Theme 3 Government Intervention, Growth and Objectives + market strcutures Flashcards
Identify and explain 3 reasons why some firms grow
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.
Identify and explain 3 reasons why some firms don’t grow/ constraint growth
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.
What is a PLC
Public Limited Company, shares are sold on public stock exchange for anyone.
Define the divorce of ownership and control of a firm
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.
What problems can occur from the divorce of ownership. and control in a firm
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.
Define the principal-agent problem
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.
How does the principal-agent problem affect the behaviour of firms
Leads to alternative objectives rather than profit maximising
What is meant by a state/ public sector organisation
An organisation which is owned and controlled by the government
What is meant by a private sector organisation
When the organisation is owned by private individuals or shareholders.
Distinguish between a not for profit, and a profit making organisation
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.
Explain two strategies to improve occupational immobility
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.
Explain two strategies to improve geographical immobility
-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
What is organic growth
when a company grows using internal funds by expanding output, sales and number of employees.
what are the advantages and disadvantages of or organic growth
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.
what is external growth
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.
distinguish between a merger and an acquisition
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.
what is meant by forward vertical integration
when a company merges with another firm in the same industry but closer to the end customer e.g. a farm and supermarket
what are the motives to do forward vertical integration
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
what is backward vertical integration
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.
what motives are there for backward vertical integration
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.
what is meant by horizontal integration
when a company merges with another company in the same industry and the same stage of production e.g. bakery merging with bakery
what are the motives for horizontal integration
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
what is meant by conglomerate integration
when a company merges with a company in a completely unrelated industry.
what are the motives for conglomerate integration
diversification and risk spread/ minimisation
advantages and disadvantages of external growth
it is quick, comapred to organic, yet it is expensive and risky
identify and explain 3 reasons why firms grow
to gain market share/ power, to increase profit, to get economies of scale.
what is meant by a demerger
when a company breaks up into two or more separate firms
reasons for a demerger
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
what is the impact of a demerger on the firm, employees and customers
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.
define short run
short run is the period when there is at least one factor of production that is fixed
define long run
when all factors of production are variable
define total product
total output of a firm at a particular level of resource employment
define average product
the output per unit of variable input
how do you calculate average product
if labour is the variable factor then average product is TP/L.
define marginal product
marginal product is the additional output from one extra unit of input
how do you calculate marginal product
change in TP/change in variable input
what is the law of diminishing returns
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.
define constant returns to scale
long run phenomenon whereby as the amount of resources employed increases, output increases by the same amount
define increasing returns to scale
long run phenomenon whereby as the amount of resources employed increases, output increases by a greater amount.
define decreasing returns to scale
long run phenomenon whereby as the amount of resources employed increases, output increases by a lesser amount
how do productivity and factor prices affect firms’ costs of production and the choice of factor inputs
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.
define fixed costs
fixed costs are costs that do not change with output such as rent, interest payments and marketing.
define variable costs
variable costs are costs that do not change with output such as raw materials and wages
write a formula showing how you could calculate Total Costs
TC=TFC+TVC
how do you calculate average TC
ATC = TC/Q
how do you calculate marginal costs
MC = change in total costs/ change in output
NAME FOUR CHARACTERISTICS of a perfectly competitive market
1 homogenous goods 2 no/ low barrier to entry 3 many firms and buyers 4 perfect knowledge amongst consumers and producers.
give two examples of competitive markets
foreign currency, commodities
what other assumptions are made about firms in competitive markets
that there are no externalities and no economies of scale
give two reasons why perfect competition is thought to be the most desirable market structure.
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
explain two reasons why the assumptions behind the model of perfect competition are unrealistic
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.
in what circumstances might perfect competition not be desirable
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.
define monopolistic competition
monopolistic competition is a market close to perfect competition, but where products are slightly differentiated.
name 4 assumptions associated with monopolistic competition
differentiated products. large number of buyers and sellers. near perfect information amongst buyers and sellers, low or no barriers to entry
can firms in this market structure make supernormal in a) the long run and b) the short run.
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.
are firms in monopolistic competition productively and allocatively efficient in the short and long run
firms in monopolistic competition are neither productively nor allocatively efficient in the short or long run.
what is a 3 firm concentration ratio
this measures the total share of the top three firms in the market.
what does it mean if a firm has a high concentration ratio
it means that market power is concentrated amongst a few large firms, so the market is therefore less competitive
give three examples of markets with high concentration ratios
the telecoms, banking and electricity markets e.g. Monopoly, Oligopoly and Duopoly markets have high market concentration.
what is product differentiation
when a firm makes its product design, features, or brand perception slightly different from its rivals.
oligopoly characteristic
interdependence, high concentration ratio, few firms, high barriers, differentiated products.
One example of a Cartel
OPEC
price leadership
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.
factors that increase the likelihood of collusion in an industry
- 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.
define monopsony
where there is a single or dominant buyer in a market
what are the characteristics of monopsonistic markets
- a single firm buying all output in a market - no alternative buyers
give two examples of markets with monopsony buyers
1 The NHS is a monopsony buyer of nurses services 2 supermarkets have monopsony power when buying from farmers
what are the adv and dis to consumers of a monopsony
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
what are the adv and dis to producers in monopolistic markets
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
what are the adv and dis of monopsonists themselves in monopsonistic markets
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.
what is productive efficiency
a firm is productively efficient when P=MC=AC, when they produce at lowest average total costs
what is meant by allocative efficiency
allocative efficiency is when a firm produces where the price=marginal cost, P=MC
what is dynamic efficiency
dynamic efficiency is when there when a firm increases efficiency over time caused by innovation and R&D
name 3 factors that would influence dynamic efficiency
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.
compare efficiency between perfectly competitive firms and those in concentrated markets.
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.
what is X-inefficiency
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
what are the conditions that make it more likely for x-inefficiency to exist
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
Who are the main regulatory bodies in the UK?
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)
what are the 3 main pillars of the competition act 1988
1 anti-competitive agreements 2 cartels 3 abuse of a dominant position
what is the role of the CMA
to protect the consumers’ interests by applying competition law, encouraging contestability and investigation reports of market abuses. they are a non-ministerial government department.
