Theme 3 Government Intervention, Growth and Objectives + market strcutures

Question 1

Identify and explain 3 reasons why some firms grow

Answer 1

1 To take advantage of internal economies of scale: when the long run average total costs of an industry fall as output increases - reduced unit costs from purchasing economies of scale would allow for efficiency and profit to increase.
2 To increase market share and therefore power, with which they have increased price setting power in the future.
3 To diversify and spread risk: diversifying their product range or expanding into foreign markets, this means they are able to protect themselves from the risk of any one of their markets failing.

Question 2

Identify and explain 3 reasons why some firms don’t grow/ constraint growth

Answer 2

1 Some industries, particularly labour intensive ones, do not experience high economies of scale and the cost minimising output level is relatively low therefore there is no cost or efficiency reasons to grow.
2 If a firm operates in a niche market then there would not be sufficient demand for them to grow much larger.
3 Some firms focus on personal service, or may want to stay under family ownership and so stay small.

Question 3

What is a PLC

Answer 3

Public Limited Company, shares are sold on public stock exchange for anyone.

Question 4

Define the divorce of ownership and control of a firm

Answer 4

Associated with larger companies, the divorce of ownership means that the owners of the company are shareholders, but the control over the firms dad to day decisions is with the managers and directors.

Question 5

What problems can occur from the divorce of ownership. and control in a firm

Answer 5

Satisficing: where the managers and directors make just enough to keep shareholders satisfied whilst pursuing other objectives e.g. revenue maximisation. This means there is a lack in accountability between owners and managers.

Question 6

Define the principal-agent problem

Answer 6

Principal - Shareholder. Agent - Manager. The principal-agent problem is where there may be a conflict in priorities and the agent may not be making decisions with the interests of the principals at heart. There is also a weak control mechanism meaning that the principles do not have effective control over the managers actions.

Question 7

How does the principal-agent problem affect the behaviour of firms

Answer 7

Leads to alternative objectives rather than profit maximising

Question 8

What is meant by a state/ public sector organisation

Answer 8

An organisation which is owned and controlled by the government

Question 9

What is meant by a private sector organisation

Answer 9

When the organisation is owned by private individuals or shareholders.

Question 10

Distinguish between a not for profit, and a profit making organisation

Answer 10

NFP organisations’ primary aim is to increase the social, financial or environmental wellbeing of an area or an entity. Profit making organisations’ primary aim is too make a profit.

Question 11

Explain two strategies to improve occupational immobility

Answer 11

Retraining schemes - gov can educate workers who are structurally unemployed to gain the skills to fill existing job vacancies.
Apprenticeship for mature workers - businesses can take on workers at a reduced rate and train them up in the skills needed for the job vacancies.

Question 12

Explain two strategies to improve geographical immobility

Answer 12

-housing market schemess such as sane new ‘garden cities’ initiatives to build houses that are affordable to reduce costs of relocation.
Improvements in transport infrastructure to allow workers to commute over longer differences

Question 13

What is organic growth

Answer 13

when a company grows using internal funds by expanding output, sales and number of employees.

Question 14

what are the advantages and disadvantages of or organic growth

Answer 14

it is the slowest method of growth and doesnt necessarily increase market share, yet means the owner can retain complete control with less risk and cheaper.

Question 15

what is external growth

Answer 15

when a company grows through a merger or acquisition, fast way to grow while eliminating competition, will also lead to increased market share and power, yet includes loss of ownership, is very expensive and may fail leading to a demerger which can be extremely costly.

Question 16

distinguish between a merger and an acquisition

Answer 16

a merger is when firms join to make a new company - it is voluntary. an acquisition however is different as its when a firm buys and takes over another firm and absorbs them into the parent company, may be hostile.

Question 17

what is meant by forward vertical integration

Answer 17

when a company merges with another firm in the same industry but closer to the end customer e.g. a farm and supermarket

Question 18

what are the motives to do forward vertical integration

Answer 18

control over the distribution of the product e.g. can only stock their product ad exclude competitor brands+ economies of scale, control over quality and customer service to protect the brand

Question 19

what is backward vertical integration

Answer 19

when a company merges with another firm in the same industry but further away from the final customer e.g. a bakery buying a wheat farm.

Question 20

what motives are there for backward vertical integration

Answer 20

control over the raw materials so that they can reduce supply to competitors needing the same raw material, to guarantee quality and supply of the raw material and to increase economies of scale.

Question 21

what is meant by horizontal integration

Answer 21

when a company merges with another company in the same industry and the same stage of production e.g. bakery merging with bakery

Question 22

what are the motives for horizontal integration

Answer 22

to increase market share/ power, to access greater economies of scale and to access new markets for existing products e.g. to expand into another country

Question 23

what is meant by conglomerate integration

Answer 23

when a company merges with a company in a completely unrelated industry.

Question 24

what are the motives for conglomerate integration

Answer 24

diversification and risk spread/ minimisation

Question 25

advantages and disadvantages of external growth

Answer 25

it is quick, comapred to organic, yet it is expensive and risky

Question 26

identify and explain 3 reasons why firms grow

Answer 26

to gain market share/ power, to increase profit, to get economies of scale.

Question 27

what is meant by a demerger

Answer 27

when a company breaks up into two or more separate firms

Question 28

reasons for a demerger

Answer 28

diseconomies of scale if the merged firm is inefficient. culture clash particularly when the two firms are from different countries/ business cultures. expected synergies did not materialise. the company wants to move in another strategic direction, or the new company does not fit the brand values1

Question 29

what is the impact of a demerger on the firm, employees and customers

Answer 29

can lead to uncertainty over job security. / can have an impact on share prices and the market valuation of the company - this is positive if the market agree that the demerger is in the companies interests but negative if it is seen as a sign of weakness. / can lead to an improvement in efficiency, or a reduction in losses if diseconomies of scale or x-inefficiencies are eliminated. / consumers may see quality of service impacted in the short run, whilst the company breaks into two separate firm, there may be more competition and choice in the long run though which may benefit consumers.

Question 30

define short run

Answer 30

short run is the period when there is at least one factor of production that is fixed

Question 31

define long run

Answer 31

when all factors of production are variable

Question 32

define total product

Answer 32

total output of a firm at a particular level of resource employment

Question 33

define average product

Answer 33

the output per unit of variable input

Question 34

how do you calculate average product

Answer 34

if labour is the variable factor then average product is TP/L.

Question 35

define marginal product

Answer 35

marginal product is the additional output from one extra unit of input

Question 36

how do you calculate marginal product

Answer 36

change in TP/change in variable input

Question 37

what is the law of diminishing returns

Answer 37

as you add more of a variable factor of production to a fixed factor of production, at first the marginal product increases but eventually starts to fall.

Question 38

define constant returns to scale

Answer 38

long run phenomenon whereby as the amount of resources employed increases, output increases by the same amount

Question 39

define increasing returns to scale

Answer 39

long run phenomenon whereby as the amount of resources employed increases, output increases by a greater amount.

Question 40

define decreasing returns to scale

Answer 40

long run phenomenon whereby as the amount of resources employed increases, output increases by a lesser amount

Question 41

how do productivity and factor prices affect firms’ costs of production and the choice of factor inputs

Answer 41

as productivity rises (output per unit of input) a firm’s average costs falls, investing in capital can can increase productivity of labour employed, factor prices such as wages affect costs, if one factor rises in relation to another then the choice of factor inputs may change from this factor e.g. if wages rise then a firm may become more capital intensive.

Question 42

define fixed costs

Answer 42

fixed costs are costs that do not change with output such as rent, interest payments and marketing.

Question 43

define variable costs

Answer 43

variable costs are costs that do not change with output such as raw materials and wages

Question 44

write a formula showing how you could calculate Total Costs

Answer 44

TC=TFC+TVC

Question 45

how do you calculate average TC

Answer 45

ATC = TC/Q

Question 46

how do you calculate marginal costs

Answer 46

MC = change in total costs/ change in output

Question 47

NAME FOUR CHARACTERISTICS of a perfectly competitive market

Answer 47

1 homogenous goods 2 no/ low barrier to entry 3 many firms and buyers 4 perfect knowledge amongst consumers and producers.

Question 48

give two examples of competitive markets

Answer 48

foreign currency, commodities

Question 49

what other assumptions are made about firms in competitive markets

Answer 49

that there are no externalities and no economies of scale

Question 50

give two reasons why perfect competition is thought to be the most desirable market structure.

Answer 50

in perfect competition the consumer is sovereign, so they have perfect choice and low prices. Firms in perfect competition are efficient as they are competing against many other firms all selling identical products

Question 51

explain two reasons why the assumptions behind the model of perfect competition are unrealistic

Answer 51

this is because there is no such thing as perfect knowledge, economies of scale might exist to some extent and externalities will also exist to a degree. There will be some barriers to entry albeit that they may be small.

Question 52

in what circumstances might perfect competition not be desirable

Answer 52

in markets where research and development are important e.g. in tech or in pharmaceutical, the fact that only normal profits will be made will be an issue as there is no funds available for investment. This makes dynamic efficiency impossible. In addition, in markets where economies of scale are at levels so great that no firm can fully exploit them it will be more efficient for there to only be one firm rather than many small firms e.g. in the case of a natural monopoly.

Question 53

define monopolistic competition

Answer 53

monopolistic competition is a market close to perfect competition, but where products are slightly differentiated.

Question 54

name 4 assumptions associated with monopolistic competition

Answer 54

differentiated products. large number of buyers and sellers. near perfect information amongst buyers and sellers, low or no barriers to entry

Question 55

can firms in this market structure make supernormal in a) the long run and b) the short run.

Answer 55

Firms can make supernormal supernormal profits in the short run but due to low barriers to entry, in the long run new firms will enter the market and compete away all the profits.

Question 56

are firms in monopolistic competition productively and allocatively efficient in the short and long run

Answer 56

firms in monopolistic competition are neither productively nor allocatively efficient in the short or long run.

Question 57

what is a 3 firm concentration ratio

Answer 57

this measures the total share of the top three firms in the market.

Question 58

what does it mean if a firm has a high concentration ratio

Answer 58

it means that market power is concentrated amongst a few large firms, so the market is therefore less competitive

Question 59

give three examples of markets with high concentration ratios

Answer 59

the telecoms, banking and electricity markets e.g. Monopoly, Oligopoly and Duopoly markets have high market concentration.

Question 60

what is product differentiation

Answer 60

when a firm makes its product design, features, or brand perception slightly different from its rivals.

Question 61

oligopoly characteristic

Answer 61

interdependence, high concentration ratio, few firms, high barriers, differentiated products.

Question 62

One example of a Cartel

Answer 62

OPEC

Question 63

price leadership

Answer 63

when one firm is dominant in a market and when it changes price, all other competitors follow them regardless of whether it is a price rise or a price fall.

Question 64

factors that increase the likelihood of collusion in an industry

Answer 64

• the fewer the firms in the industry, the easier it is to come to an agreement.
• the more mature the industry, the more likely the employees at different firms will know each other and conclude.

Question 65

define monopsony

Answer 65

where there is a single or dominant buyer in a market

Question 66

what are the characteristics of monopsonistic markets

Answer 66

• a single firm buying all output in a market - no alternative buyers

Question 67

give two examples of markets with monopsony buyers

Answer 67

1 The NHS is a monopsony buyer of nurses services 2 supermarkets have monopsony power when buying from farmers

Question 68

what are the adv and dis to consumers of a monopsony

Answer 68

a monopsony buyer has large purchasing power, meaning that they can force down suppliers prices, and could pass these onto consumers in lower prices which would be an advantage to them. However, suppliers who are being squeezed on price may cut corners on quality which could affect the end consumer

Question 69

what are the adv and dis to producers in monopolistic markets

Answer 69

the dis is that they have very little power in negotiations and have to accept price and payment terms that are not advantageous to them e.g. haribo tesco. But at least they only have to deal with one consumer

Question 70

what are the adv and dis of monopsonists themselves in monopsonistic markets

Answer 70

higher profitability as they can drive down costs and payment terms to their advantage. If they pass on the lower costs to consumers in lower prices, then they can operate limit pricing and protect or increase their market share from competitors or the threat of competition.

Question 71

what is productive efficiency

Answer 71

a firm is productively efficient when P=MC=AC, when they produce at lowest average total costs

Question 72

what is meant by allocative efficiency

Answer 72

allocative efficiency is when a firm produces where the price=marginal cost, P=MC

Question 73

what is dynamic efficiency

Answer 73

dynamic efficiency is when there when a firm increases efficiency over time caused by innovation and R&D

Question 74

name 3 factors that would influence dynamic efficiency

Answer 74

a firm can only be dynamically efficient if they are able to make a supernormal profit in the long run and do one of the below with those profits:

• investment into research and development into capital improvement: this might improve the productivity of capital and hence reduce the average total costs over time like mechanisation of car production.
• investment into improving production processes: this might also improve productivity as if there is a better way to do a task then this will reduce average total costs over time.
• investment into new products and services: dynamic efficiency is often associated with improving productive efficiency, but investment into new and better products can improve allocative efficiency as the welfare generated by the products improves over time.

Question 75

compare efficiency between perfectly competitive firms and those in concentrated markets.

Answer 75

according to the traditional theory of the firm, the extent of inefficiency depends on 2 factors: no. of existing competitors in the market and the barriers to entry controlling the threat of potential.

Question 76

what is X-inefficiency

Answer 76

also known as ‘organizational slack’, a firm is x-inefficient if it is not producing on its lowest ATC curve. There are unnessaccary costs that could removed without impacting on output

Question 77

what are the conditions that make it more likely for x-inefficiency to exist

Answer 77

if there are high barriers to entry, then the firm is protected from the threat of competition and therefore this makes it more likely for x-inefficiency to exist. The number of incumbent firms is also a factor as if there are many firms then an x-inefficient firm is likely to be beaten on price by another firm, thus forcing them to reduce their costs in order to compete

Question 78

Who are the main regulatory bodies in the UK?

Answer 78

CMA, industry regulators like OfCom and OfGem, Secretary of State for Business Innovation and Skills (their role is to oversee all competition law, they can overturn decisions by the CMA of instruct the CMA to conduct an investigation)

Question 79

what are the 3 main pillars of the competition act 1988

Answer 79

1 anti-competitive agreements 2 cartels 3 abuse of a dominant position

Question 80

what is the role of the CMA

Answer 80

to protect the consumers’ interests by applying competition law, encouraging contestability and investigation reports of market abuses. they are a non-ministerial government department.