Necessary conditions, All other factors of production are fixed, Assume labour is identical
Marginal Product: the extra output that can be produced by using one more unit of the input (for instance, the difference in output when a firm's labor usage is increased from five to six units), assuming that the quantities of no other inputs to production change.
double labour and get triple output
double labour and get same output
overlaps between clusters means that skills and technology are shared between clusters
All skilled workers are close together
Low unemployment in certain areas means wages are higher
Clusters act as a centre for production
High land values
Lack of space
That level of profit which is just sufficient to keep all factors of production in their present use. "Breaking even"
Anything above normal profit
Allocation of factors of production, Scarce factor resources tend to flow where the expected rate of return or profit is highest
Signal for market entry
Promotes innovation, If companies earn supernormal profit it allows them to undertake investment to promote dynamic efficiency
Investment, Retained profits remain the most important source of finance for companies undertaking capital investment projects
Rewards entrepreneurs for bearing risk, In return for bearing risk entrepreneures need the potential to earn profits
Economic performance indicator, profits made by businesses throughout the economy provide important signals about the general health of the macroeconomy
The difference between the price the consumer is willing to pay and the market price
The difference between which a producer is prepared to supply a good and the market price
Allocative efficiency, Exists when goods are produced in line with consumer preferences (P=MC)
Productive efficiency, Occurs at the lowest point on the average cost curve
X efficiency, Occurs when a firm is not producing on its average cost curve. Perhaps due to organisational slack. This is usually associated with a monopoly.
Net loss of economic welfare from price being raised above marginal cost.
Costs that cannot be recovered eg: advertising, training of staff, highly specialised equipment
Many buyers and sellers
No barriers to entry or exit
No externalities from production or consumption
No economies of scale
Short run: Price is less than average variable cost
Long run: Price is less than average cost
Low barriers to entry
Lower total profits
Greater entrepreneurial activity
C.R.5 = value of output of 5 largest firms/ value of output for the industry
Market power, increase market dominance giving themincreased pricing power in specific markets
Objectives of managers, Managerial status is increased through managing a larger firm
Profit motive, Larger scale enterprises grow to expand output and achive higher profits.
Economies of scale, Have the effect of increasing productive capacity of a business and help to raise profit margins. This is by becoming more productively efficient and allows the business to become more comptitive in domestic and international markets
Risk motive, The expansion of a business might be motivated by a desire to diversify production so that falling sales in one market might be compensated by stronger demand and output in another market
Retained profits or loans finance expansion by increasing fixed and variable factors. Innovation and creativity are vital to increasing the customer base for organic growth
Expansion that occurs through acquisitions or mergers, Horizontal intergration: two businesses at the same stage of production in an industry become one, Vertical intergration: acquiring a business in the same industry but at different stages of the supply chain, Lateral merger: A merger between companies that are related but not identical eg newspapers and magazines., Conglomerate merger: A merger between two firms in unrelated business
Producing a good overseas but keeping research and design operations domestic
Differneces in the price elasticity of demand
Barriers to prevent market seepage
This is charging an individual customer the maximum price they are prepared to pay
Businesses selling batches of product at lower prices than previous batches
Charging different prices for the same product in different segments of the market.
High fixed costs
Economies of scale
Control over the factors of production
Control over retail outlets
AC = TC/Quantity
AVC falls rapidly as production increase as fixed cost are diluted as production increase
Firms must take into account the likely reactions of rivals to any change in price, output or forms of non price competition.
Entry barriers maintain supernormal profits for the dominant firms to operate on the periphery of an oligopolistic market. no one firm is large enough to have a significant effect on prices and output.
each firm is selling a branded product with scope for product differentiation
advertising, loyalty cards, increased range of services, home delivery or longer opening hours are competitive strategies or oligopolistic firms.
Other firms match decrease in price
Other firms don't match raise in price
Creates price rigidity
Tacit collusion: one dominant firm sets a price and other follow
Price fixing, Cartels collectively raise the price to gain bigger supernormal profits at the consumers expense.
Price capping to control monopolies power, cuts in real price levels are good for household and industrial consumers, Provides incentives for increased productive efficiency., Price caps can lead to job losses in the industry and distorts the working price mechansm
State aid control
Liberalization of markets
Antitrust and cartel policy
vertical restraint, exclusive dealing, territorial exclusivity, quantity discounts, refusal of supply
Creation of artificial barriers to entry
Improves UK competitiveness with overseas markets
Innovation helps protect comparative advantage
Source of long term growth
Social benefits and positive externalities from safety, new health treatments and "greener" products
Nature of the product
The number of buyers for the product
Number of firms in an industry which improves competitiveness
Reduces barriers to entry
Increases amount and transparency of information