Business economics

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Business economics by Mind Map: Business economics

1. Costs & Revenue

1.1. Fixed cost= costs that don't change with output

1.2. variable cost= costs that changes directly with output

1.3. average cost= total cost/quantity

1.4. law of diminishing returns:

1.4.1. = in the short run when one factor of production is fixed

1.4.2. adding a variable factor of production to fixed factor will eventually lead to decrease in marginal product

1.5. minimum efficient scale= MES occurs at that level of production where the LRAC curve first reaches its lowest point. all EOS are exhausted.

1.6. economies of scale= the increased in efficiency of production as the number of goods being produced increases. lower average cost as there's an increased number of goods

1.6.1. purchasing economies

1.6.2. technical economies

1.6.3. financial economies

1.6.4. administrative economies

1.7. Key concepts: TR= P x Q meaning AR= TR/Q meaning AR= P

1.8. Marginal revenue= the addition to the total revenue from the sale of in =e extra unit of output

2. Price Discrimination

2.1. Definition: when a producer sells an identical product to different buyers at different prices for reasons unrelated to costs

2.1.1. New node

2.2. conditions: differences in PED and barriers to prevent 'market seepage'

2.3. types:

2.3.1. 1st degree: charging each individual consumer the maximum they are prepared to pay

2.3.2. 2nd degree: businesses selling batches of a product at lower prices than previous batches

2.3.3. 3rd degree: charge prices according to time, geography, status of consumers

2.4. consequences:

2.4.1. consumer surplus is reduced

2.4.2. producer surplus is maximised

3. concentrated markets

3.1. concentration ratio= the percentage of total market sales accounted for by a given number of leading firms

3.2. why do firms grow larger

3.2.1. market power motive

3.2.2. objectives of managers

3.2.3. profit motive

3.2.4. economies of scale

3.2.5. risk motive

3.3. growth:

3.3.1. internal growth: uses the retained profits or loans of a company of finance expansion by increasing fixed and variable factors

3.3.2. external growth: a route for epansion through acquisitions and mergers horizontal integration vertical integration lateral merger conglomerate merger

3.4. monopoly power:

3.4.1. from owning patents and copyright protection

3.4.2. exclusive ownership of productive assets

3.5. outsourcing:

3.5.1. technological change

3.5.2. increased competition

3.5.3. pressure from the financial markets

4. Profit Maximisation

4.1. normal profit= the level of profit which is just sufficient to keep all the factors of production in their present use. where AC=AR

4.2. supernormal profit= anything in excess of normal profit

4.3. profit maximised when MC=MR

4.4. role of π

4.4.1. allocation of factors of production

4.4.2. signal for market entry

4.4.3. promotes innovation

4.4.4. investment

4.4.5. rewards entrepreneurs for bearing risk

4.4.6. economic performance indicator

5. contestable market

5.1. perfectly contestable when the costs of entry and exit by potential rivals are zero

5.2. when sunk costs are high, a market becomes less contestable

5.2.1. high sunk cost = barriers to entry

5.3. to evaluate

5.3.1. no market is perfectly contestable

5.3.2. existing firms may protect themselves through patents or strategic entry barriers

5.3.3. the level of knowledge needed to enter an industry may be high and not freely available

5.4. increase contestability of markets

5.4.1. entrepreneurial zeal

5.4.2. deregulation of markets opening up of markets to competition reducing statutory barriers to entry

5.4.3. competition policy against predatory pricing against price fixing cartels

5.4.4. the European single market

5.4.5. technological change e-commerce

6. Perfect Competition

6.1. conditions:

6.1.1. many buyers and sellers

6.1.2. no barriers to entry or exit

6.1.3. identical products

6.1.4. perfect information

6.1.5. no externalities

6.1.6. no economies of scale

6.2. the competitive process:

6.2.1. 1. scarce resources

6.2.2. 2. formation of prices via forces of demand and supply

6.2.3. 3. profits or losses emerge

6.2.4. firms enter or leave the industry

6.3. the shutdown condition:

6.3.1. in the SHORT RUN, P < AVC

6.3.2. in the LONG RUN, P < AC

6.4. factors on which which forms compete in imperfectly competitive markets

6.4.1. brand: ethics, sustainability, advertising

6.4.2. product differentiation

6.4.3. quality, customer service

6.4.4. locations, price discrimination

6.5. benefits of competition

6.5.1. lower prices

6.5.2. low barriers to entry

6.5.3. lower total profits

6.5.4. greater entrepreneurial activity

6.5.5. economic efficiency static efficiency: at a given moment in time allocative productive x dynamic efficiency: uses supernormal profit, occurs over time product process government policy efficiency under perfect competition statically efficient (allocative & productive) not dynamic efficient as no π* efficiency under imperfect competition dead weight loss exists

7. Monopoly

7.1. conditions:

7.1.1. 1 firm in the industry (25% market share)

7.1.2. price maker

7.1.3. there is barriers to entry high fixed cost E of S brand loyalty legal barriers control over factors of production predatory pricing

7.2. efficiency

7.2.1. exploit E of S statically inefficient but dynamically efficient due to supernormal profit process reach MES

7.3. benefits

7.3.1. E of S =lower price

7.3.2. reach MES with natural monopoly

7.3.3. dynamically efficient from supernormal profit

7.3.4. scope to be internationally competitive

7.4. few close substitutes

7.5. costs

7.5.1. higher price & low output

7.5.2. statically inefficiency

7.5.3. reduced consumer surplus

8. oligopoly

8.1. market dominated by few producers (CR5 >60% of total market sales)

8.2. strategic interdependence

8.2.1. actions and reactions of rival firms when they make their decisions

8.3. conduct and behaiour to increase market share

8.3.1. entry barriers maintain supernormal profits

8.3.2. interdependence and uncertainty

8.3.3. product branding

8.3.4. non-price competition advertising loyalty cards

8.4. kinked demand curve

8.4.1. price rigidity

8.4.2. likely reactions of other firms

8.4.3. two elasticities

8.5. collude: to remove uncertainty

8.5.1. tacit:prices and price changes are established by a dominant firm

8.5.2. explicit: price fixing cartels to achieve joint-profit maximisation control over market supply

8.5.3. benefits joint research and development projects shared use of common facilities and exchange of information adoption of common standards

9. technology

9.1. reducing costs = industry supply shift to the right

9.1.1. a fall in the market price of the product

9.2. consumer benefit from:

9.2.1. lower price

9.2.2. higher output New node

9.3. pushes AC down

9.3.1. cost of production down

9.4. competition

9.4.1. reducing entry barriers

9.4.2. reducing concentration

9.4.3. increasing the degree of the market contestability

9.4.4. better information

9.4.5. however, can promote monopoly if firms patent their innovations