, to ensure firm don't cut quality as a measure to increase profits -Electricity generators are forced to have enough capacity to prevent blackouts However: -This requires political will and understanding Performance targets: -Regulators can introduce yardstick competition, such as setting train punctuality targets based on the best performing operators -Regulators can also split a service into a number of regional sectors, and compare performance in each (water industry) -Targets can be set on price, quality, costs of production and consumer choice However: -Requires political will and understanding, as firms will actively oppose setting targets -Enforcable punishments will need to be in place if firms don't meet targets -Attempting to meet targets could have adverse effects (NHS time targets led to low quality)

Answer 79

-The promotion of small businesses increases innovation and efficiency, as new firms will provide goods and old firms will be forced to compete -Government can give out training, grants, tax incentives and subsidies to entrepreneurs -Deregulation is the removal of legal barriers to entry, increasing efficiency through allowing higher competition -Privatisation can also be used to increase competition in the market -However, these will have negative effects of poor business behaviour -Competitive tendering is when the private sector produces goods to be bought out by the public sector -Government can contract out the provision of a good/service to private companies -Competition can be introduced, inviting private firms to bid for contracts to supply, the lowest contract wins -This helps minimise costs and ensure efficiency -However, private sector firms may cut quality in an attempt to cut costs to be able to afford lower contracts -Government can prevent firms taking anti-competitive behaviour

Answer 80

Restrictions on monopsony power: -Government's can pass anti-monopsony laws, introducing independent regulators who force monopsonists to buy fairly -Fines can be implemented, minimum prices may be introduced, self regulation could be used but is weak Workers rights: -Government protects employees through health and safety laws, employment contracts, rights to be in a union -However, if workers rights are too strong, firms will be unwilling to take on new workers, due to higher costs

Answer 81

-Privatisation is the sale of government equity in nationalised industries, or other firms to private industries, to revitalise inefficient industries +Encourages greater competition, reducing x-inefficiency and prices +Reduces government interference, and firms can invest with greater competition +Managers become more accountable and there are higher incentives for higher quality +1997 Railway privatisation lead to higher passenger satisfaction and investment -Privatised natural monopolies may abuse their monopoly power -Makes sense for the government to coordinate key industrys -Problems over externalities and inequality, as firms focus on profit -Since 1997, railway standard single fairs have risen 200%

Answer 82

-Nationalisation is when a private sector company/industry is brought under state control, to be owned/managed by the government +Government will hold more of a long-run view then shareholders +Government will consider externalities and inequality +Government will provide a minimum level of service, not being profit motivated +Government should control key national assets for security -Will be x-inefficient and can lead to opportunity cost -Nationalised industries suffer from the principal agent problem -Government may not have the funds to properly invest -NHS suffers from lack of funding, lack of uncertainty (different governments) and a lack of competition

Answer 83

Prices: -Government can force businesses with monopoly power to cap prices -This is useful for essential utilities, such as electricity, gas and water -However, low prices might force businesses out, reducing choice Profit: -Businesses will be limited in profits, due to being limited in price -Therefore firms will have to cut costs to maintain profits -Firms may be forced to reinvest profits Efficiency: -As quality standards are set, reductions in cost will have to come from efficiency -Firms may increase productive efficiency as they aim to lower costs -Firms may also become more allocatively efficient, forced to produce at AR = MC

Answer 84

-As governments set minimum quality standards, firms must meet these or be punished -Therefore acceptable standards are likely to be maintained -Quality may be lowered as the government is x-inefficient -By limiting monopoly power/barriers to entry, government creates choice and markets become more contestable -However, nationalisation will lead to reduced choice

Answer 85

-Regulatory capture occurs when an organisation set up to protect the interests of the public instead defends the interests of the industry -Government failure occurs, as businesses are organised to negate government policy -Businesses will invest in market research, leaning how to play the system -Vodafone negotiated a tax reduction from £7billion to £1billion in 2010 -Asymmetric information might occur where the government makes poor decisions -Industries may provide inaccurate or limited information to their regulator -Regulators have to use the information provided by firms, so the wrong measures will be set -Government information can be inaccurate, due to poor research or future fails -This'll deliver the wrong signals to markets, meaning decision making is flawed