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Economics - Section B: Business Economics (Part 2: Competition (Chapter 22…
Economics - Section B: Business Economics
Part 2: Competition
Chapter 22: Competitive markets
Competition is the rivalry that exists between firms when trying to sell goods in a particular market
Common features in a competitive market
A large number of buyers and sellers
The product sold by each firm are close substitutes for each other
Low barriers to entry
Each firm has no control over the price charged
Firms typically aim to dominate a competitive market by:
Operating efficiently by keeping costs as low as possible
Providing good quality products with high levels of customer service
Charging prices which are acceptable to customers
Innovating by constantly reviewing and improving the product
Advantages that consumers enjoy from healthy competition:
Lower prices
More choice
Better quality
Resources are allocated more efficiently
More innovation
Disadvantages to consumers of a highly competitive market:
Market uncertainty
Lack of innovation
Inefficient use of resources
Key terms:
Barriers to entry - obstacles that might discourage a firm from entering a market
Competition - the rivalry that exists between firms when trying to sell goods to the same group of customers
Innovation - the commercial exploitation of a new invention
Product differentiation - an attempt by a firm to distinguish its product from that of their rivals
Chapter 23: Advantages and disadvantages of small and large firms
How is the size of a firm measured?
Turnover
Number of employees
The amount of capital employed
Advantages of small firms
Flexibility
Lower wages
Personal service
Better communication
Innovation
Disadvantages of small firms
Higher costs
Difficulty attracting right staff
Vulnerability
Lack of finance
Advantages of large firms
Economies of scale
Market domination
Large-scale contracts
Disadvantages of large firms
Too bureaucratic
Co-ordination and control
Poor motivation
Chapter 24: The growth of firms
Motives for growth
Increase profits
Increase market share
Economies of scale
Reduce risk
Survival
Methods of growth
Organic growth
Takeover or acquisition
Merger
Methods of integration
Horizontal integration
Vertical integration
Backward vertical integration
Forward vertical integration
Lateral integration
Conglomerate or diversifying mergers
Limitations to growth
Lack of finance
Aim of the entrepreneur
Limited market
Low barriers to entry
Diseconomies of scale
Key terms
Backward vertical integration - merging with a firm that operates in the previous stage of production
Conglomerate or diversifying merger - the merging of firms involved in completely different business activities
Forward vertical integration - merging with a firm that operates in the next stage of production
Horizontal integration - the merging of two firms which are in exactly the same line of business
Lateral integration
Merger - the joining together of two or more businesses, usually to make one new one
Organic growth - growth achieved through the expansion of current business activities
Takeover or acquisition - the purchase of one business by another
Vertical integration - merging with a firm that operates in a different stage of production
Chapter 25: Monopoly
What is monopoly?
A pure monopoly exists when a market is supplied by just one producer
Features of a monopoly
Barriers to entry
Cost barriers
Legal barriers
Economies of scale
Unique product
Control over price
Advantages of a monopoly
More research and development
Economies of scale
Natural monopolies
International competitiveness
Disadvantages of a monopoly
Higher prices
Restricted choice
Lack of innovation
Inefficiency
Key terms
Monopoly - a situation where there is one dominant seller in the market
Natural monopoly - a situation that occurs when one firm in an industry can serve the entire market at a lower cost than would be possible if the industry were composed of many smaller firms
Patent - a licence which grants permission to operate as a sole producer of a newly designed product
Chapter 26: Oligopoly
What is an oligopoly?
A market that is dominated by a few very large producers
Features of oligopoly
Interdependence
Barriers to entry
Non-price competition
Economies of scale
Price rigidity
Collusion
Advantages of an oligopoly
Economies of scale
Price stability
Choice
Disadvantages of an oligopoly
Collusion
Price fixing
Shared geographical markets
Too much money spent on advertising
Cartels
Key terms
Interdependence - where the actions of one large firm in an oligopolistic market will have a direct effect on others
Niche - a small section in a large market
Collusion - informal agreements between firms to restrict competition
Oligopoly - a market dominated by a few large firms
Cartel - where a group of firms or countries join together and agree on pricing or output levels in the market
Price war - where one firm in the industry reduces price causing others to do the same
Part 3: Public and private sectors
Chapter 27: Public and private sectors
The public sector
Central government departments
Local authority services
Other public sector organisations
The private sector
Sole traders
Partnerships
Companies
Private sector aims
Survival
Profit maximisation
Profit satisficing
Growth
Social responsibility
Sales revenue maximisation
Public sector aims
Improving the quality of services
Minimising costs
Allow for social costs and benefits
Key terms
Dividends - payments made to shareholders form profit
Multinationals - companies that have significant production or service operations in at least two countries
Profit maximisation - making largest amount of profit as possible over a period of time
Profit satisficing - making just enough profit to satisfy the demands of business owners
Sales revenue maximisation - generating the largest amount of sales revenue in a given time period
Stakeholder - an individual or group affected by a firm and so has an interest in its activities
Chapter 29: Privatisation
Chapter 28: Government regulation
The need for government regulation
Increasing prices
Restricting consumer choice
Part 1: Production
Factors of Production and Productivity
4 Factors of Production
Labour
The workforce in the economy. Eg: Manual Labour, managers,
The value of an individual worker to a business is their human capital
Capital
Working Capital/ Circulating Capital
The raw materials and components that will be used up in the production process
Fixed Capital
The factories, offices, machinery, etc, that are used in production. It will not be used up in the production process
Enterprise
Entrepreneurs are risk takers and will come up with new innovative business ideas. They organise all the other factors of production and risk their own money in a business venture
Land
Land/Area to locate their factories, premises, etc.
Includes natural resources like dirt, coil, oil, etc
Labour and Capital Intensive Production
Labour Intensive
Using more labour than capital when producing goods and servicces
Capital Intensive
Using more capital than labour when producing goods and services
Increasing Production
If the economy wishes to increase production, more factors of production will be needed. EG: More workers, more capital, etc.
Productivity
Productivity is the output per unit of input. Increasing productivity means that more goods and services can be produced with the same of less resources used. Doing this may lower costs for firms and as a result increase profit
Hiring better labour
Using better machinery
Introducing new working practices
Sectors of the Economy
Primary Sector
Primary sector production involves extracting raw materials from the earth
Mining and Quarrying
Farming
Logging
Secondary Sector
The secondary sector involves converting the raw materials into finished or semi-finished goods. All manufacturing, processing and construction is within this sector
Metal working and smelting
Textile production
Chemical Engineering
Tertiary Sector
The tertiary sector involves the provision of services
Public Transport
Banking
Medical Care
De-Industrialization
The decline in manufacturing/ secondary sector is called de-industrialization
Changes in consumer demand
More developed countries have better public sectors, which mainly provide services
Advances in technology results in machinery replacing labour
Developed and Developing Countries
Developed Countries
Primary Sector is less important than tertiary
Small amount of workforce in primary sector
Developing Countries
Secondary Sector is growing and tertiary sector is showing some expansion
Under-Developed Countries
Most of the workforce is in the primary sector. Little growth in secondary sector
Production Costs and Revenue
Fixed Costs
Costs that do not vary with output
Variable Costs
Costs that vary with output
Total costs = Variable costs + Fixed Costs
Average Costs = Total Costs/Quantity Produced
Total Revenue = Price * Quantity
Profit = Total Revenue - Total Costs
Economies and Diseconomies of Scale
Economies of Scale
As a firm increases in size its costs start to fall