Business Economics

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Business Economics by Mind Map: Business Economics

1. Market Structure and Technology

1.1. Innovation and Invention both have the ability to enchance both ptoduction and consumption possibilities.

1.1.1. Invention is the creation of a new concpet or idea

1.1.2. Innovation is the actualisation of an invention to commercial use.

1.2. Technology in production - it should raise productivity and thereby reduce average costs. Implementation may however lead to short term higher costs,.

1.2.1. Less labour will be needed as processes become more capital intensive, could lead to job losses.

1.3. Technology in consumption - market price of products will fall with higher output. So consumer gain better quality products at lower prices.

1.4. Impact on efficiency - technology drives dynamic efficiency, and can lead to even greater efficiency gains in the future.

1.5. Technology can promote competition, by lowering barriers to entry, improving information, and challenging the power of monopolies.

1.5.1. However, through patents, technology can also limit competition.

2. Oligopoly

2.1. Definition

2.1.1. A market dominated by a few producers

2.1.2. Classified as a CR5 which is greater than 60%

2.2. Firms are strategically interdependent

2.2.1. Game Theory - use of prisoner's dilemma to think about other businesses decisions

2.3. Features of an oligopoly

2.3.1. Interdependence leading to uncertainty

2.3.2. Entry barriers

2.3.3. Product branding

2.3.4. Non-price competition

2.3.4.1. Very important - helps create brand loyalty

2.4. There are both competitive and collusive oligopolies

2.4.1. Collusion can be both tacit and explicit - price leadership and price fixing cartels.

2.4.1.1. There are some benefits to collusion, such as adoption of common standards, shared R&D, shared facilities, leading to reduced costs etc

2.5. Leads to a kinked demand curve, whereas there is price rigidity due to the PEDs.

2.6. New node

3. Profit Maximisation

3.1. Normal Profit - keeping factors in present use

3.1.1. Supernormal profit

3.2. Difference between accounting and economic profit

3.3. Maximisation at MC=MR

3.4. Role of profit - allocation, signals, innovation, investment, rewards etc.

3.5. Alternative goals for firms? Market share, revenue maximisation, sales growth etc.

3.5.1. Behavioural theories - organisations are too complex to try and single out a single goal, there is a coalition of goals.

3.6. Principal Agent problem - the divorce between ownership and control

4. Costs and Revenues

4.1. Fixed and Variable costs

4.1.1. Average costs (divided by output)

4.1.1.1. Total costs

4.2. The short run - at least one factor is fixed (usually capital)

4.2.1. Long run - all factors are variable

4.3. Diminishing Returns

4.4. Marginal Product

4.4.1. Marginal Revenue

4.4.1.1. (always the next additional unit)

4.5. Economics of Scale

4.5.1. Diseconomies of Scale

4.5.1.1. External and Internal

4.6. The Minimum Efficient Scale (point when you first when bottom of LRAC)

5. Perfect Competition

5.1. Different firms operate in differing environments

5.1.1. Perfect Competition

5.1.2. Oligopoly

5.1.3. Monopoly

5.1.4. Duopoly

5.2. Sunk cost - cost that cannot be recovered (advertising, training etc.)

5.3. Perfect Competition

5.3.1. Many buyers and sellers

5.3.2. No barriers to entry/exit

5.3.3. Homogeneous products

5.3.4. Perfect Infomation

5.3.5. No externalties

5.4. All firms only compete on price and are price takers

5.5. Shutdown condition - short run when the price is lower than AVC, long run Price lower than AC

5.6. Imperfect Competition - firms compete on quality, location, brand, customer service, differentiation, loyalty cards, reputation etc

6. Monopoly

6.1. Definition

6.1.1. Only one firm in the industry

6.1.2. Firm with greater than 25% market share

6.2. Barriers to entry - high fixed costs, economies of scale, brand loyalty, legal barriers, control over retail outlets or factors of production etc

6.3. Costs of Monopolies

6.3.1. Higher prices, lower outputs

6.3.2. Productive, Allocative and X inefficiencies

6.3.3. Reduced consumer surplus

6.4. Benefits of Monopolies

6.4.1. Lower prices due to economies of scale

6.4.2. Potential to reach MES

6.4.3. Dynamic effiency and high R&D

6.4.4. Scope to be internationally competitive

7. Efficiency

7.1. Consumer Surplus - the difference between the price a consumer is prepared to pay and the market price

7.2. Producer Surplus - difference between the price a firm is prepared to sell for and the market price

7.3. There are static efficiencies (at a given point in time) and dynamic (occurs over time continuously)

7.4. Static

7.4.1. Allocative - goods produced in line with consumer preferences (P=MC)

7.4.2. Productive - on the lowest point of the average cost function

7.4.3. X inefficiency - not working on the AC curve due to organisational slack (usually connected with monopolies)

7.5. Dynamic

7.5.1. Product Innovation - improvements in the good, leading to better performance

7.5.2. Process innovation - improving methods of production, reducuing average costs

7.6. Perfect Markets should always be statically efficient but never dynamically efficient

7.6.1. Most markets aren't perfect, leading to a deadweight loss (welfare loos associated which imperfect markets) as price and output are not at the competitive equilibrium

8. Price Discrimination

8.1. Occurs when a producer sells an identical product to different buyers at different prices for reasons unrelated to costs

8.2. Conditions for price discrimination

8.2.1. Difference in PEDs between groups of consumers

8.2.2. Barriers to prevent market seepage to prevent resale between said groups

8.3. Types of Price Discrimination

8.3.1. First Degree (Perfect) - charging people what they are prepared to pay, a unique price for each consumer

8.3.2. Second Degree - selling in batches, where lower prices are given for subsequent batches

8.3.3. Third Degree - most frequent, charging for different segments of a market, such as by time, status, geography etc

8.4. Impact on Welfare

8.4.1. Consumer surplus will be reduced, so there is a welfare loss. However, now some consumers now have lower prices. From this they may be some externalities that give social welare

8.4.2. Producers gain, with higher supernormal profit (this may lead to dynamic efficiency improvements, helping consumers)

9. Concentrated Markets

9.1. Concentration ratio - measure of total output in an industry by a given market of firms.

9.1.1. CR5 measure the output of the top five against the whole market

9.2. Internal/External Growth

9.2.1. Internal - using retained profits to finance expansion.

9.2.2. External - using acquisitions and mergers to growth.

9.2.2.1. Horizontal integration - two business at the same stage of production become one

9.2.2.2. Vertical - acquiring a business at different stages of a production chain

9.2.2.3. Lateral - merger between related but not identical companies

9.2.2.4. Conglomerate - merger between firms of unrelated business

10. Contestable Markets

10.1. Theory says that it is not the number of firms that decides whether a market is competitive, but the barriers of entry/exit

10.1.1. If barriers are low, the threat of new firms entering is enough to make current prices lower

10.2. The more contestable, the lower profit margins firms will make and the higher the consumer surplus

10.3. Evaluation - the theory is criticized for:

10.3.1. Clearly, there are no perfectly contestable markets

10.3.2. Why should the threat of hit and run be enough? Firms can make extra profit until it occurs

10.3.3. The role of patent or strategic entry barriers

10.4. In recent years, many markets have become more contestable this is due to:

10.4.1. Deregulation

10.4.2. Increasing levels of competition policy

10.4.3. Technological change, such as e-commerce