Business Economics and the Distribution of Income

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Business Economics and the Distribution of Income by Mind Map: Business Economics and the Distribution of Income

1. Costs and Revenues

1.1. Costs

1.1.1. Variable

1.1.2. Fixed

1.2. Time period

1.2.1. Short run

1.2.2. Long run

1.3. Diminishing returns to scale

1.3.1. Point where marginal product starts to fall

1.3.2. Short run/ output fixed

1.4. Economies/ diseconomies of scale

1.4.1. Internal

1.4.2. External

1.5. Minimum efficient scale (M.E.S)

1.5.1. Bottom of the LRAC curve

1.5.2. Each firm has lowest feasible cost per unit

1.6. Revenue

1.6.1. Total

1.6.2. Marginal

1.6.3. Maximised where P.E.D = 1

2. Profit maximisation

2.1. Profits

2.1.1. Supernormal

2.1.2. Normal

2.2. Marginal cost = Marginal Revenue

2.3. Role of profit

2.3.1. Allocation of factors of production

2.3.2. Signal for market entry

2.3.3. Promotes innovation

2.3.4. Investment

2.3.5. Risk bearing reward

2.3.6. Economic performance indicator

2.4. Alternative goals

2.4.1. Revenue maximisation

2.4.2. Managerial status

2.4.3. Market share

2.5. Principal-agent problem

2.6. Behavioural theories

3. Perfect Competition

3.1. Conditions

3.1.1. Many buyers ad sellers

3.1.2. No barriers to entry or exit

3.1.3. Identical products

3.1.4. Perfect information

3.1.5. No externalities

3.1.6. No economies of scale

3.2. Short run

3.2.1. Supernormal profits exist

3.2.1.1. Signal for entry into market

3.2.2. Short run losses exist

3.2.2.1. Signal for exit from market

3.3. Long run

3.3.1. Supernormal profits are always eroded

3.4. Shutdown condition

3.4.1. Short run: P<AVC

3.4.2. Long run: P<AC

3.5. Benefits

3.5.1. Lower prices

3.5.2. Low barriers to entry

3.5.3. Greater entrepreneurial activity

3.5.4. Economic efficiency

4. Efficiency

4.1. Consumer surplus

4.2. Producer surplus

4.3. Static: occurs at a given moment in time

4.3.1. Allocative: P=MC

4.3.2. Productive: lowest point on AC curve

4.3.3. X efficiency: firms not on AC curve (monopoly)

4.4. Dynamic

4.4.1. Product innovation - creates new markets

4.4.2. Process innovation: changes production process

4.4.2.1. Can lead to lower costs

4.5. Perfect competition

4.5.1. Allocative efficiency

4.5.2. Productive efficiency

4.5.3. No dynamic efficiency

4.6. Imperfect competition

4.6.1. X inefficiency?

4.6.2. Product innovation

4.6.3. Process innovation

5. Concentrated markets

5.1. Concentration ratio

5.2. Motives for firms to expand

5.2.1. Market power

5.2.2. Objectives of managers

5.2.3. Profit

5.2.4. Economies of scale

5.2.5. Risk diversification

5.3. Internal growth

5.3.1. Re-invest profit

5.3.2. Increase fixed and variable factors

5.4. External growth

5.4.1. Horizontal intergration

5.4.1.1. Merger of 2 companies in the same industry at the same stage of production

5.4.2. Vertical integration

5.4.2.1. Acquisition of business in the same industry but at a different stage of production

5.4.3. Lateral merger

5.4.3.1. Merger between companies that are related but not identical

5.4.4. Conglomerate merger

5.4.4.1. Merger between firms in unrelated business

5.5. Reasons for outsourcing

5.5.1. Technological change

5.5.2. Increased competition

5.5.3. Pressure from financial markets to improve profitability

6. Price discrimination: occurs when a producer sells an identical product to different buyers at different prices for reasons unrelated to costs

6.1. Conditions necessary

6.1.1. Differences in price elasticity of demand

6.1.2. Barriers to prevent "market seepage" - no re-selling

6.2. Types

6.2.1. First degree

6.2.1.1. Charging each individual consumer the maximum they are prepared to pay

6.2.1.2. Consumer surplus is eroded

6.2.1.3. Consumer surplus becomes producer surplus

6.2.2. Second degree

6.2.2.1. Selling batches of a product at lower prices than previous batches

6.2.2.2. Method of gaining more market share

6.2.3. Third degree

6.2.3.1. Most common - charging different prices for the same product in different segments of the market

6.2.3.2. Profit maximisation technique

6.2.3.3. Methods of market separation

6.2.3.3.1. Time

6.2.3.3.2. Geography

6.2.3.3.3. Status (age etc.)

6.3. Consequences

6.3.1. Impact on consumer welfare

6.3.1.1. In most cases consumer welfare redued

6.3.1.2. Consumers can be priced into market

6.3.1.2.1. This can have positive externalities

6.3.2. Producer surplus and the use of profit

6.3.2.1. Consumer surplus transformed into supernormal profit

6.3.2.2. Supernormal profit may be re-invested to improve dynamic efficiency

6.3.2.3. Price discrimination could also be used to harm competition in the form of predatory pricing

7. Monopoly

7.1. How to determine a monopoly

7.1.1. Greater than 25% market share?

7.1.2. The number and closeness of substitutes available to consumers

7.1.3. The levels of barriers to entry

7.1.4. The degree of product differentiation

7.2. Barriers to entry

7.2.1. High fixed costs

7.2.2. Economies of scae

7.2.3. Brand loyalty

7.2.4. Legal barriers

7.2.5. Control over factors of production

7.2.6. Control over retail outlets

7.2.7. Predatory pricing

7.3. Strategic barriers to entry

7.3.1. Hostile takeovers

7.3.2. Product differentiation

7.3.3. Capacity expansion

7.3.4. Predatory pricing

7.4. Costs

7.4.1. Abnormal supernormal profits earned at the expense of efficiency and social welfare

7.4.2. Market failure due to loss of allocative efficiency and under-consumption of good

7.4.3. Productive and X inefficiency are likely to exist

7.5. Benefits

7.5.1. Economies of scale lead to lower prices

7.5.2. Potential to reach M.E.S with natural monopoly

7.5.3. Dynamic efficiency achieved due to re-investment of supernormal profits

7.5.4. Scope to be internationally competitive

8. Oligopoly

8.1. 5-firm concentration ratio > 60%

8.1.1. Highly concentrated market

8.1.2. Few producers

8.1.3. High degree of market control

8.2. Common market features

8.2.1. Interdependance and uncertainty

8.2.2. Barriers to entry

8.2.3. Product branding

8.2.4. Non-price competition

8.3. Kinked demand curve

8.3.1. Firms aim to protect their market share

8.3.2. Rivals unlikely to match price increase but may match fall

8.3.3. Assumes price rigidity and competition based on non price factors

8.4. Key factors of non price competition

8.4.1. Better quality of service

8.4.2. Longer opening hours

8.4.3. Discounts on product upgrades

8.4.4. Contractual relationships with suppliers

8.4.5. Increased range of services

8.4.6. Advertising and loyalty cards

8.5. Collusion

8.5.1. Tacit collusion

8.5.1.1. Dominant firm sets price

8.5.1.2. Other firms follow this pricing strategy

8.5.2. Explicit collusion

8.5.2.1. Price fixing cartels

8.5.2.2. Illegal but based on desire for joint profit maximisation

8.5.2.3. Necessary conditions

8.5.2.3.1. Small number of firms in market

8.5.2.3.2. Relatively steady market demand conditions

8.5.2.3.3. Demand is fairly price elastic

8.5.2.3.4. Each firm's output can be easily monitored

8.5.3. Benefits

8.5.3.1. Joint research and development projects

8.5.3.2. Adoption of common standards

8.5.3.3. Shared use of common facilities and beneficial exchange of information

8.6. Game theory

8.6.1. Theory based around firms trying to predict competitors' strategies

8.6.2. eg. The prisoner's dilemma

9. Contestable Markets

9.1. Challenges the theory that the conduct and behaviour of firms are determined by the number of firms in the industry

9.2. States that it is the level of barriers to entry to a market that determines the conduct and behaviour of its firms

9.3. Occur when there are no barriers to entry and exit and when firms have access to same technology - same cost curves

9.4. In contestable markets firms produce at minimum cost and there is no supernormal profit

9.5. Threat of hit and run entry that drives competition

9.6. Evaluation

9.6.1. No market is perfectly contestable

9.6.2. Does threat of hit-and-run entry change behaviour of firms

9.6.3. Competition policy

9.6.4. European single market

9.6.5. Technological change

10. Market Structure and Technology

10.1. Summary of market structure: most important features

10.1.1. Number of firms

10.1.2. Market share of the largest firms

10.1.3. Nature of costs

10.1.4. Vertical integration of industry

10.1.5. Extent of product differentiation

10.1.6. Structure of buyers in the industry

10.1.7. Turnover of customers

10.2. Innovation

10.2.1. Oligopolistic markets are usually best for dynamic efficiency

10.2.2. Government see it as being very important because of economic gains:

10.2.2.1. Increased competitiveness of UK prducers

10.2.2.2. Helps to develop and maintain comparative advantage

10.2.2.3. Higher productivity keeps wages low

10.2.2.4. Shifts LRAS curve outwards

10.2.2.5. Creates new jobs

10.2.2.6. Positive externalities

10.3. Pricing power

10.3.1. Perfect competition

10.3.1.1. Price takers

10.3.1.2. Long run normal profits

10.3.1.3. Homogenous products = perfectly elastic demand curve

10.3.2. Monopoly

10.3.2.1. Supernomral profits possible in long and short run

10.3.2.2. Barriers to entry protect market position

10.3.2.3. Price discrimination can be used

10.3.3. Oligopoly

10.3.3.1. Each firm has some market power

10.3.3.2. Interdepedent pricing strategies

10.3.4. Price and cross elasticity of demand

10.3.4.1. Inelastic demand allows price rise leading to rise in revenue

10.3.4.2. Elastic demand dictates that price rise leads to fall in revenue

10.3.4.3. When C.E.D is low, pricing power is higher

10.3.5. Regulatory system

10.3.6. International environment

10.3.7. Economic cycle

10.4. Technology

10.4.1. Can cut the average cost of production

10.4.1.1. New technology - teething problems

10.4.2. Switch from labour to capital

10.4.2.1. Short term job losses

10.4.3. First mover advantage vs. Second mover advantage

10.4.4. Can cause prices to fall, leading to higher consumption

10.4.5. Can cause rise in quality of products

10.4.6. Drives dynamic efficiency

10.4.7. Can cause fall in barriers to entry

10.4.7.1. If patents used can create more barriers to entry