Private Sector

·
Aim :
profit maximisation

·
owned by individuals

① sole trader -
1 person own + control

②
partnership 2/more unlimited
liability
-

share responsibilities
③ limited legal entities
company-separate
-

limited liability
-

shareholders he dividends
 Ch2 Size of Businesses

size
Measuring Turnover No . of employees Capital

① tumover (annual sales Large > 50m > 250 > 43m

② no . of employees Medium & + 50m < 250 43m

③ amount of capital invested. small ElOm 250 E10m

Micro E2m < 10 E2m

firms exist ?
Why large
D EOS significant >
-
less but large firms
② barriers of
entry
③ motives to
grow (advantages Disadvantages
1) profit & cost (EOS
Ac)
↓ 1) bureaucratic (slow decisions)

2) market dominance (higher profile >

-

change higher) 2) Coordination (supervision ↑AC)

3) large scale contracts (↑ resources 5) ↓ motivation (X communicate >
-
X
belong)
4) ↓ risks (diversified productions 4) DoS (too large firm ↑ Al)
5) survival

Why small firms exist ? Constraints on business growth

① niche markets/innovations ↓ size of market (X enough customers)
& low labour cost/Eos small ② finance
③ low barries to ③ owner's objective
entry
① flexibility ⑨ regulations (X allow
marying/takeovers
,

efficiency
Internal is external
growth intered H !
↓ ↓ D ↓ risk ① slow
↑ factors of
production marying ② worker ↑
security OX continue
building
Corganiz) ③
Internal funds if leader ba X
oring menge
External
-
Business growth W

① fast DOS ~
rationalisation

② EOS (bigyer firm) @ works lose jobs

③ 4 market domine ③ less comp - > ↑ pri

Conglomerate (T ) (no common

interest)
=
company that owns gop
of subsidaries ->
separate business

Horizontal integration vertical integration Conglomerate

diff
-

same
production stage
-

cliff prod stages 2

industries
but same
industy -

diversity
-

Eoscope
↓
-

economics of scope
Clover ↑
coss
product diversity
I market info + new matiinly
-
Demergers
split into >2 >
focus business
-
= on core

partial demeryor parent company retains stake

=
·
a

Advantages
① focus on Core

>
-

↑ profit & resum to sharehold

② ↓ Pos & Doscope

③ defensive tactic to avoid (avoid
comp authorities attention
sentiny
①
poor performe of a brush
dray down whole

>
-

demerged more efficient

Disadvantages
O cost & complexing (legal fees
② (loss of customers
,
redundancies) templary producting
dece
uncertunity
③ X benefit from EOS
⑦ import on
reputation (instability upset statehotels
⑤ employe mould &
loyalty
 BUSINESS OBJECTIVES
· Profit Maximisation >
-

MC = MR

cost/revenue (why ? [Why not ? ]

·
M
① re-investment ① X know Mc & MR
>
-

, new tech
R& D ② greater scrutiny
② dividends (shareholders ·
X attention of
comp authorities
③ costs -↑ profit >
-

↓ prices ·
anti-business investigations
>
-

I market Share >

-
force ↓ price ,
env .

① reward for entrepreneurship (take risk) ③ harm stakeholders (2)

Qp

⑳ Profit
satisficing
sacrifice profit stakeholder
>
satisfy more
· -

e .

g .
consumers" ,
workers"
gou" ,
env .

gips "
↓ ↓ ↓ ↓
bad reputation strikes
investigate bad rep
.

· Revenue maximisation >

-

MR = 0

P/cost/rev <Why ? ]
1

MC DQRLQp >
-
↑ growth EOS

② PR < Pp predatory pricing

*!
>
-

A2
> drive out comp
.
-

③ Principal-agent problem
Al = P =
D (divone blw ownership & control
Q manager (control) want to max. revenue
·

>

Qp for in job
>
leverage more
perks
-

MR

sales maximisation >

-

Ac =
AR (breakeven)
·
max growth wo loss

[Why ?
①EOS
② set lowest possible P (limit price) >
-

↓ new entries ↓ comp

.
③ Principal agent problem
④ As largest flood market ↑ consumers
loyalty
>
- -> >
-

Survival (SR) >

-

loyalty
maximise social nelfure (public sector)
 Cost Revenues Profit
Law of Diminishing Returns- SR.

· short run-at least

I fixed FoP ; long run
-
all Fop variable

· Def : variable FoP added to fixed FOP

>
-
total /
marginal product rise then fall Mp = Ap =
output
-
D Labour
productivity ↑

specialisation
·

highest pt

O
.

"
· ·
under utilisation of fixed FoP

ap (spare quota
② labour productivity 4

impa not
enough fixed FoP
·

↑
·
Mp-ve >
-

TP ↓
·
TP maximised when no more MP

a =
used all fixed FOP

costs
& cost
Marginal Average
cost - MC
= Ac = AFC

~
Mc
= + AV
AC

i ① productivity ↑
labour MCK

Die lowest pt.

> output
② labour productivity ↓ MC4

·
reflection of MP & AP (LDR)

Fixed & variable costs

wie
↑ C
/ - TVC
explicit implicit
(physical cost copp cost ,

&
fixed variable

rent (changes

T
depending on

Q produced)
new material > output
TFC =
TC -

TVC

TVC : ↑ cost at first ↑ output

to
>
-
LDR

TC = TFC + TV
a

AFL=constant
AC AVL
-

Arc = (LDR)
 Long Run costs Call variable

cost
M
LRAC O I returns to scale ( % D output >% input) = EOS

os
W
② constant returns to scale -

③ I returns to scale (Tox output <T Dinput) =

DOS

scale lowest output to EOS

> output
Min .
efficient =
exploit
Q

cost
= LRAC stops decreasing
natural
lot of fixed costs
monopoly -
a

>
-
AL =
AF) + AVC
MES
* IRAL # ↓
> output >
-
looks like AFC curve

very large output

·
starts DOS at

scall of
monies
= reduction in LRAL as
outputIt
Al =
T ↓A

Q
·
rise faster than TC

Internal External
O
Risk
Bearing-oppcostorer larger & better transport infrastructure
·

Financial-nego (Krisk) ②
·
.
↓ interest rates raw materials suppliers nearer

③ R& D
Managerial specialist managers more nearer
· -

Technical specialize > ↑ tech

machinery
·
- >
-
-

Marketing advertising costs

·
-

nego ,

Purchasing-bulk buying -
negotiate
spread cost over
large output

of easoutput
economies =
Scale
Al
too
big

S
* z(s + 1M
O control -
1) too
many worked
2) ↓ motivation - >
produc ↓ .

② communication time unclear

messages
-

③ coordination diff departments X

way
-
same

④ motivation -

less valued , easily replaced .

 reveme
Revenue in perfect comp
. Revenue in imperfect comp
.
Prevenue piner
(always by 1)
-
.

TR -

TR maximised when

*
AR =
MR = D =
P
MR =
0 (LDR)

> Q D = P

> Q

MR =RAR =

profits
Onomal (0) AR = AC (breakeven)
- ② superomal ( ) ARYAL
explicit Secon
+
·
Profit (2) =
TR -

TC
-
·
profit
(-)
-
implicit ③ subnormal AR > AC

at nomal
profit = min level of profit to keep FoP in current use (cont .

producing
P M2
p/cost/new MC P

~
1 Mc - 1

↓
AL AL

I
Al
ART A

MR P
AR
↑
= =

loss
AR = MR
AR = P
= P

(MC =

MR)
> Q
ab MR
3 Q < Q

profit) o profit o

profit =

(perfect) superomal profit subnormal profit

>
normal profit
-

(monopolistic)

Shut-down+P
=
AR = AV XAR =
AC (breakeven conditions
tell the profit
tells if firms shid cont
producing
·
us

inshutdown(perfect) ~

specta
M MC shutdow If LR

"
>
-
PCLRAC

= P =
D
>
=

= subnormal profit

Evaluation
-

AVC ? shutdown PJ AVC ?

Why cont .

produce even AR <

Why even

O recession ->
temp . full in D +
keep customer ·
pessimistic abt market

② high loans &

savings/subsidy ·
high opp.cost (declining industry)
③ hobby (X mind
losing money (
 Efficient
Allocative efficiency P MC AR
=
=

supernormal profit
Dresources follow consumer demand
②
Pr X-inefficient MC
society surplus maximised

W
③ net social benefit max
.

Productive
efficiency AC

·
lowest pt .
of AC curve

full of
·

exploitation EOS

P =
AR

·
X-efficiency > Q
waste
·

minimising
=

production on AC curve

① monopolies [static Dynamic ]

3
vs
X motivation
② public sector firs to cut waste (1 2 3) (4)
2
,
,

E
Dynamic efficiency occur
I specific production
·
re-investment of L supernomel profit (can last
long point
over time

new tech R& D

,
 Perfect comp
Assumptions of perfect competition
O many buyers (even) price takers ① homogeneous product (X
& sellers -

branding
② freedom of exit 2x
entry & manipulation/influence ⑤ profit maximisation

③ Perfect info (X secrets)

profit
mernomal SR
AR > AL Supernomal profit low barries
-

B
supernomal profit attract firms to enter

·
-
M MC
S Ac (below D)

*
Sa
↑ supply ↑ comp .
↓P .

(market
price)
D
,
=
AR ,
=
MR *
↓
,

ARz
gradually ↓ supernomal profit
D2 = =
MR2

de > Q >

normal
*

profit in LR

Market Fin

,
AL in lowest pt

profit
mmmal * MC cut subnormal o firms
profit enter
MC *
- -

........
Ac
PY
-

=
S Su
Ci
Di
ARc MRz
↓
=
=

P. P AR , D
,
profit
MR
gradually+
------------ = =
, ,

D
↓
3 S normal profit
Qp A
, MC
1 1

-m
At normal (Q + 2)
profit :

~ AE (AR M2

3
=

Ac) allstatic V

"
VPE (min pt .
on

V XE (on AC)
X DE (supernomral profit XLR sustained

Monopolish comp
physical
of
distribution marketing differentiation
Assumptions monopolistic competition -- >
⑦ ⑤ profit
① many buyers & seller
non-homogeneous products maximisation

② low barries to
entry/exit A >
-

price makers
,
PEST O non-price comp
.
good information
~

profit
supernormal 12-
use
normal profit [A + Qp :
)
X AE
P 1

↑ MC X PE

-
DE

=
Al X
=> P =
(better than
supernomal
P
monopoly
AR = D =

M
AR = P =
D ·
if P CA

> &
S >
-

LR shutdown
Qp
 oligopoly
A .

Assumptions of digopoly
① few firms dominate ④ interdependence -
price rigidity ⑤ profit max .
X sole objective
② high barriers to entry
>
-

game theory ⑥ differentiated good

collusion/carte
③ price makers , PEST
>
-
>
price
-

non
comp
.

/non price
>
-
price comp
.

.
comp

Barriers to
B .

entry

C .

Interdependence -
Game
Theory both AB X incense to change strategy
b firm
B hory another
-

Ahigha
El

equilibriregardless
change 90p
im
>
-
both AB

of what other firm does

>
-
O price rigidity (depends on non
price comp ) .

·
if I firm changes 1 +
another makes 4m if 90p.
ifB to 14m
charges 1 A
charge 90p ② temptation to collude/cartel change El
+
earn
e .

g. >
- -

if A changes 90p B
change 90p Elm > temptation collusive agreement
>
ear to cheat
-

on
-

(fear of
getting investigated by authorities)
dominant both firs benefit the
strategy
=
·
most

ESm , E3m
·

if firms collude >

game=rElm -Elm · -
·
zero sum ,

in
advertising normal
intcollusion is
aggressive advertising ?
I
·
if I low high ->
high wins -
price war

·
if both high
->
#J* but cost ↑

both low - J but costs

advertising
>
-

*
but can cheat

Collusion

=
agreements + restrict competition & maximise mutual benefits condition few time
of rival fimy (cheating possible
overcome
uncertainty restrict comp
·

.
·

(game theory
S & (prevent entry
new

agreement) (X
Overt (v formal Tacit formal
agreements V
monitor X
cheating
·

price fixing , output levels

,
·
unwritten rules

shares
price leadership
 Costs & benefits of collusion

↓ CS
↓ AE
less choice

if PED inelastic
- >
4 TM
-

price

wages t tax for

you I
>
-

(X expand sales be hi
agreed
quota ·
markets less competitive
↓
Price fixing in cartels > adv costs
-
.

1 MC

expand
e) firs
unsuccessful
if to Q

- =
cheating
>
-
↑ supply ↓ price

! recession Qp cheat
>
want
·
>
-

B
-

Mr
gov authorities
·

3
An Qp
supply dismpts eye
·

excess

Carle prott
maximising

Reasons for competitive or collusive behaviour (evaluation)

en
Competitive (price +
non price) Collusive
- lasting like monopoly
①
larger no .
of firms (t conc .
-X monitor
behaviour) ① small firms
② low barriers to ↓ supernomal profits ② high entry burries profits X attract
entry
>
new
-

>
-

③ -X fix ③ similar costs fix price

sig cost adv
I tim w/ -
price
.

④ homogeneous products ④ consumer loyalty & inertia >

-
↓
cheating
⑤ saturated market must snatch market rivals X benefit
shares) loyal to
>
or
you
-
-

incentive to cheat & ahead switch -X be of price

get X want to to
>
you
-
come

⑥ cheating ⑤ ineffective ↓ authorities

comp policy easy caught by
>
-

& loss EOS

efficiency
lose
Evaluation
gains of
monopoly efficiency
:
Eval
pros & Dos
:
,
cons
, ,

(like facit)
Price Leadership (form of facit collusion)
=
price leader (dominant firm) sets price (supernormal) -
other follows (prevent losing market share
>
-

price rigidity
 Price competition
& Predatory Pricing
>
-

drive out rivals

① lower price below AC of other

② lose ->
bankrupt leave lose market share
money , ,

③ raise
monopoly profits
>
price
-

>
-

competives may leave & re-enter (force out) when PED

> / &

-differentiation
1 lower price
Pricing
-
⑳ Penetration set lower price at first to attract gain market share LR
=
+ in

=
Set lower
price at first to attract &
gain loyalty >
-

market share L

·
most effective when PED > O (price responsive)
at first small firms X afford
risky
·

of price was
minions
· /
Price Wars = intense
rivalry multi-lateral series of
price reduction differentiation
·

slight product
price comp weak price conscious
>
non consumers
-
·
.

·
diff .
to collude
·

penetration pricing
predatory pricing
·

-
SR ↓ price
>
-
" consumers" fims
-
LK "dominant fimy be small firm close >
-
dominant absorb their market share

" consumer be ↓ firs ↑ price

* Limit
Pricing set low
enough price to
discourage new entrants (still he normal profit)
·

supernormal profit
>
-

attract new entrants more difficult for collusion & ↓ market

power
->

profit magin
a Evaluation :

↓ Pl
Pr ·

large multinational still enters market (loss-making entry

>
- established & it
profits
7
·
more effective when higher EOS (e .

g
.

manufacturing
difficult to firms / EO]
compete /large high
>
more
-

Non-price competition
branding endorsement loyalty benefits of competition
advertising &
->
·
&
,
consumer Costs
promotion ,
free samples ,
famous celebrities
-
Price
↑ ragg
quality/unique producers ⑪
·

selling pts (e g.
.

gluten free ·
:

sales I market share

·

product placement (feat ) >

-

consumer awareness ⑪↓ profits -↓

wages
.

·
after sales service
->
consumer loyalty -
MC
I new profit
calls free check ups original profit

"mem
, Ac

of works ↑ of labour !
quality
· >
-

wages
·

ethical/charity/environmental >
-gain in
consumer

surplus

Fin
price ⑪ cheaper price
:
·
consumers
3

+D =
+x -
↑ market share & power
-
⑪ 22 small firs leave -
push up price
⑪ + Ac Cadr production) .
+

consumers : + choice ↑
quality
·

⑪ costs +↑ price ,
differentiation tucting
 Other Anti-competitive practices

↓
zontulagreements agreementestages of
cal production
① price D dealing
fixing exclusive
& territory
② output quota ·

only buy from I supplier sole distributor

③ market division (territories) +

monopolist
·

only sell I
to
buyer
① advertising bare - maintain share ② min . resale price
>
-
avoid price was
,
↑ price

⑤ joint boycott (boycott new entrants) ③ long term

supply contracts
⑧ higher ↓
bid-rigging lagreed to share
change suppliers
X
bid
comp
-> >
-
-

⑦ quanting discounts (retailers he discount)

Hes
t of anti comp.
~

⑪
output↓ Cefficiency ↓
·

·
no · of competitors ↓
>
-

SV >
-
Pt

choice ↓
·

⑪ :

time
save
searching
·

for lover
price
↑ promotions ↓ price
·

product bundling
quantity discounts

market allocation
>
monopolist
-

Stable
supply
·

long term contract

 Monopoly 1
(sure for LR)
Assumptions of
monopoly (1 firm > 25% market share) M2 breakeven
P Al

:
① I (pure/legal) Shutdous
seller
dominating market

② differentiated
products ->
price makes
supernormal
③ barriers to supernoval profits profit
high entry + LR

① imperfect info D = AR = P
M
profit
⑤ maximises
· >

Loss in society surphy

,
XAE XPE XXE VDE
At QcPc Callocative efficient) also ·X
·
LR supernomal
may comp
·

M
MC

·
hv DOS cost burriers
CS A B
high
>
+ + C excess
-

:
·

CS
PS : D + E - ↓
inefficient
he profits)
statically reinvest as capital,
monopolist

>
At QPm (profit max)
, tech
,
.
etc

CS : A

nationinvest)
PS B D
Loss of consumer surplus : +

>
-
market failure
-

give profits to shareholder

·
pay debts
-

(X reinvest
wages t as capital
-

② DOS/EOS
③ objective might X
profit max

sales max ,

① regulation of monop V reduce ineff

D2 (efficiencies)
⑤ price discrimination worsen monop
7 .
⑥ still he comp (X 100%
.
pure)

Dinamicetype
>
- still he some incentive >
-

efficiency
Cost & Benefits of monopolies of
good cluxury or necessit
o
native inefficiency PLMC + innovation
>
-

exploit consu .
>
-

↓CS ·
supernonnal profit in LR-re-invest (e .

g R&
.

D)
>
-
↓ choice
,
output , quality ② Greater EOS
(refer
·
to diay above DWL) 1

:.
② DOS (XPE) -
XAL care min pt App for mono
③ X
inefficiency
X ↑A
Q at AE

manufacturing
+

comp incentive
·

car

④ inequalities in
necessity markets industris supermarket ,
>
for food & drinks - poor "
monopolie high EOS advantage
Pr X-inefficiency MC ③ natural monopoly

supe
④ cross subsidise
subsidise
AC
·
use
supernoud profits to good w/loss

· P
 Natural Monopoly
DOS (LRAC ↓ I firm
only EOS
continuously) only supply whole market at low prices
=
no =

O
huge fixed costs Al = ③
comp .
undesirable (2nd firm XEOS
advantage
>
-

leave
② ↑TEOS of -
huge quanting > wasteful
duplication resources
>
-
-

& X DOS + AE & PEUV while w/comp . XAEXPE

P,
M

---
-__
Superman a Copposite)
subnomment(loss)
↓ ---!
subsidy given t

Dos Ets
>
-

LRAL cover loss as=

if X regulated
-
·

· PARD
- -
-
- - - -
LRMC
Mr
-

easy access
>
-

XAE
&,
>
-
n
for corres
·
loss
regulation of monophy (X
>
-

AEV compuep)

Price Discrimination ③
&
consumes
fim change diffnes todiff
=
for identical good screen

(wealthy)
O price ③ prevent
making ability2
into to
Conditions :
separate market resale
-inelastic
↑P >

monopoly identify diff PED

-

-
elastic

by collect customer info ↓P

-

block
1st degree 1) 2nd degree PD Is become

diff prices pr diff

=
charged max
price consumers
can
pay
=
charging
diff price leg -20 for first 10 units

I
= diff cust .
,
1 -10 for next 10 unin)
Is become
all

monopoly profit
3rd degree PD

---- 3

M
=

charging
Inelastic
diff prices for diff grps

M
elastic
↑
(elasticity
max profits

P > PL

--Y
p,
P - - -

W
MC A)
(constant
=
C
1st 32 (inelastic)

·
&

"
Ci

AR =
D
I
most affected D AR M12 constant MC
Mr
=

< >
until fixed

capacity reached

Cost & benefits of price discrimination ent

~
to
native inefficiency (PCMCS -
+ ①4 profit >
-
DEP (more re-investment potential)
>
-

exploit consumer (inelastic , 1st degree ② elastic grp cheaper price

>
-

② widen income lover income ③ subsidisation I

inequality -

may
be in lover
cross

less them
③
anti competitive policy (elastic) tax
bund ① prevent unprofitable business way
those who suffer
31 degree elastic low price a coupons from bankruptcy
very
·

↑ nelfure
limit drive out rivals p Choice
pricing
>
-
benefil
=
>
-

pure monopoly
>
-

① firs : administration cost