Business Economics & The Distribution of Income.

Get Started. It's Free
or sign up with your email address
Business Economics & The Distribution of Income. by Mind Map: Business Economics & The Distribution of Income.



1.1.1. Law Of Diminishing Returns

1.1.2. Increasing Returns to a Factor of Production


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

1.2.2. Economies Of Scope

1.2.3. EXTERNAL Economies and Diseconomies Of Scale Control / Principal-Agent Problem



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


2.1. 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 Managerial Status Market share or Sales growth Revenue Maximisation

2.4.2. Behavioural Theories 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


3.1. Basic Assumptions

3.1.1. Many buyers and 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. D=AR=MR

3.3. Short Run

3.3.1. New firms are unable to enter the market

3.3.2. Short run shutdown [ P<AVC ]

3.4. Long Run

3.4.1. Long run shutdown condition [ P<AC ]

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

3.5. Benefits of competition

3.5.1. Lower prices

3.5.2. Low barriers to entry

3.5.3. Lower total profits

3.5.4. Greater entrepreneurial activity

3.5.5. Economic efficiency


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

4.1.1. No Barriers / costless entry / no sunk costs - CONTESTABLE MARKET Firms will produce at minimum cost, And earn no excess profits Threat of hit-and-run entry Access to the same technology (the same cost curve) Sunk costs could be: Training Capital inputs that have little or no resale value Money spent on advertising, marketing and R&D. Downward pressure on price Lower profit margins

4.1.2. Threat of competition=actual competition

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

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

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

4.2.1. No market is perfectly contestable The theory acts as a reference point and the relevant question is - the Degree of contestability

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

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

4.2.4. The level of knowledge needed to enter

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

4.3.1. Entrepreneurial Zeal

4.3.2. De-regulation of markets

4.3.3. Competition Policy

4.3.4. The European Single Market

4.3.5. Technological Change


5.1. Most important features of market structure are:

5.1.1. The number of firms

5.1.2. The market share of the largest firms

5.1.3. The nature of costs

5.1.4. The degree to which the industry is vertically integrated

5.1.5. The extent of product differentiation

5.1.6. The structure of buyers in the industry

5.1.7. The turnover of customers

5.2. Market structure and innovation

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

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

5.2.3. 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.

5.3. 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

5.3.1. Market Structure Perfect competition Pure monopoly Oligopoly Contestable markets

5.3.2. Price and Cross-price Elasticity of Demand

5.3.3. Product differentiation - moving away from homogeneous products

5.3.4. The Regulatory System

5.3.5. The International Environment

5.3.6. The Economic Cycle

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

5.4.1. Technology and production Technology has the power to transform production processes so that more output can be made with the same level of inputs. Reduces average costs of production and influences the optimal methods of production.

5.4.2. Technology and consumptiom 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. New technology should also imply that the quality of new products rises too.

5.4.3. The impact of technology on efficiency Technology drives gains in dynamic efficiency



6.1. Static - a given point in time

6.1.1. Allocative Price=marginal cost

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

6.1.3. X

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

6.2. Dynamic - over time

6.2.1. Product Innovation

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

6.3. Supply-side strategies

6.3.1. Promoting more innovative behaviour


7.1. Motives for firms to grow larger

7.1.1. Market power motive Increasing price power

7.1.2. Objectives of managers

7.1.3. Profit Motive

7.1.4. Economies of scale

7.1.5. Risk motive

7.2. How do firms grow larger

7.2.1. Internal growth

7.2.2. External growth Horizontal Integration Vertical Integration Lateral merger Conglomerate merger

7.2.3. Monopoly Power Exclusive agreements

7.2.4. OUTSOURCING Technological change Increased competition Pressure from the financial markets


8.1. Conditions Necessary for price Discrimination to occur

8.1.1. Differences in price elasticity of demand

8.1.2. Barriers to prevent "Market seepage"

8.2. Types of Price Discrimination

8.2.1. First degree price discrimination Consumer surplus completely disappears

8.2.2. Second degree price discrimination

8.2.3. Third degree (Multi-market) price discrimination

8.3. The Consequences of price discrimination

8.3.1. The impact on consumer welfare Lower prices might mean that poorer consumers are able to afford the product IF profits are reinvested, consumers might derive long-run benefits from dynamic efficiency gains

8.3.2. Producer surplus and the use of profit Supernormal profits Might be used to improve dynamic efficiency Increased profits redistribute income from consumers to producers

8.3.3. Could be used as a predatory pricing tactic


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

9.1.1. High fixed costs

9.1.2. Economies of scale

9.1.3. Brand loyalty

9.1.4. Legal barriers

9.1.5. Control over the factors of production

9.1.6. Control over retail outlets

9.1.7. Predatory pricing

9.2. Strategic Entry Deterrence

9.2.1. Hostile takeovers

9.2.2. Product differentiation

9.2.3. Capacity expansion

9.2.4. Predatory pricing

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

9.4. The Costs and Benefits of Monopoly

9.4.1. COSTS Productive and X inefficiency Reduced consumer surplus Allocative inefficiency (underconsumption) Higher prices and lower output

9.4.2. 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


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

10.1.1. Features of Oligopoly Interdependence and uncertainty Entry Barriers Product branding Non-price competition (as a result of Price Rigidity) Better quality of service Longer opening hours Discounts on product upgrades Contractual relationships with supplier An increased range of services Advertising and loyalty cards

10.2. The Kinked Demand Curve

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

10.2.2. Limited real world evidence

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

10.3.1. Implicit collusion Price leadership is adopted to facilitate tacit collusion (i.e. silent collusion) Price leader, a dominant firm, will generally set a price, all other firms in the industry will follow suit. Barometric Price leadership 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.

10.3.2. Explicit collusion Price fixing cartels Illegal ! A desire to achieve joint-profit maximisation In order to collude on prices producers must be able to exert some control over market supply. Collusion in a market or industry is easier to achieve when: A small number of firms in the industry Market demand is not too variable Demand is fairly price inelastic Each firm's output can be easily monitored The existence of a punishment strategy There are several factors that can create problems within a collusive agreement between suppliers Enforcement problems Falling market demand The successful entry of non-cartel firms into the industry The exposure of illegal price fixing by market regulators

10.3.3. Benefits from collusion Joint Research and Development projects Shared use of common facilities and the beneficial exchange of information The adoption of common standards - network externalities

10.4. Game theory

10.4.1. Study of conduct and behaviour

10.4.2. Games of strategy where participants have incomplete information.

10.4.3. Prisoner's Dilemma Interdependence Uncertainty