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Theme 3, . - Coggle 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.
    - - Conditions
        
        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.
  - - - 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
    - - Price wars
        When firms undercut each other with lower prices to steal the other firms’ consumers.
        E.g. baked bean wars, when supermarkets undercut each other and drove the price of baked beans down to just 3p
      - Predatory pricing
        When a firm aggressively cuts its prices below AVC to force out competitors from the market.
        Short run: firm incurs a loss
        Long run: firm forces out its competitors, so they can take over the market.
      - Limit pricing
        When an incumbent firm uses its economies of scale to set a price low enough to limit new firms from entering.
        Small new firms, without economies of scale, won’t be able to compete so they’ll stay out of the market.
        Limit pricing is a barrier to entry.
  - - - consumers
        Pros
        
        perfectly competitive firms produces at normal profits and can't exploit economies of scale unlike monopolies, hence monopolies make cheaper, higher quality produce.
        
        Cons
        
        monopolies produce at the profit maximisation point, which leads to a loss in consumer surplus.
        
        perfectly competitive markets produce at allocative efficiency, which means that consumer surplus is maximised.
      - Firms
        Pros
        
        Price makers, set price at Pmax.
        
        can lower their costs through dynamic efficiency to drive out competitors.
        
        cons
        
        less competitors mean high X-inefficiency which increase costs.
    - - Pros
        
        firms achieve static efficiency(productive + allocative efficiency)
        
        Consumers benefit in a perfectly competitive market because consumer surplus is maximised . This is something which does not happen in monopoly markets.
        
        Cons
        
        as firms compete for price, some aim to lower the costs of production, reducing quality control and lowering quality of goods.
- - - - Marginal Revenue (MR) and Total Revenue (TR) relationship
        When MR is positive, TR will increase as quantity increases.
        When MR is negative, TR will decrease as quantity increases.
      - Total Revenue (TR) curve
        
        Revenue maximisation - A firm’s total revenue is maximised when MR = 0 (no more revenue can be gained at this point).
    - - Average Revenue Curve
    - - Marginal Revenue (MR) curve
        
        The MR curve must:
        
        Start at the same point as AR
        
        Cross the Q axis at half the quantity AR crosses at
        
        MR should end at the same quantity that AR ends at
        
        Important Fact about the MR curve
        
        As price decreases and quantity increases, MR decreases.
        
        MR decreases from positive to negative.
    - - PED changes along the demand curve
        At high prices, demand is elastic because a % change in price will have a big impact, so consumers will be very responsive.
        At low prices, demand is inelastic because a % change in price will have a small impact, so consumers will be unresponsive.
      - PED and Marginal Revenue (MR)
        When MR is positive, demand will be elastic.
        When MR is 0, demand will be unitary elastic.
        When MR is negative, demand will be inelastic.
- - - - 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).
      - Directors/managers objectives
        Directors and managers usually look to maximise sales or revenue.
        Maximising sales increases their sales bonus and maximising revenue increases company size, boosting their prestige.
        
        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).
  - - - 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.
    - - Organic growth
        Organic growth is when a firm grows by investing in itself to increase output.
        E.g. reinvesting profits, selling shares, taking a bank loan.
        
        Pros and cons of organic growth(CORCOG)
        Pros
        
        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.
        
        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
        
        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.
        
        However, organic growth can also mean slower growth, compared to inorganic where mergers/acquisitions speed up growth.
      - Inorganic growth
        Inorganic growth is when a firm grows by merging with, or acquiring another firm.
        E.g. when Google acquired Youtube.
        
        Vertical integration
        Vertical integration is when firms at different stages of the same production process join together.
        
        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 vertical integration(SIA RODE DOWN ENGLAND)
        Pros
        
        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.
        
        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.
        
        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
        
        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.
        
        However, costs may increase because of diseconomies of scale and acquisition costs - like when eBay bought PayPal for $1.5bn.
        
        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.
        
        Horizontal integration
        Horizontal integration which is when firms at the same stage of the production process join together.
        E.g. T-Mobile and Orange merging to form EE.
        
        Pros and cons of horizontal integration(EVERY RED CAR DOES JAIL BREAK)
        Pros
        
        Firstly, horizontal mergers can lead to economies of scale which reduce a firm’s LRAC and increasing profit.
        
        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
        
        Thirdly, horizontal integration reduces wasteful competition because the two firms are now working together.
        
        Cons
        
        However, firms can also suffer from diseconomies of scale, increasing a firm’s LRAC, decreasing their profit.
        
        However, rationalisation can lead to job losses because duplicated departments will be fired.
        
        However, horizontal integration can lead to brand dilution if the firm's’ brands are very different.
        
        Conglomerate integration
        Conglomerate integration is when two firms in unrelated industries join together.
        E.g. when Pepsi acquired Quaker Oats.
        
        Pros and cons of conglomerate integration (R(e)B(e)K does bother lots )
        Pros
        
        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.
        
        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
        
        Thirdly, conglomerate integration can lead to knowledge transfers between firms which increases dynamic efficiency.
        E.g. Apple and Beats innovating new headphones
        
        Cons
        
        However, firms can also suffer from diseconomies of scale, increasing a firm’s LRAC, decreasing their profit.
        
        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.
        
        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
      - Demergers
        
        Pros and Cons
        
        For Workers
        Pros
        
        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
        
        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
        
        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
        
        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
        
        Demergers reduce diseconomies of scale.
        
        Demergers enable each new separate firm to specialise.
        
        A firm can sell one of its demerged divisions and its assets to raise funds.
        
        Demergers reduce conflicts between different cultures within a firm.