Microeconomics Theme 3 <3

1 niche market 2 diseconomies of scale 3 conflicting objectives (family business)

1 higher profits 2 economies of scale 3 increased market share and price setting power

1 internal growth (use profits to increase output) 2 external growth (merger or takeover)

1 financial constraints 2 size of market 3 regulation 4 competition

combination of two or more companies into a single firm

horizontal and vertical

a merger that occurs in the same stage of production

a merger at different stages of the production away from the consumer

a merger at different stages of the production closer to the consumer

two completely different firms merging

1 reduce competition 2 economies of scale 3 monopoly power

1 dis economies of scale 2 lack of synergy

1 control of the supply chain 2 improved access to raw materials

1 no expertise in the industry 2 lack of synergy

1 reduced risk by diversitification 2 increased consumer base

1 lack of synergy 2 no expertise in the market

When a firm splits into two or more independent firms

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

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

maximising profits

maximising welfare of citizens

An organisation whose main objective is not to make money e.g. charity

price x quantity

total revenue increases

total revenue decreases

total revenue/quantity

the revenue you receive per unit of output

additional revenue received from one extra unit of output

MC=MR

MR=0

AR=AC

fixed costs + variable costs

total cost/quantity

(AR-AC) x quantity

all factors of production is variable

at least one factor of production is fixed (usually capital)

an additional factor of production will result in a smaller increase in output

output increasing as cost per unit decreases

1 managerial 2 financial 3 commercial 4 technical 5 marketing

employ specialist managers increase division of labour increase efficiency decrease LRAC

bigger firms are perceived as less risky by financial institutions lower interest rates when taking a loan decrease lRAC

bulk buying decreases LRAC

specialist capital decreases LRAC

lower unit cost for advertising as the firm expands

output increases as cost per unit increase

1 lack of motivation 2 loss of coordination 3 poor communication 4 organisational slack

a firm with a lot of market share so they have price setting power

firms that accept the market price

1 no barriers to entry or exit 2 infinite amount of buyers and sellers 3 homogeneous good 4 perfect information

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

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

AR shifts with the dependants of demand PACIFIC

AC shifts when fixed costs changes but MC does not AC and MC shifts when variable costs shift

the production of any particular good in the least costly way (lowest point on the AC curve)

(P=MC)

uses SNP to innovate

(any point on the AC curve)

AVC is higher than AR then the firm leaves the market immediately

1 low barriers to entry of exit 2 many buyers and sellers 3 slightly differentiated goods 4 firms aim to profit maximise

SNP acts as a signal new firms enter the market increase in competition increase in AC (marketing) decrease in AR no SNP

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

high concentration ratio in the market and the demand is inelastic

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)

two existing firms with high market share engage in price fixing or quality fixing (illegal)

firms openly speak and cooperates on explicit price fixing

firms indirectly cooperates on price fixing

1 small number of firms 2 demand is inelastic 3 firms output can be monitored easily 4 incomplete information

1 enforcement problems 2 falling market demand 3 successful entry of non cartel firms into the market 4 market regulators 5 whistle blowers

the payoff firms get if they increase price or decrease price

firms collude and set a high price to gain joint SNP

while colluding a firm could decrease price and break the agreement to gain more SNP while the other firm gain less profit

one firm supplying the only good or service dominating the market with 100% concentration

one firm has 25% or more concentration ratio

one firm has 40% concentration ratio

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

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

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

sunk costs are high so economies of scale is constant

monopolies can discriminate on price on different consumers who have different PED to increase their SNP

demand is inelastic demand is irresponsive to a change in price train firms charge higher prices

demand is elastic demand is responsive to a change in price train firms charge lower prices

a firm which is the sole buyer of resources or supplies

firms have some control over their supplier

supplier - secure revenue stream monospony - increase bargaining power consumer -

supplier - reduced bargaining power monopsony - suppliers may shut down consumer -

ease of which firms enter or exit the market

1 low barriers to entry or exit 2 good information 3 low sunk costs

1 limit pricing or predatory pricing 2 economies of scale and product differentiation 3 patents, copyrights and licensing requirements

1 no physical location 2 consumers can be reached easily 3 brand awareness reaches further 4 disrupting existing markets this increases contestability

the additional quantity of output produced by an additional unit of labour

the additional revenue received by a firm by using an additional unit of labour

MPPL x MR

each additional unit of labour, brings less additional productivity because capital is fixed

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

there is an inverse relationship between w/r and quantity of labour

when the w/r is low the capital will be substituted for labour as the labour is cheaper

when the w/r is high the labour will be substituted for capital as the capital is cheaper

capital becoming expensive

deregulation

PACIFIC

the demand of labour is dependant on the demand of the good

we cant workout individual productivity as people work in teams