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Economics > Theme 3: Business behaviour and the labour market > Flashcards

Theme 3: Business behaviour and the labour market Flashcards

1
Q

What are the limits to government intervention? (3.6.2)

A
  • Asymmetric information: parties have different info, wrong decision causes
    inefficient outcome, opportunity cost
  • Regulatory capture: influenced by firms, lobbying, bias, inconsistency
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2
Q

What are the impacts of government intervention on price, profit, efficiency,
quality, and choice? (3.6.2)

A
  • Consumer prices reduced
  • Reduces firm supernormal
  • Quality improves
  • Firm efficiency increased
  • Choice increases
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3
Q

What government intervention exists to protect suppliers and employees in
monopsonies? (3.6.1)

A
  • Independent regulators appointed
  • Encouraging industry self-regulation
  • Nationalisation
  • Minimum prices
  • Subsidising suppliers
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4
Q

What government intervention exists to promote competition and contestability in
industries? (3.6.1)

A
  • Promoting small business growth (lower tax, grants, training)
  • Deregulation
  • Competitive tendering for gov. contracts (auctioning, provides services to
    public sector, encourages efficiency)
  • Privatisation
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5
Q

What government intervention exists to control mergers? (3.6.1)

A
  • Investigation if monopoly power thereafter
  • Determines if competition impacted
  • CMA controls
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6
Q

What government intervention exists to control monopolies? (3.6.1)

A
  • Price regulation (price cap preventing exploitation)
  • Profit regulation
  • Performance targets
  • Quality standards (protecting consumers)
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7
Q

Why do wage differentials exist? (3.5.3)

A
  • Non-homogenous labour (different MRP / supply, discrimination)
  • Non-monetary benefits
  • Immobility
  • Trade unions
  • Monopsonies
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8
Q

What are the characteristics of a perfectly competitive labour market? (3.5.3)

A
  • Many potential workers/employers
  • Homogenous labour
  • Perfect information
  • Firms wage-takers
  • No entry/exit barriers
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9
Q

What economic government intervention exists in the labour market? (3.5.3)

A
  • 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)
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10
Q

What current labour market issues exist in society? (3.5.3)

A
  • Gender pay gap
  • Executive pay
  • Automation and future of employment
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11
Q

What type of immobility exists in market failure of labour markets? (3.5.2)

A
  • Geographical immobility (costs moving, reluctance)
  • Occupational immobility (hard changing, skill gap, causes mismatch between demand / supply)
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12
Q

What factors influence the elasticity of the supply of labour? (3.5.2)

A
  • Skill / qualification levels
  • Time
  • Unemployment levels
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13
Q

What factors influence the quantity supplied of labour? (3.5.2)

A
  • Pecuniary (wage rates)
  • Working population size
  • Migration
  • Trade unions
  • Income tax
  • Welfare
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14
Q

What is marginal physical product and marginal revenue product referring to?
(3.5.1)

A
  • MPP: output addition caused by extra labour unit
  • MRP: value addition caused by extra labour unit
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15
Q

What factors influence the demand for labour? (3.5.1)

A

PDPC

  • Product price
  • Derived demand (goods / services)
  • Productivity (labour)
  • Capital (machinery) costs
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16
Q

What factors influence the elasticity of the demand for labour? (3.5.1)

A

SECT

  • Substitutability (w/ capital)
  • Elasticity (product)
  • Cost of labour of TC
  • Time period
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17
Q

What is ‘hit and run’ competition in contestable markets? (3.4.7)

A
  1. Supernormal by firms in industry
  2. New firms enter, low entry barriers
  3. New firms leave when prices normal
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18
Q

What are sunk costs, and what does the degree of contestability refer to?
(3.4.7)

A

Sunk: Incurred irrecoverable costs, reduces contestability

Lower entry barriers = higher contestability degree

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19
Q

What are the characteristics and assumptions of contestable markets? (3.4.7)

A

Characteristics:

  • Entry freedom into industry
  • Low exit costs

Assumptions:

  • No entry / exit barriers
  • Low sunk costs
  • Firms profit-maximising
  • No collusion
  • Perfect knowledge
20
Q

What are the costs and benefits of a monopsony to firms, consumers, employees,
and suppliers? (3.4.6)

A

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
21
Q

What are necessary conditions for third-degree price discrimination to work, and
what benefits occur as a result of it? (3.4.5)

A

Conditions:

  • Market power (price-maker)
  • 2 markets with different PED
  • Markets separated, limiting resale
  • Information on consumer willingness

Reduces consumer surplus, increases supernormal.

22
Q

What is third-degree price discrimination and what diagrams are associated with
it? (3.4.5)

A

Different consumer groups charged different prices for same product. 2 markets,
1 elastic, 1 inelastic.

23
Q

What are the advantages and disadvantages of monopoly power? (3.4.5)

A

Advantages:

  • Dynamic efficiency
  • Stable employment
  • Internationally competitive
  • Higher EoS, better efficiency

Disadvantages:

  • Less efficiency, unincentivised
  • Exploit suppliers
  • Higher prices / lower output for consumers
24
Q

What is a natural monopoly? (3.4.5)

A

Industry can support only one firm, competition impossible.

25
Q

What are the characteristics of a monopoly? (3.4.5)

A
  • One firm
  • Unique product
  • Imperfect knowledge
  • High entry/exit barriers
  • Price-maker
26
Q

What types of non-price competition exists in oligopolistic markets? (3.4.4)

A
  • Advertising
  • Loyalty cards and schemes
  • Branding & packaging
  • Quality customer service
27
Q

What types of price competition exists in oligopolistic markets? (3.4.4)

A
  • Price wars (repeated price-lowering for advantage)
  • Predatory pricing (forcing competing firms out)
  • Limit pricing (preventing new entrants)
28
Q

What is the difference between overt and tacit collusion and why do either
occur? (3.4.4)

A

Overt: formal, secret agreement

Tacit: implicit cooperation, following market-leader

Reasons:

  • Reduces uncertainty risk
  • Restricts competition
  • Maximises profits
29
Q

What are the characteristics and diagrams of oligopolistic markets? (3.4.4)

A

Characteristics:

  • High entry / exit barriers
  • High concentration ratio
  • Firm interdependence
  • Differentiated products
  • Imperfect knowledge
30
Q

What are the characteristics and diagrams of monopolistically competitive
markets? (3.4.3)

A

Characteristics:

  • Many sellers
  • Similar differentiated products
  • Imperfect knowledge, but SN profit identifiable
  • Low entry / exit barriers
  • Some price-making

SR left, LR right:

31
Q

What are the characteristics and diagrams of perfectly competitive markets?
(3.4.2)

A

Characteristics:

  • Many buyers / sellers
  • Homogenous products
  • Perfect knowledge
  • Entry / exit freedom
  • Price-takers
32
Q

What are allocative, productive, and dynamic efficiencies, and what is
X-inefficiency? (3.4.1)

A

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

33
Q

What is the difference between internal and external economies of scale? (3.3.3)

A

Internal: individual firm

External: entire industry

34
Q

What types of diseconomies of scale exist? (3.3.3)

A
  • Communication (barriers, lower morale, reduced productivity)
  • Co-ordination (difficult management)
35
Q

What types of economies of scale exist? (3.3.3)

A
  • Technical: improved machinery
  • Managerial: better expertise
  • Financial: increased finance access, lower interest
  • Purchasing: bulk buying
  • Risk-bearing: diversification
  • Marketing: brand awareness
36
Q

What diagram is used for the LRAC curve and why does this occur? (3.3.2)

A

Short-run: 1+ FoP fixed

Long-run: All FoP variable

37
Q

What different business objectives are there and how are they represented on
diagrams? (3.2.1)

A
  • Profit maximisation (MR = MC)
  • Revenue maximisation (MR = 0)
  • Sales maximisation (AR = AC)
  • Satisficing (stakeholder satisfaction + other motive)
38
Q

What impact does a demerger have on businesses, workers, and consumers? (3.1.3)

A

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
39
Q

Why would a firm choose to demerge? (3.1.3)

A
  • Lacking synergy (DEoS)
  • Different business cultures
  • Increase focus
  • Reduce scale DEoS
  • Meet CMA requirements
40
Q

What constraints can exist on the growth of businesses? (3.1.2)

A
  • Market size (niches)
  • Finance access (financial EoS, profits)
  • Owner objectives (satisficing?)
  • Regulation (limiting market power)
41
Q

What is conglomeration, and what are its advantages / disadvantages? (3.1.2)

A

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
42
Q

What is horizontal integration, and what is its advantages / disadvantages?
(3.1.2)

A

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
43
Q

What are forward and backward vertical integration, and what are their
advantages / disadvantages? (3.1.2)

A

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
44
Q

What is organic growth and what are its advantages / disadvantages? (3.1.2)

A

Output increase, internal capital/labour investments.

Advantages:

  • Low-risk
  • Stable firm controlability

Disadvantages:

  • Slow
  • Unwillingness to change
45
Q

What is the significance of the divorce of ownership from control? (3.1.1)

A
  • Shareholder / manager conflict in motives
  • Principal-agent problem
  • Asymmetric information
46
Q

Why do some firms tend to, or want to, stay small? (3.1.1)

A
  • Lack of expansion financing
  • Avoid DEoS
  • Low barriers of entry
  • Niche market
47
Q

Why would firms tend to, or want to, grow? (3.1.1)

A
  • Higher profits
  • Increase EoS
  • Gain market power
  • Reduce risk
  • Satisfy managerial ambitions
  • Gain expertise

Economics (5 decks)

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