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Economics > Theme 3 (Micro) > Flashcards

Theme 3 (Micro) Flashcards

1
Q

5 reasons why firms might wish to grow

3.1.1

Size and Types of firms

A
  • Profits – to generate more profits to give shareholders a better return (dividends and share price).
  • Costs – to benefit from economies of scale, resulting in lower unit costs of production.
  • Market power – to become a more dominant force in their market; if a firm dominates the market it can increase its prices.
  • Reducing risk – firms might want to diversify so that if sales drop in one market they have another market to generate sales.
  • Managerial motives – senior managers may wish to grow in order to control a larger business
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2
Q

Why might a firm choose to stay small

3.1.1

Size and Types of firms

A

Lack of finance for expansion

Avoiding diseconomies of scale

Providing niche products which have a low PED or high YED

Offering a more personal service as they get to know customers and their needs

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3
Q

When does the divorce between control and ownership occur

3.1.1

Size and Types of firms

A

The principal agent problem.

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4
Q

What is the principal agent problem

3.1.1

Size and Type of firms

A

Where there is asymmetric information between the owner and manager. Managers may have different motives such as sales max. Therefore, the firm may grow larger than the profit max quantity, harming shareholder returns.

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5
Q

What is the difference between public sector and private sector organisations?

3.1.1

Size and Type of firms

A

Public sector= employed by the government eg doctors, police, teachers
Private sector= private enterprises eg retail, manufacturing

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6
Q

Difference between for profit and not for profit organisations

3.1.1

Size and Types of firms

A

Generally, for-profit companies seek to provide a product or service to consumers and make a profit by doing so. A nonprofit organization’s purpose is to provide a service or benefit to the community with no intention of earning a profit

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7
Q

Difference between organic and inorganic growth?

3.1.2

Business Growth

A

Organic Growth is where a business grows from within eg increasing it’s product range

Inorganic is growth from outside the business ie a merger

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8
Q

Advantages of organic growth

3.1.2

Business Growth

A

Less expensive
Mergers and takeovers can be extremely expensive in contrast to organic growth.
This is because the M&A often expects a premium price to be paid for the business as they are aware of the financial benefits you’ll be receiving.
Less risky – The majority of mergers and takeovers end up failing.
Organic growth allows for more control and can happen at a slower pace, planning the change in produce, promotion or place

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9
Q

Disadvantages of organic growth

3.1.2

Business Growth

A

Organic growth is often slow which can reduce the business’s ability to react to its competitors.
This may result in the business losing market share as other competitors grow inorganically at a faster rate
There can also be a long period of time between the original investment and the return from it.
R&D can take years before a product is ready to take to market. This can cause cash flow problems.

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10
Q

What is vertical integration

3.1.2

Business Growth

A

When you acquire a business on a different level of the supply chain (can be forwards or backwards)

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11
Q

What is forward integration?

3.1.2

Business Growth

A

When you acquire a business further up the supply chain eg Ebay bought PayPal

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12
Q

What is backwards integration?

3.1.2

Business Growth

A

When you acquire another firm behind you on the supply chain eg Ikea buying a forest

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13
Q

Advantages of vertical integration

3.1.2

Business Growth

A

Can increase your market share, acting as a barrier to entry (generic)
Can increase the quality of output eg Netflix acquiring rights for Roald Dahl films

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14
Q

Disadvantages of vertical integration

3.1.2

Business Growth

A

Culture conflict and problems with communication and coordination.
This can lead to diseconomies of scale.
If staff leave this was part of the asset that you’ve bought.
Also Vertical mergers will have fewer economies of scale because production is at different stages of supply.
Yet a hostile takeover might expect a premium price to be paid

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15
Q

What is horizontal integration?

3.1.2

Business Growth

A

When a firm acquires another firm on the same level of the supply chain ie a rival.

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16
Q

Advantages of horizontal integration

3.1.2

Business Growth

A

Growth

Economies of scale/synergy

Less competition

Higher SNP

CMA – concerned about choice and higher prices from a monopoly market structure that could result

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17
Q

Disadvantages of vertcal integration

3.1.2

Business Growth

A

Diseconomies of scale/inefficiency

Cultural conflict & asymmetric information

Possibly pay a premium for the company

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18
Q

What is conglomeration?

3.1.2

Business Growth

A

Where separate and diverse firms merge together to form a large corporation

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19
Q

Advantages of conglomeration

3.1.2

Business Growth

A

Risk bearing economies of scale as if one market fails, better performing businesses can compensate for the losses.
Larger customer base= shift AR outwards
Increased efficiency linked to managerial economies of scale.

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20
Q

Disadvantages of conglomeration

3.1.2

Business Growth

A

Diversification can shift focus and resources away from core operations, contributing to poor performance.
Poor culture can be linked to dis-economies of scale as it can harm productivity if staff are demotivated and unsure of what to do (norms and values)

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21
Q

4 factors which constrain growth of a firm which wants to grow

3.1.2

Business Growth

A
  1. Regulation ie CMA
  2. Size of the market ie demand reaching its peak
  3. Access to finance
  4. Owners objectives ie satisficing
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22
Q

What is a demerger?

3.1.3

Demergers

A

Where a firm splits of into 2 smaller firms eg Ebay and Paypal

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23
Q

reasons for demergers

3.1.3

Demergers

A
  1. Raising money from asset sales and retrun to shareholders
  2. Create more focused firms
  3. May be forced to by CMA
  4. Cultural differences which may cause diseconomies of scale
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24
Q

3 impacts of demergers to the business

3.1.3

Demergers

A

Focus on the core business,

Raising funds from selling part of the business,

Removing loss-making parts of the business

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25
Q

3 impacts of demergers to workers

3.1.3

Demergers

A

Increased job security if loss-making parts of the business are demerged

Reduced conflict between cultures

Increased focus on the business to enable workers to become more productive

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26
Q

2 impacts of demergers to customers

3.1.3

Demergers

A

Greater competition & efficiency improvements lead to lower prices

More focused businesses are able to better meet consumer needs

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27
Q

Why might a firm wish to profit maximise?

3,2

Business Objectives

A

1 – Reward for shareholders
Profits determine dividends
Profits influence D for shares and the share price
Create both income and wealth for shareholders

2 – Profit (internal source of finance)
Re-I into growth
Act as a barrier to entry (Eco of scale)
Reduce contestability (I into Tech)
Support higher profits in the future

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28
Q

Why might firms not want to profit maximise?

3.2

Business Objectives

A

Hard/ impossible to identify MC=MR

Rapid price changes may affect a firm’s position in the market. Therefore, they will keep the same price, harming profits in short term but making long term gains.

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29
Q

What is the formula for profit maximisation

3.2

Business objectives

A

MC=MR

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30
Q

Illustrate profit max on a diagram

3.2

Business Objectives

A
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31
Q

Why might a firm wish to revenue max?

3.2

Business Objectives

A

If a firm is able to cut prices and gain more customers, it will gain bigger exposure and brand loyalty.

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32
Q

What is the formula for revenue max?

3.2

Business Objectives

A

MR=0

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33
Q

Illustrate revenue max on a diagram

3,2

Business objectives

A
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34
Q

Why might firms wish to sales max

3.2

Business Objectives

A

Sell excess stock
Increase sales of complementary goods
External reasons eg generate better atmoshpere in stadium.

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35
Q

What is the formula for sales max

3.2

Business Objetives

A

AR=AC

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36
Q

Illustrate sales max on a diagram

3,2

Business Objectives

A
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37
Q

What is satisficing?

3.2

Business Objectives

A

Linked to the principal agent problem.

It means a business is making enough profit to keep shareholders happy or it’s sufficient for investors to maintain confidence in the management they appoint but not profit maximising.

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38
Q

What is revenue?

3.3

Revenue

A

total money generated from sales

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39
Q

How is revenue calculated

3.3.1

Revenue

A

Selling price X quantity sold

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40
Q

Draw a typical TR curve

3.3.1

Revenue

A
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41
Q

What is the relationship between price and total revenue when PED is elastic?

3.3.1

Revenue

A

As price increases, revenue decreases as demand falls less than proportionately

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42
Q

Relationship between price and revenue when PED is inelastic

3.3.1

Revenue

A

As price increases, revenue increases as demand falls less than proportionately.

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43
Q

What is average revenue?

3.3.1

Revenue

A

How much money is generated from each sale ie the selling price

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44
Q

How is average revenue calculated

3.3.1

Revenue

A

Total revenue divided by quantity

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45
Q

Why is average revenue equal to price?

3.3.1

Revenue

A

since price is charged the same for all units

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46
Q

Draw a typical AR curve

A

Same as demand curve

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47
Q

What is marginal revenue?

3.3.1

Revenue

A

The change in total revenue from each additional unit

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48
Q

Draw a typical MR curve

3.3.1

Revenue

A
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48
Q

How is marginal revenue calculated?

3.3.1

Revenue

A

change in revenue divided by change in quantity

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49
Q

What is the economic definition of the short run?

3.3.1

Production

A

At least one FOP is fixed

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50
Q

Draw a total product curve

3.3.1

Production

A
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51
Q

Draw a marginal product curve

3.3.1

Production

A
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52
Q

What is the law of diminishing marginal productivity?

A

Where employing more staff past a certain amount will lead to a reduction in productivity

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53
Q

Why does diminishing marginal productivity only happen in the short run

3.3.1

Productivity

A

Because in the long run all factors of production are variable.

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54
Q

What is the difference between accounting costs and economic costs?

3.3.2

Costs

A

Accounting costs only take the explicit costs into account ie the actual figure.

Economic cost includes the opportunity cost.

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55
Q

Difference between fixed and variable costs

3.3.2

Costs

A

Fixed costs do not change depending on the level of output eg rent.

Variable costs change depending on level of output eg raw materials.

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56
Q

What is total cost?

3.3.2

Costs

A

Fixed + variable costs

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57
Q

Draw a typical total cost curve

3.3.2

Costs

A
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58
Q

How is total variable cost claculated

A

variable cost per unit x quantity

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59
Q

Draw a total variable cost curve

3.3.2

Costs

A
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60
Q

How is average (total) cost calculated

3.3.2

Costs

A

Total cost divided by quantity

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61
Q

Draw a typical average cost curve

3.3.2

Costs

A
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62
Q

How is average fixed cost claculated?

3.3.2

Costs

A

Total fixed cost divided by quantity

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63
Q

Draw a typical average fixed cost curve

3.3.2

Costs

A
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64
Q

How is average variable cost calculated?

3.3.2

Costs

A

Total variable cost divided by quantity

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65
Q

Draw an average variable cost curve

3.3.2

Costs

A
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66
Q

Why are short run costs different from long run costs?

3.3.2

Costs

A

In the S/R due to the law of diminishing returns the SRAC will increase at lower levels of output.
In the L/R all FOP are variable so the law of diminishing returns would not set it.
This means the business can continue to benefit from economies of scale i.e. a fall in average cost as output increases.
The S/R cost curves can make up the LRAC as it reflects the increase the in the previous fixed FOP.
SRAC1 inside a factory, SRAC2 factory after expansion to elevate the problem of a lack of K meaning the division of labour can continue.

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67
Q

Illustrate relationship between short run AC and LRAC

3.3.2

Costs

A
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68
Q

What is an economy of scale

3.3.3

Economies of scale

A

Increased output = lower average unit cost

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69
Q

What is diseconomies of scale?

3.3.3

Economies of scale

A

Increased output = increased avg unit cost

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70
Q

Explain whether economies of scale are a short run or long run concept

3.3.3

Economies of scale

A

Long run concept:
The increase in costs are when all FOP are variable.
Therefore not linked to the law of diminishing returns = S/R concept

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71
Q

Explain the 6 types of economies of scale

3.3.3

Economies of scale

A

Purchasing- Ordering stock in large amounts allows the firm to negotiate a bigger discount = lower average cost

Marketing- A larger firm can use mass marketing campaigns on TV/radio which reach a wider audience. The cost is then spread over a larger product portfolio which makes the unit cost fall.

Financial- Bigger firms are considered to have less risk of failing. Therefore when borrowing large sums of money can obtain lower interest rates which reduces the average cost of a loan.

Technological/capital- Higher output allows for flow production and greater use of automation. This will be more productive/efficient which helps reduce average cost.

Logistical- Transporting more goods at once lowers the average cost

Managerial- Smaller firms are often unable to afford managers with specialist expertise (e.g. in finance, HR, marketing). As a firm grows it is better able to bring in specialist managerial expertise which should enable it to be more efficiently run.

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72
Q

Give an example of each of the 6 economies of scale

3.3.3

Economies of scale

A

Purchasing- Starbucks use 8 mill cups a day
Marketing- Superbowl ad =$5.5 mill
Financial- Tottenham stadium = £850 mill
Tech- Flow production eg coke bottles
Logistical- doubling people in taxi doesn’t double price
Managerial- eg Richard Branson/ Pep Guardiola

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73
Q

What is minimum efficient scale?

3.3.3

Economies of scale

A

Minimum point of output necessary to reach the lowest possible average cost.

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74
Q

Illustrate eco of scale, diseco of scale, constant returns to scale and minimum efficient scale

3.3.3

Economies of scale

A
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75
Q

Difference between internal and external eco of scale

3.3.3

Economies of scale

A

Internal- arise from the increased output of the business itself.
External- arise from growth of the whole market ie all competitors benefit.

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76
Q

What is normal profit?

3.3.4

Profit

A

Where average rev = avg costs
Is not the same as break even as profits are included as a cost eg dividends/ salaries

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77
Q

What is supernormal profit?

3.3.4

Profit

A

where avg rev > avg costs

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78
Q

why might a firm continue to operate in s/r when making a loss?

3.3.4

Profit

A

Because average revenue is greater than average variable costs therefore each additional unit sold will reduce the loss and can be used for covering fixed costs.
However will shut down in long term as average total costs > average revenue

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79
Q

Where does the short run shut down point occur?

3.3.4

Profit

A

Where average variable costs are equal or greater than average rev

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80
Q

Where does the long run shut down point occur?

3.3.4

Profit

A

Where average total costs > average rev

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81
Q

What is allocative efficiency?

3.4.1

Efficiency

A

Occurs when ther is an optimal distribution of g/s, taking into account consumer’s preferences.

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82
Q

What does allocative efficiency maximise?

3.4.1

Efficiency

A

Total welfare of consumers and producers ie occurs at equilibrium.

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83
Q

Wher is allocative efficiency achieved? (Year 12 version and year 13 version)

3.4.1

Efficiency

A

Year 12 = when market is in equilibrium
Year 13 = where price is equal to marginal revenue

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84
Q

Show allocative efficiency on a demand and supply diagram

3.4.1

Efficiency

A
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85
Q

Show allocative efficiency on a theory of the firm diagram

3.4.1

Efficiency

A
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86
Q

Is allocative efficiency a static concept?

3.4.1

Efficiency

A

allocative efficiency is itself a static concept and its function is to allocate resources at a point in time, the manner and method by which those resources are allocated over time changes as the modes of production and the methods of distribution change

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87
Q

What is productive efficiency?

3.4.1

Efficiency

A

Productive efficiency is concerned with producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost.

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88
Q

When is productive efficiency achieved?

3.4.1

Efficiency

A

Year 12 = when you operate on a PPF curve
Year 13 = when marginal costs are equal to average costs

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89
Q

Show productive efficiency on a PPF curve

3.4.1

Efficiency

A
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90
Q

Show productive efficiency on a theory of the firm diagram

3.4.1

Efficiency

A
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91
Q

Why might productive efficiency differ in the short and long run?

3.4.1

Efficiency

A

Formula MC=AC
Firm can operate in the S/R where MC>AC = illustrate diseconomies of scale
In L/R profit act beacon which would increase firms into the market as there are no barriers to entry

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92
Q

What is dynamic efficiency?

3.4.1

Efficiency

A

Where SNP is re-invested into R&D

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93
Q

what is innovation?

3.4.1

Efficiency

A

new technology and productive techniques can increase the productive potential of firms.

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94
Q

What is x-inefficiency?

3.4.1

Efficiency

A

X Inefficiency occurs when a firm lacks theincentive to control costs.
This causes the average cost of production to be higher than necessary.

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95
Q

Show x-inefficiency on an AC diagram

3.4.1

Efficiency

A
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96
Q

What market structure is most likely to display x-inefficiency?

A

Monopoly

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97
Q

What are the 5 market structures?

3.4.2

Market structures

A

Monopoly
Perfect competition
Monopolistic
Oligopoly
Monopsony

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98
Q

What is a barrier to entry/ exit?

3.4.2

Market structures

A

Something that prevents a firm from joining/ leaving the market

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99
Q

Name 8 barriers to entry/ exit?

3.4.2

Market structures

A

Eco of scale
Brand loyalty
Geographical factors
Limit pricing
Predatory pricing
Vertical Integration
Legal patents
Knowledge/ expertise

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100
Q

What is interdependance?

A

Where the actions of one firm impact another

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101
Q

What is homogenity?

3.4.2

Market structures

A

Where the same goods are sold

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102
Q

How is concentration ratio calculated?

3.4.2

Market structures

A

Market share of the top x amount of firms divided by whole market

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103
Q

Criticisms of concentration ratio to define a market

A

The concentration ratio tends not to be affected by mergers among the top market incumbents. If there exists a merger between the largest and second-largest companies, their combined pricing power is most likely to be larger than that of the two pre-existing companies, which the concentration ratio will not accurately represent
Also, market share doesn’t necessarily = market power.

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104
Q

What are the 4 characteristics of perfect competition

3.4.2

Perfect competition

A

Many buyers and sellers
None of whom is large enough to influence price
No barriers to entry and exit from the industry
Buyers and sellers possess perfect knowledge of prices
Products are homogenous

105
Q

Draw an industry demand curve for perfect competition

3.4.2

Perfect competition

A
106
Q

Draw a firm demand curve for perfect competition

3.4.2

Perfect competition

A
107
Q

Why does D=AR=MR in perfect competition?

3.4.2

Perfect competition

A

PED is perfectly elastic meaning;
Firm is a price taker from the market
If price was increased by 0.0001% then demand would fall by 100%
This is due to the product being homogenous and perfect knowledge
This is why the firm is to small to influence price

108
Q

Why is perfect comp PED perfectly elastic

A

Firms sell homogenous goods at the same price (lowest possible)
Therefore, they if they increase price, demand falls to 0 due the same goods and consumers having perfect knowledge

109
Q

Illustrate a perfectly competitive firm making normal profit

3.4.2

Perfect competition

A
110
Q

Illustrate a perfectly competitive firm making a short run loss

3.4.2

Perfect competition

A
111
Q

Illustrate a perfectly competitive firm making short run abnormal profit

3.4.2

Perfect competition

A
112
Q

Why can’t perfectly competitive firms maintain supernormal profit in the short run?

A

If SNP caused by increased D in the industry, the SNP act as a beacon to other firms meaning new firms enter market due to no barriers to entry

Because firms have perfect knowledge so can copy the production methods etc which allowed SNP

113
Q

Does perfect competition result in allocative efficiency?

A

Yes

114
Q

Does perfect competition result in productive efficiency?

A

Yes

115
Q

Does perfect competition result in dynamic efficiency?

3.4.2

Perfect competition

A

No as no SNP is earned

116
Q

Does perfect competition result in x ineffiency

A

No

117
Q

2 example Industries close to perfectly competitive

3.4.2

Perfect competition

A

Foreign exchange market
Crop farming

118
Q

Characteristics of monopolistic competition

3.4.3

Monopolistic

A

There are a large number of small firms

Low barriers to entry and exit

Firms produce similar but differentiated products

119
Q

Draw an industry demand curve for perfect competition

3.4.3

Monopolistic

A
120
Q

Draw an industry demand curve for perfect competition

3.4.3

Monopolistic

A
121
Q

Draw an industry demand curve for perfect competition

3.4.3

Monopolistic

A
122
Q

Draw an industry demand curve for perfect competition

3.4.3

Monopolistic

A
123
Q

Why does MR<AR at all quantities?

3.4.3

Monopolistic

A

Because the price remains constant over varying levels of output

124
Q

To what extent do monopolistically competitive firms have control over the price?

3.4.3

Monopolistic

A

They have some control as products are differentiated

125
Q

Why is a monopolistically competitive firm’s AR curve downward sloping?

3.4.3

Monopolistic

A

A firm competing in a monopolistically competitive market sells a differentiated product. Therefore, unlike a firm in a per- fectly competitive market, it faces a downward-sloping demand curve. When a monopolistically competitive firm cuts the price of its product, it sells more units but must accept a lower price on the units it could have sold at the higher price. As a result, its marginal revenue curve is downward sloping. Every firm that has the ability to affect the price of the good or service it sells will have a marginal revenue curve that is below its demand curve

126
Q

Illustrate a monopolistic firm making normal profit

3.4.3

Monopolistic

A
127
Q

Illustrate a monopolistic firm making SNP in short run

3.4.3

Monopolistic

A
128
Q

Illustrate a monopolistic firm making a short run loss

3.4.3

Monopolistic

A
129
Q

Why are monopolistic firms unlikely to maintain short term SNP?

3.4.3

Monopolistic

A

SNP act as a beacon to other firms= enter due to low barriers to entry= increased substitutes = less demand = AR contratcs back to AC =make normal profit again

130
Q

Explain why a firm may operate at excess capacity in the short run

3.4.3

Monopolistic

A

It can happen when there is a market recession or increased competition, where demand declines and firms are forced to reduce capacity to decrease costs

131
Q

Does monopolistic competition result in allocative efficiency

3.4.3

Monopolistic

A

No as price is > MC

132
Q

Does monopolistic competition result in productive efficiency?

3.4.3

Monopolistic

A

No

133
Q

Does monopolistic competition result in dynamic efficiency?

3.4.3

Monopolistic

A

No as they operate at normal profit in the long run

134
Q

Does monopolistic competition result in x-inefficiency?

3.4.3

Monopolistic

A

No

135
Q

Adv of monopolistic comp

3.4.3

Monopolistic

A

The main advantages of monopolistic competition are: (1) it encourages firms to be innovative and to offer new and improved products; (2) it provides consumers with a greater choice of products; and (3) it typically leads to lower prices than either monopoly or perfect competition.

136
Q

Disadv of monopolistic comp

3.4.3

Monopolistic

A

Excess resource waste
Not efficient
Focus on advertising rather than product quality

137
Q

2 examples of monopolistic industry

3.4.3

Monopolistic

A

Hairdresser/ Barbers
Bakery

138
Q

Characteristics of Oligopoly

3.4.4

Oligopoly

A

High barriers to entry/exit
High concentration ratio
Interdependance
Products are Differentiated

139
Q

How can an oligopoly be identified

3.4.4

Oligopoly

A

When there are multiple firms with high market share eg supermarkets

140
Q

Explain why oligopolies are often formed through mergers

3.4.4

Oligopoly

A

Mergers allow greater economies of scale by increasing their market share

141
Q

What is collusion?

3.4.4

Oligopoly

A

Where two rival firms work together to keep prices high

142
Q

What is the difference between overt and tacit collusion?

3.4.4

Oligopoly

A

Overt has a formal agreement between the 2 firms whereas tacit means there is no formal agreement but firms undertake actions to keep prices high

143
Q

What is price leadership?

3.4.4

Oligopoly

A

Where other firms follow the pricing strategy of one dominant firm

144
Q

What is a cartel

3.4.4

Oligopoly

A

Where multiple firms act as one monopoly power by controlling price or quantity eg OPEC

145
Q

Draw a sample two firm, two outcome model to show possible outcomes when firms decide whether to a)
raise price or lower price b) compete or collude?

3.4.4

Oligopoly

A
146
Q

Explain 3 forms of price competition

3.4.4

Oligopoly

A
  1. Price rigidity- prices remain stable to prevent a price war
  2. Price leadership
  3. Predatory/limit pricing
147
Q

Why might firms want to engage in non-price competition?

3.4.4

Oligopoly

A

To allow them to keep prices high and therefore prevent a price war due to interdependance

148
Q

4 forms of non price competition

3.4.4

Oligopoly

A

Customer service
Free/faster delivery
Extended warranties
Credit facilities
Longer opening hours

149
Q

Does oligopoly result in allocative efficiency

3.4.4

Oligopoly

A

No

150
Q

Do oligopolies result in productive efficiency

3.4.4

Oligopoly

A

no

151
Q

Do oligopolies result in dynamic efficiency

3.4.4

oligopoly

A

Yes

152
Q

Do oligopolies result in x-inefficiency?

3.4.4

Oligopoly

A
153
Q

Advantages of an oligopoly

3.4.4

Oligopoly

A

Dynamic efficiency= increased quality
Non price competition = increased customer satisfaction (increased quality)

154
Q

Disadv of oligopoly

3.4.4

Oligopoly

A

Productively and allocatively inefficient
Price rigidity = harm consumer welfare

155
Q

2 example industries of oligopoly

3.4.4

Oligopoly

A

Supermarket
Cars

156
Q

What are the characteristics of a monopoly?

3.4.5

Monopoly

A

Only 1 firm
High barriers to entry
Short run profit maximiser

157
Q

Why is the price curve for a monopolist downwards sloping?

3.4.5

Monopoly

A

Because they are a price maker

158
Q

Why is AR not equal to MR for a monopolist?

3.4.5

Monopoly

A

Because the price remains constant over varying levels of output

159
Q

Illustrate a monopolist making normal profit

3.4.5

Monopoly

A
160
Q

Illustrate a monopolist making a short run loss

3.4.5

Monopoly

A
161
Q

Illustrate a momonopolist making super normal profit

3.4.5

Monopoly

A
162
Q

Why can a monopoly maintain super normal profits?

3.4.5

Monopoly

A

Large market control and high barriers to entry

163
Q

What is third degree price discrimination

3.4.5

Monopoly

A

Where one group of customers is charged a different price from another

164
Q

Why would a monopoly want to use price discrimination?

3.4.5

Monopoly

A

Leads to higher supernormal profits

165
Q

Illustrate third degree price discrimination

3.4.5

Monopoly

A
166
Q

What are the 3 conditions necessary for price discrimination?

3.4.5

Monopoly

A

1.Market power to separate the market
2.Information- need to be able to distinguish differences in what customers are willing to pay
3.Ability to prevent reselling

167
Q

Why is 3rd degree price discrimination assosciated with monopoly

3.4.5

Monopoly

A

Because there is little/ no competition so they have the market power to do so

168
Q

What is a natural monopoly?

3.4.5

Monopoly

A

Where the minimum efficient scale occurs at very high levels of output, meaning monopolies are needed due to large economies of scale

169
Q

Does a monopoly result in allocative efficiency

3.4.5

Monopoly

A

No as price > marginal costs

170
Q

Does a monopoly result in productive efficiency

3.4.5

Monopoly

A

No as MC is not equal to AC

171
Q

Does a monopoly result in dynamic efficiency?

3.4.5

Monopoly

A

Yes as SNP can be earned in the long run

172
Q

Does a monopoly result in x-inefficiency?

3.4.5

Monopoly

A

Yes

173
Q

Advantages of monopoly to consumers

3.4.5

Monopoly

A

Dynamic efficiency= better quality
Cross-subsidisation may lead to increased range of g/s available to consumer

174
Q

Disadvantages of monopoly to consumers?

3.4.5

Monopoly

A
  1. Monopoly power means higher prices and lower output for domestic consumers
  2. Price discrimination= reduces consumer surplus
175
Q

Advantages of monopoly to employees

3.4.5

Monopoly

A
  1. SNP could allow for increased remuneration ie wages, bonus
  2. SNP suggests high job security
176
Q

Disadvantages of monopoly to employees

3.4.5

Monopoly

A
  1. Monopsony buyer= wages kept low
  2. Large staff numbers could leave workers feeling isolated
177
Q

Advantages of monopoly to firms

3.4.5

Monopoly

A
  1. SNP allow for reinvestment into growth/R&D increase the barriers to entry and maintain market dominance
  2. Size & eco of scale can allow for international competiveness and becoming an MNC = increase SNP
  3. Monopolists can take advantage of economies of scale, which means that average costs may still be lower than the most efficient average of a small competitive firm
178
Q

Disadvantages of monopoly to firm

3.4.5

Monopoly

A
  1. SNP less incentive to be efficient and to develop new products. This could encourage inertia which could be fatal in the L/R i.e. Kodak
  2. Monopolies may waste resources by undertaking cross-subsidisation, using profits from one sector to finance losses in another sector.
  3. Greater Government regulation
179
Q

Advantages of monopoly to supplier

3.4.5

Monopoly

A

Orders significant in size = allow supplier to grow
Dealing with a single buyer may be simpler than multiple which can aid efficiency

180
Q

Disadvantages of monopoly to supplier

3.4.5

Monopoly

A
  1. Monopoly become a monopsony buyer then could force prices down causing shut down or low profits for the supplier.
  2. Inter-dependence whereby poor performance of the monopoly could effect the supplier i.e. Tesco’s losses in USA impacting the price they are willing to pay for milk.
181
Q

2 examples of monopolies

A

Apple
Google

182
Q

What is a monopsony?

3.4.6

Monopsony

A

Where there is one buyer in the market

183
Q

How do monopsonists typically profit maximise?

3.4.6

Monopsony

A

Minimising costs by paying suppliers as little as possible

184
Q

Benefit of being a monopsony to the firm

3.4.6

Monopsony

A

Purchasing economies of scale and bargaining power= lower costs = increase profits

185
Q

Drawback of being a monopsony

3.4.6

Monopsony

A

Abuse of power = deteriorate relationship with supplier
Supplier may shut down = disrupt supply chain

186
Q

Benefit of monopsony to the consumers

3.4.6

Monopsony

A

The reduction in average costs can be passed down in lower prices = increase consumer surplus

187
Q

Drawback of monopsony to the consumer

3.4.6

Monopsony

A

Suppliers may need to reduce costs to stay profitable = decrease quality of products

188
Q

Advantage of monopsony to employees

3.4.6

Monopsony

A

Size of monopsony = job security
Increased profits could be used to reward employees

189
Q

Disadvantage of monopsony to employees

3.4.6

Monopsony

A

Some employees may not agree with the practise of squeezing the supply chain

190
Q

Advantage of monopsony to suppliers

3.4.6

Monopsony

A

Orders may be significant in quantity. If MES occurs at high levels of output, there is potential for suppliers to grow.

This can be ussed to counteract the monopsony

191
Q

Disadv of monopsony to suppliers

3.4.6

Monopsony

A

Price they sell at is reduced
The monopsonist may abuse its power by paying late or less
Suppliers may be driven out of the market due to low profitbaility

192
Q

what is a contestable market

3.4.7

Contestability

A

No barriers to entry/exit
No sunk costs
New firms have no competitive disadvantage to incumbent firms
Access to the same technology

193
Q

Difference between contestable market and perfect competition

3.4.7

Contestability

A

Contestability is not the same word as competition

Markets can either be contestable in a market with just one firm as long as the previous characteristics exist

However it is highly unlikely to be the case as a singular firm (monopoly) is likely to happen due to barriers to entry and having a competitive advantage over rivals

Key – ensure your definition does NOT relate to the number of firms

194
Q

Why do firms in a contestable market avoid setting price above AC

3.4.7

Contestability

A

If businesses makes SNP = act as a beacon
Given there is NO BARIERS TO ENTRY & ACCESS TO THE SAME TECHNOLOGY this would make them vulnerable to a ‘hit and run’ entry by a new firm
Whereby a new firm would come into the market, take some profits and then exit again.
To avoid this, the incumbent firm may charge where P=AC where there are normal profits and no incentive for entry to the market.

195
Q

What is limit pricing

3.4.7

Contestability

A

Setting prices low enough to deter new entrants

196
Q

What are sunk costs + 2 examples

3.4.7

Contestability

A

Costs that can’t be retrieved
eg advertising expenditure, R+D

197
Q

What is the demand for labour as a derived demand?

3.5.1

Demand for labour

A

The demand for labour is dependant on the demand for the g/s itself

198
Q

Why is the demand for labour downward sloping

3.5.1

Demand for labour

A

Because as the price of labour (wages) goes up the demand for labour will be less.

199
Q

3 factors that shift demand for labour

3.5.1

Demand for labour

A

Change in demand of output
Changes in productivity
Changes in the cost of capital relative to labour

200
Q

6 factors which determine the supply of labour

3.5.2

Supply of labour

A

Migration
Tax
Benefits
Skills/quals
Social trends
Trade unions

201
Q

What factors cause geographic immobility

3.5.2

Supply of labour

A

House prices
Social attachments
Transport links

202
Q

What can be done to improve geo immobility

3.5.2

Supply of labour

A

Increase supply of houses in the south east + bring down price = reduce geo immbolity
Improve transport infrastructure eg HS2 = this allows L to access jobs further from their homes
Regional development of the north with subsidies, tax breaks, new infrastructure etc

203
Q

What is occupational immbolity

3.5.2

Supply of labour

A

Workers unable to move between jobs as they lack appropriate kills/ training.

204
Q

What factors cause occupational immobility

A

Economy advancing from secondary to tertiary sector = many manufacturing workers do not have the required skills

This risk is increased as automation improvements will replace more jobs in the future

205
Q

What can be done to improve occupational immobility

3.5.2

Supply of labour

A

Training programmes- subsidise private firms to undertake vocational training = more skilled and flexible workforce

education ie further regulation/fines. Also focus on STEM/ big maths/ coding

206
Q

Illustrate how equilibrium wage and quantity are displayed on a diagram

3.5.3

Wage determination

A
207
Q

What skills are in/ expected to be in shortage in the UK

3.5.3

Wage determination

A

Teachers, doctors, electricians

208
Q

What impact will Brexit likely have on the labour market?

3.5.3

Wage determination

A

Reduce it’s size as it was a common market so people can no longer freely move (lower immigration)

209
Q

What is the current level of youth unemployment?

3.5.3

Wage determination

A

2020 = 13.4%

210
Q

What are the problems assosciated with zero hour contracts?

3.5.3

Wage determination

A

Provides firms with the flexibility but no securoty for workers
Causes underemployment = opertaing inside the PPF curve = inefficient

211
Q

Benefits of zero hour contracts

3.5.3

Wage determination

A

Provides firms flexibility = reduces costs = more productively efficient
Some workers may wish to be on zero hour contracts = improve their standard of living

212
Q

Benefits of working in the gig economy

3.5.3

Wage determination

A

Flexibility
Independance
Pay

213
Q

What is a maximum wage

3.5.3

Wage determination

A

A ceiling that a firm can’t pay more than to a worker eg CEO

214
Q

Draw a maximum wage diagram

3.5.3

Wage determination

A
215
Q

Why would governments want to use a max wage?

3.5.3

Wage determination

A

To regulate markets where workers have excess monopoly power

It reduces income inequality and the EC attached. This is linked to Marx whereby the high pay of a CEO is a reflection of the wrokers output rather than his own skillset

In some labour markets workers have the ability due to WES & WED to extract high economic rent (salary above the minimum needed to complete the job).

216
Q

Disadvantages of implementing a max wage

3.5.3

Wage determination

A

Disincentives to work (movement along the supply curve) = workers emigrate. Firms = find a shortage of skilled workers or top executives. This could harm economic prospects. = EC = risk of Govt failure.

Profit max firm operate where MRP = MCL. Therefore wage reflects market forces. Adam Smith = efficient allocation of resources as its based upon positive statements of fact over normative statements i.e. a value judgement of what someone’s job is worth.

Increasing Y tax is more effective = reduce income inequality whilst also collecting tax receipts = spent on public G/S. Therefore raise the MRT for millionaires for example.

217
Q

What is a minimum wage

3.5.3

Wage determination

A

A wage that a firm cannot legally pay workers below

218
Q

Draw a minimum wage diagram

3.5.3

Wage determination

A
219
Q

Why would governments want to use a min wage?

3.5.3

Wage determination

A

1 - Reduces poverty/inequality – increases W of lowest earners. TIIB the existence of poverty/inequality = EC & slows economic growth.

1b - 4 – Prevent exploitation of workers. Marx argument that the value of output comes from the hands of workers which should therefore be the main group to benefit from it.

2 – Increased productivity – provide an incentive to work harder for L and firms have more incentive to invest into L if they are more expensive i.e. training and education.

3 – Increase size labour force – higher NMW increases the OC of economic inactivity and relying on benefits. An increase in NMW can help overcome the U trap whereby the income from work > income from benefits – the cost to work.

4 - The higher C from increased Y will also increase GDP/productivity i.e. chef at a restaurant.

220
Q

Disadv of min wage?

3.5.3

Wage determination

A

1 – Real W/classical U = increase NMW = increase MCL. If MCL>MRP, then demand for labour will fall. Combined with the increase in supply = surplus of L = inefficient = example of Government failure i.e. increased U

2 – Labour intensive industry = L = high % of TC i.e. care homes. These will have a more elastic WED and see a more than proportional fall in demand. Where possible firms will seek to substitute L for K = U, or relocate abroad where labour laws less strict

3- National rather than regional. Cost of living variations are not accounted for. Therefore in certain locations that already suffer from regional high inequality and poverty could see a significant increase in U if the increase in NMW not reflective of costs in the local area. In some low pay areas 30% workers on NMW.

4 – Higher costs = higher prices = reduce real income. Therefore may be no better off when also consider tax brackets and NIC’s (fiscal drag).

221
Q

What % of gov spending is public sector pay?

3.5.3

Wage determination

A

Over 20%

222
Q

Comparison between public sector pay and private sector pay?

3.5.3

Wage determination

A

Public sector workers are paid less as govt is monopsony buyer = marginal cost of labour increases drastically even if wages barely increased.

Public sector workers are paid less than MRP which is considered exploitative (Marx)

223
Q

Explain why market failure occurs in labour markets such as doctors and teachers

3.5.3

wage determination

A

Because these jobs have a large external benefit so are undersupplied and not at the socially desirable quilibrium as the wage reflected does not attract enough workers

224
Q

What is the elasticity of demand for labour?

3.5.3

Wage determination

A

Responsiveness of demand for labour to a change in wage

225
Q

3 factors which influence elasticity of demand for labour

3.5.3

Wage determination

A

Ease and cost of factor substitution eg footballer cannot be replaced with capital meaning an increase in wage will cause a less than proportional decrease in demand for labour

PED of the output- increase in wages = cost can be passed onto consumer if inelastic = increase in wage = less than proportional decrease in demand for labour

Proportion of labour costs as total costs- labour intensive industry = increase in wages = less than proportional fall in demand for labour

226
Q

What is the elasticity of supply of labour?

3.5.3

Wage determination

A

The responsiveness of the supply of labour to a change in wage

227
Q

What is the board that regulates the level of competition in markets

3.6.1

Government intervention

A

CMA (competition and markets authority)

228
Q

How can governments control mergers?

3.6.1

Government intervention

A

Forced sale of assets
Blocking them

229
Q

factors which influence the elasticity supply of labour

3.5.3

Wage determination

A

The skill/ qualifications required. Low skilled jobs will have a more elastic WES because a pool of labour is available to take the job eg cleaner compared to footballer which is more inelastic

230
Q

Who is the board responsible for controlling mergers and acquisitions

3.6

Government intervention

A

Competition and markets authority (CMA)

231
Q

How can mergers be controllled?

3.6

Govt intervention

A

Forced sale of assets
Blocking it

232
Q

How can price regulations be used to control monopolies?

3.6

Govt intervention

A

Maximum pricing
Aim is to increase CS
Risk of shortage = inefficient = form of market (Govt) failure

233
Q

Adv of using price regulation to control monopolies

3.6

Gov intervention

A

total profit is lower, prices down and output higher than under a single price profit maximising monopoly.

234
Q

Disadv of using price regulation to control monopolies

3.6

Gov intervention

A

Deadweight welfare loss = some consumers who were willing to pay the equilibrium price now no longer have access to the g/s due to shortage (shown by year 12 max price diagram)

Lower quality/ choice as less profits = less dynamic efficiency

235
Q

How can profit regulations be used to control monopolies

3.6

Gov intervention

A

Windfall tax = tax on SNP

Fear of a tax based upon degree of SNP
Monopoly operates beyond Q
Still earns SNP but not profit max
Avoids the windfall tax
Increased output will mean lower prices and increased efficiency

236
Q

Adv of profit regulation

3.6

Gov intervention

A

Change behaviour = lower prices and increased efficiency

237
Q

Disadv of profit regulation to control monopolies

3.6

Gov intervention

A

Reduced dynamic efficiency

Encourage tax avoidance and firm remains at MC=MR

238
Q

How can quality standards be used to control monopolies?

3.6

Gov intervention

A

Additionally, regulators can observe the quality of the goods and services of the firm.
For example, in the gas and electricity markets, regulators ensure the elderly are treated fairly, especially in the colder months.
Governments ensure minimum standards are met.

239
Q

Adv of quality standards used to control monopolies

3.6

Gov intervention

A

The government sets targets on organisations, such as schools, to ensure a minimum target is being met.
This aims to regulate their quality. The NHS, which has monopoly power, also has performance targets, such as reducing waiting times.
It helps the firm to focus on increasing social welfare.
Create increased quality efficiency and prevents x-inefficiency

240
Q

Disadv of quality standards to control monopolies

3.6

Gov intervention

A

Asymmetric info = impact ability to measure given amount of info and dynamic nature.

Realistic/ high standard given resources = govt body set normative value

241
Q

How can promotion of small businesses improve contestability in a market

3.6

Gov intervention

A

SME = small to medium enterprises
Can offer advice = overcome info failure and increase confidence. This reduces barriers to entry and therefore increases competition
Also done through financuial grant/ subsidy.

242
Q

Benefits of increasing conestability through promoting SMEs

3.6

Gov intervention

A

Increased efficiency (productive and allocative)
Reduced prices

243
Q

Disadv of using SMEs to increase contestability

3.6

Gov intervention

A

Intervention has to be big enough to pressure monopoly
Cost to government = opportunity cost. Potential budget deficit and crowding out effect

244
Q

How can deregulation enhance competition and contestability in markets

3.6

Gov intervention

A

Lower red tape
Less laws eg environmental, H&S, employment
Decrease MRT for SMEs compared to monopoly

245
Q

Advantages of nationalising monopolies

3.6

Govt intervention

A
  1. Natural Monopoly

Many key industries nationalised were natural monopolies. This means the most efficient number of firms in the industry is one. This is because fixed costs are so high in creating a network of water pipes, there is no sense in having any competition. A private natural monopoly could easily exploit its monopoly power and set higher prices to consumers. Government ownership of a natural monopoly prevents this exploitation of monopoly power
2. Profit shared with taxpayer

If Virgin Trains set high ticket prices, you know the profit margin will go to a small number of wealthy shareholders. If the same service was run by a nationalised British Rail, any profit from profitable train services would go to government revenues and enable lower tax rates.

  1. Externalities

Some of the nationalised industries had significant positive externalities. For example, public transport plays a key role in reducing pollution and congestion. A private firm would ignore the positive externalities, but a government run public transport system could invest in public transport to help improve the economic infrastructure.

  1. Welfare Issues

Some industries play a key role in the welfare of consumers and citizens. For example, gas and water could be considered necessities for basic living standards and not luxuries. Government provision means that needy groups can be looked after and provided with basic necessities.

246
Q

Disadvantages of nationalisation

3.6

Govt intervention

A
  1. Low productivity and inefficiency
  2. Corruption and mismanagement
  3. Monopsony L buyer = lower wages
247
Q

Disadvantages of nationalisation

3.6

Govt intervention

A
  1. Low productivity and inefficiency
  2. Corruption and mismanagement
  3. Monopsony L buyer = lower wages
248
Q

Disadvantages of nationalisation

3.6

Govt intervention

A
  1. Low productivity and inefficiency
  2. Corruption and mismanagement
  3. Monopsony L buyer = lower wages
249
Q

Advantages of deregulation to enhance competition and contestability in markets?

3.6

Govt intervention

A

monopoly likely to undertake limit pricing = lower prices and mpre efficient

250
Q

disadv deregulation to promote comp/ contestability

3.6

gov intervention

A

less laws = unintended consequences = market failure

251
Q

how can competitive tendering for gov contracts enhance competition

3.6

gov intervention

A

Competitive tendering for government contracts
The government provides some goods and services because they are public or merit goods, and they are underprovided in the free market.
The government could contract out this provision, so that private firms operate things such as roads or hospital.
The firm which offers the lowest price and best quality of provision wins the government contract.
This saves the government money, since the public sector can be bureaucratic and inefficient.

The private sector has an incentive to reduce their costs, since they operate in a competitive market

252
Q

Adv of competitive tendering

3.6

Gov intervention

A

frees the government of maintenance, since the private sector might have the expertise and knowledge to fulfil the project and maintain the infrastructure.
It can also help with Government issues – monopsony buyer & pension deficit in the public sector

253
Q

Drawback of competitive tendering to increase comp/ contestability

3.6

Gov intervention

A

profit incentive = cost cutting = lower quality

Risk firm collapse = require cost subsidy

254
Q

How can privatisation enhance competition and contestability in a market?

3.6

Government intervention

A

Selling a gov run business = increased efficiency due to profit motive:
- Free market
- increased competition

255
Q

Adv of privatisation to enhance competition

3.6

Government intervention

A

Increased efficiency due to free market principles
Hayek argument = gov run = cannot understand needs of everyone = resources distributed inefficiently

256
Q

Disadv of privatisation to increase competition/ contestability

3.6

Government intervention

A
  • private monopoly = abuse power
  • X-inefficiency from private monopoly/ diseco of scale
  • Profit motive is prioritised over social objective = market failure (externalities)
257
Q

How can governments restrict the power of a monopsony

3.6

Govt intervention

A

Regulation - CMA provide a code of conduct. Therefore, behaviour is investigated and intervene in markets = fine, name and shame, recommend behaviour
TWE = asymmetric info

257
Q

How can governments protect employees

3.6

Govt intervention

A

Labour laws eg NMW, Health and safety, holiday pay

TWE = asymmetric info

257
Q

How might nationalisation protect suppliers and employees

3.6

Govt intervention

A

Govt take ownership of private firm eg railways
Adv = private firm at operate at profit max due to profit incentive but gov have own objective = operate at larger quantity where prices are lower.
this increases consumer surplus, allocative efficiency and productive efficiency

Adv 2 = impact externalitites eg can make public transport more affordable = lower demand for car jpurneys = less pollution
TWE = Hayek

258
Q

What is regulatory capture

3.6

Govt intervention

A

Government failure where the regulatory body becomes sympathetic to the busines they are supposed to be regulating. Occurs due to:

  1. Regulator is friends with firms they are dealing with
  2. Regulator is bribed
259
Q

Why might asymmetric info exist between a firm and a regulator

3.6

Gov intervention

A
  1. Inefficiencies of public sector
  2. Under resourced

Economics (4 decks)

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