# Econ 3 : Business Economics & the Distribution of Income

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Econ 3 : Business Economics & the Distribution of Income

## 1. 1. Costs and revenues

### 1.1. 1. Fixed and variable costs

1.1.1. Fixed cost

1.1.1.1. Is one that doesn't change with output, e.g. paying for a paitent

1.1.2. Variable costs

1.1.2.1. Is one that changes with output.

### 1.2. 2. The short-run average cost curve

1.2.1. Average cost

1.2.1.1. Total cost/ Quantity. Average Cost calculations. AC= AFC + AVC.

1.2.2. The short run

1.2.2.1. Is that period of time where at least one factor of production is fixed, usually capital.

1.2.3. The law of diminishing returns

1.2.3.1. States that 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 diminishing returns sets in.

1.2.4. Marginal product

1.2.4.1. The addition to total product from the production of one extra unit of output

1.2.5. Average cost, average fixed cost and average variable cost curves. Average product and average variable cost curve diagram

### 1.3. 3. The long-run Average cost curve (Economies and diseconomies of scale.)

1.3.1. Economies of scale

1.3.1.1. They exist where an increase in all factors of production (labour and capital) lead to a more than proportional increase in output. i.e. falling long run average costs.

### 1.4. 4. The Minimum efficient scale

1.4.1. M.E.S

1.4.1.1. It is the point where the lowest average cost is first reached at the LRAC curve. It is the point where all economies of scale are all exhausted.

### 1.5. 5. External Economies and Diseconomies of scale

1.5.1. Total and average revenue

1.5.1.1. TR = Price x Quantity. Average Revenue = TR/Q. P= AR

1.5.2. Marginal revenue

1.5.2.1. is the addition to total revenue, from the sale of one extra unit of output.

## 2. 2. Profit Maximisation

### 2.1. 1.What is Profit?

2.1.1. Normal Profit

2.1.1.1. Is that level; of profit which is just significant to keep all factors of production intheir present use. It occurs where AC=AR

2.1.2. Supernormal Profit

2.1.2.1. Is anything in excess of normal profit

### 2.2. 2. Maximising profit

2.2.1. Profit maximisation MC = MR, my cat = my rat

### 2.3. 3. Theory and reality

2.3.1. Is it possible to reach maximum profit etc.

### 2.4. 4.The role of profit in the economy

2.4.1. Allocation of factors of production

2.4.2. Signal for market entry

2.4.3. Promotes innovation

2.4.4. Investment

2.4.5. Rewards entrepreneurs

2.4.6. economic performance indicator

### 2.5. 5. Alternative Goals

2.5.1. Managerial Theories - Principal agent problem etc.

2.5.2. How tot tackle the principal agent problem

2.5.3. Behavioural Theories

2.5.4. New Ideas

## 3. 5. Concentration Markets

### 3.1. 1. Introduction

3.1.1. 1. Concentration Ratio Example

3.1.1.1. CR5 = value of output from the 5 largest firms / value of output for the industry

3.1.2. 2. Why do firms grow larger?

3.1.2.1. Market power motive

3.1.2.2. Objectives of managers

3.1.2.3. Profit motive

3.1.2.4. economies of scale

3.1.2.5. Risk motive

3.1.3. 3. How do firms grow larger

3.1.3.1. Internal growth

3.1.3.1.1. Cafe Nero

3.1.3.2. External growth

3.1.3.2.1. Horizontal integration

3.1.3.2.2. Vertical integration

3.1.3.2.3. Lateral merger

3.1.3.2.4. COnglomerate merger

3.1.3.2.5. Outsourcing

## 4. 6. Price discrimination

### 4.2. 2. Conditions necessary for price discrimination to occur.

4.2.1. Differnces in price elasticity of demand.

4.2.2. Barriers to prevent 'market seepage'

### 4.3. 3.Types of price discrimination

4.3.1. First degree price discrimination

4.3.1.1. Unit price for each individual unit

4.3.2. Secondary degree price discrimination

4.3.2.1. Batched of a product, multipacks etc

4.3.3. Third degree PD

4.3.3.1. Charging differently to time, location and status

### 4.4. 4. Examples

4.4.1. 1st degree

4.4.1.1. eBay

4.4.1.2. Car salesman

4.4.2. 2nd degree

4.4.2.1. Crisps

4.4.3. 3rd degree

4.4.3.1. Cineman tickets

4.4.3.2. Train tickets

### 4.5. 5. The consequences of price discrimination

4.5.1. The impact on consumer consequences

4.5.1.1. consumer suplus reduced

4.5.2. Producer surplus

4.5.2.1. More producer surplus

4.5.2.2. More supernormal profit

## 5. 7. Monopoly

### 5.1. 1. defination

5.1.1. Only one firm in the industry

5.1.2. The firm is the industry

5.1.3. More than 25% market share

5.1.4. Number of close substitutes

5.1.5. Level of barriers to entry

### 5.2. Barriers to entry

5.2.1. High fixed costs

5.2.2. Economies of scale

5.2.3. Brand loyalty

5.2.4. Legal barriers

5.2.5. Control over factors of production

5.2.6. Control over retail outlets

5.2.7. Predatory pricing

5.2.8. Strategic entry deterrence

5.2.8.1. Hostile takeovers

5.2.8.2. Product differentiation

5.2.8.3. Capacity expansion

5.2.8.4. predatory pricing

### 5.3. Monopoly and efficiency

5.3.2. Dynamically efficient

### 5.4. The costs and benefits of monolpoly

5.4.1. Costs

5.4.1.1. Under-consumed

5.4.1.2. inefficiency

5.4.2. Benefits

5.4.2.1. Natural monopoly

5.4.2.2. MES

## 6. 3. Perfect competition

### 6.1. 1. perfect competition

6.1.1. The spectrum of market structures. Perfect competition - oligopoly - monopoly

6.1.2. Six Characteristics of perfect competition: 1. Many Buyers and sellers, 2. no barriers to entry or exit, 3.identical products, 4. Perfect information, 5. no externalities, 6. no economies of scale.

6.1.3. The competitive process

6.1.3.1. scarce resources ->formation of prices via forces of demand and supply -> profits or losses emerge -> firms enter of leave the industry.

### 6.2. 2. The short run

6.2.1. Short run supernormal profits

6.2.2. Short run loesses

6.2.3. The shut down condition.

6.2.3.1. Short run P<AVC

6.2.3.2. Long-run P<AC

### 6.3. 3. The long run

6.3.1. The period of time where all factors are variable implying that new firms are able to enter the industry

### 6.4. 4. Theory and reality

6.4.1. Imperfect information

6.4.3. Externalities

6.4.4. Factors on which firms compete in imperfect competitive markets- Quality, brands, location etc.

### 6.5. 5. Benefits of competition

6.5.1. lower prices due to lots of firms

6.5.2. low barriers to entry

6.5.3. low total profits

6.5.4. greater entrepreneurial activity

6.5.5. economic efficiency

## 7. 4. Efficiency

### 7.1. 1. Consumer Surplus and producer surplus

7.1.1. Consumer Surplus

7.1.1.1. Is the difference between the price the consumer is prepared to pay and the price they actually pay

7.1.2. Producer Surplus

7.1.2.1. The difference between the price at which the producer is prepared to supply and the price they actually receive.

7.1.3. Static efficiency vs Dynamic efficiency

7.1.3.1. Static efficiency (allocative, productive, x) occurs at a given moment in time, where as dynamic efficiency ( product and process) occurs over time.

### 7.2. 2. Allocative, Productive and X efficiency

7.2.1. Allocative

7.2.1.1. occurs where goods are produced in line with consumer preferences. p= mc

7.2.2. Productive efficiency

7.2.2.1. Occurs on the lowest point on the average cost curve

7.2.3. X

7.2.3.1. inefficiency is where firms are not on the average cost curve owing to organisational slack, normally owing to monopoly.

### 7.3. 3. dynamic efficiency and technological game.

7.3.1. Product innovation

7.3.1.1. Telecommunications

7.3.1.2. Pharmaceuticals

7.3.1.3. transport

7.3.1.4. audio-visual products

7.3.1.5. knowledge industries

7.3.2. Process innovation

7.3.2.1. Changes to the way production takes place

### 7.4. 4. Government Policy and Dynamic efficiency

7.4.1. Supply side strategies

7.4.1.1. tax cuts, capital allowances, funding etc

### 7.5. 5. Is perfect competition An efficient market structures.

7.5.1. Efficiency under perfect competition

7.5.2. Imperfect competition and efficiency

7.5.3.1. The welfare loss associated with monopoly power

## 8. Oligopoly

### 8.1. Defining Oligopoly

8.1.1. Few producers, each with a degree of market power

8.1.2. needs the following features

8.1.2.1. Product branding

8.1.2.2. Non-price competition

8.1.2.3. entry barriers

8.1.2.4. Interdependence and uncertainty

8.1.3. top five firms in the market account for more than 60% of the market demand/sales

### 8.2. kinked demand curve

8.2.1. based on the likely reactions of other firms

8.2.2. assuming price rigidity

8.2.3. assums there will be periods of price stability

8.2.4. however there is limited real-worl evidence that this is true

### 8.3. The importance of non-price competition under oligopoly - firms in an oligopoly can compete through non-price factors

8.3.1. better quality of service

8.3.2. longer opening hours for retails

8.3.4. contractual relationships

8.3.5. more services

8.4.1. tacit collusion

8.4.1.1. prices decided by a dominant firm

8.4.2.1. the first firm to react to a change in conditions to supply or demand

### 8.5. explicit collusion

8.5.1. price fixing cartels

8.5.2. Joint profit maximisation

8.5.3. control supply

### 8.6. Game theory

8.6.1. Prisoners dilemma

8.6.2. price fixing agreements

8.6.3. possible benefits from collusion higher than normal competition

## 9. 9. Constable Markets

### 9.1. Definition

9.1.1. this challenges the view that contestable markets and performance are determined by the number of firms, instead the barriers to entry

9.1.2. the cost of entry and exit

### 9.2. contestable markets and the performance and conduct of buisness

9.2.1. the effect of market contestability

9.2.2. lower price and higher output increases consumer surplus

### 9.3. evaluating contestable

9.3.1. no market perfectly contestable

### 9.4. the increasing contestability of markets

9.4.1. entrepreneurial zeal

9.4.2. de-regulation of markets

9.4.3. competition policy

9.4.4. the european single market

9.4.5. technological change

## 10. Market structure and technology

### 10.1. Summary of market structures

10.1.1. number, size,costs, vertical intergration

10.1.2. Market structure and innovation

10.1.3. gov. policy and innovation

### 10.2. price takers and makers

10.2.1. monopoly

10.2.2. oligopoly

10.2.3. contestable markets

10.2.3.1. hit and run

10.2.3.2. barriers

10.2.4. price and cross-price elasticity of demand

10.2.5. product differentiation

10.2.6. the regulatory system

10.2.7. environment

10.2.8. economic cycle

10.2.9. New node

### 10.3. impact of technology

10.3.1. on costs

10.3.2. consumption

10.3.3. on efficiency