Flashcards · YEC11 · A Level Topic 3

Business behaviour (A Level) flashcards

36 cards on A Level Topic 3, subtopics 3.3.1 to 3.3.5. Pick a subtopic or study them all.

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3.3.1 Types and sizes of businesses

Not-for-profit organisation: An organisation whose surplus is reinvested in its purpose (social or charitable aim) rather than paid to owners. It can still earn a surplus.
Organic growth vs merger vs takeover: Organic: growth from within, often funded by retained profit; slow, low risk. Merger: agreed combination of firms. Takeover: purchase of control of another firm, agreed or hostile.
Horizontal, vertical and conglomerate integration: Horizontal: same stage, same industry. Vertical: a different stage of the same chain (forward towards customers, backward towards suppliers). Conglomerate: an unrelated industry.
Profit, revenue and sales maximisation: the conditions: Profit maximisation: MC = MR. Revenue maximisation: MR = 0. Sales (volume) maximisation: the largest output where AR = AC (normal profit).
Principal-agent problem: Owners (principals) and managers (agents) have different aims, and managers know more. Managers may pursue revenue, growth, pay or status instead of profit. Fixes: profit-related pay, share options, independent directors.
Satisficing: Aiming for an acceptable level of profit (and other goals) rather than the maximum, to satisfy several stakeholders.
Why do some firms stay small?: Niche or local demand, personal service and flexibility, the owner's choice, and lack of access to finance.

3.3.2 Revenue, costs and profits

AR and MR: AR = TR ÷ Q and always equals price (the demand curve). MR = ΔTR ÷ ΔQ. MR lies below AR when the firm must cut price to sell more.
Law of diminishing returns: In the short run, as more of a variable factor is added to a fixed factor, the marginal product eventually falls, so marginal cost rises. Falling MP is not falling total product.
Where does the MC curve cut AVC and ATC?: At their minimum points, from below. MC ignores fixed cost. AFC falls throughout and never reaches zero.
Economies of scale vs diminishing returns: Economies of scale: long run, all factors change, LRAC falls as output rises. Diminishing returns: short run, at least one factor fixed.
Internal vs external economies of scale: Internal: from the firm's own growth (technical, purchasing, financial, managerial, marketing); a movement along LRAC. External: from growth of the industry; a downward shift of LRAC.
Normal profit vs supernormal profit: Normal profit: the minimum reward to keep the entrepreneur in the industry; counted as a cost (AR = AC). Supernormal profit: profit above normal (AR > AC).
Short-run vs long-run shutdown point: Short run: shut down if price (AR) falls below minimum AVC. Long run: leave the industry if AR is below minimum AC. A firm making a loss may still stay open in the short run.

3.3.3 Market structures and contestability

Productive, allocative and dynamic efficiency: Productive: output at the lowest average cost (MC = ATC). Allocative: P = MC; resources make what consumers value most. Dynamic: falling costs and new products over time, from investment and research.
X-inefficiency: Costs above the lowest possible because of weak cost control or little competitive pressure: the actual cost curve sits above the lowest possible one.
Concentration ratio: formula and example: CRn = sales of the n largest firms ÷ total market sales × 100. Top three sell 45, 30 and 15 in a market of 150: CR3 = 90 ÷ 150 = 60%. It measures concentration, not behaviour.
Perfect competition: characteristics and long-run outcome: Many firms, identical products, perfect information, no barriers; each firm is a price taker (P = AR = MR). Long run: normal profit only, allocatively and productively efficient.
Monopolistic competition in the long run: Many firms, differentiated products, low barriers. Entry removes supernormal profit, so AR is tangent to ATC: normal profit, but with excess capacity and P > MC, so neither productively nor allocatively efficient.
Oligopoly: interdependence and the dominant strategy: A few large firms with barriers to entry; each firm's best choice depends on rivals' choices. A dominant strategy is the best choice whatever the rival does. Collusion may be formal (a cartel) or tacit (price leadership).
Monopoly: profit-maximising output and price: Output where MR = MC; price read up to the demand (AR) curve. For a straight-line demand curve P = a − bQ, MR = a − 2bQ.
Conditions for third-degree price discrimination: Market power, groups with different PED, and the ability to separate the markets so there is no resale. The less elastic group pays the higher price.
Contestable market: Rivals can enter and leave cheaply and quickly (low sunk costs), so the threat of hit-and-run entry restrains incumbents' prices and profits. It does not need many firms.

3.3.4 Labour markets

Derived demand: Demand for a factor such as labour exists only because the final product is wanted. Demand for labour shifts with demand for the product.
Factors affecting the elasticity of demand for labour: Ease of substituting capital for labour, the PED of the final product, the share of labour in total costs, and time (more elastic in the long run).
What happens to wages and employment when demand for labour shifts vs when supply shifts?: Demand shifts: wage and employment move the same way. Supply shifts: they move in opposite directions (more supply: lower wage, more employment).
Effect of a national minimum wage: competitive market vs monopsony: Competitive market, set above equilibrium: unemployment (supply exceeds demand). Monopsony: a minimum wage can raise both the wage and employment, up to a point.
Geographical vs occupational immobility of labour: Geographical: workers unable or unwilling to move to where jobs are (housing costs, family ties). Occupational: workers unable to switch easily between jobs or industries (skills mismatch). Both cause structural unemployment.
Nominal pay rises 5% and inflation is 3%. Real change in pay?: 1.05 ÷ 1.03 − 1 = 0.0194, a real rise of about 1.9%.

3.3.5 Government intervention

Price regulation vs profit regulation of monopolies: Price regulation caps the price, often at inflation minus X; a cap too low can hurt quality and investment. Profit regulation limits the rate of return on capital; the firm may overstate its capital.
Inflation is 4% and X is 1.5%. What does an inflation-minus-X price cap allow?: Prices may rise by 4 − 1.5 = 2.5%. The firm gains only by cutting costs faster than that.
Privatisation vs deregulation vs nationalisation: Privatisation: transfer of state-owned assets to private owners. Deregulation: removing rules and entry limits. Nationalisation: transfer of private assets to state ownership. A privatised firm can still be tightly regulated.
Regulatory capture: The regulator comes to act in the interests of the industry it regulates rather than consumers.
Natural monopoly: the three pricing rules: MR = MC: profit maximising. P = ATC: normal profit. P = MC: allocatively efficient but loss-making, because ATC is still falling, so it needs a subsidy.
Ways to promote competition: Lower entry costs (grants, tax incentives), deregulation, privatisation, competitive tendering for public contracts, and trade liberalisation. Each takes time to work.
Employer NICs vs employee NICs in a labour market diagram: Employer contributions raise the cost of hiring, shifting demand for labour left. Employee contributions cut take-home pay, shifting supply of labour left.