Allocative efficiency
When welfare is maximised, where MC = AR.

X-inefficiency
When a firm is producing above its average cost curve for a given level of output.

Dynamic efficiency
Dynamic efficiency is how changing technology improves a firm's output potential over time.

Workers objectives
Workers want higher wages, job security and improved working conditions.

Shareholders objectives
Shareholders usually look to maximise profit

Consumers objectives
Consumers want lower prices, better customer service and quality, and they also care about social and environmental causes (e.g. homeless people and polar bears).

Revenue maximisation
Where MR = 0.

Sales maximisation
When a firm maximises its sales without making a loss, where AC = AR.

Profit satisficing
Profit satisficing is when a company makes enough profit to satisfy its influencers, but then pursues other objectives (social, environmental, personal).

Reasons why some firms grow while others stay small(SPIDO FRINQ)
Reason to grow

1.Increase sales and profit

2. More market power, so firms can increase prices and increase profit
   
   3. Diversify and enjoy risk-bearing economies e.g. Apple launching new products, iPod, iPhone, iPad.
   4. Exploit internal economies of scale to decrease LRAC and increase profit.
      5.Owners objective might be to run a hugely successful company e.g. Steve Jobs wanting to change the world.
      
      

Reason to stay small (Evaluation)

1. However, firms might lack the finance to expand.
2. However, regulations might prevent firms from growing
3. However, firm might be in a niche market or selling personalised goods
4. However, firm might run into internal diseconomies of scale
5. However, other owners might just want a quiet life running a small firm
   

The divorce of ownership and controlWhen the managers/directors of a firm are different from the owners of the firm.

The principal-agent problem
The principal-agent problem is when the agent (e.g. the manager who controls the business) pursues different objectives to the principal (e.g. the shareholders who own the business).
E.g. managers (agent) look to sales maximise for sales bonuses while shareholders (principal) look to profit maximise.

Public sector firms
Public sector firms are owned by the government.

For-profit firms
For-profit firms are looking to make a profit.

Not-for-profit firms
Not-for-profit firms are not looking to just make a profit, they also pursue other social and environmental objectives.
E.g. charities like Oxfam and Young Enterprise.

Backwards vertical integration
Backwards vertical integration is when a firm integrates backwards, with a firm further away from the consumer.
E.g. Ford’s car factory integrating with the tyre manufacturer.

Forward vertical integration
Forward vertical integration is when a firm integrates forwards, with a firm who is closer to the consumer.
E.g. Ford’s car factory integrating with a car showroom.

Pros and cons of organic growth(CORCOG)
Pros

1. Firstly, using a bank loan or reinvesting profit to grow organically, a firm’s owner will keep ownership and control over the company, and take most of the profit.
2. Secondly, organic growth is low risk because the firm expands by increasing its own output.
   
   

Inorganic growth is higher risk because a firm might move into a completely new market.

Cons

1. However, if the owner grows organically by selling lots of shares, they will lose ownership to the shareholders.
   
   

Or if the owner sets up lots of franchises, they will lose control to their franchise managers.

2. However, organic growth can also mean slower growth, compared to inorganic where mergers/acquisitions speed up growth.
   

Pros and cons of horizontal integration(EVERY RED CAR DOES JAIL BREAK)
Pros

1. Firstly, horizontal mergers can lead to economies of scale which reduce a firm’s LRAC and increasing profit.
2. Secondly, horizontal integration can lead to rationalisation: when firms reorganise to avoid duplicated costs.
   E.g. after two firms merge, only one accounting team will be needed, not two
3. Thirdly, horizontal integration reduces wasteful competition because the two firms are now working together.
   
   

Cons

1. However, firms can also suffer from diseconomies of scale, increasing a firm’s LRAC, decreasing their profit.
2. However, rationalisation can lead to job losses because duplicated departments will be fired.
3. However, horizontal integration can lead to brand dilution if the firm's’ brands are very different.
   

Pros and cons of conglomerate integration (R(e)B(e)K does bother lots )
Pros

1. Firstly, conglomerate integration can lead to risk-bearing economies. Integrating with an unrelated firm helps a firm diversify, reducing cost of failure in one sector.
2. Secondly, conglomerate integration can increase brand awareness. Consumers of one firm will become aware of the other, increasing both firms’ sales.
   E.g. when TATA and Starbucks merged, TATA consumers became aware of Starbucks
3. Thirdly, conglomerate integration can lead to knowledge transfers between firms which increases dynamic efficiency.
   E.g. Apple and Beats innovating new headphones
   
   

Cons

1. However, firms can also suffer from diseconomies of scale, increasing a firm’s LRAC, decreasing their profit.
2. However, conglomerate integration can also lead to brand dilution, if one firm’s brand image negatively affects another.
   E.g. Pepsi diluting Quaker Oats’ healthy porridge image.
3. However, conglomerate integration can fail if firms lack expertise.
   E.g. if Nando’s acquired with Ferrari, Nando’s wouldn’t know how to run Ferrari
   

Pros and cons of vertical integration(SIA RODE DOWN ENGLAND)

Pros

1. Firstly, vertical integration enables firms to control the supply chain.
   E.g. if an electricity-producer buys a power grid, it can prevent competitor firms from entering the market, by refusing to let them use the power grid.
   So the electricity producer will take over the market, increasing sales and profit.
2. Secondly, vertical integration can cut out intermediary costs (or middleman costs) - like transport costs and markups. This will reduce a firm’s costs and increasing profits.
3. Thirdly, vertical integration improves access to consumers and raw materials.
   Vertically integrating forward helps receive customer feedback directly, so a firm can improve its product, increase sales and increase profit.
   Vertically integrated backward means a firm can control quality, improving its final product’s quality, increasing sales and profit.
   
   

Cons

1. However, vertical integration could lead to regulation if it
   Firms may be banned from vertically integrating or forced to pay penalties as high as 10% of annual turnover. This will increase firms’ costs, reducing profit.
2. However, costs may increase because of diseconomies of scale and acquisition costs - like when eBay bought PayPal for $1.5bn.
3. However, vertical integration can backfire because of a lack of expertise. If a firm integrates into a stage of the production process it knows nothing about, it won’t know how to organise production, decreasing efficiency, increasing costs, decreasing profits.
   

For Workers
Pros

1. Workers will benefit from reduced cultural conflicts between different divisions with different attitudes. This will reduce tension, increase productivity and job satisfaction, benefitting workers.
   cons
2. However, workers will suffer from lower job security. They won’t know which new division they’ll join after the demerger and if one of the division is sold to raise funds, workers may lose their jobs entirely.
   

For Consumers
Pros

1. Consumers will benefit after a demerger as each new smaller firm can specialise in their job, increasing efficiency, reducing costs and prices, but also increasing quality.
   Cons
2. However, if the demerged companies are too small, it might reduce economies of scale, increasing LRAC, so firms will have to put their prices up.
   

Reasons for demergers

1. Demergers reduce diseconomies of scale.
2. Demergers enable each new separate firm to specialise.
3. A firm can sell one of its demerged divisions and its assets to raise funds.
4. Demergers reduce conflicts between different cultures within a firm.

Assumptions

1. There’s only one firm in the market
2. The monopoly will want to profit maximise .
3. High barriers to entry .

Monopoly Diagram
Just a regular costs and revenue diagram:

high sunk costs
Very high sunk costs mean it would be inefficient if a second firm entered the market and also had to incur those sunk costs - so one firm is most efficient.

E.g. TFL’ sunk costs have been estimated as high as £129bn - it would completely inefficient for a second firm to waste £129bn to enter the market, too.

huge economies of scale
Huge economies of scale means it’s most efficient for just one firm to be in the market so it can increases its output massively to reach its MES.

Natural monopoly diagram

market power
The firm must have market power: it must be able to change their prices

information on elasticities
The firm must be able to identify which consumers are elastic and which are inelastic.

limit reselling
The firm must be able to limit reselling: it must be able to limit elastic consumers from selling cheap tickets to inelastic consumers

E.g. trains require student IDs or student Oysters, to stop inelastic adult consumers using resold student tickets!

Price discrimination diagram

• Elastic demand is flatter.
• Inelastic demand is steeper.
• And total demand juts out at lower prices, because elastic consumers join the market.
  
  
  

Monopolistic competition

Overt collusion
When there’s a formal agreement between firms to limit competition .
E.g. a phone call/contract/handshake between firms.

Tacit collusion
When there’s an unspoken agreement between firms to limit competition.

both overt and tacit collusion are illegal

Non-price competition

1. advertising
2. loyalty cards
3. branding
4. quality