Business Economics & The Distribution of Income.

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Business Economics & The Distribution of Income. by Mind Map: Business Economics & The Distribution of Income.

1. COSTS AND REVENUES

1.1. SHORT-RUN

1.1.1. Law Of Diminishing Returns

1.1.2. Increasing Returns to a Factor of Production

1.2. LONG-RUN

1.2.1. INTERNAL Economies and Diseconomies Of Scale (falling / rising long-run average costs)

1.2.1.1. Technical Economies Of Scale

1.2.1.2. Purchasing Economies

1.2.1.3. Financial Economies Of Scale

1.2.1.4. Administrative Economies Of Scale

1.2.2. Economies Of Scope

1.2.3. EXTERNAL Economies and Diseconomies Of Scale

1.2.3.1. Control / Principal-Agent Problem

1.2.4. The MINIMUM EFFICIENT SCALE

1.3. REVENUE

1.3.1. Total

1.3.2. Marginal

1.3.3. Average

1.4. COSTS

1.4.1. Average Cost

1.4.2. (Average) Fixed Cost

1.4.3. (Average) Variable Cost

2. PROFIT MAXIMISATION

2.1. Normal / Supernormal Profit

2.2. Profit Maximisation MC=MR

2.3. The Role of Profit in the Economy

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. Rewards entrepreneurs for bearing risk

2.3.6. Economic Performance Indicator

2.4. Alternative goals (not short-term profit maximisation)

2.4.1. Managerial Theories

2.4.1.1. Managerial Status

2.4.1.2. Market share or Sales growth

2.4.1.3. Revenue Maximisation

2.4.2. Behavioural Theories

2.4.2.1. Assumes that firms are inherently complex and that maximising a single variable is impossible. Implies a coalition of goals and satisficing.

2.5. The Principal-Agent Problem

2.5.1. Divorce ownership

3. EFFICIENCY

3.1. Static - a given point in time

3.1.1. Allocative

3.1.1.1. Price=marginal cost

3.1.2. Productive

3.1.2.1. When a firm produces on the lowest pint of the average cost curve

3.1.3. X

3.1.4. Economic Efficiency occurs when there is both allocative and productive efficiency

3.2. Dynamic - over time

3.2.1. Product Innovation

3.2.2. Process Innovation

3.2.2.1. It should lead to a more efficient use of resources reflected in gains in productive efficiency / productivity.

3.3. Supply-side strategies

3.3.1. Promoting more innovative behaviour

4. PERFECT COMPETITION

4.1. Basic Assumptions

4.1.1. Many buyers and sellers

4.1.2. No barriers to entry or exit

4.1.3. Identical products

4.1.4. Perfect information

4.1.5. No externalities

4.1.6. No economies of scale

4.2. D=AR=MR

4.3. Short Run

4.3.1. New firms are unable to enter the market

4.3.2. Short run shutdown [ P<AVC ]

4.4. Long Run

4.4.1. Long run shutdown condition [ P<AC ]

4.4.2. New firms can enter the industry, and influence the market price

4.5. Benefits of competition

4.5.1. Lower prices

4.5.2. Low barriers to entry

4.5.3. Lower total profits

4.5.4. Greater entrepreneurial activity

4.5.5. Economic efficiency

5. CONCENTRATED MARKETS

5.1. Motives for firms to grow larger

5.1.1. Market power motive

5.1.1.1. Increasing price power

5.1.2. Objectives of managers

5.1.3. Profit Motive

5.1.4. Economies of scale

5.1.5. Risk motive

5.2. How do firms grow larger

5.2.1. Internal growth

5.2.2. External growth

5.2.2.1. Horizontal Integration

5.2.2.2. Vertical Integration

5.2.2.3. Lateral merger

5.2.2.4. Conglomerate merger

5.2.3. Monopoly Power

5.2.3.1. Exclusive agreements

5.2.4. OUTSOURCING

5.2.4.1. Technological change

5.2.4.2. Increased competition

5.2.4.3. Pressure from the financial markets

6. PRICE DISCRIMINATION

6.1. Conditions Necessary for price Discrimination to occur

6.1.1. Differences in price elasticity of demand

6.1.2. Barriers to prevent "Market seepage"

6.2. Types of Price Discrimination

6.2.1. First degree price discrimination

6.2.1.1. Consumer surplus completely disappears

6.2.2. Second degree price discrimination

6.2.3. Third degree (Multi-market) price discrimination

6.3. The Consequences of price discrimination

6.3.1. The impact on consumer welfare

6.3.1.1. Lower prices might mean that poorer consumers are able to afford the product

6.3.1.2. IF profits are reinvested, consumers might derive long-run benefits from dynamic efficiency gains

6.3.2. Producer surplus and the use of profit

6.3.2.1. Supernormal profits

6.3.2.1.1. Might be used to improve dynamic efficiency

6.3.2.2. Increased profits redistribute income from consumers to producers

6.3.3. Could be used as a predatory pricing tactic

7. MONOPOLY

7.1. Barriers to entry - protecting monopoly power in the long run

7.1.1. High fixed costs

7.1.2. Economies of scale

7.1.3. Brand loyalty

7.1.4. Legal barriers

7.1.5. Control over the factors of production

7.1.6. Control over retail outlets

7.1.7. Predatory pricing

7.2. Strategic Entry Deterrence

7.2.1. Hostile takeovers

7.2.2. Product differentiation

7.2.3. Capacity expansion

7.2.4. Predatory pricing

7.3. Although Monopoly is statically inefficient, it is likely to be dynamically efficient

7.4. The Costs and Benefits of Monopoly

7.4.1. COSTS

7.4.1.1. Productive and X inefficiency

7.4.1.2. Reduced consumer surplus

7.4.1.3. Allocative inefficiency (underconsumption)

7.4.1.4. Higher prices and lower output

7.4.2. BENEFITS

7.4.2.1. Economies of scale leading to lower prices

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

7.4.2.3. Dynamic efficiency from supernormal profits

7.4.2.4. Scope to be internationally competitive

8. OLIGOPOLY

8.1. The top 5 firms in the market account for more than 60% of total market demand/sales

8.1.1. Features of Oligopoly

8.1.1.1. Interdependence and uncertainty

8.1.1.2. Entry Barriers

8.1.1.3. Product branding

8.1.1.4. Non-price competition (as a result of Price Rigidity)

8.1.1.4.1. Better quality of service

8.1.1.4.2. Longer opening hours

8.1.1.4.3. Discounts on product upgrades

8.1.1.4.4. Contractual relationships with supplier

8.1.1.4.5. An increased range of services

8.1.1.4.6. Advertising and loyalty cards

8.2. The Kinked Demand Curve

8.2.1. Price Rigidity

8.2.1.1. Rival firms are unlikely to match another's price increase but they may match a price fall.

8.2.2. Limited real world evidence

8.3. Collusion - can be seen as a way of removing uncertainty

8.3.1. Implicit collusion

8.3.1.1. Price leadership is adopted to facilitate tacit collusion (i.e. silent collusion)

8.3.1.1.1. Price leader, a dominant firm, will generally set a price, all other firms in the industry will follow suit.

8.3.1.2. Barometric Price leadership

8.3.1.2.1. Firm that responds most quickly to changing cost and demand conditions acts as the industry's price leader even though it does not have significant market power.

8.3.2. Explicit collusion

8.3.2.1. Price fixing cartels

8.3.2.1.1. Illegal !

8.3.2.1.2. A desire to achieve joint-profit maximisation

8.3.2.1.3. In order to collude on prices producers must be able to exert some control over market supply.

8.3.2.2. Collusion in a market or industry is easier to achieve when:

8.3.2.2.1. A small number of firms in the industry

8.3.2.2.2. Market demand is not too variable

8.3.2.2.3. Demand is fairly price inelastic

8.3.2.2.4. Each firm's output can be easily monitored

8.3.2.2.5. The existence of a punishment strategy

8.3.2.3. There are several factors that can create problems within a collusive agreement between suppliers

8.3.2.3.1. Enforcement problems

8.3.2.3.2. Falling market demand

8.3.2.3.3. The successful entry of non-cartel firms into the industry

8.3.2.3.4. The exposure of illegal price fixing by market regulators

8.3.3. Benefits from collusion

8.3.3.1. Joint Research and Development projects

8.3.3.2. Shared use of common facilities and the beneficial exchange of information

8.3.3.3. The adoption of common standards - network externalities

8.4. Game theory

8.4.1. Study of conduct and behaviour

8.4.2. Games of strategy where participants have incomplete information.

8.4.3. Prisoner's Dilemma

8.4.3.1. Interdependence

8.4.3.2. Uncertainty

9. CONTESTABLE MARKETS

9.1. Not the number of firms that influences conduct and performance, but the level of barriers to entry.

9.1.1. No Barriers / costless entry / no sunk costs - CONTESTABLE MARKET

9.1.1.1. Firms will produce at minimum cost, And earn no excess profits

9.1.1.1.1. Threat of hit-and-run entry

9.1.1.2. Access to the same technology (the same cost curve)

9.1.1.3. Sunk costs could be:

9.1.1.3.1. Training

9.1.1.3.2. Capital inputs that have little or no resale value

9.1.1.3.3. Money spent on advertising, marketing and R&D.

9.1.1.4. Downward pressure on price

9.1.1.5. Lower profit margins

9.1.2. Threat of competition=actual competition

9.1.3. High sunk cost act as a barrier to entry of new firms

9.1.4. Actual behaviour of agents in the market is more important than a simple picture of the number of firms in an industry

9.2. The theory can be criticised along a number of lines:

9.2.1. No market is perfectly contestable

9.2.1.1. The theory acts as a reference point and the relevant question is - the Degree of contestability

9.2.2. Controversy about whether the threat of hit-and-run competition is sufficient to make incumbent firms change their behaviour.

9.2.3. Existing firms can protect themselves through patents or strategic entry barriers.

9.2.4. The level of knowledge needed to enter

9.3. An increase in the number of markets and industries that are genuinely contestable. Several factors explain this development:

9.3.1. Entrepreneurial Zeal

9.3.2. De-regulation of markets

9.3.3. Competition Policy

9.3.4. The European Single Market

9.3.5. Technological Change

10. MARKET STRUCTURES & TECHNOLOGY

10.1. Most important features of market structure are:

10.1.1. The number of firms

10.1.2. The market share of the largest firms

10.1.3. The nature of costs

10.1.4. The degree to which the industry is vertically integrated

10.1.5. The extent of product differentiation

10.1.6. The structure of buyers in the industry

10.1.7. The turnover of customers

10.2. Market structure and innovation

10.2.1. High levels of R&D spending are frequently observed in oligopolistic markets.

10.2.2. The government places a huge emphasis on the potential value from more innovation across all sectors of the British economy

10.2.3. Market structure is the pivotal factor in determining as whether the firm will operate on the lowest point of the AC curve (i.e. PRODUCTIVE EFFICIENCY is reached). And in determining the degree of ALLOCATIVE EFFICIENCY too.

10.3. The factors that determine the variety of pricing decisions open to a business nearly always come back to two main driving forces: The Market Structure and The Objectives

10.3.1. Market Structure

10.3.1.1. Perfect competition

10.3.1.2. Pure monopoly

10.3.1.3. Oligopoly

10.3.1.4. Contestable markets

10.3.2. Price and Cross-price Elasticity of Demand

10.3.3. Product differentiation - moving away from homogeneous products

10.3.4. The Regulatory System

10.3.5. The International Environment

10.3.6. The Economic Cycle

10.4. Technology has the capacity to enhance both production and consumption possibilities. [Invention is distinct from Innovation]

10.4.1. Technology and production

10.4.1.1. Technology has the power to transform production processes so that more output can be made with the same level of inputs.

10.4.1.2. Reduces average costs of production and influences the optimal methods of production.

10.4.2. Technology and consumptiom

10.4.2.1. The effect that technology has in reducing costs means that the industry supply curve will shift to the right, leading to a fall in the market price of the product.

10.4.2.2. New technology should also imply that the quality of new products rises too.

10.4.3. The impact of technology on efficiency

10.4.3.1. Technology drives gains in dynamic efficiency

10.4.4. TECHNOLOGY CAN PROMOTE COMPETITION BY REDUCING ENTRY BARRIERS, REDUCING CONCENTRATION AND INCREASING THE DEGREE OF MARKET CONTESTABILITY.

10.4.4.1. IT CAN ALSO PROMOTE MONOPOLY IF FIRMS PATENT THEIR INNOVATIONS,