Notesale: Turn your study into money

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Theme 3 key terms
3
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● Principals = shareholders
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● Asymmetric information = when one party has more or better information
than the other party
...
g
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● Private sector organisations = firms which are not run by the government
and whose primary goal is to make a profit (e
...
Tesco)
...
g
...

● Organic growth = when a firm grows by borrowing or reinvesting profits back
into the business
...

● Mergers = integration of 2 or more firms in order to expand business
operations
...

● Joint ventures = when 2 or more firms agree to work together for a short
term project
...
g
...

● Lateral integration = a merger of 2 firms which are in similar or related
industries (e
...

● Conglomerate integration/diversification = a merger of 2 firms in unrelated
industries (e
...
a brewery buying a sock-making firm)
...

➔ Forward vertical integration = at the next stage of the production
process (e
...
a brewery buying a pub - one step closer to the
consumer)
...
g
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● Sunk costs = costs which have already been incurred and cannot be
recovered (e
...
marketing)
...

● Synergy = the sum of the whole must be more than the sum of its parts for a
merger to work
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3
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● Sales maximisation = when a firm maximises sales of its output whilst
achieving normal profits (AR = AC, or normal profit)
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● Welfare efficient output/allocative efficiency = producing at a point where
the price of a good is equal to the marginal cost of production (AR = MC)
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● Profit satisficing = doing just enough to make sure certain stakeholders are
happy (combination of satisfying and sufficing)
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3 Revenues, costs and profits
● Average revenue = P (P x Q/Q)
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● Marginal revenue = change in total revenue / change in quantity
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● PED = the responsiveness of demand as a result of a change in price
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● Short-run = a time period in which at least one factor of production is fixed,
so only costs of production can change
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● Implicit costs = the opportunity cost
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● Variable costs = costs which vary with output (e
...
utility bills and wages)
...
g
...

● Marginal costs = change in total costs / change in quantity
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● Average costs = total costs / quantity
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● Internal economies of scale = a reduction in long run average cost as output
increases (caused by the growth of the firm)
...

● Risk-bearing economies = as a firm expands, it can diversify and enter new
markets to spread risk and minimise the impact of any downturn
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● Financial economies = as a firm expands, it has more access to finance at
lower interest rates
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● Managerial economies = as a firm expands, it is in a position to hire more
specialist managers (e
...
accountants) to increase productivity
...
This also includes the concept of increased
dimensions - by increasing the surface area of, for example, a lorry the cubic
capacity of the lorry can store much more meaning that transport costs
decrease
...
These
ad costs are spread over more goods and services than before, so long run
average cost decreases (e
...
Mars advertising Mars Bars is also advertising
Mars Bar ice creams simultaneously)
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Potential issues with
monopsonies and exploitation…
● External economies of scale = any reduction in long run average cost
caused by factors external to the firm (e
...
growth in the size of the industry)
...

● Diseconomies of scale = an increase in long run average cost as output
increases
...

● The Law of Diminishing Marginal Returns = in the short run, when variable
factors of production are added to a stock of fixed factors of production,
marginal product will initially rise then fall
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● Normal profit = the point where AR = AC (breaking even)
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3
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● Static efficiency = the most efficient combination of existing resources at a
given point in time
...

● Allocative efficiency = an output level where price (AR/D) equals the
marginal costs (MC/S)
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● Productive efficiency = the point where economies of scale are fully
exploited
...

● Dynamic efficiency = the development of better technology and working
practices which improve the efficiency of production over a period of time
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● Shutdown point for firms = when the firm is not covering its average
variable costs (AVC)
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● Perfect competition = a market structure where many small firms offer a
homogeneous product
...

● Monopolistic competition = a market with many small firms, which supply
goods that are slightly differentiated, allowing them some price-setting power
...

● Cartel = a group of firms which colludes in order to maintain high prices and
limit competition (e
...
OPEC)
...

● Game theory = is concerned with predicting the outcome of games of
strategy in which the participants (for example two or more businesses
competing in a market) have incomplete information about the others'
intentions
● Nash equilibrium = a concept within game theory where the optimal outcome
of a game is where there is no incentive to deviate from their initial strategy,
after considering their opponents’ strategies
...
This is
anti-competitive and illegal and in the short run the firm makes a loss
...
Exploits economies of scale
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● Price discrimination = the ability to charge different markets different prices
for the same good due to the fact that those markets have different
elasticities
...

● Overt collusion = when firms openly fix prices, output and marketing
...
An extreme case of this would be a cartel
(illegal in EU and many other countries)
...
Although this is still illegal, it can be hard to identify
(especially when prices may be similar anyway, e
...
in supermarkets)
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Sticky prices = the observation that many shops charge the same price for
certain goods as their competitors and that prices do not change much over
time
...
g
...

Legal natural monopolies (e
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Royal Mail and posting letters)
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Monopsony = when there is only one buyer but multiple sellers
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Legal monopoly (UK Govt definition of a monopoly) = when a firm has
25% or more of the market share in that industry
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Hit and run competition = when a new firm temporarily enters a market due
to the prospect of supernormal profit but then leaves when supernormal
profits are exhausted
...
g
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3
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g
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● Marginal product of labour = the change in output generated when an
additional worker is employed
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● The formula for MRPL = marginal product of labour x marginal revenue
...
It shows how many workers an
employer is willing and able to hire at a given wage rate in a given time
period
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● Occupational labour supply = the number of people in an industry who are
willing and able to work, whereas individual labour supply = one person’s
willingness and ability to supply their labour
...
g
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● Labour market failure = when supply and demand meet to create an
inefficient allocation of resources
...
g
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● Occupational immobility = when workers are unable to change jobs or take
up new opportunities due to a lack of skills or training (e
...
structural
unemployment within the manufacturing sector in the UK)
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● Elasticity of supply for labour = the responsiveness of the supply of labour
to changes in the wage rate
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● Underemployment = when a person is working but would like to work more
hours
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● Minimum wage = a floor wage set by the government, below which it cannot
fall
...

● Maximum wage = a ceiling wage set by the government, above which it
cannot rise
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● Asymmetric information = where consumers and producers have unequal
access to information about a good or service in the market (e
...
“lemon
markets” emerge, such as in the market for used cars where producers have
more knowledge about their condition than consumers)
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3
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● Regulation = introducing direct controls on firms, such as price controls,
where increasing competition does not solve market failure problems
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● Performance standards and quality targets = set by the regulator, these
may involve improvements in the quality of a service or the number of
customer complaints and may be supported by a system of fines or rewards
...
This is sometimes also
called “windfall taxes”
...
Prices are regulated through
the formula: RPI - X + K where “X” represents an amount/percentage agreed

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●
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by the regulator, whilst the addition of “K” allows for a firm’s capital spending
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Regulatory capture = when the regulator starts acting in the interests of the
firm it is supposed to be regulating
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Government failure = when the government intervenes to correct a market
failure, but the results are a more inefficient allocation of resources and there
is a net welfare loss
...
This often results in the most cost-effective bid winning but
sacrifices in quality may have to be made to compensate
...

Deregulation = removing government legislation and laws in a particular
market, therefore removing barriers to entry/exit for firms and increasing
competition

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