Business Economics

Econ Unit 3

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Business Economics by Mind Map: Business Economics

1. Costs & Revenues

1.1. Fixed cost: one that does not change with output - i.e. patent, capital

1.2. Variable cost: one that changes with output - i.e. energy

2. Profit maximisation

2.1. Normal profit: the level of profit which is just sufficient to keep all factors of production in their present use. It occurs where AC = AR

2.2. Supernormal proft: Anything in excess of normal profit

2.3. Role of profit in an economy: Allocation of factors of production; Signal for market entry; Promotes innovation; Investment; Rewards entrepreneurs for bearing risk; Economic performance indicator

3. Perfect competition

3.1. For it to be perfect competition, there needs to be: Many buyers and sellers; No barriers to entry or exit; Identical products; Perfect information; No externalites; No economies of scale

3.2. Benefits of perfect competition: Lower prices; Low barriers to entry; Lower total profits; Greater entrepreneurial activity; Economic efficiency.

4. Monopoly

4.1. Defined as a firm that has >25% of the market share in that industry

4.2. Barriers to Entry: Protection of the monoply power in the long run

4.2.1. High fixed costs; Economics of Scale; Brand Loyalty; Legal Barriers; Control over the factors of production; Control over retail outlets; Predatory Pricing

5. Privatisation & Deregulation

5.1. Defined as the transfer of assets from the public (government) sector to the private sector.

5.2. For: 1 Promotes efficiency, 2 raises incentives, 3 promotes competition, 4 reduces size of the public sector, 5 promotes enterprise culture

5.3. Against: 1 replaces one monopoly with another?, 2 private firms may ignore externalities, 3 may lead to widening inequality, 4 safety standards may be compromised in pursuit of profit

6. Efficiency

6.1. Allocative efficiency: this occurs where goods are produced in line with consumer preferences, technically it's where P=MC

6.2. Productive efficiency: this occurs at the lowest point on the average cost curve

6.3. X efficiency: this exists where firms are not on the average cost curve owing to organisational slack (normally associated with a monopoly)

7. Concentrated markets

7.1. Why do firms grow larger?

7.1.1. Market power motive; Objectives of managers; Profit motive; Economies of Scale; Risk motive

7.2. How do firms grow larger?

7.2.1. Internal Growth (by increasing factors of production) or External Growth (Horizontal integration; Vertical integration; Lateral merger; Conglomerate merger) or Outsourcing (Technological Change; Increased competition; Pressure from financial markets)

8. Price discrimination

8.1. Definition - this occurs when a producer sells an identical product to different buyers at different prices for reasons unrelated to costs.

8.2. 2 main conditions required for discriminatory pricing: Differences in price elasticity of demand and Barriers to prevent "market seepage"

8.3. Advantages: lower prices for some; increased output; reinvested profit

8.4. Disadvantages: Disappearance of consumer surplus; higher prices for others; could be used as a predatory price tactic; inreased profits redistribute income from consumers to producers.

9. Competition Policy

9.1. The aim is to promote competition, make markets work better and promote increased efficicency and competitiveness within the Uk and European Union

9.2. 4 methods of promoting competition: 1 State aid control. 2 Liberalisation of markets. 3. Antitrust & cartels policy. 4 Merger control

9.3. Anti-Competive practices include predatory pricing, creation of artificial barriers to entry and collusive practices

10. The Labour Market

10.1. The demand for labour boils down to two key factors: 1 productivity 2 demand for the product (as expressed by its price)