econ theme 4

• Competition


  The degree of rivalry between firms in a market
• Non-price competition


  When a firm distinguishes or differentiates its product from that of its competitors
• Characteristics of monopoly


  • One firm dominates the market
  • Price leaders - they can charge high prices but are often restricted from doing so by government regulation
  • New product development is not affected by competitors
  • Monopolies will use promotion to inform and persuade customers
  • They can increase sales revenue through increasing market size
  • How monopolies distribute and sell goods and services depends on the type of product
• Characteristics of oligopoly


  • A few firms dominate the market
  • Do not tend to compete on price in the long run
  • However, firms might compete on price as a tactic (short run)
  • Tend to spend heavily on new product development
  • Branding is crucial and expensive marketing budgets are available
  • Firms must ensure that their products are accessible if they are going to be successful
• Characteristics of perfect competition

  • A large number of producers in the market and no barriers to entering the market exist
  • Each firm is relatively small in size and sell to a large number of small buyers
  • All of these producers are price takers i.e., they are not large enough to influence price
  • Each firm can sell all of its output at the current market price
  • This means that the demand curve for each firm is price elastic i.e., horizontal
  • D = AR
• Characteristics of imperfect competition


  • There are less firms in the market
  • There is some form of product differentiation
  • There are at least some barriers to entry and exit
  • The demand curve is downward sloping
  • Suppliers can influence prices
• Market structure with little competition

  Goods and services are more likely to be price inelastic, allowing firms to charge higher prices
• Limitations of the model of perfect competition


  • Theoretical model
  • Lack of innovation
  • No scope for economies of scale
  • Lack of choice for consumers
• Contestability


  A type of market structure that is competitive because of a lack of barriers to entry
• Characteristics of a perfectly contestable market


  • Freedom to enter or exit the market
  • No sunk costs
  • Hit and run competition
• In a perfectly contestable market, there are few or no barriers to entry meaning that firms can enter the market at little expense
• Firms grow to achieve economies of scale, which increases market power over consumers and suppliers, leading to greater market share and brand recognition, and increased profitability. However, problems arising from growth include diseconomies of scale such as poor communication and coordination.
• Purchasing economies provide discounts for bulk-buying, allowing firms to secure lower costs per unit which can be passed onto the consumer in the form of lower prices
• Concentration ratios


  The number of firms that dominate the market
• Tacit agreement


  When two or more firms implicitly agree to set price or negotiate market share in different geographical regions
• Price discrimination


  When a firm charges different prices to different consumers for the same product
• The GB supermarket industry is likely to be oligopolistic as it is dominated by a few firms, with the 'Big Four' having a 66.5% market share
• Tacit agreement is illegal in the UK as firms agree to manipulate the market in some form to create higher profits, behaving like a monopoly
• Price discrimination is likely to increase revenues for a firm as it allows the transfer of consumer surplus to become producer surplus by targeting consumers willing to pay higher prices
• Business objectives


  Targets that a business wants to achieve within a set period of time
• Marginal cost


  The additional cost incurred by a firm because of the production of one additional unit of output
• Marginal revenue


  The additional revenue generated by a firm from the production and sale of one extra unit of output
• Sales volume is the number of sales expressed as a number of units sold. Sales revenue is the amount of sales expressed as the total sum of money spent by consumers. Sales revenue = selling price x quantity sold.
• Fixed costs stay the same regardless of output e.g., rent and manager's salaries. Variable costs change in relation to the number of items produced e.g., raw materials. Total costs are fixed costs plus total variable costs. TC = FC + TVC.
• Profit maximisation objective


  The firm will operate where MC=MR, leading to higher prices than under sales maximisation, making the firm more likely to undertake a premium pricing strategy.
• If an economy undertakes investment, this will lead to an increase in capital goods at the expense of consumption today, but will bring a stream of income to the economy in the future, allowing for more consumption then.
• Allocative efficiency takes into account the desires of consumers, so if good Y is in greater demand than good X, production of more of good Y will lead to greater allocative efficiency.
• Ways of increasing productivity to reduce average cost


  • Improving technology
  • Improving human capital (skills training and education)
  • Improving the quality of management
• Improvements in technology will lead to greater production with less faults, and although the initial cost is expensive, the average cost will decline as output increases and fixed costs are spread over a greater number of units.
• Greater demand for a product will lead to a reallocation of resources from the production of one good to another, as consumers now demand more of one good and less of the other, which can increase allocative efficiency.
• Market failure


  When the market is unable to efficiently allocate scarce resources to meet the needs of society
• Monopsony power


  Any factors that allow a buyer of labour some degree of control on the demand for labour and the wage rate in a market
• Natural monopolies


  A market where continual returns to scale occur, leading to an L-shaped LRAC curve where average costs are always falling, so the most efficient number of firms is 1
• Natural monopolies


  A market where continual returns to scale occur, leading to an L-shaped LRAC curve where average costs are always falling. Therefore, the most efficient number of firms in the market is 1
• Restrictive practices to trade fall short of cartels but attempt to raise prices or restrict output and might include refusing to supply stock to competitors and price discrimination to different buyers. Therefore, resources are not allocated in an efficient manner
• Overt agreement


  When there is no attempt to hide an agreement, to set price or output between firms, from the authorities
• Disadvantage of a monopsony


  Suppliers will have to focus on cutting costs or be driven out of business as they cannot cover their average variable costs. This might lead to less choice and inferior products
• A natural monopoly sees continual returns to scale. This leads to an L-shaped LRAC curve where average costs are always falling. This will give a firm the incentive to keep increasing the scale of production to reduce average costs further
• Benefit of a trade union

  Trade unions benefit their members in terms of higher wages and better working conditions. This leads to an increase in the supply of labour, allowing for increased long run economic growth
• Disadvantage of a trade union


  If agreements cannot be reached, then industrial action can be taken by the trade union. This can lead to increased short and long run costs for the firm