Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Economics of Work and Leisure
All the materials needed to get an A* in Alevel economics (notes include analyses and
evaluation points + some essay stile
examples+ research of particular leisure
market industries useful for application)

Spectator Sports
The dominant sport is football (Football
League (72 small clubs) and Premier
League (10))
Premiership football the top four teams that
regularly appear to dominate the league,
Manchester United, Liverpool, Arsenal and
Chelsea may well be considered to fit this
description
...

1) Barriers to entry (high) into this top
echelon may also be said to exist as
continued success in the top division of the
English league yields handsome financial
rewards
...
This allows these top
teams to buy the services of the best players
(good football-increase customers loyaltybrand name), denying them to other teams,
and consequently maintaining their
dominance
...

2) Also, it is easier for dominant football
clubs to get sponsorship(shirt sponsorship
and commercial sponsorship of competition
such as e
...
the Guinness Premiership in
rugby
...

3) Plus consumers usually have a greater
level of loyalty towards a particular club
(big-big fans)- demand for its tickets is
inelastic- brand loyalty- BTE
...
(Heavily branded product,
significant non-price competition – product
differentiation (adverts are important)
exists between the businesses)
...

5) The dominance of some firms also
suggests that
...

6) Price discrimination takes place
...
(They are
loyal enough to their clubs to travel abroad,
and then are not price incentive towards
tickets of the favorite club)
7) Plus it depends on technological advance
(Internet allows clubs to communicate with
fans abroad and reduce the LR costs (EoStechnological)- no need to travel abroadimproving their loyalty)
However:
1) On the other hand there are other teams
in the division who could grow their
businesses through success on and off the
field- potential competition-contestability
2) Also each year due to promotion and
relegation 3 new teams join the league and
3 exit; consequently there is the potential
for change to occur especially over a
number of years
...
8 pounds) The apparent
willingness of clubs to immediately reinvest funds into playing staff purchase and

salaries is testament to the rejection of the
idea that profit maximization is the main
goal of these top clubs (profit satisficing –
likely to keep players happy, improve the
brand, make good football)
...

Admittedly these are less apparent at the
homes of the top 4 teams but even their
signs are that to attract support to matches
against less popular opposition, lower ticket
prices are on offer
...
Whether its’ substitutability is
strong? - Demand then elastic- might have
to lower ticket price- will act not like
oligopolistic firms
...

Therefore, each club has the same amount
of TV rights -so it might increase the
competition within the league- reduces the
power of dominate firms
...

Financial Fair Play rules
Football’s financial Fair Play (FFP) rules
were introduced in an attempt to prevent
clubs spending more than they earn and
hence potentially going bankrupt
...
There was a case when Manchester
City broke this rule and had to pay a fine of
16,3 million pounds and never broke it
again!
8) However, positive externalities such as –
tourists and hotels around the popular
stadium- improvement in infrastructure,
businesses around may benefit, higher
employment – government can be
interested- subsidize such clubs (likely to be
popular ones)
To conclude we have conflicting evidence as
to the extent to which Premiership football
has become an oligopoly market
...
Olympic
Games of 2010 –boost domestic demand
and tourism –GDP increased + boost in
employment while the facilities are
constructed (Short run)
...
Third parties
benefit- businesses around-hotels
...

The trend in broadcasting over recent years has
been use of the Internet

Competition between platforms
Consumers can access multi-channel television
free of charge via the digital terrestrial platform
(freeview) or satellite (freesat)
Pay-TV Providers (greater range of channels –
Sky main provider (satellite 41%), Virgin Media
is the only provider (Cable 14%) and BT Vision
and freeview (digital TV 45%)
1) High MRC (different platforms) –oligopolistic
market
...


Terrestrial television (in the past)
The television market was oligopolistic, as
analogue spectrum has only limited number of
channels
...

The trend has changed after 1991, since
alternative channels became available and
become close substitutes for the programs
broadcast by ITU and BBC
...


Channel market
...
To achieve a low AC< it is
necessary to secure large number of
viewers- difficult (too many channels)
2) Some firms therefore might decide to
integrate leading to a more
concentrated market in the futureoligopoly (fewer channels but more
viewers per channel)
3) In digital media, content can easily be
transferred between formats- cost
advantages for firms providing other
media services in addition to television
...

5) Some TV channels are connected to the
Internet – increase in popularity of
Smart TVs, which have Internet
functionality- product differentiationgreater market share- dominance
(potentially)

Why beneficial, why not?
Negative Externalities
1) Excess of TV watching- obesity –
health problems- NHS treatment –
government has to spend more on ill
population – impose greater tax to
get money (taxpayers-third party)
or spend less on other areas
...

Positive Externalities
1) Information received
2) Education form TV (special
programs)
Social costs and benefits are not taken into
account- might cause market failure through
allocative inefficiency and insufficient
regulations of TV market (government failure)

TV signals as Public Goods
2 characteristics – non-rivalrous (consumption
by one person does not leave any less of the
good for other to consume) and non-excludableonce they have been provided no-one can be
pretended from enjoying their benefits)
Free-rider problem –each individual has an
incentive not to pay and enjoy the benefits of TV
bought by others- market failure-lack of
provision of TV

TV signals are not pure PG- can be provided for
a profit because they are excludable
However- TV signals are quisi-public goodsthey do posses the characteristics of non-rivalry
– if extra person tunes to watch a program this
does not prevent other from watching it- AC of
supplying TV programs fall almost indefinitely
as more viewers watch any given program
...

Allocative efficiency- MC of providing TV
program to an extra viewer may be 0 – efficient
price then should be 0 –this is why the
government keen to support free-to-air TV
channels provided through digital platforms,
although viewers have to pay for the platform
them itself
...


Internet Broadcasting and videoon-demand
The trend is- many consumers access audiovisual content via the Internet
...

Can be substitute to Pay-TV services – demand
for them might drop significantly

Cinema







There are currently just under4000
individual screens in the UK, with
around 60% controlled by the ‘big
three’ - Odeon, Cineworld and Vue
...
72 £
...
Given that attendance only rose by
0
...

Cinema theatres earn revenues from three
main sources - box office takings, the sale
of food, drink and merchandise
(concessions) and from advertising
...

Market Shares of the
Leading UK Cinema
Chains

Percentage
market share

Odeon
Cineworld

21
...
3

Showcase

7
...
4

4
...




1) Large chains have the power to
obtain the rights to screen first-run
films and to do so at a lower average
cost per screening
...

3)Similarly, a large chain can re-equip
its cinemas with new technology (such
as 3-D viewing) at a lower average cost
than smaller, independent cinemas
...

5)Management and administration
economies of scale may also be made,
with some costs centralised at Head
Office
...

6)There are also financial and risk
bearing economies of scale available to
multiplex cinemas, including the
ability to raise finance for expansion
through acquisitions, and to bear and
manage commercial risks more
effectively than smaller independent
cinemas, or small chains
...

Another barrier to entry into the industry
is the extent of integration
...
Vertical integration makes it
difficult for potential entrants to join –
either because the supply chain is not
open to them, or because they have no
outlets to promote their service
...










The way in which cinema chains boost
their profits is by cutting their costs, and
they are well known for being one of the
main types of employer employing staff on
zero hours contracts
...
Typically busy times for
cinemas are school-holidays and weekend
evenings, so this is when most staff is
employed
...

With around 20% of revenue for cinemas
being spent on staff, cutting these costs
will have a strong effect on profits
...
More are
offering „premium‟ services, with luxury
reclining seating and specialist at-seat‟
food services
...

The Electric in Birmingham provides
waiters that will bring absinth and olives to
your seat; at Manchester‟s Cornerhouse
you can enjoy a slice of pizza to
accompany your film quiz
...

However, the market is not completely
uncontestable as there may be room for a
niche cinema in larger towns and cities
...

The significance of interdependence can
be seen in terms of how similar pricing
‘rules’ emerge
...
„Cheap
Tuesday‟ is an example of how discounts
can be organised on a „rule‟ basis
...
Given the
need to attract customers, cinemas still
need to compete with other chains and
with other leisure pursuits, even when
pricing „rules‟ exist
...

Of course, it is difficult to assess whether
cinema owners actually collude or not,
other than through an implicit
understanding of pricing rules
...
What is clear is that film
exhibition in the UK is highly concentrated
and indeed dominated by a few large firms
and that these firms exhibit all the
characteristic behaviour of oligopolists
...
72 £
A change in the price of a ticket will cause
a movemen along the demand curve while
a change is any of the following conditions
of demand will shift the demand curve to
the laft or right
...
the sale of complements
to cinema admissions such as popcorn
and soft drinks generates significant
revenue for cinemas
...

5)The popularity of films on release very popular films are likely to give a
temporary boost o overall cinema
admissions as people desperate to see
them
...
168
...

Evaluation points from Mr Lees
Handout
1
...

2
...
Everyman, where viewers can
enjoy champaign, leather seats and even
meal with a film,which led to increased
spendings per head on cinema to17
...
Rivals for cinemas are other forms of
out-of-home-entertainment eg Legoland,
so cinema has to be very good value for
money to be able to compete
...
VUE held its !st music concert in a
cinema in 2005; two years later it
screened a live transmission of a Genesis
concert
...
Ways to improve: installing new sound
system,ultra-high-definition 4K and 3D
screens, Imax
...


2) the weakness of the pound –exchange
rate fell during recession by 25% drinks and meal are more expensive
abroad-all-inclusive holidays are
popular
3) collapse of some low budget airlines
and holiday firms (Sun4U) reminds
consumer of the security value of the
package holiday

Dynamic packaging and niche
marketing
1)Dynamic- have become important as they
allow tourists to put together their own package
( flexibility of choice)
2)Niche- target particular segment within the
market- people who require adventure holidays
, sporting activities, unusual destinations
...

3) advantages of online booking –larger firms
can benefit( can share the systems among
offices)

The trend is downwards
Reasons;
1) low-cost airlines have reduced the price
to holidays makers of planning their
own holiday and booking flights and
accommodation separately
2) the internet – ease of using online travel
agents( Expedia) or other websites –
improvement in information
3) people prefer to buy property abroad
rather than book package holidays each
time
...

3) Divercification-many firms in a niche
markets carry higher profit margins

Vertical integration

Thomson owned its own travel agent in Lunn
Poly(forward vertical intefration) and its own
airline Britannia( backwards vertical
integration)- guaranteed supply of air seats and
the opportunity to offer preferential sales of its
own holidays in Lunn Poly estate agents
...

However, the price does not necessarily
falls as the departure dates approaches
(a rush of bookings for that holiday may
lead them to raise the price)

Long run pricing strategies
1) depends on the future demand(
forecasts have to be made)
2) depends on the actions of others –
interdependence

International leisure travel
Mostly by air
1) Recession is a hard time for air travelling
companies – many budget airlines failed during
recession of 2008-9(XL leisure)
2) These failure mainly was caused by the high
oil price (fuel) – depends on the prices of
resources
3) consumers are reluctant to take international
travel- demand dropped

4) unemployment rose- unemployed are
unlikely to take any holidays abroad
5) British pound has weakened against other
currencies (dollar/euro)- this leads to higher
costs the tour operators have to pay- it is more
expensive for Britons to go abroad

Market structure
British airways is the dominant firm in the
market (48%) then Virgin Atlantic (17%) then
easy Jet (11%) Thomsom Airways (6%) Thomas
Cook (5%)
...
Other smaller firms own 13% of the
rest of the market- some competition there
...


BTE and contestability
Traditionally - difficult to enter
In the past markets were regulated by
governments to limit access
...

1) open sky agreement – Under EU open
skies agreement is has been possible for
any airline based in an EU member state
to operate flights between two points in
Europe (since 1997)
...

o These have been granted
permission to be the sole
producer for a particular
industry
...

 Absolute monopoly – when there is
only on firm in a market
...

 Price maker (can chose price or
output position MC=MR)
 Unique good
Exploits advantages of economies of scale

upon the degree of competition in the market,
which for a pure monopoly is zero
...


Advantages of Monopoly
1
...
These cost reductions will lead to
a decrease in costs and increase in profits
for the monopoly producer
...
Purchasing economies
...

2
...
The costs to finance
may be lower for larger firms as they may
have better credit ratings and have access
to the capital market
...

3
...
Increased capacity
or a technological development that results
in lower long-run average costs (specialist
equipment)
...
Risk-bearing economies
...

5
...
When larger firms
have a network of suppliers and customers
...

6
...
Savings in long-run
average costs due to the specialization or
management
...
Research & Development

-A monopoly maximises profits where MR=MC
...

-MC curve always cuts AC curve at its lowest
point
...

-Monopolies can maintain super-normal profits in
the long run
...
This is
important for industries like medical drugs
...
A firm

needs a dominant position to bear the risks

benefit
...


protect their intellectual property by

3
...
Otherwise Why spend

occur at the lowest point on the AC curve
...
X – Inefficiency
...
Includes over

3
...
Therefore the AC curve is higher

overseas markets, earning a country

than it should be
...
This is certainly the

5
...
A Monopolist makes

case with Microsoft
...

6
...
E
...
Supermarkets have been criticised
for paying low prices to farmers
...
Diseconomies of scale
...

-Management diseconomiescan occur when the firm
is so big that there are communication break downs
...
The business
owners and managers will find it difficult to manage



Green area = Supernormal Profit (AR-AC) Q

the entire firm easily
...
(the overall (net) loss of

changing market
...
Higher Prices
...


set higher prices than in a competitive market
...


2
...
A monopoly is allocatively

-Marketing diseconomies occurs when a larger firm

inefficient because in monopoly the price is greater

has to spend even more on advertising because of

than MC
...
In a competitive market the

more sales required
...
Lack of incentives
...
Vertical Integration
...
A good example is the oil

develop better products
...
Charge higher prices tosuppliers
...


may use their supernormal profits to charge higher
prices to suppliers
...
Legal Monopoly
...
g
...

4
...
Firms can increase

Evaluation of Monopolies
Some industries need a lot of research and

possibly benefiting from economies of scale
...
g
...
Therefore, a monopoly may be



market share by increasing their sales and

dominating the search engine market
...



A government may be able to regulate monopolies

5
...
g
...


to gain benefits of economies of scale, without the
disadvantages of higher prices
...
Barriers

1
...

2
...


How Monopolies can develop
1
...
Where two firms join at
the same stage of production, e
...
two banks such
as TSB and Lloyds

to entry can include – brand loyalty through
advertising and economies of scale

Oligopoly
An oligopoly is a market dominated by
a few producers, each of which has
control over the market
...
Although there could be quite a
few firms, the concentration ratio tends to
be fairly high
...
The
implication of this is that firms in oligopoly
are interdependent
...
Each of the
large firms in the industry has to try and
predict the actions of the others
...
This will allow them to establish
some brand loyalty
...

High barrier to entry - Oligopolies can use
barriers to entry to protect their super
normal profits in the long run, by
preventing other firms from entering the
market and competing away these profits
Imperfect Knowledge - Firms will not have
access to other firm’s costs and revenues
...


This results in firms in an oligopoly being said to be
INTERDEPENDENT - the actions of one firm in an
oligopoly will have a direct impact on the firms in
the industry
...
Ifa firm raises their prices
then the other firms will not react in the same way
and sell their similar goods and hope to gain market
share
...


( so, consumer satisfaction is maximised and
production takes place using the least amount of
scarce resources)

The Kinked Demand Curve Model

The kinked demand curve show how Oligopolists
are inter-dependent and faced with uncertainty
...

Above P, the demand curve is relatively elastic rivals will not follow any price rises its initiates so by
raising prices it will lose sales
...

Evaluation of kinked demand curve
-In real world, prices do change
-Firms may not seek to maximise profits, but prefer
to increase market share
- Some firms may have very strong brand loyalty and
be able to increase price without demand being very
price elastic
...
If demand was elastic, then the
situation where all three firms drop their price might
result in an increase in revenue for each firm
...

A war develops! Obviously, the motive is to protect,

or increase, market share at the expense of
immediate profits
...
In recent years, we
have seen price wars in the following industries: fast
food (McDonald's verses Burger King) and package
holidays
...
Some cartels (an informal agreement) are
very open, the classic example being OPEC
...

The goal of a cartel is for the few firms in the
industry to join together and, effectively, form a
monopoly
...
The big
problem, of course, is the fact that it is tempting for a
member of the cartel to cheat
...
It
is an attempt by the firms in an oligopolistic
situation to eliminate any competition, which is bad
for the consumer
...

Businesses will use other policies to increase market

2
...
g
...
When brand loyalty is
strong, cross-price elasticity of demand for price
changes between two substitutes weakens and fewer
consumers will switch their demand when there is a
change in relative prices in the market
...

Limit pricing is where the firms in oligopoly try to
set a price that limits the entry of new firms into the
industry
...
It is temporary and not
really designed to be a loss leader, unlike predatory
pricing, where, as the title suggests, the goal is to kill
off an existing competitor
...
Once the competitor has left
the market, the price can be raised back up to the old
level and there are more customers to go round

share:
Better quality of customer service including
guaranteed delivery times for consumers and lowcost servicing agreements, good after-sales service
...

Discounts on product upgrades when they become
available in the market
...


Loyalty cards, free delivery, online ordering,
free gifts, guarantees

Using a leisure market of your choice,
discuss the extent to which it may be
considered to be an oligopoly
...

However, any leisure industry example will
be accepted
...

An oligopoly market is one dominated by a
few firms who have a significantly high
concentration ratio i
...
a high proportion of
the total market share lies in the hands of
just a handful of firms
...
Between them they certainly
have a significant share of the total revenue
earned in the UK market, and each of them
regularly appear in the top 10 money
earning clubs in the world
...

This is probably more important in the
worldwide market for Premier League
merchandise, replica shirts etc, than at
home where partisan allegiances might play
a more significant part
...

These payments represent a significant
proportion of the money television stations
around the world pay to the Football
Association who manages the league
...
Year on year these top four then
qualify for the equally lucrative European
champions league, which becomes
increasingly inaccessible to the rest of the
clubs in the league and once again the
barriers to entry grow
...
The
top 4 are the biggest earners repeatedly and
the most successful on the field
...
Also
each year due to promotion and relegation
3 new teams join the league and 3 exit;
consequently there is the potential for
change to occur especially over a number of
years
...
Certainly there is no convincing
evidence that any of the top 4 clubs are
making abnormal profits as the Chelsea FC
final accounts of the last couple of seasons
will testify
...
Thirdly, in recent times,
there is evidence that price competition is
beginning to enter the market, with
discount tickets on offer at an increasing
number of Premiership grounds
...
To conclude we have
conflicting evidence as to the extent to
which Premiership football has become an
oligopoly market
...
The changing economic climate
of the present time may even lend itself
more favourably to such an occurrence
...

Only once since the 1992/93 season has the
league been won by a team outside the top
4 clubs, indeed since the 2000/2001 season
only once has a team from outside finished
in the top three places, Newcastle in the
02/03 season
...
They have secured
financial dominance and won support on
the world stage due to the highly successful
marketing of the league
...
In football the

top 4 are getting richer and more dominant
in terms of success at the game, if not in
terms of profitability, due to their
reluctance to take cost of production
seriously
...
Firms operating under monopolistic
competition usually have to engage in

The model of monopolistic competition

advertising
...


Characteristics

9
...


Monopolistically competitive markets
exhibit the following characteristics:
1
...
Many smaller firms

Equilibrium under
monopolistic competition

about price and output, based on its product,
its market, and its costs of production
...
Knowledge is widely spread between

attracted into the industry, because of

participants, but it is unlikely to be perfect
...


menus available from restaurants in a town,
before they make their choice
...
However, they
cannot fully appreciate the restaurant or the

At profit maximisation, MC = MR, and output

meal until after they have dined
...
Given that price (AR) is

3
...

4
...
There are
four main types of differentiation- non-price
+ price competition
...
Firms are price makers and are faced with
a downward sloping demand curve
...


above ATC at Q, supernormal profits are
possible (area PABC)
...


the left, driving down price
...


Monopolistic competition in
the long run

Examples of monopolistic competition can be
found in every high street
...
New entrants continue until only

possible, such as:

normal profit is available
...




Hotels and pubs



General specialist retailing
Consumer services, such as
hairdressing



The survival of small firms
The existence of monopolistic competition
partly explains the survival of small firms in
modern economies
...


Evaluation
The advantages of monopolistic
competition
Monopolistic competition can bring
the following advantages:

2
...
This is because price is above
marginal cost in both cases
...


Inefficiency
The firm is allocatively and productively

1
...

2
...
For example, a typical high street in any
town will have a number of different
restaurants from which to choose
...
The market is more efficient than monopoly
but less efficient than perfect competition less allocatively and less productively efficient
...
For example,
retailers often constantly have to develop new
ways to attract and retain local custom
...
This means they are productively
inefficient in both the long and short run
...

As an economic model of competition,
monopolistic competition is more realistic than

1
...
Advertising
may also be considered wasteful, though
most is informative rather than
persuasive
...

perfect competition - many

Perfect competition
- is a market structure where many firms offer a
identical product, there is freedom of entry and exit
and perfect information, firms will make normal
profits and prices will be kept low by competitive
pressures
...

Many individual buyers, none has any control over
the market price
Perfect freedom of entry and exit from the
industry
...
This
assumption means that all firms in a perfectly
competitive market make normal profits in the long
run
...
This leads to each firms
being “price takers” with a perfectly elastic demand
curve for their product
...
Likewise sellers have
perfect knowledge about their competitors
...






All firms produce an identical or homogeneous product
...




Freedom of entry and exit; this will require low sunk costs
...


- The internet and perfect competition

Many firms
...


-Consumers have imperfect information and their
preferences and choices can be influenced by the
effects of persuasive marketing and advertising
...


There is perfect information and knowledge
...

- Clearly the assumptions of pure competition do not
hold in the vast majority of real-world markets, for
example, some suppliers may exert control over the
amount of goods and services supplied and exploit
their monopoly power
...
It has reduced
barriers to entry for firms wanting to
compete with well-established businesses –
for example specialist toy retailers are
better able to battle for market share with
the dominant retailers such as ToysRUs and
Wal-Mart
...
There are an enormous
number of price comparison sites in the UK
covering everything from digital cameras to
package holidays, car insurance to CDs and
jewellery
...
For
example the sites offering to compare
hundreds of different motor insurance
policies or mortgage products draw
information from the insurance and
mortgage brokers but might use limiting
assumptions about the different types of
consumers looking for the best price – the
result is a range of prices facing the
consumer that don’t accurately reflect their
precise needs – and consumers may only
realise this when, for example, they make a
claim on an insurance policy bought over
the internet which turns out not to provide
the specific cover they needed
...
com currently has
around 40% of the overall comparison site
market, with Confused
...


Price and output in the short run under
perfect c








competition

In the short run, the interaction between demand
and supply determines the “market-clearing” price
...

This price is taken by each firm
...

Since the market price is constant for each unit sold,
the AR curve also becomes the marginal revenue
curve (MR) for a firm in perfect competition
...
This output generates a total
revenue (P1 x Q2)
...

This is not necessarily the case for all firms in the
industry since it depends on the position of their
short run cost curves
...


- Firms are making ‘super- normal’ profits equal to the
rectangle abcd
...
At this point, each firm in the
industry is making normal profit
...
This is
shown in the next diagram
...

3
...


Evaluation point*:
Some economists claim that perfect
competition is not a good market
structure for high levels of research and
development spending and the resulting
product and process innovations
...
Allocative efficiency: In both the short and
long run we find that price is equal to
marginal cost (P=MC) and thus allocative
efficiency is achieved
...
No one can be made better off
without making some other agent at least as
worse off – i
...
we achieve a Pareto
optimum allocation of resources
...
Productive efficiency: Productive efficiency
occurs when the equilibrium output is
supplied at minimum average cost
...
Firms with high unit costs may not
be able to justify remaining in the industry as

for research and innovation to flourish
...


Market contestability
Contestable market- is a market with low or no
barriers to entry and exit
...
So, in order to

Key characteristics of contestable
market

discourage rivals to enter a market , existing

 no brand loyalty

only normal profits are generated
...
However-even
brand name can be sold
...
In a perfectly contestable
market with an umlimited number of potential

 no long-run abnormal profits/supernormal
profits
 good knowledge of existing technology ---Asymmetric information is a key barrier to
entry
...

 no significance to the number of firms in the
market
 susceptible to hit and run tactics
 long run economic efficiency
 allocative efficiency
 productively efficiency

If there are resemble a highly competitive one
as the supernormal profits attract potential
competitiors to enter a market
...
)

Contestability and regulation( to
improve it)

more contestable
...


Opening up a market to potential entrants may

4
...
A huge investment in open source

competitive behaviour
...


and industries have become genuinely
contestable
...
The recession – an economic downturn can

helped increased
Contestability

have the effect of opening up markets to new
businesses
...
Generally, the costs of

2
...



barriers to entry that exist
...
This gives new firms a better chance

aimed at opening up trans-Atlantic air travel
...
This is a common
approach in the communications industries
where incumbents are likely to

More information
...

The internet has enabled firms to compete

dominant food retailers
...



Internet also enables firms to have better
information about technology and cheapest
suppliers reducing advantage of established
firms

have significant market power (SMP) in terms
of control of a network
...
Competition Policy: Tougher competition
laws acting against predatory behaviour by
existing firms are designed to make markets

Evaluation



Works better for some industries than others
...
g
...




Internet creates its own barriers of entry
...



People may not trust new online businesses
...

The camping industry as a whole displays a
considerable degree of evidence to suggest that
it may be considered quite contestable
...
g
...


income
...
On the other
hand article two does suggest in the sub-market
of ready erected tents, two firms dominate;
65% of the market shared by Eurocamp and
Keycamp
...
Do they attempt to erect barriers
through advertising campaigns? It is difficult to
imagine that barriers to entry due to scale
economies do not exist in the manufacture of
some camping equipment goods or perhaps the
production of caravans and mobile homes
...
It may be that
there are chains of campsites all owned by one
firm thus significantly reducing the amount of
competition in the market
...
However, in a number of
sub-markets this is not necessarily the case
...


Costs - are the value of that which

must be given up to achieve or acquire
something
...

In this time period, some of firm's costs are
fixed, while some are variable
...
Eg
insurance, pensions paid to workers, rent
etc
Any business with significant
capacity will have high fixed costs, for
example a vehicle manufacturer that
spends millions of pounds building a new
factory and installing expensive and bulky
capital equipment
...



The law of diminishing returns implies that
marginal cost will eventually rise as output
increases



At some point, rising marginal cost will lead
to a rise in average total cost
...

Thus, MC curve intersects AC curve
at the lowest point of the AC curve
...
When the marginal curve
is belowthe average curve, then the average
is falling
...


production
...
Marginal costs relate only
to variable costs!
Variable costs:costs that change with changes in
output
...

Average variable cost = total variable costs
(TVC) /output (Q)

Average cost:

𝒕𝒐𝒕𝒂𝒍𝒄𝒐𝒔𝒕𝒔
𝒐𝒖𝒕𝒑𝒖𝒕

Marginal Cost

, also called unit cost
...
Total cost = total fixed costs + total
variable costs (or TC = TFC + TVC)

Long-term Costs
-the time period when it is possible to
alter all factors of production
...
e
...
It is due to economies of
scale anddiseconomies of scale
...
However, after a certain
output, a firm may experience diseconomies of
scale
...
For example, in
a big firm it is more difficult to communicate
and coordinate workers
...
These lower costs represent an
improvement in productive efficiency and can
give a business a competitive advantage in a
market
...
e
...

As long as the long run average total cost curve
(LRAC) is declining, then internal economies of
scale are being exploited
...
Purchasing economies
...

2
...
The costs to finance
may be lower for larger firms as they may
have better credit ratings and have access
to the capital market
...

3
...
Increased capacity or
a technological development that results in
lower long-run average costs (specialist
equipment)
...
Risk-bearing economies
...

5
...
When larger firms have
a network of suppliers and customers
...

6
...
Savings in long-run
average costs due to the specialization or
management
...

 Management diseconomiescan occur when
the firm is so big that there are
communication break downs
...
The business owners and
managers will find it difficult to manage the
entire firm easily
...

 Co-ordination problems may occurs
between departments
...
Includes over
paying for resources, such as paying
managers more then they deserve
...

 Marketing diseconomies occurs when a
larger firm has to spend even more on
advertising because of more sales required
...

External economies/diseconomies of scale –
results from the growth of the industry,
affecting firms within the industry
...

Economies of scale are limited by the size
and nature of the market
...
Personal services and unique
products are such examples
...

What is true for software developers is also
important for telecoms companies, airlines, music
distributors and cinema operators



We find across many different markets that, when
a high percentage of costs are fixed the higher the
level of production the lower will be the average
cost of production



Strong demand means capacity utilization rates
are high and this lowers the unit cost of supply

If LRAC is falling when output is increasing then
the firm is experiencing economies of scale
...

When LRAC eventually starts to rise then the firm
experiencesdiseconomies of scale, and, If LRAC
is constant, then the firm is experiencing constant
returns to scale

Constant returns to scale– longrun average cost remaining unchanged as
output increases
...



1
...
The marginal cost of one extra copy for sale is
close to zero, perhaps just a few cents or pennies



3
...
Because marginal cost is low, the extra output
reduces average costs creatingeconomies of
scale
Capacity Utilisation, Fixed Costs and Profits

Minimum efficient scale– lowest level of
output at which full advantage can be taken
by economies of scale
...
This
means that their average costs are lower by
virtue of their size
...
Potential firms are likely to start
on a smaller scale and so will find themselves at
an immediate cost disadvantage
...


level of production
...

This is known as backward vertical
integration
...

In the first case, the firm would now have
control over some of the raw materials
...
In both cases, the
firm has become more powerful, making it
harder for new firms to compete
...


High set-up costs deter initial market entry
...
Sunk costs
are those that cannot be recovered when a firm
leaves a market, and include marketing and
advertising costs and other fixed costs
...
Apart from the fact
that they are trying to get you to buy the
product in the short term, the long-term aim
is to create brand loyalty
...

Advertising is another sunk cost - the

more that is spent by incumbent firms
the greater the deterrent to new
entrants
...

Vertical integration is a form of merger
...

An established restaurant will know when it
will be busy and when it will be quiet
...

These are the sorts of things that can only be
learnt with experience
...
If the patent is granted by the
government, it gives the firm legal protection
to produce the product without competition
for a given time period (usually a number of
years)
...
Obviously this creates a barrier
for firms wishing to join this new market
...


Existing firms may be operating a predatory
pricing policy
...
The idea is that once the
competitor is killed off, the firm can raise the
price back up to the old level and steal all
their customers
...
Actions like this by
incumbent firms obviously act as a barrier to
entry for potential new firms
...
If it
is easy for firms to enter and leave the
market, supply will adjust quickly and
smoothly in line with changes in consumer
demand
...
EG
...
In constructing
and maintaining barriers , resources may be
wasted
...
High expenditure on
advertising would mean that any potential
entrants may be put off by the need to
match such spending
...

-In addition, they may be dissuaded by the
awareness of the incumbent firm's or firms'
excess capacity, since such capacity would
enable the incumbent firms to raise output
and lower price should they enter the
market
...
In order to
compete, new entrants will have to
match, or exceed, this level of spending
in order to compete in the future
...

-is achieved when a firm is producing at the
lowest possible average cost
...
e
...


concept of Technical Efficiency
...


technically efficient when it combines the



Point C is inefficient because you could

optimal combination of labour and capital to

produce more goods or services with no

produce a good
...
e
...

Allocative efficiency is concerned with the
optimal distribution of resources
...


Allocative Efficiency
-is the concept of producing goods and
service using least possible scare
resources that are most wanted or desired
by consumers
...


good i
...
the price paid by consumers reflects

soMC=AC
...

So(P=MC=AR)As when the cost is greater
than the benefit it is inefficient
...
This is because
monopolies have market power and can
increase price to reduce consumer surplus
...


Allocative efficiency is achieved when

Monopoly sets a price of Pm
...


this is how much the consumer values

Alloactive efficiency would occur at the point

the good
...


Perfect competition – allocatively
efficient
...

-is concerned with the productive efficiency of
a firm over a period of time
...

-Dynamic Efficiency will enable a reduction in
both SRAC and LRAC
...

-This

causes the average cost of
production to be higher than
necessary
...
Monopoly Power
...
Therefore, it might
be easy for the monopolist to make

-For example, in 1923, Henry Ford’s car

supernormal profits
...
But, by today’s standards that same

may not try very hard to control costs
...

-Therefore dynamic efficiency is concerned

2
...
A nationalised firm

with the optimal rate of innovation and

owned by the government may face little

investment to improve production processes

or no incentive to try and make profit
...


cut costs
...




-Dynamic efficiency may also involve

for the productive process
...
For

about the political implications of making

example, better relationships with unions that

people redundant than getting rid of

help to introduce new working practises
...
To

surplus workers
...
If a firm
doesn’t have supervision of workers, then

costs in the short run
...


Employing workers who aren’t necessary

easy’


Not Finding Cheapest Suppliers
...


The objectives of firms
Influenced by:
1) Type of organization
2) Managers interest

Profit maximisation
Maximising profits means achieving the
highest possible profit (MR=MC) Profits are
achieved when a firm’s revenue is greater than
its production costs
...

Economists distinguish different types of
profit, including normal profit- sufficient to
keep the entrepreneur supplying their
enterprise, and super-normal, or abnormal
profit -profit in excess of normal profit
...


2) Too much profit may attract potential
rivals- depends on the market
contestability
3) It also depends on how other firms
react
...

But, if they are the only firm to
increase price, demand will be elastic
(oligopoly)
4) Demand may change due to many
other factors apart from price
...
For example,
increasing price to maximise profits in
the short run could encourage more
firms to enter the market; therefore
firms may decide to make less than
maximum profits and pursue a higher
market share
...
Higher
profit means:


Higher dividends for shareholders
...
(dynamic efficiency)
Higher profit makes the firm less vulnerable to
takeover
...
It is
difficult for firms to know the price
elasticity of demand for their good –
which determines the MR
...
This enables
the firm to make supernormal profits (green

area)
...
But, to maximise

have much less incentive to maximise profits
because they do not get the same rewards,

profit, it involves setting higher price and
lower quantity than a competitive market
...
- welfare loss, loss of
consumer surplus
...

(e
...
not sacking them) This is the problem of
separation between 0
0
...

Advantages:

Profit Maximisation in Perfect Competition

In perfect competition, the same rule for profit
maximisation still applies
...

For a firm in perfect competition, demand is
perfectly elastic, therefore MR=AR=D
...


Alternative Aims of Firms
However, in the real world, firms may pursue
other objectives apart from profit
maximisation
...
Profit Satisficing(AR>AC)




Getting a satisfactory level of profit
...
Those who own the company
(shareholders) often do not get involved in the
day to day running of the company
...

Regulation consists of requirements
the government imposes on private
firms and individuals to achieve
government‟s purposes and to
correct market failure, arising from
the abuse of the market power,
imperfect information, underconsumption of merit goods and
others
...

Economists distinguish between two
types of regulation:economic and

social
...
For example, taxi
drivers and many professionals
(lawyers, accountants, beauticians,
financial advisers, etc
...

As for price controls, for many
years, airlines, trucking companies,

and railroads were told what prices
they could charge, or at least not
exceed
...

“Social regulation” refers to the
broad category of rules governing
how any business or individual
carries out its activities, with a view
to correcting one or more “market
failures
...
(Harmful effect from
carbon emissions) Governments
respond to this problem by setting
standards for emissions (tradable
permits) or even by requiring that
firms use environmentally friendly
technologies
Another kind of market failure arises
from the lack of information
(asymmetric information- not equally
shared between two parties)
Examples include- disclosures by
pharmaceutical companies of the
possible side effects of the drugs
they sell
...

+ Individuals may be unable to
effectively process or act on the
information that is disclosed (moral
hazard)
The british Broad of Film

Classification- Consumer
protection

Used to treat parts of films as
demerit goods
Now, classify films into various
categories
...

Only a certain age-group is allowed
to watch some films, thereby
cinemas lose potential customers
and generate less profits
...
(Contestability is low)
Ofcom is the independent regulator
for the UK communications industry,
including television and radio
broadcasting
...

Enforcing rules on telecoms
providers that have a large share of
the market;(Football industry)
Setting general rules to which all
telecoms providers must keep
...

The aim is to ensure that customers
receive the best choice
...


Other bodies;
Football Association (FA)
responsible for changes in game
rules
...

The Office of Fair Trading (OFT) –
government body that enforces
consumer protection and
competition law
...


Open skies agreement- Airline
deregulations
Provides Free market competition
...
For example
foreign companies can be based
now in the UK- competition and
contestability are higher)

The Competition Act 1998
Is the current major source
of competition law in the United
Kingdom
1) Cartels and collusions
...
These are primarily in
the form of horizontal agreements
(agreements to collude between
firms on the same level of the
supply chain such as retailers or
wholesalers)
...


2)Competition and Markets
Authority (CMA) is responsible for
prosecuting such firms who engage
in these activities, and are able to
levy fines up to 10% of annual UK
turnover for every year in which a
violation has taken place up to a
maximum of 3 years
...

4) Deals with the abuse of a
dominant position by a firm who
uses practices such as predatory
pricing, excessive prices, refusal to
supply, vertical restraints and price
discrimination to maximise profit,
gain competitive advantage or
otherwise restrict competition
...
Generally if a firm is
found to have a market share in
excess of 40% then it is considered
a threat to competition
...
Whether such a change
in price results in a rise in total revenue
will be determined by price elasticity of
demand
...
Firms sell goods and services in
return for revenue
...
EG
...


-While total cost is expected to rise with
output, total revenue may not always
move in the same direction as sales
...

Average revenue - total revenue divided
by the output sold
...

TR is maximised where MR = 0
AR and MR start at the same point, but
MR is below AR
...

When TR doesn't change and MR is 0,
there is unit elasticity of demand
...

Unit elasticity of demand - when a given
percentage change in price causes an
equal percentage change in demand,
leaving TR unchanged

A firm operating under conditions of
monopoly or oligopoly may seek to raise
its revenue in the longer term by driving
a competitors out of business through

predatory pricing
...

Most leisure products have income
elastic demand
...
A rise in the
price of car and public transport, may
reduce demand for cinema tickets and
tickets to country cricket matches
...

Among the other factors that may
influence demand are weather and
special events
...
A period of bad
weather in the UK may increase TV
viewing and the number of foreign
holidays bought but may reduce
attendance at some sports events
...

Superior good - a good with positive
income elasticity of demand greater than
one

Influences on revenue
-The more market power a firm has, the
more any change in its output will

The Demand for Labour

complements to labour
...


Demand for labour is a derived demand
...

The Aggregate Demand for Labour
- The total demand for labour depends
mainly on the level of economic activity
...

-If output is decliningor growing at a
slower rate than the trend in growth and
firms are pessimistic about future levels of
aggregate demand, employment is likely
to be falling
...
g
...

The quantity of any factor employed will
be determined by where the marginal
cost of employing one more unit of that
factor equals the marginal revenue
product of that factor
...

Marginal revenue product - is the
change in a firms revenue from employing
one more worker and is found by
multiplying marginal product by marginal
revenue
...
However once a
certain level of employment is reached
marginal product may fall as diminishing
returns set in
...

- Whereas under conditions of
monopolistic competition, oligopoly and
monopoly, MR falls with output
...

The marginal product curve for labour is
the demand curve for labour
...
For example the
demand for electricians will increase if the
productivity of electricians rises
...
Workers often work as
teams so its is difficult to isolate the
contribution one worker makes to changes
in output
...
g
...

The Elasticity of Demand for Labour
...


%change in the quantity of labour
demanded
%change in wage rate
If employers are relatively sensitive to a
change in the wage rate, demand will be
elastic
...
Price elasticity of demand for the
product produced
...
The rise in the price of the
product from an increase in the wage
will cause a smaller % fall in demand
...

2
...

Larger the proportion of wages in total
cost the more elastic the demand for
labour
...

3
...
The easier
to substitute capital for labour, the more
elastic is demand
...
Demand for labour will fall
by a greater percentage than the rise in
the wage rate
...
The elasticity of supply of
complementary factors
...

5
...
Elasticity increases
with time- firms have longer to
reorganise their production processes
and methods
...

-Demand for labour in capital-intensive
industries, eg chemical industry, is
inelastic, as labour forms a small

percentage of the industries' labour
costs
...

- The elasticity of demand for labour
tends to be higher for youn than adult
workers, and for unskilled than for
skilled workers
...
Skilled
workers are more productive, more
likely to have long-term contracts and
more difficult to replce by capital
equipmant
...

It is thought that at low wages a rise in the
wage rate will cause an extension in
supply with a worker being prepared to
work more hours
...

This change in response to an increase in
wage rates gives rise to the backward
sloping supply curve
...
As it has more bargaining
strength when it is representing labour
that is in inelastic demand
...

2)Government, in considering the
effects of raising a minimum wage or
providing employment subsidies, will to
take account of the elasticity of demand
for labour
...
Employment
subsidies may be used to encourage
firms to take on unskilled workers
...


The Supply of Labour
THe short-run supply curve of labour

The behaviour of the worker can be
explained by the income and substitution
effects
...
As the wage rises workers
buy more of most goods and services
including leisure
...

-It is to increase the number of hours
worked
...

- At a low wage it is thought the
substitution effect outweighs the income
effect
...


- The income and substitution effects
emphasise that the number of hours the
worker decides to work is influenced by
the number of hours on offer and the
relative importance that the worker
attaches to income and leisure
...


•
–
–
–
–
•

The long-run supply curve of labour (
or the AS of labour)

•

Influenced by three key factors
•
•
•
•
•

•
–
–
–
–

Size of the population
Size of the working population (labour or
workforce)
Hours worked
1) Population
The larger the population size the greater
the potential supply of labour
...

The proportion of the population of
working age can be influenced by:
birth rates
net migration
Changes in school leaving age
Changes in retirement age
2)The Working Population

•

•

–
–
–
–
•
–
–
–
–

The working population consists of
those in employment and those seeking
employment
...
g
...

The hours worked is influenced by:
The working week
The number of days holiday
The number of days sick
Days lost through industrial action
The more hours worked the greater the
supply off labour in quantity
...

The Supply of Labour to a Particular
Occupation
- It is influenced by pecuniary and nonpecuniary benefits
...

3)The possibility of bonuses: by being
highly productive will be attractive to firms
and occupations offering overtime work
and bonuses
...
g
...

In addition supply to a particular firm is
influenced by:
The quality and quantity of training on
offer
The location of the firm
The level of unemployment
The reputation of the firm
The recent performance of the firm
The opportunity to work overtime

•
•
•
•
•
•

–

–

4 )Mobility of labour: the easier workers
find it to switch jobs and to move from one
area to another the more elastic the
supply will be
5) Time period: supply is more elastic the
longer the time period involved
...

The wage rates of a group of workers will
rise if either the demand for their services
increases or their supply decreases
...
This effect is shown in the figure
below:
Wages of Computer Programmers

The Elasticity of Supply of Labour
- is the responsiveness of the supply of
labour to a change in the wage rate
- The rate at which the supply of labour
changes as a result of a change in the
wage rate is measured by the elasticity of
supply of labour:
percentage change in supply of labour
percentage change in wage rate
•
–

–

–

Factors influencing the elasticity of
supply:
1) Qualifications and skills required: the
supply of skilled workers is more inelastic
than the supply of unskilled workers
2) Length of training: a long period of
training may discourage new workers to
undertake an occupation
3) The level of employment: if there is
high unemployment the supply of labour in
many occupations is likely to be elastic

Wage determination in a Competitive
Market
Demand is based on MRP theory
Supply for the industry is positively sloped,
for the firm is perfectly elastic
...

Hence:

•
•

•

•

•

•

Economic Rent and Transfer Earnings
The level of demand and supply and their
elasticities determine the proportion of
wages which consist of transfer earnings
and the proportion of wages which are
economic rent
...
They areequivalent to the
minimum which has to be paid to keep the
worker in their current job
...
This is total
earnings minus transfer earnings
...
The first worker
employed would have been prepared to
work for considerably less than the wage
rate actually paid, whereas the last worker
employed would have been prepared to
work only for the going wage rate so earns
no economic rent
...
YWX of this is economic rent and
0YXQ is transfer earnings
...
Economic rent forms a large
proportion when supply is inelastic e
...
the
supply of premier league footballers is
inelastic as they would continue to play
even if their wage rate was cut, so they earn
a large economic rent
...

Government policy
...

Government policy affects wages directly an
indirectly:
The government is a major employer
...
g
...

Attitudes to ‘what people deserve to be
paid’ influence wages e
...
being prepared to
undergo long periods of study and training
are valued highly
...

Wages are likely to be low where supply is
high relative to demand and both demand
and supply are elastic
...


•

The figures below show the market for
brain surgeons and waiters and waitresses
...

Wage differentials occur between
occupations, industries, firms and regions
and within these categories
...


The factors that influence
differentials:
•

Relative bargaining strength: workers
have higher bargaining power if:

– They belong to trade unions and
professional bodies
– They are in occupations where industrial
action has significant consequences
...
g
...

• Public opinion: Some occupations are held
in higher public regard than others
...
They are perceived as providing a
vital service and are highly skilled having
undergone a long period of training
...

Wage Differentials Between Particular
Groups
1
...
Male and female workers: Women still
earn less than men for a number of reasons:
– More women than men work part time
– In the past men were more highly qualified
than women
...

– Women may leave the labour market to
bear and raise children thereby losing out
on promotional chances
3)Part-time and full-time workers:

•

•
•

part-time workers on average receive less
pay per hour than full-time workers
...

Ethnic groups:
A large proportion of ethnic minorities
work in the catering industry which is low
paid
Qualifications of ethnic minorities are
below the average for the population
Discrimination may exist

Labour Market Failure
Labour market failure is the non-achievement
of an optimal allocation of labour resources in
an economy
...

Examples are:
Unemployment
Shortages of skilled workers
Workers being in jobs they are not best suited
for
A lack of training
Wage rates being above or below equilibrium

Labour market failure
1)
2)
3)
4)
5)
6)
7)
8)

Discrimination
Unemployment
Attachment
Skills shortage
Factor immobility
Information failure
Segmentation
Dominance

Unemployment
•

•

•
•

The existence of unemployment means
that:
– Some of those willing and able to
work cannot obtain a job
...
(Lack of AD)
The extent to which unemployment
causes labour market failure is
influenced by the number of people who
are out of work and how long people are
out of work (potential labour force is
greater than actual)
Not all economic inactivity is labour
market failure (homemakers)
A rise in the number of full-time
students will be likely to benefit the
economy in the long run

Dominant buyers and sellers

•

Lack of information
•
•

•

•
•

•

Trade unions -push the wage rate above
the equilibrium -cause unemployment
...

Employers may not appoint the most
productive workers because they are
not in touch with all the potential
workers
...
Employers incur costs of
advertising, assessing applications,
interviewing and inducting new staff
...

It takes workers time, effort and money
to look for a new job
...
When this occurs shortages in
one area and surpluses in another are
not corrected resulting in regional
unemployment and geographical
wage differentials
...
These contribute to
occupational wage differentials and
structural unemployment
...
This will
influence the flexibility of the labour
force
...


Attachment between workers and
employers: workers may stay in less
well paid jobs because they like working
for their employer
...
This reduces mobility in the
labour market
...

Externalities: Training is a merit good
...
(Employers might be
reluctant to devote money to train staff
as employees might leave for a better
paid jobs- no incentive+ part time
employment is popular now) Lack of
training might lead to a market failure
...
The firms pay in the form of
lower profits
...

– Some economists argue that
employers discriminateto
reduce their costs
...

– For example, employers may
assume older workers are less
productive than younger
workers so may not promote or
train older workers and if
deciding on redundancies may
select older workers first
...

Groups discriminated against:
– Are likely to be paid less than
other workers doing the same
job
...

1) Consumers experience higher prices
if producers discriminate
...

2) The government may have to pay out
more welfare benefits to groups that are
discriminated against and incur the
costs of introducing and monitoring
legislation to end discrimination
...
Output
will be below the potential output
...


The Effect of Labour Organisations on Wages
and Employment
• A Trade union will act as a monopoly
seller and this will alter the supply
curve of labour
...

Employment falls from Q1 to Q2
...

In these two market structures firms can earn
only normal profits in the long run, so a rise in
their costs will cause marginal firms to leave the
industry causing output and employment to fall
...
g
...
g
...
If these measures are successful
the marginal revenue productivity and hence
the demand curve will shift to the right
...
This is because the firms may be
earning supernormal profits in the long run
...

– Reasons for the decline in
membership include:
– The change in the composition
of the working population
...

Legislation introduced in the
1980s and 1990s restricted their
rights
...


Monopsony Employer- Employers with
labour market power
•

•

•

Employers who employ a high
percentage of workers in a particular
labour market can influence the wage
rate
...
e
...

An example of a monopsonist is the
Ordinance Survey, which is the main
employer of map makersin the UK
...
They influence the wage
rate
...

Hence, a monopsonist, facing a large
number of independent workers, will
force wage rates down to W2 and
employ Q2 workers
...
e
...

The wage rate will be determined by the
relative bargaining strength of the two
sides
...

The upper limit will be the maximum
the monopsonist can pay without
threatening the existence of the firm
...


The entry of a union into the market,
which sets a minimum wage of W1, will
kink the supply curve of labour and
produce a discontinuity of the MC curve
of labour
...
Hence, at a wage rate of W1,
Q1 will be employed
...

Government can affect wages
...

4) Can regulate and contract the power of
monopsonist and monopolist
5) To affect the consumption of merit or demerit goods
...


Regional Policy
Regional policy seeks to influence the
distribution of firms and people
...

1) Financial assistance may be given to workers
to relocate to areas where there are vacancies
requiring their particular skills

2) Work may be taken to workers by providing
financial assistance to firms to locate and
relocate in areas of high unemployment

Training and Education
A government can seek to raise the level of
training to the allocatively efficient level in a
variety of ways:
1) It can provide training directly to its own
employees, the unemployed and those changing
jobs
2) It can subsidise individuals to engage in
training and/or firms to provide training
3) It can pass legislation requiring firms to
engage in a certain level of training
Increases and improvements in the state
educational provision should raise the
qualification and skill level of workers
...
If there is investment in developing the
abilities of a wide range of people the problem
of social exclusion should be reduced
...
To have any effect the minimum wage
has to be set above the market equilibrium
wage rate
...
The figure
below shows that setting a minimum wage of
Wm above the equilibrium wage of W causes an
extension in the supply of labour but also a
contraction in the demand for labour, causing a
shortfall of employment of QS- QD
...


3) Productivity will also increase if
employers seek to gain higher returns
from the now higher paid workers by
providing more training
If the minimum wage raises the demand for
products and increases its price, marginal
revenue product (demand for labour) will shift
to the right and increase employment, as shown
below
...

Low-paid workers often have low bargaining
power relative to their employers, some of
which are monopsonists or oligopsonists
...

The figure below shows that a minimum wage
of Wm becomes the new marginal cost of labour
and raises employment from Q2 to Q1
...

1) In the UK the Equal Pay Act was
implemented in 1975 and sought to end
differences in pay between men and
women undertaking broadly similar
work
...

1) The first effect of its introduction is to
raise wages
...


However: Such legislation may change attitudes
over time
...

Such legislations might be avoided
...

Most of it remains in place
...

If the courts decide a strike is illegal the union is
liable for damages and union assets can be
seized
...

Flexibility is influenced by:
1) How easy it is for a firm to ‘hire and fire’
labour
2) How easy workers find it to adapt to
new tasks and technology
Flexibility is interpreted in terms of:
Numerical flexibility – ability to change the
number of workers
Temporal flexibility – ability to change the
hours people work
Locational flexibility – ability to change where
people work
Functional flexibility – ability to change the
tasks workers perform
Wage flexibility – the ability to raise or lower
wages
Flexibility allows firms to respond smoothly
and quickly to changes in demand
...
Therefore firms are more
internationally competitive
...
Also there is a need to be more
geographically and occupationally mobile
...

The USA is one of the few countries that has
lower employment protection than the UK
...

However studies have shown that a large
proportion of workers are not free to alter the
hours they can work, and of those who can, as
many choose to work fewer hours as work more
hours
...

Keynesians believe that the main cause of
unemployment is a lack of aggregate demand
and hence job vacancies
...


Reducing Unemployment Benefit
(JSA)
Some new classical economists suggest that
the gap between paid employment and reducing
benefits should increase benefits
...
They believe cutting
benefits will increase unemployment by
reducing aggregate demand
...

Increasing labour market information, training
and education-raise the responsiveness of
labour to changes in the market
...
This targets those prone to longterm unemployment
When people are first unemployed they receive
careers advice and guidance and help with
developing job search skills
...


Trade Union Reform
New classical economists believe that trade
unions can cause unemployment by:
Pushing up wage rates above the equilibrium
level
Reducing the flexibility of labour by restrictive
practices
Between 1979 and 1997 a number of acts were
passed limiting the power of trade unions
...

• Marketable wealth is wealth that can be
transferred to another person (houses,
stocks and shares)
• Non-marketable wealth is specific to a
person and cannot be transferred
(pension rights)
• The distribution of wealth is considered
in terms of how it is distributed
between the population, the forms in
which it is held and the characteristics
of the wealth holdings
...

•

Wealth distribution between assets
Examples are life assurance and pension
funds, property, securities and shares,
bank and building society deposits and
cash
...

The proportion of a particular asset held
in the wealth depends onits changes in
value
...


Wealth Distribution Between
Different Groups
Wealth is unevenly distributed between
age categories
...
Men
have more wealth than women
...


•

Savings: To achieve significant wealth
saving has to be on a large scale
...

The use of entrepreneurial skills:
building up a business can accumulate
Wealth
...


Causes of the Inequality of Wealth
These are linked to the sources of wealth:
The pattern of inheritance: Significant
holdings of wealth are traditionally passed on to
the next generation on the basis of
primogeniture (the right of the eldest son to
inherit to the exclusion of others)
...

Marriage patterns of the wealthy: the wealthy
tend to marry other wealthy people, which
further concentrate wealth in the hands of a
few
...
(Marginal
propensity to save is greater for wealthy
people)
Different tendencies to save: those who save a
higher proportion of their income will
accumulate more wealth than those who save a
lower proportion
...
different entrepreneurial skills
...

While a person can survive without
owning any assets, it is not possible to
survive without any income
...

Within a country the distribution of
income can be considered in terms of
how income is shared out between the
factors of production (functional

distribution of income) and between
geographical areas (geographical
distribution of income)
...

Income can be earned by:
1) Labour in the form of wages
2) Capital in the form of interest
3) Land in the form of rent
4) Entrepreneurs in the form of profits
...

Income from dividends, interest and rent
(collectively known as investment income) has
been rising
...

The relative shares of earned income,
investment income and transfer payments
depend on a variety of factors, principally the
level of employmentand the relative power of
labour and capital
...
The Lorenz curve can be used to

compare the distribution of income and wealth
over time and between countries
...
The 450line is the line of
income equality
...
The
greater the degree of inequality the greater the
extent to which the curve will be below the 450
line
...

It is the ratio of the area between the line of
equality and the Lorenz curve and the total area
below the line of inequality
...
Complete equality gives a ratio of 0 and
complete inequality a ratio of 1
...


The Size Distribution of Income in the
UK
In recent years the distribution of income has
become more unequal
...
The cuts in the top tax rates in
the 1980s and 1990s have
benefited the richer people
...
There has been a decrease in the
real value of benefits
...
There has been a rise in the
number of lone parents
...


The Causes of Income Inequality
between Households
These include:

Unequal holdings of wealth: wealth generates
income in the form of profits, interest and
dividends
...

Differences in skills and qualifications: those
with high skills and qualifications tend to be
high earners
...

Discrimination: the income of some groups is
adversely affected by discrimination in terms of
employment opportunities, pay and promotion
chances
...


The Geographical Distribution of
Income
Income is unequally distributed between
regions in the UK
...
The
causes of differences include:
• Unemployment rates
• The proportion of the
population claiming benefits
• The qualifications and skills of
the labour force
• Industrial structure
• Occupational structure
• Additional income to meet
higher living costs such as the
London Allowance
...
They believe that differences in
income act as signals encouraging workers to
move between jobs and differences in wealth
promote saving and investment
...

In contrast, Keynesiansbelieve that
intervention is justified as market forces will
not ensure an efficient allocation of income and
wealth
...
They also think that significant
differences in income and wealth can cause
social division and exclusion
...
Regressive taxes such
as VAT take a higher percentage of the income
of the poor which makes the distribution more
unequal
...

Universal benefits, such as child benefit, are
available to everyone irrespective of their
income
...
Universal benefits form a larger
percentage of the income of the poor
...
The
take up of these benefits depends on the age
composition of the household and attitudes and
opportunities to access the provision
...

Macroeconomic policy: e
...
measures to reduce
unemployment may benefit low-income
households and regional policies reduce
geographical inequalities
...


Relative Poverty

A situation of being poor relative to
others
...
Someone regarded as poor in the USA
may be regarded as relatively rich in Ethiopia
say
...

2) The concept of human poverty sees poverty
as a situation where people not only lack
material goods but also lack access to those
items needed to enjoy a long, healthy and
creative life including self-esteem and the
respect of others
...

New Changes-The UK government has set itself
the task of eradicating child poverty and
publishes a poverty audit which assesses the
government’s performance against a set of
indicators including:
1) An increase in the proportion of working age
people with a qualification
2) Improving literacy and numeracy at age 11
3) Reducing the proportion of older people
unable to heat their homes properly
4) Reducing the number of households with low
incomes
5) Reducing homelessness
6) Reducing the number of children in workless
households

Particular groups are more prone to poverty
than others including the old, disabled, lone
parents, the unemployed and those from ethnic
minorities
...
The reasons why particular people
are poor include:
Unemployment: some households have no one
in employment
...

However just because someone earns low
wages does not mean they are poor
...

Sickness and disability: Most of the long terms
sick or disabled are dependent on benefits that
take them into the low-income category
...
However private
pensions and investment income are forming
and increasing proportion of income in old age
...

Being a lone parent: lone parents may find it
difficult to take full- time employment
...


The Effects of Poverty
The poor tend to suffer worse physical and
mental health and have a lower life expectancy
...
They are less likely to stay in full
time education post 16, they have few books at
home and attend poor performing schools
...


3) These factors result in gaining fewer
qualifications and a vicious circle of poverty
developing
...


Government Policy Measures to
Reduce Poverty
Governments seek to reduce absolute poverty
by measures that raise the income of the
poorest groups
...

Measures that they might use are:
• Operating a national minimum
wage- but not all the old paid are
in poor households
...

2) Making use of the trickle down effect: the
idea is to cut the rate of corporation tax and the
highest rate of income tax with the intention of
encouraging entrepreneurs to expand and

thereby create employment for the poor
...
However, it is difficult to predict the
behaviour of the rich
3) Increasing benefits: views differ on the effect
of raising benefits for the unemployed
...

4) Increasing the provision of affordable childcare
Results
•

•
•
•
•

The problem of the Poverty Trap has
arisen
...

Those in poverty rose from 12% to 13%
in the period 1997 to 2003
...

There have been improvements in
important areas; child poverty has been
cut by 25% between 98/99 and 2004/5
The Poor’s spending patterns have been
changed
...


Pensions
and the
Ageing Population
Introduction
The UK, USA, Japan and Europe have ageing
populations
 This means the average age of a
country’s population is rising
 This is occurring due to a fall in
both the birth and death rates

Consequences
Positives

1
...
They take fewer days off sick
3
...
Interact better with customers

Negative Aspects

1
...
They are less geographically and
occupationally mobile
3
...
Greater risk of serious illness

The Dependency Ratio

Is a proportion of the population who are too
young, too old or too sick to work and so who
are reliant on the output of those who are
working

This is the relationship between those not in the
labour force (the dependent part) and those in
the labour force (the productive part)
...
The ratio will worsen in all major
economies over the next 4 decades
2
...
This is the problem of the Demographic
Time Bomb

Pensions
A pension is a regular payment made by the
government or a private pension provider to
people at or above the retirement age
...
It is financed on a ‘pay as you go basis’,
which means that current pensions are being
paid for by the NIC’s of current workers
...
Money Purchase Schemes

Here workers and employers pay into a fund
and at retirement age the worker uses the Fund
to purchase a pension or uses the money to
fund their retirement in some other way
...
Final Salary Schemes

Here workers and employers pay into a fund
and at retirement age the worker receives a
pension based on the number of years of service
and the salary the employee was earning at
retirement
...
The
Turner Report – A New Pension Settlement for
the 21Century- sees the retirement age being
raised to 66 by 2030, 67 by 2040 and 68 by
2080
...


Discouraging Early Retirement- by

stopping it for public sector workers and by
giving tax breaks to schemes that penalize early
retirement
...


But -1) put the pressure to low-paid workers
2) reduces the employment chances 3) put
downward pressure on wages 4) pressure on
health care service and education

Increase the Labour Force-helping single

Promote Private (Occupational and
Personal) Pensions-by favourable tax

parents and the disabled into work and
encouraging immigration
...

However depends on migrationnetimmigration, withmorepeople coming into
the country to live than leaving it, will add to
the labour force- 1) can help overcome skill
shortages 2) reduce dependency ration 3)
increase income tax revenue 4) might force
economic growth without inflationary pressure

treatment of contributions
...


Change the salary structure- if salaries

reflected productivity then if older workers are
less productive they would be paid less and
firms would have less incentive to get rid of
them

---