Theme 3 graphs

• Internal diseconomies of scale refers to a firm growing.

  Initially, average costs fall, since firms can take advantage of economies of scale. This means average costs are falling as output increases.After the optimum level of output, where average costs are at their lowest, average costs rise due to diseconomies of scale.

  The point of lowest LRAC is the minimum efficient scale. This is where the optimum level of output is since costs are lowest, and the economies of scale of production have been fully utilised.

  
• Monopsony: Larger firms are able to negotiate lower prices from their suppliers through monopsony power.
• Reasons why firms want to grow:

  • Economies of scale
  • Market share increases
  • Brand loyalty
  • Diversification
  • Shareholder value increases
  • Managerial motives.
• Reasons why firms want to remain small:

  
  

  
  

  • Profit decreasing
  • Avoid diseconomies of scale
  • Niche Market
  • Barrier to entry are too low
  • Managerial motives
• The principal - agent problem (analysis)

  As firms grow the separation between ownership and control increases.

  Owners want to maximise profit

  Workers want to maximise utility

  Can lead to conflicting objectives
• solutions to PA problem:

  • Performance based pay: dividends, commission, bonuses that link wages to effort
  • Observe effort: Appraisals, HR department
  • Demerge
  • Team production
  • Social norms
  • Automation
• Problems with solutions to PA problem

  • Unintended consequences, workers take more risks
  • Snitching
  • Sacrifice other advantages
  • higher short run costs.
• Organic business growth - a firm increasing its size through investment in capital and other factors of production.
• Mergers/Integrations/Take over: Joining together of two or more firms under common ownership
• Horizontal growth: A merger between one or more firms in the same industry at the same stage of production
• Forward vertical - a merger where the supplier joins with one ore more of its buyers
• Backward vertical growth - A merger where the buyer joins with one or more of its suppliers.
• Conglomerate: A merger between firms in different industries. Producing unrelated products.
• Organic advantages: lower risk, more sustainable
• Organic disadvantages: Growth can be significantly slow, market saturated
• Horizontal advantages - increasing market share, reducing competitions and EOS
• Horizontal disadvantages - Increased regulatory scrutiny
• Forward vertical advantages allow business to access different distribution channels.
• Forward vertical disadvantages - Due to lack of competition, quality and efficiency may suffer.
• Backward vertical advantages - improved control, efficiency and quality or raw materials.
• Backward vertical disadvantages - Capital intensive (large sum of money) C.O.P decreases
• conglomerate advantages - diversification, expanded customer base.
• Conglomerate disadvantage - Lack of expertise, risk of losing vital employee, PA problem.
• Reasons to demerge

  • Focus for business
  • To raise finance
  • Avoid diseconomies of scale
  • A defensive tactic
  • Competition regulation
• Impacts of demergers - Firms - Advantages

  • Reduces costs as diseconomies of scale are avoided
  • Increase in finance from EOS
  • Can specialise and focus
• Impacts of demergers - Firms - disadvantages

  • Increases costs of EOS
  • loss of market share and consumers
• Impacts of demergers - workers - Advantages

  • New roles and opportunities created for some workers
• Impacts of demergers - disadvantages - workers

  • Expected job losses as firms reduce size
• Impacts of demergers - Consumers - Advantages

  • More competition may reduce prices
• Impacts of demergers - consumers - disadvantages

  • Higher costs may increase prices.
• Allocative efficiency is where resources follow consumer demand, where society surplus is maximised - where net social benefit is maximised D = S, MSB = MSC, P = MC
• Productive efficiency is when a firm is operating at the lowest point on their AC curve, full exploitation of EOS
• x-efficiency

  • Minimising waste
  • Production on the AC curve
• Dynamic efficiency

  • Re-investment of long run supernatural profit
• Constant returns to scale (crs)

  
  

  • Use if: No division of labour, no crowding out of fixed factor, no economies of scale, no diseconomies of scale|
  • Do not use for: Economies of scale, shutdown - points, fixed cost shift, natural monopoly
• Monopoly is one seller dominating the market.

  • Differentiated products - firms is a price maker
  • High barrier to entry
  • Imperfect information
  • Firm is a profit maximiser
  • Analyse through efficiency: Allocative efficiency (x), Productive efficiency (x) , X- efficiency (x), Dynamic efficiency (use) - LR supernormal profits and reinvest into R&D
• Monopoly cons

  • Allocative inefficiency
  • Productive inefficiency
  • x - inefficiency
  • Inequalities in necessity markets
• Monopoly pros

  • Dynamic efficiency
  • Greater economies of scale
  • Natural monopoly
• Evaluation for dynamic efficiency - In theory can work, in reality profit can go to shareholders and not in reinvesting

  • EOS or DEOS - Depends on size of firm
  • Objective - Sale maximisation
  • regulation
  • price discrimination
• Perfect competition is where buyers and sellers are so numerous and well informed that all elements of buying or selling power are absent. The market price is beyond the control of the individual buyers and sellers.