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econ theme 3 - Coggle Diagram

- - - - advantage: gain EOS, increase market share, eliminate competitor, gain degree of monopoly power, merge reduces risk of being bought out by rival company, increased revenue for larger customer base
      - disadvantages: risk of diseconomies of scale, share price of firm being bought out may rise, meaning buy out expensive, some workers may lose their job, some workers may have to move/ ravel further, assets may be sold off which is wasteful
    - - advantages: control over raw materials mean supply and quantity are guaranteed, other firms might be orevented from getting supplies (eliminate competition)
      - disadvantage: firm may not have specialist knowledge of production (may lead to diseconomies of scale) firm may find it hard to adapt to changes in consumer demand
    - - advantage: may guarantee that consumers see a firms products at their best, consumer may not be distracted by competition from other products, market research is more effective and firm can adapt in response to consumer preference
      - disadvantage: firm on its own may not have wide enough range or choice for cu=onsumers, firm might not have marketing/ sales experience, risk of larger losses.
- - - - contrasts to allocative and productive as they are more concerned with the most efficient combination of resources at one point in time (static efficiency)
      - can be achieved thru:
        innovation
        investment in new production process
        investment in human capital thru training
    - - could occur in markets like monopolies or in firms owned by or subsidised by the public sector- if wages and employment are not dependent on revenues workers may not work as hard to raise volume of sales. lack of competitive pressure can lead to slack
      - results is upward shift of AC curve
  - - - concentration ratio is the proportion of the market supplied by the largest firms in that industry
        
        market power is measured using concentration ratios
        the n firm concentration ratio measures the proportion of the market supplied by the largest n firms
        
        high concentration ratio implies industry is dominated by a few firms that have a high degree of monopoly power to exploit consumers
        
        low concentration ratio implies industry is competitive and individual firms in the industry have little ability to exploit consumers
      - interdependence means the action of one firm are dependent on the actions of another
    - - collusive behaviour may occur because it enables firms to increase profits and because they do not believe their collusion will be discovered by the regulator
      - non collusive behaviour may occur if there is no trust between firms in the market, possibility of new entrants in the market, high penalties for being found guilty of collusion
      - collusion refers to agreements among sellers to raise or fix prices and reduce output in order to increase profits (when firms collaborate with other firms in the market)
      - overt collusion is any form of direct contact between firms. there is a formal agreement among firms to control the market by fixing prices, allocating consumers, act.
        
        a cartel is a form of overt collusion. it is a formal agreement between groups of producers that limit output in order to manipulate prices. might also engage in collusive bidding for contracts and dividing the market between the firms involved
      - tacit collusion results from situations where firms act individually but jointly exercise market power with other competitors. eg by following the market leader in raising prices, there is an implicit (unspoken) agreement with nothing in writing
    - - price wars- when price cutting leads to retaliation and other firms cutting prices, meaning the original firms again want to cut prices to increase sales
      - predatory pricing- cutting prices below average cost of production (prices may be below AVC). used in short term, once firms have been forced out the market, firm raises price back up
      - limit pricing- involves cutting prices to the point that deters new entrants from entering the market. may also be used to discourage incumbent firms (already existing firms in the market) from expanding.
  - - - benefits:
        innovation of products
        lower prices (may produce at lower AC so prices may be lowered)
      - costs:
        less choice
        higher prices (restrict supply and increase price to maximise profits)
        lower quality (no competition)
        X-inefficiency
    - - benefits:
        better job security
        higher pay/ perks
      - costs:
        weak bargaining power
        profits used to replace workers with machinery
    - - benefits:
        higher tax revenue (large firms pay more corporation tax which is a tax on profits)
        lower unemployment
      - costs:
        tax avoidance
        higher rate of inflation
    - - necessary conditions:
        market power
        ability to separate markets
        price elasticities of demand must be different in the different markets
        cost of keeping markets separated is less then the increased profits gained from price discrimination
      - for consumers
        
        benefits:
        lower prices (higher consumer surplus) for those in the market where demand is elastic
        may benefit from better quality goods and services
        helps consumers who otherwise wouldn't be able to afford the product
        
        costs:
        higher prices (lower consumer surplus) for those where demand is inelastic
        creates unequal distribution of income (consumers pay higher prices while shareholders gain higher dividends)
      - for producers
        
        benefits:
        higher revenues and profits
        may enable a firm to provide a product or service that would otherwise be unprofitable without price discrimination
        
        costs:
        might create a poor image for the company
        costs involved might outweigh extra revenue gained from price discrimination
  - - - types of barriers to entry
        
        artificial (strategic) barriers are deliberately imposed and can be seen by the regulators as illegal. EG:
        predatory pricing
        limit pricing
        loyalty schemes
        
        natural (structured) barriers- exist due to the nature of the business or market. EG:
        EOS
        high start up costs
        ownership of key resources
        
        legal barriers are imposed by authorities in cases where too much competition might be seen as working against the interest of the consumer. EG:
        patents
        state owned franchises
        license to allow firms to operate
      - types of barriers to exit (often referred to as sunk costs)
        
        advertising
        
        costs of closure (redundancy costs, loans, costs of terminating contracts early)
        
        specialised machinery- cant be transferable to other industries
- - - - measures to reduce:
        provision of affordable housing
        subsidies towards removal expenses
        improvements in transport
    - - measures to reduce:
        training and retraining schemes
        apprenticships
        improvements in job information
        reduce regulations, licensing or educational requirements
  - - - advantages:
        might prevent exploitation
        might reduce poverty
        might eliminate unemployment trap (where it is financially better not to go to work and rely on state benefits)
      - disadvantages:
        might cause unemployment
        might be inflationary if it leads to higher costs that are then passed on by firms in higher prices
    - - advantages:
        may reduce income inequality
        may allow higher wages to be earned by a wider group of workers
      - disadvantages:
        may lead to shortages of certain types of workers
        can destroy incentives
- - - - economies of scale occur when an increase in the scale of production results in a more then proportionate increase in output, causing a fall in LRAC
        
        EOS are a long run concept as a change in scale of production implies that all resources are variable
      - internal EOS arise when a firm grows larger and benefits from lower LRAC
        
        technical: eg larger warehouse or shop can hold more per square metre
        
        marketing: as a firm grows bigger the cost of advertising is spread out over a larger amount of potential consumers
        
        commercial: large firms can bulk buy from their suppliers. because they buy a large amount at a steady rate they are likely to get better deals
        
        managerial: larger firms can increase efficiency by employing highly skilled and more experienced managers who specialise in managing particular parts of the business
        
        financial: large firms can issue shares on the stock market and can do deals with lenders to borrow at a lower rate of interest
        
        risk bearing: large firms can spread risk by diversification- they can sell a wider range of goods or sell in a wider range of markets
      - external EOS arise when a whole industry grows larger and firms in that industry benefit from lower LRAC
        
        types include:
        improvements in transport that benefit all firms
        new methods of production
        skilled labour may be attracted to an area that gets a reputation for specialising in a particular service.
      - minimum efficient scale= output where a firms LRAC curve stops falling or where costs first reach a minimum
        
        between MES and the point just before the LRAC starts to rise (the horizontal part of the curve), there may exist constant returns to scale which is where an increase in scale of production results in an exactly proportionate increase in output
      - diseconomies of scale occur when LRAC increase as output increases
        
        x inefficiency: as a firm increases in size, administration costs may increase disproportionately.
        
        poor communication: lines of communication between managers and workers may become complex, as a result workers may experience delays in getting information
        
        demotivation: large businesses tend to be impersonal and workers may not feel valued. productivity likely to decrease
        
        poor coordination: large firms can become difficult to manage especially if they are operating in different countries with different cultures/ languages/ hours of working. therefore productivity may fall and average costs increase
        
        types of external diseconomies of scale include:
        might be higher costs
        congestion could occur if an industry located in a particular area grows rapidly- this would increase costs of transporting raw materials and finished goods
        as industry grows, resources needed by that industry increase
- - - - when this happens, the firm is at equilibrium. this means there is no tendency for the firm to increase or decrease output because either one of those would reduce the profitability of the firm.
  - - - when this happens firm cuts its price down
- - - - may result in dynamic inefficiency as businesses lost the incentive to innovate and have less profit to do so
    - - difficult to do as regulators dont have as much info as the monopoly
  - - - benefits include more choice for consumers and increased innovation
        costs include small businesses might struggle with EOS
    - - improves efficiency thru competition
        should lower costs, increasing productive efficiency, can lead to dynamic efficiency
        however does encourage creaming of markets which is where firms only provide a service in the most profitable areas so reduced consumer protection
    - - benefits include driving down gov spending and improves service quality, encourages innovation
        drawbacks include risks of corruption, bid rigging, short term cost cutting that may effect quality of public services
    - - benefits include improved service quality, lower prices, increased innovation due to competitive pressures
        costs include potential short term job losses, reduced public control over essential services