Unit 3 Economics Flashcards
State-owned enterprises ( Public sectors such as; Emirates, Ethihad airways)
Large organizations that are created by a countries government to carry out commercial activities
For-profit and Non-profit organizations
For-profit organizations: Organizations that have making a profit a goal
Non-profit organizations: Organizations that don’t have making a profit as a goal but may use any profit they generate to support their aims
Co-operatives
A firm operated and owned by a group of members where each member has one vote on a major business decision. Its main aim is to provide a service
Joint venture
Where a separate business entity is created by two or more parties. It involves sharing ownership, profits, and risks of the new project
Why some firms tend to remain small and why others grow
Small - (1) The owners might lack expertise/finance and are happy to remain small.
(2) Firms may operate in a niche market and so demand may be too low to expand
(3) Owners don’t want to take extra risks
Big - (1) Profit motive; By growing, firms get the opportunity to earn higher profits and potentially achieve economies of scale
(2): By growing and expanding the product range, firms reduce their risk of making huge losses
(3) Market power: large firms have more dominance over the market, which allows them to gain price-setting powers and discourage the entrance of new
firms.
Organic Growth
A firm increasing in size through investment in capital equipment and increased labor force
Merger & takeovers (External growth)
Mergers; The joining together of two or more firms under common ownership ( google and android)
Takeovers: when one company makes a bid to require another company
Vertical integration
Is the joining together of two or more firms at different production stages in the same industry.
Foward - supplier merging with its buyer (primary to secondary)
Backward - Purchaser mergers with one or more of its suppliers (secondary to primary)
Vertical integration - Adv and dis
Adv: 1) Cost savings
2) Reduces risk as firms can deny competitors the source of raw materials
3) Foward integration, gives firms more control over their market by deciding prices, feedback, etc.
Dis: 1) High costs, merging together two firms will require extra layers of management and a newly formed team, which will significantly increase the costs
2) Lack of work expertise when collaborating with another firm
3) Key workers may leave taking with them much of the expertise of the business
Horizontal integration
Is the joining together of two or more firms in the same industry at the same stage of production
Adv - 1) Allows reduction of costs, therefore economies of scale
2) Reduces competition, by reducing the number of competitors
3) Increased ability to control prices
Dis - 1) Expensive
2) Badly managed in the short run, which could lead to business failure
Conglomerate integration
Is the merging together of two or more firms in different industries producing unrelated products
Adv: 1) Spreads risk, potentially achieving risk bearing economies of scale
2) Easier to expand, as there are more options to obtain finance
Dis: 1) Lack of expertise could lead to failure
2) Expensive
Demergers
When a firm splits into two or more independent businesses
Reasons for demergers
synergies - when two or more activities can lead to greater outcomes
Lack of synergies - where one part of the firm is having no impact compared to the profitable side of the firm.
Value of the firm- The value of a demerged firm can be valued at a higher price compared to one large firm
Focused companies - some companies would only want to focus on one aspect to boost performances
Profit maximization
Revenue Maximisation
Sales maximization
Profit maximisation (MC=MR) Revenue Maximisation (MR =0) Sales maximisation (AC =AR)
Profit satisfaction
Making sufficient profit to satisfy the demands of owners /shareholders
Reasons businesses Revenue Maximisation
In other words, each extra unit sold
generates no extra revenue.
i) Economies of scale
ii) Predatory pricing - (occurs when a firm sells a good or service at a price below cost (or very cheaply) with the intention of forcing rival firms out of business.
iii) Principal-agent problem
Reasons businesses Sales maximize
i) Economies of scale
ii) Limit pricing (Limits competition)
iii) Principal-agent problem
iv) Flood the market
v) Build customer loyalty
Divorce of ownership control
Occurs when the managers and directors are separate from the owners of the business
Principal-agent problem
Managers revenue/sales max to justify perks in the job
Formula for :
- total revenue
- avg revenue
- marginal revenue
- total cost
- total fixed cost ( rent, salaries, interest )
- total variable cost (wages, utility bills, transport costs)
- avg total cost
- avg fixed cost
- avg variable cost
- marginal cost
^ - CHANGE SIGN
total revenue = P x Q
avg revenue = TR / Q
marginal revenue = ^TR / ^Q
total cost = FC + VC
total fixed cost = TC - TVC
total variable cost = TC - TFC
avg total cost = TC / Q
avg fixed cost = TFC / Q
avg variable cost = TVC / Q
marginal cost = ^TC / ^ Q
Short-run costs vs long-run costs
Short-run costs: When there is at least one fixed factor of production available
Long-run costs: When all factors of production are variable
Economies of scale -
[Really fun moms try making pancakes]
As output increases LRAC decreases.
Risk bearing - Diverse product range Financial - Easier access to loans, lower interest Managerial - Specialist manager Technical - Investment in technology Marketing - Better advertisement Purchasing - Bulk buying
External economies of scale
Skilled labor
Better infrastructure
Diseconomies of scale
As output increases LRAC increases
Co-ordination problems
Conflicts
Demotivation for workers
4 types of efficiencies
Allocative efficiency: Resources being allocated to a point where consumer satisfaction is maximized
Productive efficiency: Occurs when firms maximize production and minimize costs.
Dynamic efficiency: is when resources are allocated effectively over time
X- inefficiency: Ineffecicency arising due to failure to minimize avg cost of production at a given level of output
Concentration ratio
The collective market share of the largest firm in an industry.
A higher concentration ratio indicates few large firms dominating the market
Perfect competition -
Many buyers/ sellers Homogenous goods No barriers to entry/ exist Perfect information Price takers ( MUST sell at market price)
Allocative - YES
Productive - YES
Dynamic - No
X - inefficient - No
SNP -SR
NP -LR
Monopolistic competition -
Price makers ( ARE able to influence the market price and enjoy pricing power.)
Many buyers/sellers Slightly differentiated goods Low barriers to entry/exist Information available Non-price competition Firms are profit maximizes
Allocative - No
Productive - No
Dynamic - No
X - inefficient - No
SNP -SR
NP -LR
Oligopoly competition - price-makers
High barriers to entry/ exist
High concentration ratio ( few firms dominate )
Interdependence of firms ( Action of 1 firm affect others)
Non-price competition
Differentiated goods
Allocative - No
Productive - No
Dynamic - Yes
2 collusions
Formal collusion: When firms make agreements among themselves to restrict competition by reducing output and raising prices
Tacit collusion: When firms collude without any formal agreement being reached and there is no explicit communication between firms. Ex; Price leadership
Cartels
A group of firms that have a formal agreement to restrict competition in a market
Preadotary pricing
predatory pricing scheme, prices are set low to attempt to drive out competitors from the market.
Non-price competition
Advertising and branding
Quality
Endorsement
Monopoly
One seller in the market
High barriers to entry
imperfect information
The firm is a profit maximizer
Productive - No
Allocative - No
Dynamic - depends if there are competitors
X - inefficient - No
Price Discrimination
Charging a different price for the same good/ service in different markets
3rd-degree discrimination tactics =>
1) Time: Charge differently during the months, weeks, days.
2) Place: Depending on the location
3) Income: Separating consumers into income groups
Degrees of discrimination
3rd degree - When consumers are divided into groups and asked to pay different prices
Monopsony
Ex) The miltary equimpent
Exists when there is only one buyer in the market. (Ex The military equipment the government buys.)
Profit maximizes
Able to negotiate low prices
Price makers
Contestability
A market where there is the freedom to entry to the industry and low costs to exist
Low barriers to entry/exist Large pool of potential entrants Perfect information Short un profit maximisers Hit and run completion exits ( pump and dumb )
Factors that influence the demand for labour to a particular occupation:
Change in demand for the final product
Change int the price of the product
Change in productivity of labor
Change in the price of capital (machines)
Factors that affect the elasticity of demand for labour
Availability of substitutes
The elasticity of the demand for the product
Cost of labour as a percent of the total cost
Time period
Factors that influence the supply of labour to a particular occupation
Size of population Net migration Income tax rates Level of welfare benefits Government regulations Trade unions.
Factors and consequences of the geographical immobility of labour.
Geographical immobility of labour exits when workers find it difficult to relocate to areas
Factors:
House price differences from region to region
Social issues
Legal barriers
Language differences
Result: Inequality increases
Causes and consequences of the occupational immobility of labour
Occupational immobility of labour exits when workers find it difficult to transfer from one occupation to another occupation
Factors :
Lack of knowledge
Lack of finance
Lack of experience
Effects: Structural unemployment
subsidy
money that is given by the goverment to consumers and firms with the aims of lowering the cost of production to improving the quality/ quantity of the product and promoting consumption of the product
Min wage
The lowest amount of money a firm is legally required to pay its workers
Specialization
when a firm uses all of its resources to produce a certain type of good/service
