Theme 3: Business behaviour and the labour market Flashcards
What are the limits to government intervention? (3.6.2)
- Asymmetric information: parties have different info, wrong decision causes
inefficient outcome, opportunity cost - Regulatory capture: influenced by firms, lobbying, bias, inconsistency
What are the impacts of government intervention on price, profit, efficiency,
quality, and choice? (3.6.2)
- Consumer prices reduced
- Reduces firm supernormal
- Quality improves
- Firm efficiency increased
- Choice increases
What government intervention exists to protect suppliers and employees in
monopsonies? (3.6.1)
- Independent regulators appointed
- Encouraging industry self-regulation
- Nationalisation
- Minimum prices
- Subsidising suppliers
What government intervention exists to promote competition and contestability in
industries? (3.6.1)
- Promoting small business growth (lower tax, grants, training)
- Deregulation
- Competitive tendering for gov. contracts (auctioning, provides services to
public sector, encourages efficiency) - Privatisation
What government intervention exists to control mergers? (3.6.1)
- Investigation if monopoly power thereafter
- Determines if competition impacted
- CMA controls
What government intervention exists to control monopolies? (3.6.1)
- Price regulation (price cap preventing exploitation)
- Profit regulation
- Performance targets
- Quality standards (protecting consumers)
Why do wage differentials exist? (3.5.3)
- Non-homogenous labour (different MRP / supply, discrimination)
- Non-monetary benefits
- Immobility
- Trade unions
- Monopsonies
What are the characteristics of a perfectly competitive labour market? (3.5.3)
- Many potential workers/employers
- Homogenous labour
- Perfect information
- Firms wage-takers
- No entry/exit barriers
What economic government intervention exists in the labour market? (3.5.3)
- Minimum wage (reducing exploitation, reducing relative poverty)
- Maximum wage (below equilibrium, less societal inequality, lower labour costs
for firms) - Public sector wage setting (affects industry, monopsonist)
- Policies tackling immobility (training programmes, relocation subsidies)
What current labour market issues exist in society? (3.5.3)
- Gender pay gap
- Executive pay
- Automation and future of employment
What type of immobility exists in market failure of labour markets? (3.5.2)
- Geographical immobility (costs moving, reluctance)
- Occupational immobility (hard changing, skill gap, causes mismatch between demand / supply)
What factors influence the elasticity of the supply of labour? (3.5.2)
- Skill / qualification levels
- Time
- Unemployment levels
What factors influence the quantity supplied of labour? (3.5.2)
- Pecuniary (wage rates)
- Working population size
- Migration
- Trade unions
- Income tax
- Welfare
What is marginal physical product and marginal revenue product referring to?
(3.5.1)
- MPP: output addition caused by extra labour unit
- MRP: value addition caused by extra labour unit
What factors influence the demand for labour? (3.5.1)
PDPC
- Product price
- Derived demand (goods / services)
- Productivity (labour)
- Capital (machinery) costs
What factors influence the elasticity of the demand for labour? (3.5.1)
SECT
- Substitutability (w/ capital)
- Elasticity (product)
- Cost of labour of TC
- Time period
What is ‘hit and run’ competition in contestable markets? (3.4.7)
- Supernormal by firms in industry
- New firms enter, low entry barriers
- New firms leave when prices normal
What are sunk costs, and what does the degree of contestability refer to?
(3.4.7)
Sunk: Incurred irrecoverable costs, reduces contestability
Lower entry barriers = higher contestability degree
What are the characteristics and assumptions of contestable markets? (3.4.7)
Characteristics:
- Entry freedom into industry
- Low exit costs
Assumptions:
- No entry / exit barriers
- Low sunk costs
- Firms profit-maximising
- No collusion
- Perfect knowledge
What are the costs and benefits of a monopsony to firms, consumers, employees,
and suppliers? (3.4.6)
Firms:
- Lower prod. costs, MC 🡇
- Poor supplier relationship
- Encourages suppliers into alternative buyers
Consumers:
- Lower prices from lower costs
- May decrease quality
Employees:
- Product monopsony improves wages / investment
- Labour monopsony employs less, decreases wages
Suppliers:
- Exploitation potential, reducing income
What are necessary conditions for third-degree price discrimination to work, and
what benefits occur as a result of it? (3.4.5)
Conditions:
- Market power (price-maker)
- 2 markets with different PED
- Markets separated, limiting resale
- Information on consumer willingness
Reduces consumer surplus, increases supernormal.
What is third-degree price discrimination and what diagrams are associated with
it? (3.4.5)
Different consumer groups charged different prices for same product. 2 markets,
1 elastic, 1 inelastic.
What are the advantages and disadvantages of monopoly power? (3.4.5)
Advantages:
- Dynamic efficiency
- Stable employment
- Internationally competitive
- Higher EoS, better efficiency
Disadvantages:
- Less efficiency, unincentivised
- Exploit suppliers
- Higher prices / lower output for consumers
What is a natural monopoly? (3.4.5)
Industry can support only one firm, competition impossible.
What are the characteristics of a monopoly? (3.4.5)
- One firm
- Unique product
- Imperfect knowledge
- High entry/exit barriers
- Price-maker
What types of non-price competition exists in oligopolistic markets? (3.4.4)
- Advertising
- Loyalty cards and schemes
- Branding & packaging
- Quality customer service
What types of price competition exists in oligopolistic markets? (3.4.4)
- Price wars (repeated price-lowering for advantage)
- Predatory pricing (forcing competing firms out)
- Limit pricing (preventing new entrants)
What is the difference between overt and tacit collusion and why do either
occur? (3.4.4)
Overt: formal, secret agreement
Tacit: implicit cooperation, following market-leader
Reasons:
- Reduces uncertainty risk
- Restricts competition
- Maximises profits
What are the characteristics and diagrams of oligopolistic markets? (3.4.4)
Characteristics:
- High entry / exit barriers
- High concentration ratio
- Firm interdependence
- Differentiated products
- Imperfect knowledge
What are the characteristics and diagrams of monopolistically competitive
markets? (3.4.3)
Characteristics:
- Many sellers
- Similar differentiated products
- Imperfect knowledge, but SN profit identifiable
- Low entry / exit barriers
- Some price-making
SR left, LR right:
What are the characteristics and diagrams of perfectly competitive markets?
(3.4.2)
Characteristics:
- Many buyers / sellers
- Homogenous products
- Perfect knowledge
- Entry / exit freedom
- Price-takers
What are allocative, productive, and dynamic efficiencies, and what is
X-inefficiency? (3.4.1)
Allocative: maximising consumer welfare, where P = MC
Dynamic: LR productive potential, technology / technique changes.
Productive: lowest AC, MC = AC, MES.
X-inefficiency: when AC > MES, not prod. efficient
What is the difference between internal and external economies of scale? (3.3.3)
Internal: individual firm
External: entire industry
What types of diseconomies of scale exist? (3.3.3)
- Communication (barriers, lower morale, reduced productivity)
- Co-ordination (difficult management)
What types of economies of scale exist? (3.3.3)
- Technical: improved machinery
- Managerial: better expertise
- Financial: increased finance access, lower interest
- Purchasing: bulk buying
- Risk-bearing: diversification
- Marketing: brand awareness
What diagram is used for the LRAC curve and why does this occur? (3.3.2)
Short-run: 1+ FoP fixed
Long-run: All FoP variable
What different business objectives are there and how are they represented on
diagrams? (3.2.1)
- Profit maximisation (MR = MC)
- Revenue maximisation (MR = 0)
- Sales maximisation (AR = AC)
- Satisficing (stakeholder satisfaction + other motive)
What impact does a demerger have on businesses, workers, and consumers? (3.1.3)
Businesses:
- Core business focus 🡅
- Removes loss-making parts
- Increases efficiency
- Removes culture conflict
Workers:
- Job losses
- Better team dynamics
- Increased promotion opportunities
Consumers:
- Competition 🡅, efficiency 🡅, prices 🡇
- Better quality, needs met
- Reduced product range
Why would a firm choose to demerge? (3.1.3)
- Lacking synergy (DEoS)
- Different business cultures
- Increase focus
- Reduce scale DEoS
- Meet CMA requirements
What constraints can exist on the growth of businesses? (3.1.2)
- Market size (niches)
- Finance access (financial EoS, profits)
- Owner objectives (satisficing?)
- Regulation (limiting market power)
What is conglomeration, and what are its advantages / disadvantages? (3.1.2)
Merger / takeover with 2 diversified, unrelated firms.
Advantages:
- Risk reduction, diversified
- Easier expansion with finance
- Improved skills / management
Disadvantages:
- Lacking expertise
- Brand dilution
- Shareholder cost
What is horizontal integration, and what is its advantages / disadvantages?
(3.1.2)
Two firms at same production stage.
Advantages:
- Lower AC, EoS
- Reduced competition
- Already have knowledge / expertise
Disadvantages:
- DEoS (communication / coordination)
- Different corporate cultures
- Risks of non-diversification
- Weakening brand
What are forward and backward vertical integration, and what are their
advantages / disadvantages? (3.1.2)
Forward: merger with later process stage
Backward: with earlier process stage (e.g. bread firm buying wheat firm)
Advantages:
- EoS
- Diversification (risk reduction)
- Backward more control / security
- Forward more price control, better consumer info
Disadvantages:
- Lacking expertise
- DEoS (communication / coordination)
- Different corporate culutres
What is organic growth and what are its advantages / disadvantages? (3.1.2)
Output increase, internal capital/labour investments.
Advantages:
- Low-risk
- Stable firm controlability
Disadvantages:
- Slow
- Unwillingness to change
What is the significance of the divorce of ownership from control? (3.1.1)
- Shareholder / manager conflict in motives
- Principal-agent problem
- Asymmetric information
Why do some firms tend to, or want to, stay small? (3.1.1)
- Lack of expansion financing
- Avoid DEoS
- Low barriers of entry
- Niche market
Why would firms tend to, or want to, grow? (3.1.1)
- Higher profits
- Increase EoS
- Gain market power
- Reduce risk
- Satisfy managerial ambitions
- Gain expertise
