Theme 3: Business Behaviour and the Labour Market Flashcards

Question

What is a demerger

Answer 1

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

Answer 2

● **Lack of synergies** : managers are splitting their time between areas which are so different it could lead to diseconomies of scale ● Value of the company/share price: e the value of the separate parts of the company is worth more than the company combined. ● Focused companies: . By focusing on one area, managers can improve their skills and knowledge and become more successful.

Answer 3

firms may need their own managers and leaders so people could get a promotion. However, the goal of making the firm more efficient may result in job losses.

Answer 4

a smaller core business may enable it to be more efficient and then lead to more innovation and surviving higher competition. However, the smaller size of the business could lead to a loss of economies of scale and access to finance

Answer 5

may gain from innovation and efficiency, leading to better products and cheaper prices . demerged firms may be less efficient through loss of economies of scale or raise prices/reduce quality or range of goods as they become motivated by profits.

Answer 6

● Neo-classical economics assumes that the interests of owners or shareholders are the most important and therefore the goal of firms is to profit maximise ● This is at MC=MR

Answer 7

● Baumol suggested managers are most interested in their level of revenue since this is what their salary depended on. ● Revenue maximisation is at MR=0

Answer 8

● Robin Marris suggested that managers aim to maximise the growth of their company above any other objective. ● Size is often linked to security ● Growth will also increase market share, and may push other firms out of business * Sales maximisation is AC=AR

Answer 9

In the real world it is not so easy to know exactly your marginal revenue and marginal cost of last goods sold. Many firms may have to seek profit maximisation through trial and error. It is difficult to isolate the effect of changing price on demand. Demand may change due to many other factors apart from price. Firms may also have other objectives and considerations.

Answer 10

Revenue is the money earned from the sale of goods and services

Answer 11

● Total revenue (TR): The total amount of money coming into the business through the sale of goods and services. quantity x price

Answer 12

Average revenue (AR): Demand is equal to AR: total revenue/output

Answer 13

Marginal revenue (MR): The extra revenue that the firm earns from selling one more unit of production: total revenue from ‘N’ goods- total revenue from (N-1) goods OR change in total revenue change in output

Answer 14

price received by the firm for the good is constant and so MR=AR=D. Their demand curve is horizontal. The TR curve is upward sloping because prices are constant and so the more goods that are sold, the higher the revenue made.

Answer 15

D = AR MR is 1/2 of Gradient of AR and TR is dependent on MR elasticity ● If marginal revenue is positive , when the firm sells the product at a lower price (or when they increase output), total revenue still grows and so the demand curve is elastic. ● If MR is negative , TR decreases as price decreases (or output increases) and so the demand curve is inelastic. After output Q, the demand curve is inelastic. ● When MR=0, TR is maximised and the demand curve is unitary elastic

Answer 16

Seasonality refers to fluctuations in output and sales revenue related to the seasonal of the year. For most products there will be seasonal peaks and troughs in production and/or sales

Answer 17

Business expense that does not vary directly with the level of output Examples: * Business insurance * Consulting fees Rental fees

Answer 18

costs that relate directly to the production or sale of a product Examples: Energy and fuel costs Component parts Packaging costs

Answer 19

● Total cost (TC): The cost of producing a given level of output: fixed + variable costs ● Total fixed cost (TFC) : Costs that do not change with output and remain constant e.g. rent, machinery ● Total variable cost (TVC): Costs that change directly with output e.g. materials

Answer 20

● Average (total) cost (ATC): total costs/ output ● Average fixed cost (AFC): total fixed cost/ output ● Average variable cost (AVC): total variable cost /output

Answer 21

Marginal cost (MC): The extra cost of producing one extra unit of a good

Answer 22

The short run is the length of time when at least one factor of production is fixed and cannot be changed; this varies massively with different types of production. The long run is when all factors of production become variable.

Answer 23

● Diminishing marginal productivity means that if a variable factor is increased when another factor is fixed there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit. ● Marginal output will decrease as more inputs are added in the short run. This will mean that the marginal cost of production will rise.

Answer 24

● The average fixed cost curve (AFC) starts high because the whole fixed costs are being divided by a small output. As output is increased, AFC falls as the same amount is divided by a larger number.

Answer 25

● The average total cost curve (AC/ATC) is U-Shaped due to the law of diminishing marginal productivity. Costs initially fall as machinery is used more efficiently but as production continues to expand, efficiency falls as machinery is overused.

Answer 26

The average variable cost curve (AVC) is also U-Shaped, but it gets closer to ATC as output increases since AFC gets smaller.

Answer 27

● The marginal cost (MC) will also be U-Shaped due to the law of diminishing marginal productivity. It will initially fall as the machines are used more efficiently but will rise as production continues to rise

Answer 28

The marginal cost line will always cut the AC line at the lowest point on the AC curve if MC is below AC, then AC will continue to fall since producing one more costs less than the average so the average falls; but if MC is above AC, then AC will rise. Marginal costs can be rising whilst AC is still falling, as long as MC is still below AC.

Answer 29

Short run average cost (SRAC) curves because of the **law of diminishing returns** Log run average cost (LRAC) curves because of **economies and diseconomies of scale.**

Answer 30

LRAC is the envelope ffor all associated SRAC curves because the LRAC is either equal to or below the relevant SRAC

Answer 31

Short run curves get diminishing marginal returns as some factors fixed Long run curves all factors become variable and so the SRAC curve can be shifted, new SRAC curve will be lower since the firm can have economies of scale This continues until the firm experiences constant returns to scale and eventually diseconomies of scale

Answer 32

The long run average cost curve is a boundary representing the minimum level of average costs attainable at any given level of output. Points below the LRAC are unattainable and producing above the LRAC is inefficient.

Answer 33

The long run average cost curve is a boundary representing the minimum level of average costs attainable at any given level of output. Points below the LRAC are unattainable and producing above the LRAC is inefficient.

Answer 34

**Movement along the LRAC **is due to a change in output which changes the average cost of production **due to internal economies/diseconomies of scale**. **A shift can occur due to external economies/diseconomies**, taxes or technology, which affects the cost of production for a given level of output.

Answer 35

* the minimum level of output needed for a business to fully exploit economies of scale. It is the point where the LRAC curve first levels off and when constant returns to scale is first met.

Answer 36

Economies of scale are the advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business

Answer 37

the disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise

Answer 38

firms increase inputs and receive an increase in output by the same percentage

Answer 39

an advantage that a firm is able to enjoy because of a growth in the firm, independent of anything happening to other firms or the industry in general.

Answer 40

* Technical Economies * Financial Economies * Risk Bearing Economies * Managerial Economies * Marketing and purchasing economies

Answer 41

* Economies that arise from improvements in the production process 1. Specialisation 2. Increased dimensiones; if you double the size of a container you increase the amount it can carry by more than double 3. Indivisibilty of Capital; spme processes require huge capital 4. Research and Development

Answer 42

● Large firms have greater security because they have more assets so it is easier for them to obtain finance and interest rates will be lower due to lower risk. This makes investment more accessible.

Answer 43

● Large companies are able to operate in a range of different markets, producing different products which means that if one area of business fails, their whole business will not collapse.

Answer 44

● Large companies can afford to appoint specialist managers in every field, who are specialised and so have greater knowledge and are able to do their job better. Staff represent an indivisibility and so small firms cannot employ specialist staff.

Answer 45

● **Buying in bulk** ● **Specialisation**: Like other areas, businesses can afford to take on specialist buyers and sellers who could be more efficient due to the extra time and knowledge. ●**Distribution**: Large firms are able to enjoy preferential rates from transport companies because they offer the company a lot of businesses.

Answer 46

an advantage which arises from the growth of the industry within which the firm operates, independent to the firm itself. These cause the LRAC curve to shift downwards.

Answer 47

* Labour * Support Services * Subsidies Cluster effect Transport links Supportive legislation

Answer 48

● Businesses established in an area with other successful firms from the same industry find that labour tends to come to that area if they want a job in that industry, for example Silicon Valley. This reduces the cost and time take to recruit. ● Another advantage for large industries is that local education and training providers are more likely to develop courses to prepare people to take up jobs in these businesses. ● Firms will be able to hire staff who have been trained by other businesses , which is cheaper and more efficient for the firm than training the workers themselves.

Answer 49

● Businesses who provide products or services for large businesses will naturally move to the area where those businesses are based, which reduces transport cost/time delays for the business.

Answer 50

1. Workers 2. Geography 3. Change 4. Price of materials 5. Management

Answer 51

* In a large business, people can think their efforts go unnoticed and have less chance of promotion so lose motivation and work less hard. * They can also lose their sense of belonging and have less personal commitment and identification with the business.

Answer 52

● A firm may have to transport finished products huge distances and firms may find it harder to control parts of the business which is miles away.

Answer 53

● It takes much longer and is much more difficult for a large firm to respond to change.

Answer 54

● an increase in demand can cause prices to rise and therefore increase production costs. This could also occur if the whole industry increases and so firms bid up prices.

Answer 55

● Coordination and control: As a business grows, it will become progressively more difficult to coordinate and keep control of all the different parts of the business. ● Communication: Within a large business, communication can be slow and also can lose accuracy

Answer 56

* Industry experience reduces LRAC ○ Workers may become more adapt and Managers schedule the production process more effectively.

Answer 57

Businesses in similar industries tend to cluster together and attract an influx of skilled talent which then provides human capital to expanding businesses.

Answer 58

Economies of scope happen when it is cheaper to produce a range of products rather than specialize in a limited number……Amazon

Answer 59

* The nature of production / technology requirements will influence the size of MES relative to market demand * Economies of scale may run out at a certain point but constant returns to scale means that unit cost will be stable * Many economies depend on businesses achieving a high rate of capacity utilisation – this lowers the fixed cost per unit

Answer 60

* Profit is maximised when TR and TC are furthest apart (TR>TC) * Also occurs at **MC=MR**

Answer 61

Sometimes, MR and MC may cross at two points and thus the profit maximising point is where marginal cost rises as it crosses the MR line.

Answer 62

● Normal profit is the return that is sufficient to keep the factors of production committed to the business . In economics, costs include the level of profit needed to keep the producer in the market and to cover the opportunity cost. Therefore, if the firm covers its costs it earns normal profit. This is at the point where** AC=AR or TC=TR. **

Answer 63

When AVC>AR as producing more goods will increase the loss If AVC

Answer 64

Firm must make at least normal profits of AC=AR (also cover fixed costs)

Answer 65

AVC=AR (don't need to cover fixed costs in short run)

Answer 66

* AVC cost is only C2 so AR>AVC so can produce in SR * IN LR needs AC=AR so will have to shut down

Answer 67

* In the real world it is more difficult to maximise profits because firms do not have access to costs and MR data easily; ends up being prediction * Principle agent problem; profit satisficing * ESG considerations, other strategies

Answer 68

* The firm may not close down at price of less than shutdown * if they expect the** fall in demand to be temporary** and they are hopeful they can cut costs. A firm will try to avoid shutting down because it will lose market share and long term customers

Answer 69

* Market Share * Brand Image * Competition * Costs * Exchange rate * Economic Growth

Answer 70

When resources are allocated to the best interests of society, when there is maximum social welfare and maximum utility; P=MC

Answer 71

Where one party has more information than the other, leading to market failure and causing problems for regulators

Answer 72

The cost of production per unit total costs/ quantity produced

Answer 73

The price each unit is sold for TR/quantity sold

Answer 74

Where there is only one buyer and one seller in the market

Answer 75

A formal collusive agreement where firms enter into an agreement to mutually set prices

Answer 76

Occurs when firms agree to work together, for example by setting a price or fixing the quantity they produce

Answer 77

Government action to increase competition in markets

Answer 78

When the government contracts out the provision of a good or service and invites firms to bid for the contract

Answer 79

The merger of firms with no common connection

Answer 80

Output increases by the same proportion that the inputs increase by

Answer 81

When there is the threat of new entrants into the market, forcing firms to be efficient

Answer 82

An increase in inputs by a certain proportion will lead to output increasing by a smaller proportion

Answer 83

A single business is broken into two or more businesses to operate on their own, to be sold or to be dissolved

Answer 84

The removal of legal barriers to allow private enterprises to compete in a previously protected market

Answer 85

The demand for one good is linked to the demand for a related good

Answer 86

If a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit; after a certain point, marginal output falls

Answer 87

The disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise

Answer 88

Firms are owned by shareholders, who have little say in the day to day running of the business, and controlled by managers; this leads to the principal-agent problem

Answer 89

Efficiency in the long run; concerned with new technology and increases in productivity which causes efficiency to increase over a period of time

Answer 90

The advantages of large scale production that enable a large business to produce at a lower average cost than a smaller business

Answer 91

An advantage which arises from the growth of the industry within which the firm operates, independent of the firm itself

Answer 92

constant costs whatever the amount of goods produced

Answer 93

A business whose main aim is to make money

Answer 94

Used to predict the outcome of a decision made by one firm, when it has incomplete information about the other firm

Answer 95

The ease and speed at which labour can move from one area to another

Answer 96

The merger of firms in the same industry at the same stage of production

Answer 97

An increase in inputs by a certain proportion will lead to an increase in output by a larger proportion

Answer 98

The actions of one firm directly affects another firm

Answer 99

An advantage that a firm is able to enjoy because of growth in the firm, independent of anything happening to other firms or the industry in general

Answer 100

When firms set prices low in order to prevent new entrants; used in contestable markets

Answer 101

When revenue does not cover costs

Answer 102

The additional cost of producing one extra unit of good

Answer 103

The additional revenue gained by selling one extra unit of good

Answer 104

A ceiling wage which people cannot earn above

Answer 105

The lowest level of output necessary to fully exploit economies of scale

Answer 106

A floor wage which people cannot earn below

Answer 107

Where there are a large number of buyers and sellers who are relatively small and act independently, selling non-homogeneous goods

Answer 108

A single seller in the market

Answer 109

A single buyer in the market

Answer 110

The percentage of market share held by the ‘n’ biggest firms

Answer 111

When a private sector company or industry is brought under state control, to be owned and managed by the government

Answer 112

Where economies of scale are so large that not even a single producer is able to fully exploit them; it is more efficient for there to be a monopoly than many sellers

Answer 113

When firms in an oligopoly compete against each other, rather than making agreements to reduce competition

Answer 114

When firms compete on factors other than price, for example customer service or quality; they aim to increase the loyalty to the brand which makes demand more inelastic

Answer 115

The minimum reward required to keep entrepreneurs supplying their enterprise, the return sufficient to keep the factors of production committed to the business; TC=TR

Answer 116

Where firms are run in order to maximise social welfare and help individuals and groups; any profit they do make is used to support their aims

Answer 117

The ease and speed at which labour can move from one type of job to another

Answer 118

Where a few firms dominate the market and have the majority of market share, they act interdependently

Answer 119

Where firms grow by increasing their output

Answer 120

Collusion where firms come to a formal agreement, for example a cartel

Answer 121

A market with many buyers and sellers selling homogenous goods with perfect information and freedom of entry and exit

Answer 122

A market with no barriers to entry, where a new firm can easily enter and compete against incumbent firms completely equally

Answer 123

When a large, established firm is threatened by new entrants so sets such a low price that other firms make losses and are driven out the market

Answer 124

Where one firm sets prices and other firms tend to follow this firm as they are fearful of engaging in a price war

Answer 125

Where firms continuously drive prices down to the point where they are frequently making losses and firms are forced to leave

Answer 126

Where the agent makes decisions on behalf of the principal; the agent should maximise the benefits of the principal but have the temptation of maximising their own benefits

Answer 127

The part of the economy that is owned and run by individuals or groups of individuals

Answer 128

The sale of government equity in nationalised industries or other firms to private investors

Answer 129

When resources are used to give the maximum possible output at the lowest possible cost; MC=AC

Answer 130

When firms produce at a point which derives the greatest profit; MC=MR

Answer 131

When a firm earn just enough profit to keep its shareholders happy

Answer 132

The part of the economy that is owned or controlled by local or central government

Answer 133

When regulators become more empathetic and are able to ‘see things from the firm’s perspective’, which removes impartiality and weakens their ability to regulate

Answer 134

When firms produce at a point which derives the greatest revenue; MR=0

Answer 135

When firms produce at a point where they sell as many of their goods and services as possible without making a loss; AR=AC

Answer 136

The level of efficiency at one point in time

Answer 137

Costs that cannot be recovered once they have been spent

Answer 138

The profit above normal profit, TR>TC

Answer 139

Collusion where there is no formal agreement, such as price leadership

Answer 140

When monopolists charge different prices to different groups for the same good or service

Answer 141

The cost to produce a given level of output total variable costs+total fixed costs

Answer 142

Revenue generated from the sale of a given level of output price x quantity sold

Answer 143

Costs which change with output

Answer 144

When a firm merges or takes over another firm in the same industry, but at a different stage of production

Answer 145

when the value to society from consumption is equal to the marginal cost of production, where P=MC.

Answer 146

firms produce at the bottom of the AC curve, in the short run this is where MC=AC, has to be **technically efficient**

Answer 147

his is achieved when resources are allocated efficiently over time. It is concerned with investment,will be achieved in markets where competition encourages innovation but where there are differences in products and copyright/patent laws. Supernormal profit is required to provide firms with the incentive to invest and the ability to do so.

Answer 148

oncerned with the most efficient combination of existing resources at a given point in time. Allocative + prod effieiencies

Answer 149

If a firm fails to minimise its average costs at a given level of output, it is X-inefficient and there is organisational slack. It often occurs where there is a lack of competition so firms have little incentive to cut costs.

Answer 150

* Cost Reducing Innovation * Creative Destruction

Answer 151

*** Product innovation** ○ Small-scale and frequent subtle changes to the characteristics and performance of a good or a service *** Process innovation** ○ Changes to the way in which production takes place or is organised ○ Changes in business models and pricing strategies Innovation has demand and supply-side effects in markets and the economy as a whole

Answer 152

* The socially efficient level of output and/or consumption occurs when **marginal social benefit (MSB) = marginal social cost (MSC)**

Answer 153

* The monopolist will seek to extract a price from consumers above the cost of resources used in making the product. Higher prices mean that consumers’ needs and wants are not being satisfied, as the product is being under-consumed. Higher prices cause a **loss of consumer surplus & welfare** and will **disproportionately affect lower income families**.

Answer 154

* Allocative efficiency: In both the short and long run, price is equal to marginal cost (P=MC) * Productive efficiency: in the long run so static efficiency Dynamic efficiency: no room to innovate because homogeneity or enough for R+D ● Competition should keep costs, and therefore prices, low. However, firms will be unable to benefit from economies of scale and this may mean costs are higher than they otherwise could be.

Answer 155

1. Prices are above marginal cost – meaning that the equilibrium is **not allocatively efficient** 2. Saturation of the market may lead to businesses being unable to exploit fully economies of scale - causing average cost to be higher – therefore **not productively efficient** 4. Debate over the social costs of packaging and negative externalities is linked to monopolistic competition Monopolistic competition associated with extensive consumer choice and innovation – **good for dynamic efficiency**

Answer 156

* Economies of scale from horizontal integration (productive efficiency) * Higher supernormal profits leads to increased R&D spending and more innovation (dynamic efficiency) Firms with monopoly power still face competition in contestable markets (allocatively efficient prices)

Answer 157

* Increased market power can lead to X-inefficiency (managerial slack, waste) * Risks of diseconomies of scale (rising long run AC) * Many takeovers fail to achieve forecast cost gains Growing number of de-mergers points to limited impact of takeovers on overall economic efficiency

Answer 158

* Prices are higher than under competitive conditions Leads to a **loss of allocative efficiency** (price > MC) **Regressive effects **on lower-income households * Absence of genuine market competition may lead to **production inefficiencies** ○ **X-Inefficiencies** such as wasteful production and advertising spending ○ Higher prices can limit the final output in a market and lead to **fewer economies of scale being exploited** * Protected markets – perhaps less drive to innovate Monopoly may get too big – diseconomies of scale

Answer 159

High market concentration does not always signal absence of competition; can reflect the success of firms in providing better-quality products, more efficiently, than their rivals. 1. Profits used to fund **investment & research** 2. Natural monopoly – economies of scale 3. Domestic monopoly faces global competition 4. Monopolistic firms can be **regulated** – i.e. industry regulator acting as a proxy consumer 5. Price discrimination may help some consumers (cross-subsidisation)

Answer 160

· Schumpeter argued that firms have a **very real incentive** to invest in R and D, · He stated that firms would **fear Creative Destruction**. Where new firms enter the market with technological advancement a force out existing firms. Incumbents fear this. * They invest therefore in R and D and this is likely to come in the **form of the product/process. **

Answer 161

· Scarce resources are effectively allocated to meet consumer needs and wants. · Consumers **utility is met/improved** and although consumers may face higher prices one could argue this level of product development and meeting the consumers’ needs is not possible in a competitive market due the absence of abnormal profit in the long run.

Answer 162

Investment in production-invention or innovation. Investment in process is an example of technological EOS and the impact of tech improvement will drive down average and marginal cost. This can be shown. (see diagram)

Answer 163

1.There must be many buyers and sellers. This means that **no one will be able to influence the market** 2. **freedom of entry and exit** from the industry 3. There must be** perfect knowledge** 4. **Homogenous products**

Answer 164

when a business is making profits anyone can enter that market and start producing that product for themselves. As a result, business are **unable to make SNP in the long run** and **if they are making losses they are able to leave**. In the **long run, they make normal profits**.

Answer 165

This enables firms to know when other firms are making profits which will attract them to join the market. Moreover, all firms have the same costs as they can use the same production techniques. It also means that any attempt to raise prices above the level determined by the market will lead to no sales, as customers will be aware they can buy the same good for a lower price and firms know there is no point lowering the price as they will sell all their goods at the higher price determined by the market.

Answer 166

it means if a firm raises it price above the competitors’ no one will buy it and they will not gain from lowering their price because they can sell all of your product at the same price as everyone else.

Answer 167

Firms are assumed to short run profit maximise and so the firm will produce at MC=MR. In the short run, it is possible for the firm to make a normal profit, a supernormal profit or a loss

Answer 168

Only normal profits :0

Answer 169

SR SNP signals to other firms to enter the market (perfect competition + no barriers) so they enter causing a shift out in supply of the industry so firms have to sell at a lower and lower price (price-taker) until SNP disappears

Answer 170

PC firms will know they are making a loss and leave to produce their opportunity cost (no barriers to exit). This causes a shift in of supply in the firm causing firms to increase their price ( price taker ) until there is no loss and normal profit is left

Answer 171

The market (s+d diagram) because firms are price takers

Answer 172

1. Most firms have **some amount of price-setting power** – they are price makers not price takers! 2. Dominance in real world markets of **differentiated / branded products** 3. Highly complex products, there **always information gaps** facing consumers 4. Impossible to avoid search costs even with the spread of digital/web technology 5. Patents, control of intellectual property, control of key inputs are all ignored by the competitive model 6. Rare for entry and exit in an industry to be costless

Answer 173

● There must be a **large number of small, independent buyers** so no one buyer or seller has a large price setting power. ● There are **no barriers to entry or exit** ● The difference is that in monopolistic competition firms produce **differentiated, non-homogenous goods** or services. * The entrepreneur has a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision making.

Answer 174

Firms are assumed to be short run profit maximisers As a result, they produce Q1 at MC=MR and make a supernormal profit

Answer 175

new firms will enter the industry as they know that supernormal profits are being earnt. This will cause demand for the individual firm to decrease and therefore the AR and MR curves will shift to the lift and so the firm is making normal profits. If the firm was making a loss, firms would leave the industry and thus demand for the individual firm would increase as they had less competition. This would lead to normal profits in the long run.

Answer 176

* that information may be imperfect and so firms will not enter the market as predicted as they are unaware of the existence of abnormal profits. * firms are likely to be different in their size and cost structure as well as in their products, which may allow some firms to maintain supernormal profits because firms cannot compete on equal terms.

Answer 177

● Since they can only make normal profit in the long run, AC=AR and since they profit maximise, MR=MC. Therefore, the firm will not be allocatively or productively efficient, as MR does not equal AR so AC cannot equal MC and AC cannot equal MR. ● They are** likely to be dynamically efficient** since there are differentiated products and so know that innovative products will give them an edge over their competitors and enable them to make supernormal profits in the short run. However, since the firms are small they may struggle to receive finance or have the retained profits necessary to invest. ● In monopolistic competition compared to perfect competition, less is sold at a higher price and firms may not necessarily be producing at the lowest cost. However, the market will offer greater variety and may be able to enjoy some degree of economies of scale.

Answer 178

· There are no significant barriers to entry; therefore markets are **relatively contestable**. · Differentiation creates diversity, choice and utility. The market is more efficient than monopoly but less efficient than perfect competition - less allocatively and less productively efficient.

Answer 179

· Some differentiation does not create utility but generates unnecessary waste, such as excess packaging. Advertising may also be considered wasteful, though most is informative rather than persuasive. · there is **allocative inefficiency** in both the long and short run. This is because price is above marginal cost in both cases. In the long run the firm is less allocatively inefficient, but it is still inefficient. There may be a lack of dynamic efficiency in the long run due to the absence of long run abnormal profit

Answer 180

* There is a tendency for excess capacity because firms can never fully exploit their fixed factors because mass production is difficult. This means they are productively inefficient in both the long and short run.

Answer 181

* products are generally differentiated * supply in the industry must be concentrated in the hands of a relatively small number of firms * firms must be interdependent so the actions of one firm will directly affect another * there are barriers to entry.

Answer 182

· At P1 if one firm increased their price, other firms would not follow suits. Consumers would buy from the other firms therefore the firms raising price would face a PED elastic response on the AR curve would lose a large share of the market, revenue and likely profit · If one firms cut price then they could gain a big increase in market share, however it is unlikely that firms will allow this. Therefore, other firms follow suit and cut price as well. Therefore demand will only increase by a small amount: Demand is inelastic for a price cut and revenue would fall for all firms · This model suggests price will be rigid because there is no incentive for firms to change the price, they are risk averse.

Answer 183

* It assumes there is an intial price set * It does explain why prices tend to be stable

Answer 184

total sales of n firms x100 /total size of market

Answer 185

* Collusion is when firms make collective agreements that reduce competition . * When firms don’t collude, this is a competitive oligopoly.

Answer 186

● if they work together, they could maximise industry profits. ● Collusion reduces the uncertainty firms face and reduces the fear of engaging in competitive price cutting or advertising, which will reduce industry profits.

Answer 187

● collusion is illegal and due to the risks of collusion , such as other firms breaking the cartel or prices being set where they don’t want it. ● A firm with a strong business model and something that sets it apart from other firms will not want to collude if they feel they can increase market share and/or charge higher prices than competitors.

Answer 188

there are a few firms which are all well known to each other the firms are not secretive about costs and production methods and the costs and production methods are similar they produce similar products there is a dominant firm which the others are happy to follow the market is relatively stable; and there are high barriers to entry.

Answer 189

overt and tacit collusion. Overt collusion is when firms come to a formal agreement whilst tacit collusion means there is no formal agreement.

Answer 190

A formal collusive agreement is called a cartel, which is a group of firms who enter into agreement to mutually set prices. The rules will be laid out in a formal document which may be legally enforced and fines will be charged for firms who break these rules.

Answer 191

1) agree on a price for the goods and then compete freely using non-price competition to maximise their market share 2) agree to divide up the market according to the present market share of each business.

Answer 192

● there is constant temptation to break the cartel. The more successful the cartel, the greater the incentive to break it; it is important for firms to be the first to break it and not the firm who is left to deal with the after effects. ● Since collusion is illegal, firms may be involved in tacit collusion such as price leadership and barometric firm.

Answer 193

Price leadership is where one firm has advantages due to its size or costs and becomes the dominant firm to set the price Other firms will tend to follow this firm because they would be fearful of taking on the firm on in any form of price war.

Answer 194

● Barometric firm price leadership is where a firm develops a reputation for being good at predicting the next move in the industry and other firms decide to follow their leader.

Answer 195

1. **MaxiMin** Policy - firms working out the strategy where the worst possible outcome is the least bad (minimising losses) 2. **MaxiMax** Policy - firms working out the policy with the best possible outcome.

Answer 196

**Dominant Strategy**

Answer 197

where neither player is able to improve their position and has optimised their outcome based on the other players expected decision. They have no incentive to change behaviour, unless someone else changes theirs.

Answer 198

1. Price Wars 2. Predatory Pricing 3. Limit Pricing

Answer 199

● These occur in markets where non-price competition is weak ; where goods have weak brands and consumers are price conscious. They also occur when it is difficult to collude. ● A price war will drive prices down to levels where firms are frequently making losses. In the short term, firms will continue to produce if their AVC is below AR but in the long run, they will leave the market and prices will have to rise since supply falls. ● It lowers industry profits.

Answer 200

●Threat of Competition means Firms sets such a lower price so firms are unable to make a profit ● This is illegal and only works when one firm is large enough to be able to have low prices and sustain losses.

Answer 201

● In order to prevent new entrants, firms will set prices at AC=AR to ensure normal profits ● The greater the barriers to entry, the higher the limit price. It is mainly used in contestable markets. ● The drawback of this is that it means firms cannot make profits as high as they would be otherwise be able to.

Answer 202

Firms add on a percentage increase to their average costs; doesn't consider the market

Answer 203

Firms utilising non-rounded prices to given an impression that the price is cheaper than it is

Answer 204

Firms follow pricing set by other firms; ignores cost

Answer 205

new products can have high prices to cover R+D and supress demand This can be lowered over time

Answer 206

New products at low price so people get used to it and gain brand loyaly so firm can increase price e,g, BOLT (opposite of price skimming)

Answer 207

1. **Advertising/ Branding**; lower PED 2. **Loyalty Cards** 3. **Quality** 4. **Customer Service** 5. **R+D**

Answer 208

They are often expensive and so firms need the money before they are able to undertake the competition

Answer 209

● Firms will be statically inefficient, since they are not productively or allocative efficient. ● They are likely to be dynamically efficient; SNP + threat of comeptition incentivies DE ● They will be able to exploit economies of scale, lowering costs.

Answer 210

1) Damages consumer welfare ○ Higher prices / lost consumer surplus ○ Loss of allocative efficiency ○ Hits lower income families – i.e. has a regressive impact lack of choice due to high conc. 2) Absence of competition hits efficiency ○ X-inefficiencies leads to higher unit costs ○ Less incentive to innovate / loss of dynamic efficiency * Output quotas penalise firms who want to expand 3) Reinforces the cartel’s monopoly power Harder for new businesses to enter the market – this reduces market contestability

Answer 211

* Period of relative **price stability** * A reduction of some of the wasteful costs of advertising and marketing if producers co-operate rather than compete with each-other * **Guaranteed supply** from the producer cartel

Answer 212

* Producer cartels may be successful in raising the price of exported commodities ○ May help to fund **higher levels of capital investment** Boost to export revenues for countries with a high dependency on exports of primary commodities

Answer 213

As long as the Firms MC curve lies in this area MC=MR this will be the best strategy for the individual firm

Answer 214

· No explanation of how the original price was arrived at. · The theory only deals with price competition not non price competition · It ignores certain practices such as interest free credit · In a recession competition may increase

Answer 215

· No explanation of how the original price was arrived at. · The theory only deals with price competition not non price competition · It ignores certain practices such as interest free credit · In a recession competition may increase

Answer 216

· Barriers to entry are high · Govt regulation is weak · Demand is stable Price and output are easily monitored

Answer 217

using the formula: total sales of N firms / total size of market

Answer 218

The CMA is now the UK’s key competition regulator, combining the competition elements of the OFT and Competition commission. * Investigate mergers which could restrict competition where there may be breaches of UK or EU law against anti-competitive agreements and abuses of dominant positions * Bring criminal proceedings against individuals who commit a cartel offence * Cooperate with sector regulators (such as Ofcom) and encouraging them to use their competition powers considering regulatory references and appeals

Answer 219

where the regulator is captured or hijacked by the regulated. the regulated develop a deep understanding of the details of the regulation and can learn how to ‘play the system’ OR increased exposure of regulators to the regulated encourages them to ‘see things from their perspective’

Answer 220

Aug 2015: Pfizer and a UK company called Flynn Pharma found to have charged “excessive and unfair prices” for an anti-epilepsy drug — phenytoin sodium — inflating the annual NHS drugs bill by tens of millions of pounds

Answer 221

RBS admitted that staff involved in making loans to big law and accounting firms had illegally given pricing data to corresponding staff at Barclays. ** RBS fined £28 million** **No action is to be taken against Barclays, **as a reward for having acted as an informant within the industry, voluntarily disclosing its part in the affair to the competition authorities.

Answer 222

* Overt is illegal and a fomal agreement * Tacit is legally grey and an unwritten agreement

Answer 223

· Price leadership where the dominant firm in the industry changes its prices and all others follow · Firms monitoring each others behaviour closely and** unwritten rules developing**. Eg all following certain principles · Barometric price leadership

Answer 224

· Firms working together, perhaps even encouraged by the government. · There could be significant benefits to society of such sharing of info and ideas. (+externalities of improved medical treatments) · There is a danger though that collusion may be the result and also monopoly power

Answer 225

* Monopsony pricing – where retailers collude to reduce the amount paid to suppliers. * Collusion between existing firms in an industry to exclude new firms from deals * Sticking to output quotas and higher prices. * Collusive tendering. For example, ‘cover prices’ for competitive tendering in bidding for public construction contracts.

Answer 226

collusion may be a way to try to save the industry and prevent firms from going out of business, which would not be in the long-term consumer interest. Dairy suppliers tried to use this justification in 2002/03 after problems from foot and mouth disease led to a decline in farm incomes.

Answer 227

Firms would decide which contracts they wanted, and rivals would bid purposefully high price. This is a practice known as “Cover pricing”. Successful companies would often reward rivals with a secret payment for avoiding competition. During the investigation, the OFT found 199 offences where the 103 companies artificially inflated £200m worth of work. Companies were fined a total of £129.5m by the OFT.

Answer 228

90% market share in the hands of just four supermarkets so farmers are presssured by extreme barganing power meant farmers’ margins have been squeezed Regulators have failed to curb this excessive power. In the long term, consumers will be worse off through less choice and innovation in products, less efficiency and productivity

Answer 229

● In order to prevent new entrants, firms will set prices low (the limit price). The price needs to be high enough for them to make at least normal profit but low enough to discourage any other firm from entering the market. ● The greater the barriers to entry, the higher the limit price. It is mainly used in contestable markets. ● The drawback of this is that it means firms cannot make profits as high as they would be otherwise be able to.

Answer 230

Bank lobbyists are seeking to water down a new Financial Accountability Regime proposed by Australia’s Treasury, which includes A$1m fine for executives who breach accountability obligations.

Answer 231

Federation of Quebec Maple Syrup Producers (FPAQ) produce 70% of world supply of maple insist that the majority of members benefit from quotas, a 2016 study by the independent Montreal Economic Institute disagreed. Quebec sold 78% of the world’s maple syrup, that percentage has already fallen to 69% due to it giving price stability to it's competitors

Answer 232

many suppliers lacked the financial resilience to deal with the six-fold increase in wholesale prices seen last year, the NAO said. "By allowing so many suppliers with weak finances to enter the market, and by failing to imagine that there could be a long period of volatility in energy prices, Ofgem allowed a market to develop that was vulnerable to large-scale shocks," said Gareth Davies, head of the NAO.

Answer 233

a single supplier that dominates the entire market – the market has 100% concentration

Answer 234

A working monopoly is any firm with greater than 25% of the industries' total sales

Answer 235

A dominant firm is a firm that has at least 40% market share

Answer 236

This is when monopolists charge different prices to different people for the same good or service

Answer 237

1. the firm must be able to clearly separate the market into groups of buyers 2. the customers must have different elasticities of demand 3. they must be able to control supply and prevent resale

Answer 238

The diagram shows the seperate markets for separate groups: those with inelastic demand and those with elastic demand. Assumption of constant cost This shows that by price discriminating and having two separate markets, the inelastic market and the elastic market, rather than a combined market, the firm can make higher profits. The orange area plus the purple area is larger than the yellow area.

Answer 239

The diagram shows the seperate markets for separate groups: those with inelastic demand and those with elastic demand. Assumption of constant cost This shows that by price discriminating and having two separate markets, the inelastic market and the elastic market, rather than a combined market, the firm can make higher profits. The orange area plus the purple area is larger than the yellow area.

Answer 240

the economies of scale are so large that even a single producer is not able to fully exploit all of them (decreasing cost industries) when the most efficient number of firms in the industry is one. A natural monopoly will typically have very high fixed costs meaning that it is impractical to have more than one firm producing the good.

Answer 241

It would be pointless to encourage competition since it would raise average costs for the industry. If any new firm enters the market, they will be easily priced out as their costs will be so much higher. ● Natural monopolies tend to be found in industries with very high fixed costs , such as railways.

Answer 242

● Monopolists have the **potential to make huge profits for their shareholders** through profit maximisation. ● The existence of supernormal profits so **finance for investments** and will be able to build up reserves to overcome short term difficulties. ● Large firms will be able to **maximise economies of scale**, reducing costs and increasing profit further. ● However, firms may not always choose to profit maximise because of X-inefficiencies, sales or revenue maximising, profit satisficing or contestability leading to limit pricing. In the long run, the lack of competition may mean that firms become complacent and so they may not make maximum profits.

Answer 243

● Monopolists produce at lower outputs, so will employ fewer workers. ● However, the inefficiency of the monopoly may mean employees receive higher wages, particularly directors and senior managers. Profit satisficing or sales/revenue maximising may mean output is higher and so more employees are employed.

Answer 244

depend on the extent to which the monopolist is also a monopsonist. If the monopolist buys all or most of the suppliers’ goods (so is a monopsonist), it will reduce the suppliers’ profits as the monopolist will decrease prices.

Answer 245

● With a natural monopoly, consumers tend to be better off than if there was competition. ● When firms enjoy economies of scale = higher consumer surplus ● Monopolists may produce more choice due to **cross subsidisation. ** ● The use of price discrimination will allow for survival of a product or service , and benefits some customers (those in the cheap market) whilst is negative for others. For example, it is said that economy class flights are funded by business class flights ● Consumers may pay higher prices and see a poorer quality service , due to a lack of competition. ● There is less choice for consumers, since there is only one firm producing the good.

Answer 246

● A monopoly **is productively inefficient**, since they don’t produce at MC=AC. They are also **not allocative efficient** as P>MC. ● Since a monopolist is likely to make supernormal profits, **they will be dynamically efficient**. However, if there is no competition, they may have no incentive to invest.

Answer 247

A diagram that shows the effect of a monopolist compared to perfect compeittion; assumed that industry is a constant cost where **AC=MC**

Answer 248

- As a profit maximiser the monopoly will restrict output to Q1 in order to achieve MC=MR. - Consumers suffer through a lack of choice but also high prices reducing surplus to [5,6,7]. - Producer benefits by capturing surplus from the consumer, a transfer in welfare [1,2,11,12]. Total producer surplus is now [1,2,13,14]. - The monopoly is not allocatively efficient as P≠MC, This creates a welfare loss of [8,9,10] made up of lost consumer and producer surplus. - The firm is not productively efficient it doesn’t not produce at the lowest point of the AC curve - there is likely to be a degree of x-inefficiency. This results in higher AC, higher prices and poor service. - The monopoly does not fully exploit its EoS on the graph as it does not produce at the MES point since it restricts output.

Answer 249

· lower consumper surplus and restricted choice for consumers. · Allocative and productively inefficient. · Welfare loss leads to a market failure. · Likely to be** x-inefficient **due to a lack of competition. · Not fully exploiting Economies of Scale as **not producing at the MES point**. · Protected by high barriers to entry, could lead to a **lack of dynamic efficiency** (no incentive to innovate). · They may suffer from Dis-economies of scale and higher AC. Price discrimination can lead to some consumers having to pay more than others

Answer 250

· A monopoly will be able to use its size to benefit from **Economies of Scale** so lower average costs which could be passed onto consumers. · Dynamic efficiency will benefit consumes in the long-run, more so than perfect competition. Monopolies can compete on an **international scale due to their EoS**. This benefits the economy on a macro-level with output, employment, exports, tax revenue etc. On a micro-level, in a local community suppliers and local shops benefit and there are positive externalities of employment.

Answer 251

* Firms would fear Creative Destruction, where new firms enter the market with technological advancement a force out existing firms. * They invest therefore in R and D and this is likely to come in the form of the product/process.

Answer 252

**The product:** · Scarce resources are effectively allocated to meet consumer needs and wants. · Consumers utility is **met/improved** and although consumers may face higher prices · This is to the benefit of consumers compared to competitive markets.

Answer 253

**The process:** Investment in production-invention or innovation. Investment in process is an example of technological EOS and the impact of tech improvement will **drive down average and marginal cost. **

Answer 254

3 (only need to know 3rd) This involves charging different prices for different groups of consumers for the same good or service, for reasons not associated with cost.

Answer 255

* Monopoly Power * The ability to prevent market seepage (second hand arbitrage/resale). * Ability to split the market into segments through PED. This is usually done through time or geography.

Answer 256

* Each consumer in theory is **charged the maximum** they individually are willing to pay so **extracts all consumer surplus**. * In reality, this is an unrealistic theory as consumers are unlikely to reveal their true preferences

Answer 257

* Excess capacity pricing exists when sellers try to off-load their spare output to buyers * This involves charging different prices depending upon the choices of consumer. For example quantity, time period, collecting coupons e.g. · Early Bird Discount – Creates cash flow, and ensures they can run the flight Buying in Bulk – e.g. if you buy 100 units then they are £10 each, if you buy 500 units then they are £8 each. Diagram:

Answer 258

This involves charging different prices to different groups of people

Answer 259

· **Cross Subsidisation** o This is where unprofitable routes are subsided and ran because of the profitable routes which are engaging in price discrimination. Some consumers benefit from lower prices, Some consumers have access to services which they otherwise would not be able to afford. These last minute deals are second degree price discrimination.

Answer 260

· Certain consumers will pay higher prices, due to the extraction of consumer surplus by firms. · Some groups, for example graduates travelling to work, are particularly penalised. · As monopoly power is needed for price discrimination to be possible, monopoly arguments can be used here too x-inefficiency. This leads to higher costs/inertia-consumers may suffer Dis. EOS – higher average costs, meaning higher final prices for the consumer.

Answer 261

· In first/third degree, producer surplus is increased so higher SNP · Dynamic efficiency means that barriers to entry for potential entrants to the market increase. · Economies of scale provide barriers to entry for the monopoly. Provides profits to engage in anti-competitive strategies– for example predatory pricing.

Answer 262

· Monopoly inertia · Creative destruction Dis EOS harms producers as well as consumers

Answer 263

· The key word in the question is “always”. o Price discrimination is not bad for all consumers o It is also not always good for producers, due to government regulation and monopoly inertia. · There may be an asymmetric impact between regions, some being cheaper and some more expensive. · Dynamic efficiency – does the monopoly invest in R + D, or do profits go into ‘back pocket’?

Answer 264

- As a profit maximiser the monopoly will restrict output to Q1 in order to achieve MC=MR. - Consumers suffer through a lack of choice but also high prices reducing surplus to [5,6,7]. - Producer benefits by capturing surplus from the consumer, a transfer in welfare [1,2,11,12]. Total producer surplus is now [1,2,13,14]. - The monopoly is not allocatively efficient as P≠MC, This creates a welfare loss of [8,9,10] made up of lost consumer and producer surplus. - The firm is not productively efficient it doesn’t not produce at the lowest point of the AC curve - there is likely to be a degree of x-inefficiency. This results in higher AC, higher prices and poor service. - The monopoly does not fully exploit its EoS on the graph as it does not produce at the MES point since it restricts output.

Answer 265

· lower consumper surplus and restricted choice for consumers. · Allocative and productively inefficient. · Welfare loss leads to a market failure. · Likely to be** x-inefficient **due to a lack of competition. · Not fully exploiting Economies of Scale as **not producing at the MES point**. · Protected by high barriers to entry, could lead to a **lack of dynamic efficiency** (no incentive to innovate). · They may suffer from Dis-economies of scale and higher AC. Price discrimination can lead to some consumers having to pay more than others

Answer 266

· A monopoly will be able to use its size to benefit from **Economies of Scale** so lower average costs which could be passed onto consumers. · Dynamic efficiency will benefit consumes in the long-run, more so than perfect competition. Monopolies can compete on an **international scale due to their EoS**. This benefits the economy on a macro-level with output, employment, exports, tax revenue etc. On a micro-level, in a local community suppliers and local shops benefit and there are positive externalities of employment.

Answer 267

* Firms would fear Creative Destruction, where new firms enter the market with technological advancement a force out existing firms. * They invest therefore in R and D and this is likely to come in the form of the product/process.

Answer 268

**The product:** · Scarce resources are effectively allocated to meet consumer needs and wants. · Consumers utility is **met/improved** and although consumers may face higher prices · This is to the benefit of consumers compared to competitive markets.

Answer 269

**The process:** Investment in production-invention or innovation. Investment in process is an example of technological EOS and the impact of tech improvement will **drive down average and marginal cost. **

Answer 270

3 (only need to know 3rd) This involves charging different prices for different groups of consumers for the same good or service, for reasons not associated with cost.

Answer 271

* Monopoly Power * The ability to prevent market seepage (second hand arbitrage/resale). * Ability to split the market into segments through PED. This is usually done through time or geography.

Answer 272

* Each consumer in theory is **charged the maximum** they individually are willing to pay so **extracts all consumer surplus**. * In reality, this is an unrealistic theory as consumers are unlikely to reveal their true preferences

Answer 273

* Excess capacity pricing exists when sellers try to off-load their spare output to buyers * This involves charging different prices depending upon the choices of consumer. For example quantity, time period, collecting coupons e.g. · Early Bird Discount – Creates cash flow, and ensures they can run the flight Buying in Bulk – e.g. if you buy 100 units then they are £10 each, if you buy 500 units then they are £8 each. Diagram:

Answer 274

This involves charging different prices to different groups of people

Answer 275

· **Cross Subsidisation** o This is where unprofitable routes are subsided and ran because of the profitable routes which are engaging in price discrimination. Some consumers benefit from lower prices, Some consumers have access to services which they otherwise would not be able to afford. These last minute deals are second degree price discrimination.

Answer 276

· Certain consumers will pay higher prices, due to the extraction of consumer surplus by firms. · Some groups, for example graduates travelling to work, are particularly penalised. · As monopoly power is needed for price discrimination to be possible, monopoly arguments can be used here too x-inefficiency. This leads to higher costs/inertia-consumers may suffer Dis. EOS – higher average costs, meaning higher final prices for the consumer.

Answer 277

· In first/third degree, producer surplus is increased so higher SNP · Dynamic efficiency means that barriers to entry for potential entrants to the market increase. · Economies of scale provide barriers to entry for the monopoly. Provides profits to engage in anti-competitive strategies– for example predatory pricing.

Answer 278

· Monopoly inertia · Creative destruction Dis EOS harms producers as well as consumers

Answer 279

· The key word in the question is “always”. o Price discrimination is not bad for all consumers o It is also not always good for producers, due to government regulation and monopoly inertia. · There may be an asymmetric impact between regions, some being cheaper and some more expensive. · Dynamic efficiency – does the monopoly invest in R + D, or do profits go into ‘back pocket’?

Answer 280

In markets where the marginal cost of an extra passenger is very low, the firm has an incentive to use price discrimination to sell all the tickets.

Answer 281

Busways a new entrant into the deregulated bus markets, offered free bus travel to try and force the rival Darlington Bus company out of business. The result was that Darlington Transport Company (DTC) went out of business leading to monopoly power for the remaining Busways Company. “It was the combination of Busways’ actions in recruiting so many of DTC’s drivers so quickly, registering services on all its routes and running free services which caused DTC’s final collapse. We find these actions to be predatory, deplorable and against the public interest.” Since bus deregulation, **bus use in Darlington has fallen from 10 million journeys a year (2001) to 6.6 million (2014).**

Answer 282

* A large multinational may be willing to enter a market – even if it is unprofitable in the short-term. * Limit pricing will be more effective in industries with substantial economies of scale For industries, with few economies of scale, such as restaurants and bars, limit pricing will not be effective

Answer 283

This is where there is **only one buyer of labour or products in the market**,

Answer 284

One example could be the NHS, who pay less for cancer drugs than a number of other high-income countries.

Answer 285

They will **pay their suppliers the lowest price possible** to minimise their costs and make the most of their position as the only buyer. e.g. Requiring suppliers to cover costs such as delivery Forcing suppliers to make **lump sum payments** to the monopsonist, for example, for access to particular positions in stores and outlets **Delaying payments to suppliers** to improve the monopsonist’s cash flow.

Answer 286

They will produce where the cost to them (MC) is equal to the value they get (AR). Hence, they will produce where MC=D.

Answer 287

● The monopsony gains higher profits by being able to buy at lower prices. ● They achieve purchasing economies of scale, which will lower costs and increase profits. ●More investment and DE

Answer 288

● Customers may gain from lower prices as reduced costs are passed on. ● It could lead to a **fall in supply**, since the business buys fewer inputs. Dependent on PES of supplier ● They may act as a** counter-weight to monopolists. ** ● There may be a** fall in quality** as prices are driven down

Answer 289

● The supplier will sell less goods and so employ less people whilst the monopsonist may employ fewer, more or the same amount of people since they have less inputs to use for production but their costs are also lower. ● Monopsonists** may pay higher wages** as they are making higher profits.

Answer 290

● Suppliers will lose out as they will receive lower prices ; less will be supplied leading to some firms leaving the market

Answer 291

* Setting up a **specific regulator** to monitor the activities of firms with monopsony power, such as the UK’s Groceries Code Adjudicator (GCA). * Controlling prices paid to suppliers – such as **setting minimum prices**. * **Subsidising suppliers** who are adversely affected by the exertion of monopsony power. * Legislate against late payments. * Prevent further monopsony power by **blocking mergers** or by forcing firms to divest outlets or divisions of their business. * encourage new entrants into the industry.

Answer 292

- Establishing **producer cooperatives **as a counter-balance to monopsony buyers - Using technology for suppliers to sell directly to consumers

Answer 293

Arla Foods is a global dairy company and cooperative owned by 9,700 dairy farmers with 2,100 of whom are British. - Ormoia Coffee Union in Ethiopia over 20,000 farmers.

Answer 294

· This means there are **no barriers to entry and no barriers to exit**, such as sunk costs, economies of scale and contractual agreements. · **No brand loyalty** · **Perfect information.**

Answer 295

● **Hit and run competition**; only way to prevent this is by using limit pricing, which reduces the incentive for firms to enter the market. ● In a perfectly contestable market, firms will **only be able to make normal profits** and produce where AC=AR ● Firms are likely to be **productive and allocative efficient**. * The threat of contestability is sufficient for economic efficiency, all markets may be efficient provided there is contestability. · Potential competition may be as important as actual competition for economic efficiency. · It shifts the emphasis of govt policy away from the number of firms to barriers to entry. · The absence of competition does not necessarily mean a lack of contestability. · Nobody entering the market may just be out of fear for the incumbent’s efficiency

Answer 296

* Economies of Scale of existing firms * Network effect * High r+d costs * High set-up costs * Ownership of key resources or raw materials

Answer 297

* **Predatory pricing**, as well as an acquisition. * **Limit pricing** * Advertising and brand * Contracts, patents, and licenses * Loyalty schemes * **Switching costs** discourage new entrants

Answer 298

Perfect competition: Zero barriers to entry Monopolistic competition: Medium barriers to entry Oligopoly: High barriers to entry Monopoly: Very high to absolute barriers to entry

Answer 299

obstacles or impediments that **prevent a company from exiting a market in** which it is considering cessation of operations, or from which it wishes to separate.

Answer 300

highly specialized assets, which may be difficult to sell or relocate, and high exit costs, such as asset write-offs and closure costs. A common barrier to exit can also be the loss of customer goodwill. 1. Highly specialised assets that are hard to sell off 2. Tax breaks and regulation 3. Costly Equipment 4. Impact on the Enviroment

Answer 301

A new company could buy up the assets of a company wishing to exit at a favourable price. Or a competitor could do this

Answer 302

A sunk cost is a **fixed cost that a business cannot recover if it leaves the industry**

Answer 303

Etent to which the gains from market entry for a firm exceed the costs of entering the market, A market with no sunk costs and no barriers to entry and exit is a perfectly contestable market

Answer 304

* Deregulation of markets allowed for a reduction of barriers to entry * Competition policy means firms can no longer use predatory pricing/cartels * Globalisation has allowed for more firms to enter * Technology (internet shopping) reduced entry capital costs

Answer 305

* Deregulation of an industry * Open up networks of monopolies * Tough rules on predatory pricing * Encouraging international trade

Answer 306

When a business enters an industry to take advantage of temporarily high (supernormal) market profits.

Answer 307

· There is downward pressure on prices because high prices and profits act as incentives for new producers to compete away monopoly profit. · Normal profit will occur AC=AR (link to alternative objectives) · An improvement in c/s and welfare will occur.

Answer 308

* Sunk costs are extremely high even with transferable capital * Contestability requires specific technical inowledge necessary to operate to be freely avaliable however patents iin the drugs industry last for 20 years

Answer 309

* the taxi industry, with the introduction of Uber * the hotel market, with AirBnB * Ocado, who are set to replace M&S in the FTSE 100 (2018), showing the new replacing the old.

Answer 310

* Greater access to relecommuncations had reduced barriers to entry and incrased information * European single market has opened up new market for firms and so these firms can enter into the market easily

Answer 311

MRPL = marginal physical product * marginal revenue

Answer 312

how many workers will be hired of any given wage rate over a given period of time

Answer 313

The need to expand output to satisfy demand; goods need workers to make

Answer 314

MC (marginal cost) = MRP (marginal revenue product)

Answer 315

As workers increase, ceteris paribus, MRP will increase at first then decline

Answer 316

* **Short run** fixed levels of capital so **diminshing marginal returns** means adding extra workers gives a lower return so they are woth a lower wage rate * Long run, all factors of prod. vary, high wage rates will e**ncourage businesses to use machinery instead of workers**

Answer 317

1. Wage Rates 2. Demand for the product 3. Price of other factors of production 4. Wages in other countries 5. Technology 6. Regulation

Answer 318

same influence on demand for labour as price has on the demand for a product Higher wage means contraction of demand

Answer 319

if there is no demand for the product, there is no demand for the labour.

Answer 320

If machinery and equipment becomes cheap, people will switch machinery for labour and therefore the demand for labour will fall.

Answer 321

people will be employed in other countries as it represents a lower cost for businesses. This means that demand in the UK is low.

Answer 322

less demand for labour, but demand for labour in technological based industries is increasing. By 2040, about 47% of jobs could be lost to technology.

Answer 323

High regulation within the labour market is likely to discourage firms from hiring since it can be very costly and time-consuming so this will reduce demand for labour in these areas

Answer 324

responsiveness of the quantity demanded of labour to the wage rate % change in quantity demanded for labour/ % change in the wage rate

Answer 325

* PED of product * Propotion of wages to the total cost of production * Subsitutes * Time

Answer 326

If the good is elastic, then a rise in wages and hence a rise in prices for consumers will have a large impact on the quantity the business sells. This will mean that the business will reduce the number of people it employs, in order to help it make a profit. **direct correlation**

Answer 327

* if wages are a huge proportion of costs, then an increase in wages will increase costs massively and so there will be a large fall in demand for labour hence it will be elastic. **direct correlation**

Answer 328

substitutes, such as machinery and labour in other countries, then the demand will be elastic. This means high skilled jobs tend to be more inelastic than low skilled jobs as the labour cannot be easily replaced.

Answer 329

In the long run, it is more elastic as machinery can be developed and jobs can be moved whilst in the short run firms have to employ workers and redundancy payments can be expensive.

Answer 330

The labour supply is the the ability and willingness of people to make themselves available to work at different wage rates.

Answer 331

1. Wages 2. Population/distribution of age 3. Non-monetary benefits 4. Education 5. Trade unions and barriers to entry 6. Wages and conditions of other jobs 7. Legislation

Answer 332

* Through either offering more hours or getting new workers, higher wagese wil incentivise more workers

Answer 333

* High population ensures large supply * Distribution of age is important to also ensure this * Migration rienforces working force (75% of child-bearing age) and boost young people

Answer 334

* Supply will increase from high job satisfaction * this may be due to being close to family or offer perks like free healthcare/ flexible hours

Answer 335

More educated workers means a higher supply of workers in skilled labour or just generally being able to overcome barriers to enter

Answer 336

* Can increase job satisfaction through security and higher wages * Restrict supply of labour by introducing barriers e.g. need degree to teach

Answer 337

If many jobs in a local area are considered to be unpleasant and offer low wages, then supply for alternatives will be higher.

Answer 338

The government rules can affect supply of labour, for example school leaving age and the retirement age.

Answer 339

workers find it difficult to move from one job to another because of a lack of transferable skills. It is particularly difficult in the short term when workers need to get new training but in the long run it may only be possible at a high cost

Answer 340

they find it difficult to move from one place to another due to the cost of movement, family etc. Those on lower incomes are more geographically immobile.

Answer 341

mmobility can mean that there can be excess supply of labour in one area/occupation and excess demand in another. Even if wages are higher where there is excess demand, people will be unable to leave where there is excess supply to get a job in that area/occupation because of their immobility.

Answer 342

The UK suffers from a severe skills shortage and this could **cost £90bn a year following Brexit.** There are **four million too few high skilled people but six million too many low skilled people**. Engineering is one industry suffering particularly badly from skills shortages.

Answer 343

responsiveness of supply to a change in wage rates.

Answer 344

● Higher skill requirement reduces elasticity ● Similarly, it can depend upon the availability of suitable labour in other industries , for example if a company can ‘poach’ workers from other industries, then it will be more elastic ● Moreover, it depends on time as in the long run supply of labour will be more elastic as people will have time to train. If the job is vocational, it will be inelastic since even if wages fall people won’t leave the job.

Answer 345

* Workers may be attracted into industry from related jobs * Workers previously employed in this occupation may be attracted back e.g. they decided to end a period of economic inactivity

Answer 346

1. **Net inward migration** of suitable qualified / experienced workers 2. **Fall in relative pay/earnings** in substitute occupations 3. **Lower entry barriers **to this particular job such as minimum professional qualifications 4. Demographic factors causing a rise in the active labour supply

Answer 347

1. **Net inward migration** of suitable qualified / experienced workers 2. **Fall in relative pay/earnings** in substitute occupations 3. **Lower entry barriers **to this particular job such as minimum professional qualifications 4. Demographic factors causing a rise in the active labour supply

Answer 348

1. **Brain drain effects** – an economy loses skilled workers overseas 2. **Decline in non-monetary rewards** associated with the job e.g. job dissatisfaction / stress 3. **Fall in relative pay in this occupation compared to other jobs** / rise in min qualifications

Answer 349

Positive income effect: Higher wages --> incentivise to work more hours (to reach a target income) Negative income effect: Target income reaches so higher wages --> incentivises working less hours

Answer 350

* A rise in the real wage increases the **opportunity cost of leisure** * Therefore higher wages will always cause people to be incentivized to work longer hours via the substitution effect But the income effect may work in the opposite direction

Answer 351

Backwards bending supply curve

Answer 352

f a firm can employ each additional worker at the same wage rate, then the average and marginal cost of labour will be the same If the firm has to pay higher wages to attract more workers, then the average cost of labour rises and the **marginal cost of labour will be above ACL**. This is since raising wages for one worker means raising wages for workers

Answer 353

when there are barriers to the mobility of factors of production between different industries leading to these factors remaining unemployed, or being used inefficiently structural UE is when applied to a whole industry

Answer 354

Geographical immobility refers to barriers people moving from one area to another to find work.

Answer 355

* Family and social ties – older people more reluctant to move * Financial costs involved in moving home; no affordable housing, differences in costs * Migration controls e.g. possible caps on inward migration * Cultural and language barriers to living and working overseas

Answer 356

1. Better funding for and more effective workplace training 2. Teaching new skills e.g. Computing skills 3. An expansion of apprenticeship / internship programmes

Answer 357

1. Rise in house-building will help to keep property prices lower and encourage more affordable rents 2. Active regional policy to create new jobs and businesses

Answer 358

1. Higher minimum wage or a living wage 2. Reductions in income tax / national insurance 3. Welfare reforms to reduce the risk of the poverty trap

Answer 359

* age * education * training * work experience * skill/talent/ability to perform tasks * sex * ethnic background.

Answer 360

sex and ethnic background

Answer 361

excess supply in one area/occupation, causing low wages, and not enough workers in another, meaning high wages

Answer 362

* Same assumptions as perfect competition in products * Therefore, wages are determined purely by demand and supply and all workers are paid the same. * If workers were not paid the same, they would simply move somewhere else where the wage rate in the industry was higher. *

Answer 363

there is only one buyer of labour

Answer 364

They will employ to where: Cost of employment (MC) = Value of worker to company (MRP/D) At this quantity they will then use their monospony power to push the wages down to a wage determined by the Supply curve Compared to a perfectly competitive market they employ less people at a lower wage

Answer 365

* Only seller of labour * existence of trade unions through a process of collective bargaining.

Answer 366

1) They could set **barriers of entry **which would reduce supply. Teachers’ unions lobbied for a rule which means that all teachers must have degrees . 2) Alternatively, they could set wages at a specific wage and ensure workers are not prepared to work for less, creating a kinked supply curve as seen in the diagram (the grey line). Supply is perfectly elastic up to output of QS and if the company wanted to employ more than this, they would have to increase wages further. The firm will employ where supply is equal to demand, at QDW2. Both of these methods will lead to higher wages but **cause a fall in employment from the perfectly competitive equilibrium of Q1W1**.

Answer 367

The government has introduced **postal ballots, outlawed secondary picketing, restricted the size of the picket line and forced unions to provide 14 days’ notice of action.** The Trade Union Act 2016 clause saying that **at least 50% of people must vote in the ballot**

Answer 368

both monospony and monopoly in the labour market

Answer 369

* The firm is a monopsonist and wants to employ at Q2W2. * However, the union may decide to set a minimum wage at W1 and ensure that there is no one willing to work below this price, creating a kinked supply curve. The new MC and AC curves are the purple curves. * The wage that is set will depend on the relative bargaining strength of both . * In a time of economic recession and unemployment the unions may have less bargaining power and wage is most likely to be down at W1. In times of full employment, they may have the power to influence and wages could be at W3 .

Answer 370

they are able to increase wages to W3 without negatively impacting the number of workers. This increase in wages and employment is able to make the economy more efficient. even at W1 that increases employment rather than decrease

Answer 371

1. Skills Shortage 2. Young Workers 3. Retirement 4. Wage Inequality 5. Zero-hour contracts 6. The 'Gig Economy' 7. Migration

Answer 372

Occupational and geographical issues mean there are a lack of engineers shortfall of roughly 59,000 engineers every year.

Answer 373

Rising life expectancy and demographic shift as 'baby boomers' reach retirement Retirement age will have to rise and **pensioners makeup over 50% of welfare spending**

Answer 374

Over time, those on the highest wages have seen their wages grow by a bigger percentage than those on the lowest wages. **wealthiest 100 people in the UK have as much money as the poorest 18 million people**, according to the Equality Trust.

Answer 375

Nearly half (48%) of employers of zero-hours workers said that they do not compensate workers for shifts that are cancelled with less than 24 hours' notice. incentivises a lack of capital investment

Answer 376

Nearly half (48%) of employers of zero-hours workers said that they do not compensate workers for shifts that are cancelled with less than 24 hours' notice. incentivises a lack of capital investment

Answer 377

Many more people are now self-employed and undertake short term contracts, working for companies such as Uber and Deliveroo. There are concerns over the rights of these workers and the unreliability of their pay each week.

Answer 378

people suggest that migration causes a fall in wages With Brexit, drivers are also choosing not to return to the UK, as large numbers of them now prefer "EU stability" and the perspective of higher salaries working in France or Germany. **100,000 shortage in crucial HGV drivers in Septmeber 2022**

Answer 379

a legally enforced lowest salary possible

Answer 380

* **Reduces poverty** and inequality * Reduces gender wage differentials * More content workforce makes the business more productive * Prevents **unemployment trap**

Answer 381

benefits are higher than the wage people would otherwise receive.

Answer 382

1. Classical UE aka Real Wage Inflexibility; dependent on elasticity of supply and demand 2. Cost-push inflation/ lower profits so lower R+D 3. No consideration of regional differences 4. Dependent wether it is above or below current wage

Answer 383

increasing wages can lead to increased labour productivity because workers feel more motivated to work with higher pay. Therefore if firms increase wages – some or all of the higher wage costs will be recouped through increased staff retention and higher labour productivity.

Answer 384

1. Fear of losing jobs – “Shirking model” 2. Loyalty 3. Labour market 'Gift Exchange' 4. Lower costs of supervision 5. Attract higher quality labour 6. Nutritional +healthcare

Answer 385

if workers are paid a relaatively higher wage, they have more to lose from being made redundant. Shapiro and Stiglitz posited that workers with **a higher wage will work at an effort level which involves no shirking**. This wage is above market-clearing levels.

Answer 386

labour market has a ‘gift exchange’ where good labour relations depended on goodwill. FIrms could pay wages above market-clearing levels, and in return, workers would take on more responsibility and initiative.

Answer 387

Rebitzer noted that **lower wages were associated with higher levels of supervision.** Workers receiving higher wages were more motivated and therefore needed less managerial supervision

Answer 388

in 1914 when Henry Ford introduced a five dollar day. Ford paid well above the market-clearing rate. He wanted to pay higher wages in order to: * Ban unions. A condition for high pay was no trade unions * Compensate for boring work on his efficient assembly lines. Ford increased productivity by the revolutionary use of assembly lines, but was worried a low wage, workers would get bored and stop working. Raff and Summers (1986) concluded that Ford’s five dollar day was consistent with what was expected of efficiency wage theories. “There is vivid evidence that the five-dollar day resulted in substantial queues for Ford jobs. Finally, **significant increases in productivity and profits at Ford accompanied the introduction of the five-dollar day**

Answer 389

* In practice, many factors determine worker morale and productivity, wages are just one of them. Often other factors are more important such as work conditions, management * Wages are relative to similar positions by other firms Firms with monopsony power may not need to pay higher wages to create the threat of workers losing their jobs.

Answer 390

A legally enforced limit on a wage

Answer 391

* Help to reduce inequality; max pay ratio to lowest earners * Dependent on elasticities; chief executives are v inelastic so no effect * **Excess demand** within industry --> loss of most productive workers

Answer 392

SR: * Gov. can make whatver wage it decideds e.g. 2010-15 **pay freeze** LR: * To incentivise workers to stay have to stay in line with private sector wage rises

Answer 393

Even if a firm is not a pure monopsony, it may have a degree of monopsony power, due to geographical and occupational immobility’s They will also often have a degree of monopoly selling power

Answer 394

· Supermarkets have monopsony power in buying food from farmers. If farmers don’t sell to the big supermarkets, there are few alternatives. · Amazon.com is one of the biggest purchases of books. If publishers don’t sell to Amazon at a discounted price, they will miss out on selling to the biggest distributor of books.

Answer 395

Thatcher **banned wildcat strikes** (instant strikes) and **secondary picketing** (sympathy strikes) and **introduced secret ballots** to remove intimidation to get workers to strike. TU action can still consist of: - Announced Strikes - Introducing overtime ban - Work to rule (working to the contract and no extra)

Answer 396

* Will likely neogitate productivity deal; changing working practices, training and capital to **increase MRP of the workforce**

Answer 397

Diagram shows that as MRP rises, more workers could now be employed at the TU wage, contrary to the opinion that the TU will increase wage rate at the expense of employment. This should protect against redundancy

Answer 398

TU now enters a monopsony market and through collective bargaining now raises the wage to w/pTU. The agreed wage becomes the standard for the industry/firm, therefore MC = AC = LS. This is because the cost of employing the next worker is the same as the previous, meaning MC is constant and so is AC.

Answer 399

At this wage, QTU workers are prepared to work and the monopsony is happy to employ as MC is below MRP. If the monopsony wished to employ beyond the LS curve kink, a higher wage would have to be offered. In offering a higher wage, all previous workers would have to be paid more and MC would discontinue and go above MRP. Therefore, the firm would not employ beyond QTU.

Answer 400

A merger is investigated if it will result in market share greater than 25% or if it meets the turnover test of a combined turnover of £70 million or more.

Answer 401

whether there will be a substantial lessening of competition (SLC). The CMA will consider the likely competitive situation if the merger goes ahead compared to if it does not, and the merger will be approved if its potential benefits are greater than its cost.

Answer 402

The merger between Activision Blizzard and Microsoft due to it's potential monopoly in the cloud-gaming market

Answer 403

* Higher prices --> fall in allocative efficiency and consumer surplus * X-Inefficiency * Less competition --> less dynamic efficiency * Less choice for consumers * May suffer from DEoS * Impetus may come from high-achieving employees e.g. ABN Amro

Answer 404

* **Economies of scale** (esp. for natural monopolies) * Help **compete internationally** * **Greater dynamic efficiency** through more R+D

Answer 405

* Is there a scope for economies of scale? Are fixed costs high enough? * Will there be a significant reduction in competition (magnitude) * Is the market still contestable (force limit pricing) * Other factors: need for financial sector e.g. First Republic and JP Morgan

Answer 406

1. Price Regulation 2. Profit Regulation 3. Quality Standards 4. Performance Targets 5. Windfall Taxes 6. Breaking them up 7. Subsidies 8. Self-Regulation

Answer 407

Regulators set price controls to force monopolists to charge below MC=MR X Reprents the **expected efficiency** gains of the firms and the aim is ot ensurte firms pass on those gains to consumers since if firms can **reduce costs more than X than they enjoy increased profits**

Answer 408

Same as RPI-X but K represents the level of investment

Answer 409

Water industry, it allowed ro investment of **£130bn**

Answer 410

* Incentive for efficiency gains through profit * Stability can help for some forward planning; esp if regulated for long time * System is flexible * Independent and Specialist Regulator --> more likely to set prices closer to MC

Answer 411

**Significant cuts in real prices of telephones and electricity**

Answer 412

* Assymetric information leading to too weak or too strong regulation * Regulatory Capture * If too strict --> Hampers investment ('**UK is closed for Business**') * may be fewer incentives to cut costs because, if they do increase efficiency, the regulator may just increase the value of x. e.g. Five Year Plan targets * Performance/Quality more important than price

Answer 413

Prices set to allow covering of operating costs and to earn a **'fair' rate of return on invested capital**, based on returns in a competiitiive market Thus encouraging investment and prevents firms setting high prices

Answer 414

* There is **substantial incentives to invest in R and D** and capital as this could allow for greater future return. This can lead to greater long run dynamic efficiency. * Consumers are protected from price hikes above inflation etc as there is very little incentive to raise prices. This effectives waters down price making power and creates a more allocative efficient environment.

Answer 415

* There are **incentives to over invest**as the more capital employed can mean the industry/firm can attain more profit. This is inefficient spending and is not useful for consumers or industry in the long run * Assymetric information - firms overreport capital employed and costs for greater profit * There is very little incentive to cut costs as greater profitability is not allowed. This can lead to a lack of productive efficiency and more x inefficiency (diagram)

Answer 416

Introduce quality standards to ensure sufficieny investment of profits to benefit the consumer e.g. Post Office has to deliver letters on a daily basis to all areas despite the loss incurred

Answer 417

'Yardstick Competition' by setting puntuality targets for companies based on the best-performing Can be targets on price,quality, consumer choice or cost e.g. Train companies subject to close scrutiny on punctuality, safety records and win franchieses based on level of service

Answer 418

* Targets may be too weak and have little deterrence for failure e.g. Ambulances have 8 minute target but often don't make it * Unintended Consequences e.g. GPs may not do proper diagnoses * May cheat to meet targets e.g. train comppanies change timetables to give themselves more time to arrive * Regulatory Capture

Answer 419

Discourage monopolists from making excessive profits and/or encourage htem to reinvest them e.g. UK Windfall tax had a tax break through investment

Answer 420

* Disincentive for investment e.g. TotalEnergies leaving * High profit may be due to an efficient firm * Short-term solution and firms may start to underreport profits

Answer 421

* Split Monopoly into competing units to lead to lower profits and prices as well as greaterr consumer choice but * May also have loss of EoS leading to higher prices * Lobby groups may make it unfeasible1

Answer 422

* Beneficial for producing at allocatively efficient point when unprofitable otherwise (natural monopoly) BUT * Assymetric information * Dynamic Market means MC can change a lot * Politically unpopular --> large opportunity cost

Answer 423

* Monopolies may have a profit motive to self-regulate properly to avoid worse side effects ( financial crises ) or greater regulation But * There always exists a profit motive and they will take actions that minimisse change and to maximise profit e.g. (SVB)

Answer 424

1. Promotion of small businesses 2. Deregulation 3. Competitive Tendering 4. Privatisation

Answer 425

* Training and grants to new entrepreneurs * Increases incumbents fear of creative destruction

Answer 426

provide tax relief for people who buy shares in small companies to help them grow.

Answer 427

* Small firms will lack EoS * Depends also on quality and success of business * Assymetric information of gov. grant size

Answer 428

Private sector businesses used to provide public sector work

Answer 429

1. competition can save the tax payer money 2. Private sector businesses more likely to achieve efficiency improvemments and costs savings 3. Also might be more innovative, less heirarchical and less prone to suffering from DEoS

Answer 430

1. Business bidding to win contracts may sacrifice quality of service as a way of loweing their costs 2. Doubts about some employmeny practices of service companies 3. Contracting-out/outsourcing requires proper monitoring which itself invovles extra spending

Answer 431

* It gives firms a private monopoly; danger that the private firm will increase prices, or cut back on service. * It requires the government to monitor the quality of service provided and to make sure they don’t take shortcuts to boost profit. * Because the contract is short-term, it may discourage long-term investment e.g. Railway firms not taking 7 year contracts * Costs involved in the bidding process. * Private Firms may collude in **cover pricing** e.g. construction £200m

Answer 432

* Allows greater competition by reducing legal barriers to entry and thus more efficiency e.g. Royal Mail * Reduce regulation costs e.g. Red Tape Challenge effective in increasing competition in the retail of electricitty and gas

Answer 433

* More competition may mean less profit and less DE * Unable to benefit from EoS therefore never reach MES * Some industries require regulation e.g. Gas, Financial * Doesn't work in Natural Monopolies

Answer 434

· Increased choice · Increased competition mean firms will cut costs and a decrease in x inefficiency as firms look to offer lower prices through productivity gains · Regulation often involves costs of bureaucracy and therefore deregulation should help relieve the burden to the taxpayer. Lesser regulation can help reduce the effects of regulatory capture

Answer 435

· Alternatives to deregulation · Ideal in theory but how good is deregulation in practice. · is there an optimal level of regulation? · S/R vs. L/R effects · Greater allocative and productive efficiency (greater static efficiency) but may be less long run efficiency in terms of dynamic efficiency

Answer 436

1. Reduced government short-terminism 2. Remove borrowing limits 3. Private Companies are more efficient from profit motive 4. **Improved public finances** 5. Increased comeptition --> AE, better quality

Answer 437

1. **Barriers to Entry** make it hard to increase competition 2. **Public Services should be run in the public interest** 3. **Positive Externalities** of industries like rail 4. Revenue is one off 5. Privatised businesses close off essential unprofitable parts and so services worsen 6. Lack of investment or improvement e.g. Water Companies £18.2 billion in dividends

Answer 438

1. Restrictions on monopsony power of firms 2. Nationalisation 3. Workers Rights

Answer 439

* Monopolists exploit suppliers/employees by reducing prices/wages * Governments can introduce an independent regulator and make such practices illegal * Minimum prices can also be introduced But * Regulatory Capture * Assymetric information

Answer 440

* Health and safety laws, employment contracts, redundancy processes, maximum hours at work and the right to be in a trade union BUT * If workers rights are too strong than employers will be unwillling to take on new workers due to the extra cost of employiing these workers

Answer 441

* Providing essential services to the consumer (equity) - Natural Monopoly * Need for strategic control e.g. Arms, Finance * Private companies only do short-term investment * Positive Externalities * Profit shared with tax revenue * Better protection of employees

Answer 442

* Principle Agent Problem - loss covered by gov. * No profit motive/ competition --> X-Inefficiency * Influenced by government short-terminist as based on budget * Worsening public finances --> higher debt e.g. NHS lack of funcing/compeititon leads to ppoor quality as well as uncertainity with each government.

Answer 443

As Hungryhouse was less dynamic and loss making

Answer 444

1. Regulatory Capture 2. Assymetric Information

Answer 445

* Regulators see things from the firms perspective rather than the consumers which damages the ability to regulate * Regulators often have personal links with the coporation e.g. HMRC alledged capture by vodafone who negotiated their tax of £7bn to be reduced to £1bn