1. 1. Costs and Revenues
1.1. Fixed and Variable Costs
1.1.1. A fixed cost is one that does not change with output.
1.1.2. A vairable cost is one that changes with output.
1.2. Diminishing Returns
1.2.1. As more of a variable factor is added to a fixed factor, marginal product will initially rise, owing to specialisation, but marginal product will fall as DM sets in.
1.3. Marginal Product and Revenue
1.3.1. Marginal is the addition to toal product from the production of one extra unit of output.
1.3.2. Revenue is the addition to total rev. from the sale of one extra unit of output.
1.4. Economies of Scale
1.4.1. The cost advantages that an enterprise obtains due to expansion.The average cost per unit to fall as the scale of output is increased.
1.5. Minimum Efficient Scale
1.5.1. Where lowest average cost is first reached on the LRAC - all economies of scale are exhausted.
1.6. Total and Average Revenue
1.6.1. Total = Price x Quantity.
1.6.2. Average = Total/Quantity.
1.6.2.1. P = AR.
2. 2. Profit Maximisation
2.1. Normal Profit
2.1.1. That level of profit which is just sufficient to keep all factors of production in their present use. It occurs where AC = AR.
2.2. Supernormal Profit (abnormal profit)
2.2.1. Anything in excess of normal profit.
2.3. Profit is maximised when MC = MR
2.3.1. Any extra unit will make a loss on that unit as MC > MR.
2.3.2. Any unit less is not producing maximum profit as MC < MR.
2.4. Principal-Agent Problem
2.4.1. Where one has more information than another (managers over shareholders) - danger that the agent may not act in the best interests of the principal.
2.4.2. Solved by:
2.4.2.1. Expert assessment.
2.4.2.2. Regular meetings with the shareholders.
2.4.2.3. Perfomance related pay (incentives).
3. 3. Perfect Comeptition
3.1. Assumptions:
3.1.1. Many buyers and sellers.
3.1.1.1. No firm can influence the market price.
3.1.2. No barriers.
3.1.2.1. Anyone can enter or exit the market freely, no sunk costs (see below).
3.1.3. Identical products.
3.1.3.1. Can compete on price alone, e.g. metals and shares.
3.1.4. Perfect info.
3.1.4.1. Free research for info. on prices.
3.1.5. No externalities.
3.1.5.1. Arising from production/consumption which lie outside the market.
3.1.6. No econ. of scale.
3.1.6.1. If a firm becomes large there is potential for them to have pricing power.
3.2. Sunk costs
3.2.1. Those that cannot be recovered:
3.2.1.1. Highly specialised capital equipment.
3.2.1.2. Training.
3.2.1.3. Advertising.
3.3. Short-run
3.3.1. No one could sell for more, and no one would sell for less if they knew they could get a higher price.
3.3.1.1. Perfectly elastic demand curve.
3.3.2. D=AR=MR
3.3.2.1. The sale of an extra unit will be at the prevailing market price.
3.3.2.1.1. AR=MR.
3.3.3. Losses.
3.3.3.1. Shutdown condition.
3.3.3.1.1. Short-run = P < AVC.
3.3.3.1.2. Long-run = P < AC.
3.4. Long-run
3.4.1. Firms can easily enter the market that shows supernormal profits.
3.4.1.1. This increase in supply causes prices to fall.
3.4.2. Therefore will the fall in price supernormal profit is eroded and normal profits are earned.
4. 4. Efficieny
4.1. Consumer Surplus
4.1.1. Difference between price consumer is prepared to pay and the price they actually pay.
4.2. Producer Surplus
4.2.1. Difference bewtween price at which producer is prepared to supply and price they receive.
4.3. Static
4.3.1. Occurs at a given moment.
4.4. Dynamic
4.4.1. Occurs over time.
4.4.1.1. Factors to improve it are:
4.4.1.1.1. R and D.
4.4.1.1.2. Techonoligcal change.
4.4.1.1.3. Increased human and physcial (education and training) capital.
4.5. Allocative (static)
4.5.1. Occurs where goods are produced in line with consumer preferences - P=MC.
4.6. Productive (static)
4.6.1. Occurs at the lowest point on the AC curve.
4.7. X (static)
4.7.1. Exists where firms aren't on the AC curve because of organisational slack (normally a monolpoly).
4.8. Product Innovation (dynamic)
4.8.1. Examines improvements that lead to goods + services of higher quality/perform better.
4.9. Process Innovation (dynamic)
4.9.1. Looks at progress that leads to better methods of production.
4.9.1.1. Reduces a firm's AC.
4.10. Perfect Comp.
4.10.1. Acheives allocative as P=MC.
4.10.2. Acheives productive when equilibrium output is supplied at the miminum AC.
4.10.3. Dynamic no as identical products so no product + everyone shares process with perfect info.
4.11. Imperfect Comp.
4.11.1. Deadweight loss.
4.11.1.1. The welfare loss associated with monopoly power.
5. 5. Concentrated Markets
5.1. Concentration Ratio
5.1.1. The percentage of total market sales acounted by a given number of leading firms.
5.1.2. For example CR5 (value of output from 5 largest firms/value of output for industry.
5.2. Internal Growth
5.2.1. Retained profits to reinvest.
5.3. External Growth
5.3.1. Horizontal:
5.3.1.1. 2 Businesses in the same industry of production merge.
5.3.1.1.1. E.g. Morrisons over Safeway.
5.3.2. Veritcal:
5.3.2.1. Businesses in the same industry but at different times of production merging.
5.3.2.1.1. E.g. Oil extracter and an oil refininer.
5.3.3. Lateral:
5.3.3.1. Companies that are related but not identical who merge.
5.3.3.1.1. E.g. Newspapers and magazines.
5.3.4. Conglomerate:
5.3.4.1. Merger between firms in unrelated busniesses.
5.3.4.1.1. E.g. Food processor and car maker.
6. 6. Price Discrimination
6.1. Occurs when a producer seels an identical product to diff buyers at diff prices for reasons unrelated to costs.
6.2. Conditions
6.2.1. Different P.E.D. for each group of consumers.
6.2.2. Barriers to prevent the re-sale of the product.
6.3. First Degree
6.3.1. Charging each consumer the max they want to pay.
6.3.1.1. Ebay
6.3.1.2. Cars salesman
6.4. Second Degree
6.4.1. Selling batches of products at lower prices than previous batches - bulk buying.
6.4.1.1. Crisps
6.4.1.2. Paper
6.5. Third Degree
6.5.1. Different prices for different segments of the market.
6.5.1.1. Time
6.5.1.1.1. Train tickets
6.5.1.2. Status
6.5.1.2.1. Cinema tickets
6.5.1.3. Geography
6.5.1.3.1. Club membership
6.6. Advantages
6.6.1. Lower prices means the poorer can afford products.
6.6.2. Output is higher than with a single price monopoly.
6.6.3. Reinvested profits means long-run benefits from dynamic efficeiny.
6.7. Disadvantages
6.7.1. Under 1st degree consumer surplus disappears.
6.7.2. Some pay more than others.
6.7.3. Predatory pricing tactic.
6.7.4. Increased profits move profits from consumers to producers.
7. 7. Monopoly
7.1. There is only one firm in the industry.
7.2. Where a firm has greater than 25% of market share.
7.3. 3 Factors to Assess Monopoly Power:
7.3.1. Number and closeness of available substitutes to consumers.
7.3.1.1. Few close substitutes - demand will be price inelastic.
7.3.2. Level of barriers to entry.
7.3.2.1. Few barriers to entry - no short/long run.
7.3.3. Degree of product differentiation.
7.4. Barriers to Entry
7.4.1. High fixed costs.
7.4.2. Economies of scale.
7.4.3. Brand loyalty.
7.4.4. Legal barriers.
7.4.5. Control over the factors of production.
7.4.6. Control over retail outlets.
7.4.7. Predatory pricing.
7.5. Strategic Entry Deterrence
7.5.1. Hostile takeovers and acquisitions.
7.5.2. Product differentiation - brand proliferation.
7.5.3. Capacity expansion.
7.5.4. Predatory pricing.
7.6. Efficieny
7.6.1. Allocatively inefficient.
7.6.2. Productively inefficient.
7.6.3. X inefficient.
7.6.4. Dynamic efficiency from profit reinvestment.
7.7. Costs
7.7.1. Higher prices + lower outputs.
7.7.2. Inefficiency.
7.7.3. Reduced consumer surplus.
7.8. Benefits
7.8.1. Economies of scale - lower prices.
7.8.2. Potential to reach M.E.S.
7.8.3. Dynamic efficiency.
7.8.4. Scope to be internationally competitive.
8. 8. Oligopoly
8.1. A market dominated by few producers, each have a degree of market control - high level of market conc.
8.1.1. Concentration ratio can be used to measure the extent to which a market is dominated by a few firms.
8.1.1.1. Normally an oligopoly exists when the top 5 firms account for more than 60% of the total market demand/sale.
8.2. Strategic interdependence.
8.2.1. The outcome for an oligopolistic firm depends on the actions of their rivals.
8.3. Classic features:
8.3.1. Interedependence and uncertainty.
8.3.1.1. Firms must take into account the likely reactions of their rivals.
8.3.2. Entry barriers.
8.3.2.1. They maintain supernormal profits for their dominant firms. Possible for small firms but they have no effect on prices/output.
8.3.3. Product branding.
8.3.3.1. Each firm is selling a branded product with scope for product differentiation.
8.3.4. Non-price competition.
8.3.4.1. Advertising, loyalty cards, increased range of services etc. are competitive strategies.
8.4. Kinked demand curve.
8.4.1. If one firm rasises price above P its rivals would not follow so sales would fall.
8.4.2. If the firm lowered price below P its rivals would follow so sales would not increase much.
8.5. Collusion.
8.5.1. Tacit collusion is where one or more firms employ a certain strategy without open collusion to give themselves an unfair advantage over other smaller firms in the industry.
8.5.2. Explicit collusion where firms may engage in price fixing cartels - illegal.
9. 9. Contestable Markets
9.1. Challenged the view that it was the number of firms that determined performance (behaviour and efficiency).
9.1.1. This theory says that its not the number of firms, its the level of barriers to entry into an industry that affects performance.
9.2. The threat of a new firm enetering the industry could provoke a monopoly to reduce its prices to a more competitive level if barriere to entry are low.
9.2.1. This is because of the 'hit-and-run' threat.
9.3. 'Hit-and-run' threat.
9.3.1. Outside firms may be able to enter the market, undercut the price of existing firms, and draw customers away from them before the existing firms are able to respond.
9.3.2. Firms produce at minimum cost.
9.3.3. Works on the assumption that costs to entry and exit are 0.
9.4. A market is perfectly contestable when the costs of entry and exit by potential rivals are zero, and when such entry can be very rapid.
9.5. A pure monopoly prices where MC = MR (profit maximising but this is an idicator for firms to enter the market - potential for undercut.
9.5.1. So normal profit equilibirum is where AR = AC.
10. 10. Market Structure and Technology
10.1. Structure features:
10.1.1. Number of firms.
10.1.2. Market share of largest firms.
10.1.3. Nature of costs.
10.1.4. Degree to which the industry is vertically integrated.
10.1.5. Extent of product differentiation.
10.1.6. Structure of buyers.
10.1.7. Turnover of customers.
10.2. The factors that determine the variety of prcicing decision open to a businesee are mainly:
10.2.1. Market structure in which the business operates.
10.2.2. Objectives of a business.
10.3. Technology brings in new production techniques, therefore raising productivity and reducing average costs of production.
10.4. Technology also changes the optimal methods of production.
10.4.1. If production becomes more capital intensive then less labour will be needed to produce the same amount of output.
10.5. The decrease in costs will shift the supply curve to the right, decreasing prices for consumers (assuming the market is broadly competitive).
10.6. Techonology drives dynamic efficiency.
10.6.1. Product - can develop and produce a new product that boosts sales - higher profits?
10.6.2. Process - higher profits can leade to more R + D which can increase product etc.