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

Profit Maximisation

Normal profit

Supernormal profit

AR>AC

Alternative goals

Traditional, Assume, Owners are managers

Managerial theories, Assume sales,revenue or market share maximisation, Divorce between ownership and control, Principal-agent problem

Behavioural theories, Coalition of goals and satisficing

Cost and Revenues

Cost

Total cost, Total average cost, Total fixed cost

Marginal cost

Short run

The law of diminishing returns

Average cost, Average fixed cost, Average variable cost

Long run

LRAC, Minimum Efficient Scale

Total product

Marginal product

Economies of scale

Falling SRAC

Falling LRAC

External Economies of scale

Diseconomies of scale

External Diseconomies of scale, Rising LRAC

Revenue

Total revenue

Average revenue, = Price

Marginal revenue

Perfect Competition

Many buyers and sellers

No barriers to entry or exit

Identical products

Perfect information

No externalities

No economies of scale

Perfectly elastic demand curve

Shut down condition

Short-run : P < AVC

Long-run: P < AC

Long-run

Firms only make normal profits

Efficiency

Surplus

Consumer surplus

Producer surplus

Static efficiency

Productive

Allocative

X

Dynamic efficiency

Product

Process

Perfect competition

Allocative efficiency as P=MC

Productive efficiency as equilibrium output is supplied at minimum average cost

Dynamic inefficiency due to homogeneous products

Imperfect competition

Deadweight loss

Concentrated Markets

Concentration ratio

Growth

Internal / Organic

External, Horizontal intergration, Vertical intergration, Forward, Backward, Lateral merger, Conglomerate merger

Outsourcing

Price Discrimination

IDENTICAL PRODUCT to DIFFERENT BUYERS at DIFFERENT PRICES for reasons unrelated to costs

Conditions

Differences in price elasticity of demand

Barriers to prevent ''market seepage''

First degree (perfect price discrimination)

Unique price

Second degree

Batches of a product at lower prices than previous batches

Third degree

By time

By geography

By status

Monopoly

Barriers to entry

High fixed costs

Economies of scale

Brand loyalty

Legal barriers

Control over the factors of production

Control over retail outlets

Predatory pricing

Strategic entry deterrence

Hostile takeovers

Product differentiation

Capacity expansion

Predatory pricing

Costs

Higher prices and lower output

Allocative inefficiency as P > MC and underconsumption

Reduced consumer surplus

Productive inefficiency

X inefficiency due to protection by barriers to entry

Benefits

Economies of scale leading to lower prices

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

Dynamic efficiency from supernormal profits

Scope to be internationally competitive

Oligopoly

Market dominated by a FEW PRODUCERS

Interdependence and uncertainly

Entry barriers

Product branding

Non-price competition

Competitive

Based on strategic interdependence

Collusive

Tacit

Explicit

Kinked demand curve

Game theory

Contestable Markets

Theory of contestable markets: not the number of firms than influences conduct and performance, but the level of barriers to entry into an industry

Perfectly contestable: when the costs of entry and exit by potential rivals are 0

Evaluation

no market is perfectly contestable, i.e. has 0 sunk costs

Threat of hit-and-run competition is insufficient to make incumbent firms change their behaviour

Existing forms protect themselves through patents or strategic entry barriers

Barriers formed by the level of knowledge needed to entry

Increasing contestability of the markets

Entrepreneurial zeal

Deregulation of markets

Competition policy

The European Single Market

Technological change e.g. e-commerce

New node

Market Structure & Technology

Technology

Lowers AC

Lowers price

Raises quality of products

Gains in dynamic efficiency

Promote competition, Reducing entry barriers, Reducing concentration, Increasing the degree of market contestability

However, reinforce monopoly power if firms patent their innovations, have greater global reach

First mover advantage: the advantages to the first firm that moves into a new market, creates a new product or adopts a new production process