Studied by 11 people
1 niche market 2 diseconomies of scale 3 conflicting objectives (family business)
why firms stay small
1 higher profits 2 economies of scale 3 increased market share and price setting power
why firms grow big
1 internal growth (use profits to increase output) 2 external growth (merger or takeover)
how firms grow big
1 financial constraints 2 size of market 3 regulation 4 competition
what stops growth
combination of two or more companies into a single firm
merger
horizontal and vertical
2 types of mergers
a merger that occurs in the same stage of production
horizontal integration
a merger at different stages of the production away from the consumer
backward vertical integration
a merger at different stages of the production closer to the consumer
forward vertical integration
two completely different firms merging
conglomerate integration
1 reduce competition 2 economies of scale 3 monopoly power
advantages of horizontal integration
1 dis economies of scale 2 lack of synergy
disadvantages of horizontal integration
1 control of the supply chain 2 improved access to raw materials
advantages of vertical integration
1 no expertise in the industry 2 lack of synergy
disadvantage of vertical integration
1 reduced risk by diversitification 2 increased consumer base
advantage of conglomerate integration
1 lack of synergy 2 no expertise in the market
disadvantage of conglomerate integration
When a firm splits into two or more independent firms
demergers
1 reduce diseconomies of scale 2 new separate firms can specialise 3 a firm can sell one of its demerged divisions and its assets to increase SNP 4 reduce conflicts between different cultures within a firm
Reasons for demergers
business - in SR, there is cost of administration and in LR high returns so increases AC workers - job losses, increase in managers consumers - impact on price depends on scale of competiton
impacts of demergers
maximising profits
private sector
maximising welfare of citizens
public sector
An organisation whose main objective is not to make money e.g. charity
non profit organisation
price x quantity
total revenue
total revenue increases
elastic good price decreases
total revenue decreases
inelastic good price decreases
total revenue/quantity
average revenue formula
the revenue you receive per unit of output
average revenue
additional revenue received from one extra unit of output
marginal revenue
MC=MR
profit maximisation point
MR=0
revenue maximisation point
AR=AC
sales maximisation point
fixed costs + variable costs
total cost formula
total cost/quantity
average cost formula
(AR-AC) x quantity
profit formula
all factors of production is variable
long run average cost
at least one factor of production is fixed (usually capital)
short run cost curve
an additional factor of production will result in a smaller increase in output
the law of diminishing marginal returns
output increasing as cost per unit decreases
economies of scale
1 managerial 2 financial 3 commercial 4 technical 5 marketing
5 types of economies of scale
employ specialist managers increase division of labour increase efficiency decrease LRAC
managerial EofS
bigger firms are perceived as less risky by financial institutions lower interest rates when taking a loan decrease lRAC
financial EofS
bulk buying decreases LRAC
commercial EofS
specialist capital decreases LRAC
technical EofS
lower unit cost for advertising as the firm expands
marketing EofS
output increases as cost per unit increase
diseconomies of scale
1 lack of motivation 2 loss of coordination 3 poor communication 4 organisational slack
4 types of diseconomies of scale
a firm with a lot of market share so they have price setting power
price maker
firms that accept the market price
price taker
1 no barriers to entry or exit 2 infinite amount of buyers and sellers 3 homogeneous good 4 perfect information
Characteristics of perfect competition
in the SR they make SNP new firms enter the market as profits act as a signal supply increases in the LR firms make no SNP
price takers making profit in the short run
in the SR they make a loss firms leave the market as loss acts as a signal supply decreases in the LR firms make no SNP
price takers making a loss in the short run
AR shifts with the dependants of demand PACIFIC
what shifts AR
AC shifts when fixed costs changes but MC does not AC and MC shifts when variable costs shift
what shift AC
the production of any particular good in the least costly way (lowest point on the AC curve)
productive efficiency
(P=MC)
allocative efficiency
uses SNP to innovate
dynamic efficiency
(any point on the AC curve)
x efficiency
AVC is higher than AR then the firm leaves the market immediately
shut down point
1 low barriers to entry of exit 2 many buyers and sellers 3 slightly differentiated goods 4 firms aim to profit maximise
characteristics of monopolistic competition
SNP acts as a signal new firms enter the market increase in competition increase in AC (marketing) decrease in AR no SNP
firms in monopolistic competition in the LR
1 5 firms have 60% market share 2 high barriers to entry and exit 3 slightly differentiated goods 4 firms aim to profit maximise 5 firms are interdependent
oligopoly characteristics
high concentration ratio in the market and the demand is inelastic
oligopoly
price rigidity if a firm increases their price, then other firms will not (demand is elastic) if a firm decreases their price, then other firms will decrease prices (demand is inelastic)
kinked demand curve
two existing firms with high market share engage in price fixing or quality fixing (illegal)
collusion
firms openly speak and cooperates on explicit price fixing
overt collusion
firms indirectly cooperates on price fixing
tacit collusion
1 small number of firms 2 demand is inelastic 3 firms output can be monitored easily 4 incomplete information
collusion characteristics
1 enforcement problems 2 falling market demand 3 successful entry of non cartel firms into the market 4 market regulators 5 whistle blowers
why collusion breaks down
the payoff firms get if they increase price or decrease price
pay off matrix
firms collude and set a high price to gain joint SNP
joint profit maximisation
while colluding a firm could decrease price and break the agreement to gain more SNP while the other firm gain less profit
first movers advantage
one firm supplying the only good or service dominating the market with 100% concentration
pure monopoly
one firm has 25% or more concentration ratio
legal monopoly
one firm has 40% concentration ratio
dominant monopoly
1 one firm in the market 2 high barriers to entry 3 firms aim to profit maximise 4 price setting OR quantity setting power but not both
monopoly characteristics
government - corporation tax, compete on international market worker - increase job security, bonuses and perks consumers - innovation in the market other firms - secure outlet for suppliers, constant quality for firms
benefits of monopoly
government - often avoid tax workers - low bargaining power, low job security (increase in capital) consumers - less choice, higher prices, lower quality other firms - monopsony set low prices for the supplier
costs of monopoly
sunk costs are high so economies of scale is constant
natural monopoly
monopolies can discriminate on price on different consumers who have different PED to increase their SNP
price discrimination
demand is inelastic demand is irresponsive to a change in price train firms charge higher prices
peak traveller (commuter)
demand is elastic demand is responsive to a change in price train firms charge lower prices
off peak travellers (leisure)
a firm which is the sole buyer of resources or supplies
pure monopsony
firms have some control over their supplier
monopsony power
supplier - secure revenue stream monospony - increase bargaining power consumer -
benefits of monopsony
supplier - reduced bargaining power monopsony - suppliers may shut down consumer -
costs of monopsony
ease of which firms enter or exit the market
contestability
1 low barriers to entry or exit 2 good information 3 low sunk costs
what affects contestability
1 limit pricing or predatory pricing 2 economies of scale and product differentiation 3 patents, copyrights and licensing requirements
types of barriers of entry or exit
1 no physical location 2 consumers can be reached easily 3 brand awareness reaches further 4 disrupting existing markets this increases contestability
technology reducing contestability
the additional quantity of output produced by an additional unit of labour
marginal physical product of labour (MPPL)
the additional revenue received by a firm by using an additional unit of labour
marginal revenue product of labour (MRPL)
MPPL x MR
MRPL formula
each additional unit of labour, brings less additional productivity because capital is fixed
the law of diminishing marginal productivity
labour is homogenous
prefect information
perfect labour mobility
workers and firms are price takers and they must accept the industry wage rate
no barriers to entry or exit
perfectly competitive labour market
there is an inverse relationship between w/r and quantity of labour
how w/r affects demand for labour
when the w/r is low the capital will be substituted for labour as the labour is cheaper
labour substitution
when the w/r is high the labour will be substituted for capital as the capital is cheaper
capital substitution
capital becoming expensive
deregulation
PACIFIC
shifts in the demand for labour curve
the demand of labour is dependant on the demand of the good
derived demand
we cant workout individual productivity as people work in teams
criticism of the law diminishing marginal productivity
Note 
Flashcard (24)