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Economics > Theme 3 - Business Behaviour & the Labour Market > Flashcards

Theme 3 - Business Behaviour & the Labour Market Flashcards

1
Q

Why do firms grow ?

A
  • to make money
  • to gain monopoly power
  • for greater security
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2
Q

How can firms grow to exploit economies of scale ?

A

Can help decrease production costs/unit and can sell more goods to increase revenue and therefore profit

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3
Q

Why would firms grow to gain monopoly power ?

A

To hold a greater share of the market and therefore be able to influence prices and restrict entry, can also cut costs by having monopsony power

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4
Q

Why would firms grow to have greater security ?

A

Larger firms have more security by building up cash and assets to use if in financial difficulty, will also have a larger range of goods in different markets so will be less affected by individual products/places

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5
Q

Why would some firms remain small ?

A
  • size of the market
  • access to finance
  • owner objectives and regulation
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6
Q

What is the principal agent problem ?

A

The agent makes decisions on behalf of the principal; agents have the temptation to maximise their own welfare.
Owners want to profit maximise but managers are tempted to maximise their own benefits, hence firms are run to profit satisfice

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7
Q

How can the principal agent problem be solved ?

A

Linking managers bonuses to profits or giving managers shares in the business

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8
Q

What is the private sector ?

A

Part of the economy which is owned and run by individuals/groups of individuals

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9
Q

What is the public sector ?

A

Part of the economy which is owned or controlled by local or central government; they provide a service rather than make profit

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10
Q

What is a for profit business ?

A

Most private sector organisations aim to make a profit and to maximise the financial benefits for shareholders

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11
Q

What is a non for profit business ?

A

These organisations aim to maximise social welfare by helping individuals/groups (e.g. charities)

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12
Q

What are the two main types of firm growth ?

A
  • organic growth (internal)
  • integration
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13
Q

What is organic growth ?

A

Firms grow by increasing output (e.g. new stores, products, more labour, increasing investment, like Lego

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14
Q

What are the advantages of organic growth ?

A
  • can maintain control over business
  • integration is expensive, time consuming, and high risk
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15
Q

What are the disadvantages of organic growth ?

A
  • the firm may be unable to gain access to a new market/asset through organic growth
  • may be too slow, directors may want to maximise salaries
  • more difficult for firms to get new ideas
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16
Q

What is integration ?

A

Growth through amalgamation, merger, or takeover

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17
Q

What is a merger/amalgamation ?

A

Firms join under common ownership

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18
Q

What is a takeover ?

A

One firm buys another

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19
Q

What is vertical integration ?

A

Integration of two firms in the same industry but at different points of the production process

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20
Q

What is backwards vertical integration ?

A

Merger takes the firm back towards the supplier of a good (e.g. Tesco and Booker)

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21
Q

What is forwards vertical integration ?

A

Merger takes the firm towards the eventual consumer of a good

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22
Q

What are the advantages of forwards/backwards vertical integration ?

A
  • increased potential for profit
  • less risks as goods will definitely be bought/supplied
  • (backwards integration) ensures quality and delivery of supplies, can also keep prices low
  • (forwards integration) secures retail outlets, can limit competition
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23
Q

What are the disadvantages of forwards/backwards vertical integration ?

A
  • firms may have no expertise in the stage of production which they have taken over (e.g. car manufacturers may not know how to sell cars)
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24
Q

What is horizontal integration ?

A

Firm in the same industry at the same stage of production integrate (e.g. Currys and PC World)

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25
Q

What are the advantages of horizontal integration ?

A
  • reduces competition, increases market share
  • firm can specialise and rationalise
  • can grow in a market where it already has expertise
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26
Q

What are the disadvantages of horizontal integration ?

A
  • increases risk for the business if that particular market fails
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27
Q

What is conglomerate integration ?

A

Firms in industries with no obvious connections/links integrate (e.g. General Electric merging with firms in the oil/water/aviation markets)

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28
Q

What are the advantages of conglomerate integration ?

A
  • useful where there’s no room for growth in the current market
  • range of products reduces risk
  • easier for each individual part of the business to expand
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29
Q

What are the disadvantages of conglomerate integration ?

A
  • no expertise in new markets, can be damaging for business
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30
Q

What are the constraints on business growth ?

A
  • size of the market (limited demand)
  • access to finance (unwilling lenders/lack of retained profits)
  • owner objectives (may not want to expand)
  • regulation (e.g. government preventing monopolies)
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31
Q

What is a demerger ?

A

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

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32
Q

What are the reasons for demergers ?

A
  • lack of synergies (different parts of the firm failing to make each other more efficient)
  • value of the company/share price (may be worth more demerged)
  • focussed companies (can be more successful if specialising in one market)
  • forced to by competition authorities
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33
Q

What are the impacts of a demerger on workers ?

A
  • more efficient, job losses
  • manager positions needed, promotions
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34
Q

What are the impacts of a demerger on a business ?

A
  • more efficient/innovative focusing on one market
  • could lead to a loss of economies of scale
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35
Q

What are the impacts of a demerger on consumers ?

A
  • could gain from increased efficiency (lower prices/better quality)
  • could lose out from lower efficiency and less economies of scale (poor quality/smaller range/higher prices)
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36
Q

Who determines a firm’s motives ?

A

Whoever controls it

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37
Q

What are the reasons behind profit maximisation ?

A

Can generate funds for investment and can help a firm survive a slowdown during a recession

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38
Q

Where do firms produce in order to profit maximise ?

A

Where MC = MR

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39
Q

What are the reasons behind revenue maximisation ?

A

Managers want to increase revenue, salary depends on it and increases business prestige

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40
Q

What are the 4 different business objectives ?

A
  • profit maximisation
  • revenue maximisation
  • sales maximisation
  • profit satisficing
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41
Q

Where do firms produce in order to maximise revenue ?

A

Where MR = 0

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42
Q

What are the reasons behind sales maximisation ?

A

Managers aim to maximise sales, increases business prestige, increases salaries, increases firm’s security, and increases market share

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43
Q

Where do firms produce in order to maximise sales ?

A

Where AC = AR

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44
Q

What are the reasons behind profit satisficing ?

A

Principle agent problem - make enough profit to keep shareholders happy whilst following objectives (e.g. manager’s own benefits) and not profit maximising, amount of profit needed will change annually dependent on profit made by other firms

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45
Q

What is total revenue ?

A

The total amount of money coming into the business through the sale of its products - quantity * price

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46
Q

What is average revenue ?

A

Same as demand curve - total revenue / output

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47
Q

What is marginal revenue ?

A

Extra revenue a firm gains from selling one more unit of production, change in total revenue / change in output

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48
Q

What shape is the total revenue curve and why ?

A

U shape - as total revenue rises with output but begins to decline when MR becomes negative

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49
Q

When is total revenue maximised ?

A

When MR = 0

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50
Q

What is the economic cost of production for a firm ?

A

The opportunity cost of production

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51
Q

What does ‘total cost’ mean ?

A

The cost of producing a given level of output, fixed + variable costs

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52
Q

What does ‘total fixed cost’ mean ?

A

Costs which do not change with output and remain constant, e.g. rentW

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53
Q

What does ‘total variable cost’ mean ?

A

Costs which change directly with output, e.g. materials

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54
Q

What is the formula for average total cost ?

A

total costs / output

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55
Q

What is the formula for average variable cost ?

A

total variable cost / output

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56
Q

What is the formula for average fixed cost ?

A

total fixed cost / output

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57
Q

What is the marginal cost ?

A

The cost of producing one extra unit of a good, change in total cost / change in output

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58
Q

Why is the SRAC U shaped ?

A

Law of diminishing marginal returns

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59
Q

Why is the LRAC U shaped ?

A

Economies of scale

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60
Q

What is economies of scale ?

A

Advantages of large scale production, firm experiences increasing returns to scale

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61
Q

What is diseconomies of scale ?

A

Efficiency reduced as businesses grows resulting in average cost rising, firms experiences decreasing returns to scale

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62
Q

What is constant returns to scale ?

A

Firms increase input and receive an increase in output by the same percentage

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63
Q

What is the minimum efficient scale ?

A

Minimum level of output reached for a business to fully exploit economies of scale

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64
Q

What is an internal economy of scale ?

A

Benefit enjoyed due to a growth in the firm

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65
Q

What are some internal economies of scale ?

A
  • technical economies (specialisation, R&D)
  • financial economies (higher security)
  • risk bearing economies (multiple markets)
  • managerial economies (specialist staff employed)
  • marketing and purchasing economies (bulk buying, specialisation, transport)
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66
Q

What is an external economy of scale ?

A

Advantage which arises from growth of the industry

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67
Q

What are some external economies of scale ?

A
  • labour (availability increases)
  • support services (large businesses will move to where support services are)
  • well developed infrastructure
68
Q

What are some diseconomies of scale ?

A
  • workers (lose sense of belonging)
  • geography (harder to control parts of the business which are further)
  • change (takes longer to respond)
  • price of materials (more demand)
  • management (coordination/control/communication)
69
Q

What is normal profit ?

A

Return which is sufficient to keep the factors of production committed to the business

70
Q

Where is normal profit shown on a diagram ?

A

TC = TR

71
Q

Where is supernormal (abnormal/monopoly) profit on a digram ?

A

Where AR > AC or TR > TC

72
Q

What is a loss ?

A

Where a firm fails to cover its costs

73
Q

Where is loss on a diagram ?

A

AR < AC or TC > TR

74
Q

What does the shut down point depend on ?

A

AVC, if AVC < AR then the firm should continue operating as producing can reduce the size of the loss

75
Q

What is the short term shut down point ?

A

AVC = AR

76
Q

What is the long term shut down point ?

A

Firms must be making at least normal profit to continue operating in the long run

77
Q

What is efficiency ?

A

Can be used to judge how well the market allocates resources and the relationship between scarce inputs and outputs

78
Q

What is allocative efficiency ?

A

Resources used to produce goods and services which consumers want, marginal cost of production is equal to value to society from consumption, P=MC

79
Q

What is productive efficiency ?

A

Goods are produced at the lowest average cost, MC = AC

80
Q

What is dynamic efficiency ?

A

Resources are allocated efficiently over time (opposite to static)

81
Q

What is static efficiency ?

A

Efficiency at a set point in time (opposite to dynamic)

82
Q

What is X-inefficiency ?

A

Fails to minimise average costs, producing above LRAC, occurs due to a lack of competition (little incentive to cut costs)

83
Q

What is competition like in a perfectly competitive market ?

A

High degree of competition, doesn’t necessarily maximise welfare or produce ideal resultsW

84
Q

What are the characteristics of perfect competition ?

A
  • demand is perfectly elastic, firms are price takers, prices are determined by interactions between supply and demand
  • many buyers and sellers (one economic agent cannot influence the market)
  • freedom of entry and exit
  • perfect knowledge
  • homogenous
85
Q

What do firms maximise in perfect competition ?

A

Firms short run profit maximise; can make supernormal profits in the short run but can only make normal profits in the long run

86
Q

What is efficiency like in a perfectly competitive market ?

A
  • productively and allocatively efficient
  • not dynamically efficient (no R&D)
  • firms are unable to benefit from economies of scale, limited growth and therefore efficiency
87
Q

What two concepts does the idea of monopolistic competition lie between ?

A

Perfect competition and monopoly

88
Q

What are the characteristics of monopolistic competition ?

A
  • large number of buyers and sellers
  • no barriers to entry and exit
  • goods produced are differentiated, not homogenous
89
Q

What profits can firms make in the long and short run under monopolistic competition ?

A

Firms can make supernormal profits in the short run, but only normal profits in the long run

90
Q

What are the limitations of the monopolistic competition model ?

A
  • information may be imperfect, firms may not enter the market as expected
  • firms may not be able to compete on the same level (due to differentiated products) so some firms could continue to maintain supernormal profits
91
Q

What is efficiency like in monopolistic competition ?

A
  • not allocatively or productively efficient as firms are profit maximising
  • likely to be dynamically efficient (differentiating products relating to consumer desires)
  • greater variety of goods, may be able to somewhat benefit from economies of scale
92
Q

What is an oligopoly ?

A

Where a few firms dominate the market

93
Q

What are the characteristics of an oligopoly ?

A
  • products are differentiated
  • high concentration ratio
  • firms are interdependent
  • barriers to entry
94
Q

What is the n-firm concentration ratio ?

A

The percentage of total market share that a particular number of firms have

95
Q

What is the n-firm concentration ratio formula ?

A

(total sales of n firms / total size of market) * 100

96
Q

What is collusion ?

A

When firms make collusive agreements which reduce competition

97
Q

Why do firms collude ?

A
  • firms can maximise industry profits
  • reduces uncertainty felt by firms
  • works best when firms are similar in a stable market with high barriers
98
Q

Why might some firms not want to collude ?

A
  • it is illegal
  • may have a strong business model which can allow them to have a larger market share, no need to collude
99
Q

What is overt collusion ?

A

Firms come to a formal agreement (illegal)

100
Q

What is tacit collusion ?

A

No formal agreement

101
Q

How may a cartel operate ?

A

Agreeing on a price or agreeing to divide up the market

102
Q

What is a problem with cartels ?

A

There is constant temptation for a firm to break the agreement and to be the first to do so

103
Q

What is price leadership ?

A

One firm has advantages due to size, so other firms follow this price set as they are unwilling to engage in a price war

104
Q

What is barometric firm price leadership ?

A

Firm develops a reputation for being good at predicting the next move in the industry, other firms begin to follow

105
Q

What is game theory ?

A

Reactions of one player to changes in strategy by another player

106
Q

What is the dominant strategy ?

A

Greatest reward and the least bad

107
Q

What is the Nash equilibrium ?

A

The optimal outcome for both parties, no incentive to deviate from original strategy

108
Q

What are some forms of price competition ?

A
  • price wars (lower prices so AVC is below AR, firms leave market so supply drops and prices go back up
  • predatory pricing (illegal)
  • limit pricing (low price deters new entrants)
109
Q

What are some examples of non price competition ?

A
  • advertising
  • loyalty cards
  • branding
  • quality
  • customer service
  • product development (competitive advantage)
110
Q

What is efficiency like in an oligopoly ?

A
  • statically inefficient, not productively or allocatively efficient
  • dynamically efficient
  • can exploit economies of scale
111
Q

What are characteristics of a monopoly ?

A
  • one firm is the sole seller of a product
  • monopoly power is > 25% market share
  • high barriers to entry
112
Q

What profits can monopolists make ?

A

Can make supernormal profits due to high barriers to entry

113
Q

What is third degree price discrimination ?

A

Charging different prices to different people for the same good/service

114
Q

What must take place for third degree price discrimination to occur ?

A

Must be able to separate the market into groups of buyers who have different elasticities of demand

115
Q

What are the benefits of third degree price discrimination ?

A
  • firms increase profits
  • can increase equality
116
Q

What are the costs of third degree price discrimination ?

A

Some consumers have to pay more - resulting in a lower consumer surplus

117
Q

What is a natural monopoly ?

A

Occurs when the economies of scale are so large that even a single producer are unable to exploit all of them

118
Q

Where are natural monopolies found ?

A

Industries with high fixed costs, pointless to encourage competition and as this would increase costs

119
Q

What are the effects of a monopoly on firms ?

A
  • huge profits for shareholders
  • firms can finance investments, can build up profit to use in financial difficulty
  • can compete against large overseas corporations
  • can maximise economies of scale
  • may not choose to profit maximise
120
Q

What are the effects of a monopoly on employees ?

A
  • fewer workers employed
  • high inefficiency may result in workers receiving higher wages
121
Q

What are the effects of a monopoly on suppliers ?

A

Depends on the extent to which a monopolist is also a monopsonist

122
Q

What are the effects of a monopoly on consumers ?

A
  • can benefit from a higher surplus (lower prices from economies of scale)
  • price discrimination can allow for the survival of a product to benefit consumers (e.g. economy and business flights)
  • less choices due to one firm producing
  • consumers may pay higher prices for lower quality
123
Q

What are the effects of a monopoly on efficiency ?

A
  • productively and allocatively inefficient
  • dynamically efficient, but firms may not have an incentive to invest
124
Q

What are the characteristics of a monopsony ?

A
  • only one buyer in the market
  • same as monopoly
  • pay suppliers to lowest price possible to minimise costs
125
Q

Where does a monopsonist produce ?

A

Where MC = D

126
Q

What are the effects of a monopsony on firms ?

A
  • higher profits
  • purchasing economies of scale
127
Q

What are the effects of a monopsony on consumers ?

A
  • lower prices
  • could lead to a fall in supply, less inputs bought
  • fall in quality as prices are driven down
128
Q

What are the effects of a monopsony on employees ?

A
  • supplier will sell less goods and employ less
  • monopsonist may pay higher wages as costs fall
129
Q

What are the effects of a monopsony on a supplier ?

A

Receive low prices, some firms may leave the market as they will be worse off

130
Q

What is a contestable market ?

A

A market which has a high threat of new entrants which keeps firms producing at a competitive level

131
Q

What are the characteristics of a contestable market ?

A
  • perfect knowledge
  • freedom of entry and exit, relative absence of sunk costs
  • average cost is the same due to the use of the best available technology
  • low product loyalty, consumers are willing to switch
132
Q

What are the implications of a contestable market ?

A
  • limit pricing may be used to deter new entrants
  • firms are only able to make normal profit and produce where AC = AR
  • firms are likely to be productive and allocatively efficient
133
Q

What are types of entry/exit barriers ?

A
  • legal barriers (e.g. patents/rights)
  • marketing barriers
  • pricing decisions of firms (limit/predatory)
  • start up/sunk costs
  • economies of scale
  • cost of writing off assets/paying leases/making workers redundant
134
Q

What is a sunk cost ?

A

A fixed cost which the business cannot recover if it leaves the industry (e.g. advertising)

135
Q

How is the degree of contestability measured ?

A

The extent to which the gains from market entry for a firm exceed the costs of entering a market

136
Q

What does the demand curve for labour show ?

A

The quantity of labour which employees would wish to hire at each possible wage

137
Q

What is the demand for labour determined by ?

A

The marginal revenue product (MRP)

138
Q

How is labour derived demand ?

A

Derived from the demand for the product which the labour produces

139
Q

What are factors affecting the demand for labour ?

A
  • wage rates
  • demand for the product
  • prices of other factors of production (e.g. machinery)
  • wages in other countries
  • technology
  • regulation (can lead to less hiring)
  • state of the economy
140
Q

What is the price elasticity of demand (PED) for labour ?

A

The responsiveness of the quantity demanded of labour to the wage rate

141
Q

What are factors affecting the PED of labour ?

A
  • PED for the product
  • proportion of wages in the total cost of production
  • substitutes available
  • time
142
Q

What does the supply of labour curve show ?

A

The ability and willingness of people to make themselves available to work at different wage rates

143
Q

What factors influence the supply of labour ?

A
  • wages
  • population and distribution of age
  • non-monetary benefits
  • education/training/qualifications required
  • trade unions and barriers to entry (e.g. degrees)
  • wages and conditions of other jobs
  • legislations (e.g. school leaving and retirement ages)
144
Q

What is occupational immobility ?

A

Workers find it difficult to move from one job to another due to a lack of transferable skills

145
Q

What is geographical immobility ?

A

Workers find it difficult to move from one place to another

146
Q

What can immobility result in ?

A

Excess demand or supply

147
Q

What is the elasticity of supply ?

A

The responsiveness of supply to a change in wage rates

148
Q

What affects the elasticity of supply ?

A
  • level of qualifications and training required
  • availability of suitable labour in other industries
  • time
149
Q

Why do wage rates differ ?

A
  • age
  • education
  • training
  • work experience
  • skills/talent/ability to perform tasks
  • sex
  • ethnic background
150
Q

How are wages determined in a perfectly competitive market ?

A

Purely through the interactions of supply and demand

151
Q

How are wages determined in a monopsony ?

A

MC = D, people are employed at a lower wage rate

152
Q

How are wages determined in a monopoly ?

A

Trade unions bargain for higher wages

153
Q

What are some labour market issues ??

A
  • skill shortages, immobility
  • young workers, unemployment
  • wage inequality
  • retirement, expensive for the government
  • zero-hour contracts
  • gig economy
  • migration
154
Q

What are some examples of government intervention in the labour market ?

A
  • national minimum wage (reduces inequality, impact differs by region)
  • maximum wages (excess demand, less inequality)
  • public sector wage setting (downwards pressure on private sector wages)
  • tracking immobility (improving infrastructure, encouraging further study/training)
155
Q

What do the CMA do ?

A

Promotes competition for consumer benefit, investigated mergers

156
Q

Why are mergers controlled ?

A
  • if there will be a substantial lessening of competition
  • market share > 25% (monopoly)
157
Q

How can monopolies be controlled through government intervention ?

A
  • price regulation (RPI + X or RPI - X + K)
  • profit regulation (may limit efficiency)
  • quality standards (requires political will and understanding)
  • performance targets
158
Q

How can competition and contestability be promoted ?

A
  • promoting small businesses
  • deregulation
  • competitive tendering
159
Q

How can suppliers and employees be protected ?

A
  • restriction on monopsony power
  • worker’s rights (e.g. health and safety laws)
160
Q

What are some advantages of privatisation ?

A
  • greater competition
  • managers more accountable
  • reduces government interference
  • workers more motivated
161
Q

What are some disadvantages of privatisation ?

A
  • monopolies created ?
  • externalities/inequalities
  • lack of coordination and these impacts on other industries
162
Q

What are some advantages of nationalisation ?

A
  • maximises social welfare (in the case of a monopoly)
  • considers externalities
  • guarantees a minimum level of service
163
Q

What are some disadvantages of nationalisation ?

A
  • principle agent problem
  • moral hazard
  • influenced by government decisions
  • government may not be able to afford to invest
164
Q

What are the impacts of government intervention ?

A
  • prevents monopolies charging excessive prices
  • can increase efficiency
  • limited impact, large firms have political power
165
Q

What are the limits to government intervention ?

A
  • regulatory capture (bias)
  • asymmetric information (price targets set incorrectly)

Economics (4 decks)

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