Microeconomics > AI theme 3 > Flashcards

AI theme 3 Flashcards

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1
Q

Why might a firm seek to gain monopoly power as a reason for growth?

A

To influence prices and restrict the entry of other firms into the market.

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2
Q

How does monopsony power help a larger firm reduce its costs of production?

A

It allows the firm to drive down the prices of its raw materials from suppliers.

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3
Q

Give one reason why large firms have greater security during financial difficulties.

A

They are able to build up significant assets and cash reserves to use as a buffer.

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4
Q

Which constraint on growth occurs when banks perceive smaller businesses as high risk?

A

Access to finance.

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5
Q

How does competition law restrict the growth of firms in the UK?

A

It can forbid mergers that create a company with more than a 25% market share

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6
Q

Term: The Principal-Agent Problem

A

Definition: A conflict of interest where agents (managers) make decisions to maximise their own benefits rather than those of the principals (owners).

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7
Q

In the context of firm ownership, who are the ‘principals’?

A

The shareholders who own the company.

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8
Q

In the context of the principal-agent problem, who are the ‘agents’?

A

The chief executive and senior managers who run the company day-to-day.

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9
Q

How can a firm align the interests of managers with those of shareholders to solve the principal-agent problem?

A

By giving managers shares in the business or linking bonuses to profit levels.

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10
Q

What is the primary motive of public sector organisations in the UK?

A

To provide a service for citizens rather than making a profit.

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11
Q

Term: Organic Growth

A

Definition: A firm expanding internally by increasing its own output, such as by opening new stores or launching new products.

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12
Q

Identify one advantage of organic growth over inorganic.

A

The firm is able to keep full control over the business without the risks of a takeover.

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13
Q

Term: Backward Vertical Integration

A

Definition: A firm merging with or taking over a supplier earlier in the production process.

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14
Q

What is the primary benefit of forward vertical integration?

A

It secures retail outlets and can restrict competitors’ access to those outlets.

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15
Q

Term: Horizontal Integration

A

Definition: The merger of firms in the same industry at the same stage of production.

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16
Q

What is a major disadvantage of horizontal integration regarding risk?

A

It increases risk by ‘placing all eggs in one basket’ if that specific market fails.

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17
Q

Term: Conglomerate Integration

A

Definition: The integration of firms in different industries with no obvious connections.

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18
Q

What is the main advantage of conglomerate integration for a firm’s survival?

A

The diverse range of products reduces the risk of total business failure if one industry fails.

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19
Q

Term: Demerger

A

Definition: A business strategy where a single business is broken into two or more independent components.

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20
Q

Why might a ‘lack of synergies’ lead a firm to demerge?

A

Different parts of the company fail to make each other more efficient, potentially leading to diseconomies of scale.

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21
Q

How can a demerger impact workers negatively?

A

The drive for increased efficiency following the split may result in job losses.

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22
Q

What is the condition for short-run profit maximisation?

A

$MC = MR$

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23
Q

According to William Baumol, what is the primary objective of managers whose salaries depend on sales?

A

Revenue maximisation.

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24
Q

What is the condition for revenue maximisation?

A

$MR = 0$

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25
What is the condition for sales maximisation?
$AC = AR$ (or where the firm makes normal profit).
26
Why do firms following a sales maximisation objective produce at $AC = AR$?
To achieve the highest level of sales possible without making a loss.
27
Term: Profit Satisficing
Definition: Making enough profit to keep shareholders happy while following other managerial objectives.
28
Formula: Average Revenue ($AR$)
$AR = \frac{TR}{Q}$
29
Formula: Marginal Revenue ($MR$)
$MR = \frac{\Delta TR}{\Delta Q}$
30
In a perfectly competitive market, how is the demand curve for an individual firm described?
Perfectly elastic (horizontal).
31
What is the relationship between $MR$ and Price Elasticity of Demand ($PED$) when $MR$ is positive?
Demand is price elastic.
32
At what point on the Total Revenue ($TR$) curve is the demand curve unitary elastic?
At the maximum point of the $TR$ curve, where $MR = 0$.
33
Term: Total Cost ($TC$)
Definition: The sum of total fixed costs and total variable costs at a given level of output.
34
Term: Marginal Cost ($MC$)
Definition: The extra cost incurred by producing one additional unit of a good.
35
Why is the Short Run Average Cost ($SRAC$) curve U-shaped?
Due to the Law of Diminishing Returns.
36
Term: Law of Diminishing Returns
Definition: As more units of a variable factor are added to a fixed factor, the extra output produced eventually declines.
37
Where does the Marginal Cost ($MC$) curve always intersect the Average Cost ($AC$) curve?
At the lowest point (minimum) of the $AC$ curve.
38
Why is the Long Run Average Cost ($LRAC$) curve U-shaped?
Due to economies and diseconomies of scale.
39
Term: Minimum Efficient Scale ($MES$)
Definition: The lowest level of output at which a firm can fully exploit internal economies of scale.
40
Term: Internal Economies of Scale
Definition: Advantages of growth that arise from within the firm, independent of the industry.
41
Identify a 'technical' economy of scale related to containers or buildings.
Increased dimensions, where doubling dimensions increases capacity by more than double without doubling costs.
42
What are 'managerial' economies of scale?
Large firms can afford specialist managers who have greater knowledge and efficiency in their specific fields.
43
Term: External Economies of Scale
Definition: Cost-saving advantages that arise from the growth of the industry in which a firm operates.
44
Give one example of an external economy of scale.
Local education providers developing specific courses to prepare people for jobs in a local dominant industry.
45
Identify one cause of diseconomies of scale related to employee psychology.
Loss of motivation as workers feel their efforts go unnoticed in a very large business.
46
Term: Normal Profit
Definition: The minimum level of profit required to keep factors of production in their current use ($AR = AC$).
47
Term: Supernormal Profit
Definition: Any profit earned above the level of normal profit ($AR > AC$).
48
What is the short-run shut-down point for a loss-making firm?
Where $P < AVC$ (or $AR < AVC$).
49
Why should a firm continue to produce in the short run if $AR > AVC$ but $AR < AC$?
The revenue covers all variable costs and contributes towards paying some of the fixed costs.
50
Term: Allocative Efficiency
Definition: Occurs when resources are distributed to produce the goods and services consumers value most ($P = MC$).
51
Term: Productive Efficiency
Definition: Occurs when a firm produces at the lowest possible average cost (the minimum point of the $AC$ curve).
52
Term: Dynamic Efficiency
Definition: Efficiency over time achieved through investment in new products and production techniques.
53
Term: X-inefficiency
Definition: Occurs when a firm fails to minimise its average costs at a given level of output, often due to a lack of competition.
54
List the four key characteristics of Perfect Competition.
Many buyers/sellers, freedom of entry/exit, perfect knowledge, and homogenous products.
55
What level of profit do firms in perfect competition earn in the long run?
Normal profit.
56
Why are firms in perfect competition 'price takers'?
Because products are homogenous and there are so many firms that no single firm can influence the market price.
57
Is perfect competition dynamically efficient?
No, because firms only make normal profit in the long run and lack the funds for significant $R&D$.
58
What is the key difference between monopolistic competition and perfect competition?
In monopolistic competition, firms produce differentiated (non-homogenous) products.
59
What level of profit is earned by firms in monopolistic competition in the long run?
Normal profit, due to the lack of barriers to entry.
60
Is a firm in monopolistic competition productively efficient in the long run?
No, because the firm does not produce at the minimum point of the $AC$ curve.
61
Term: Pure Monopoly
Definition: A market structure where there is only one single seller of a product.
62
What is the legal definition of a monopoly in the UK?
A firm that has more than $25\%$ of the market share.
63
Why can a monopolist maintain supernormal profits in the long run?
Because there are high barriers to entry that prevent new firms from joining the market.
64
Term: Third-Degree Price Discrimination
Definition: Charging different prices to different groups of consumers for the same good or service based on their $PED$.
65
What are the three conditions necessary for price discrimination to occur?
Market power, ability to separate groups, and preventing resale (sealing the market).
66
In third-degree price discrimination, which group is charged a higher price?
The group with price inelastic demand.
67
Term: Natural Monopoly
Definition: An industry where economies of scale are so large that a single producer can supply the entire market at a lower cost than multiple firms.
68
Why is it often considered 'pointless' to encourage competition in a natural monopoly?
Competition would result in a wasteful duplication of resources and higher average costs for the industry.
69
What is the 'deadweight loss' associated with a monopoly?
The loss of allocative efficiency (consumer and producer surplus) compared to a perfectly competitive market.
70
Term: Monopsony
Definition: A market structure where there is only one single buyer in the market.
71
How does a monopsonist typically affect its suppliers?
It drives down the prices paid to suppliers, which can reduce supplier profits and lead to firms leaving the market.
72
Give an example of a monopsonist in the UK.
The NHS, as a major buyer of pharmaceutical drugs.
73
Term: Derived Demand
Definition: Demand for a factor of production (like labour) that arises from the demand for the good or service it produces.
74
Term: Supply of Labour
Definition: The ability and willingness of people to make themselves available for work at different wage rates.
75
Identify a benefit for the economy of introducing a National Minimum Wage.
It can reduce poverty and increase the incentive for people to work (the 'participation rate').
76
What is a potential disadvantage of a National Minimum Wage for a firm?
It increases the firm's costs of production, which may lead to higher prices for consumers or reduced employment.
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