4.1.4 Production, costs and revenue and MARKET STRUCTURES
12 February 2026 08:58
4.1.4.1 Production and productivity
Content Additional Production and productivity
information
• Production converts inputs, or the services of factors of production such as capital and labour, into final
output.
Specialisation: concentrating on a narrow range of g/s
• The meaning of productivity, including labour productivity.
4.1.4.2 Specialisation, division of labour and exchange Division of labour: Breaking down production into separate tasks
Content Additional
information
• The benefits of specialisation and division of labour. Strategies to increase Productivity:
• Why specialisation necessitates an efficient means of exchanging goods and services, such as the use of money
as a medium of exchange.
- In-work-training for specific skills to boost production. Output per worker per hour increasing
4.1.4.3 The law of diminishing returns and returns to scale
Content Additional information
- Motivate: Perks, worker appraisals, job security, self-actualisation, enrichment
• The difference between the short run and the long Students should appreciate
run. that both the law of diminishing returns and returns to scale explain
• The difference between marginal, average and total relationships between inputs and output. - Specialist capital machinery: Cost-effective.. Increase output and QUALITY
returns. They should also understand that these relationships have implications for
• The law of diminishing returns. costs of production. - Improved raw material quality: Less time in quality assurance, inspecting and rejecting defunct products.. LABOUR spent in productive areas
• Returns to scale.
• The difference between increasing, constant and
decreasing returns to scale.
4.1.4.4 Costs of production Advantage specialisation:
Content Additional information - Increase output: Concentrate on what they are specialist in..
• The difference between fixed and variable costs. Students should be able to calculate different costs from given data. - Goods and Services diversified:
• The difference between marginal, average and total costs. They should also be able to draw and interpret cost curves. - Allocative Efficiency: follow consumer demand.. Non-wasted products ( Static efficiency)
• The difference between short-run and long-run costs. - COMPARATIVE ADVANTAGE: lowest opportunity cost of production.
• The reasons for the shape of the marginal, average and
total cost curves.
• How factor prices and productivity affect firms’ costs of
production and their choice of factor inputs. CONS specialisation:
4.1.4.5 Economies and diseconomies of scale - FINITE RESOURCES: Primary Resource Dependency/ inelastic supply of raw materials. If currency appreciation leads to higher demand of raw commod ity exports…
Content Additional information make other exports less price-competitive ( GDP growth decrease and DIVERSIFICATION decrease) " Dutch disease"
• The difference between internal and external economies of Students should be able to categorise and give examples of both
scale. internal and external economies of scale. - Constant tastes changing: reliant on fashionable tastes.. Need DIVERSIFICATING OF SPECIALISATION. MOBILE FOPS
• Reasons for diseconomies of scale. Students should understand the significance of the minimum
• The relationship between returns to scale and economies or efficient scale for the structure of an industry and barriers to entry.
diseconomies of scale. - De-industrialisation: If another country that specialises had the absolute advantage… RE-STRUCTURING OF ECONOMY meant more focus on non-specialised sectors ( financial)>.
• The relationship between economies of scale, diseconomies of - . GLOBAL PRICE FOR MANUFACTURED GOODS DOMINATE UK MARKETS= UK firms downsize/ structural unemployment
scale and the shape of the long-run average cost curve.
• The L-shaped long-run average cost curve.
• The concept of the minimum efficient scale of production.
Pros division of labour:
4.1.4.6 Marginal, average and total revenue
- Workers very good at current role= TIME SAVED: Productivity increase= wage rise = QUALITY IMPROVEMENT.. Productive efficiency
Content Additional information
• The difference between marginal, Students should be able to calculate marginal, average and total revenue from given data.
average and total revenue. They should also be able to draw and interpret revenue curves. - Given specialist machinery: cost effective.. Productivity rise… wages rise
• Why the average revenue curve is the
firm’s demand curve. - LOWER PRICES: of divided labour goods.. Productivity rise and time saving.. Capital machinery utilisation.. Cost of production rise.. Low prices and CONSUMER SURPLUS INCREASE
• The relationship between average and
marginal revenue.
• The relationship between marginal
revenue and total revenue. CONS division of labour:
4.1.4.7 Profit FUNCTIONS OF PROFIT:
Content Additional information - Quality suffer: VALUE WORK LESS.. Long hours.. Demotivational
• Profit is the difference between total revenue and total costs. 1) Incentive to invest: retained profits.. S
• The difference between normal and abnormal (supernormal) profit. - High labour turnover|: Boring repetitive tasks.. Move to job that’s more enriching innovation ( DYNAMIC EFFICIENCY)), A
• The role of profit in a market economy. makers and withhold a DEGREE of Mo
- Increased administration and recruitment cost
4.1.4.8 Technological change DIFFERENTIATING A PRODUCT
Key source of non-leveraged finance for dyn
Content Additional information develop a COMPARATIVE ADVANTAGE… EXP
• The difference between invention and innovation. Students should understand how the process of creative pound to to higher pound demand = IMPORT
- HYSTERESIS: LR unemployment… over-specialisation= occupationally immobile.. Tech improvement.. COMPARATIVE ADVANTAGE:; increase structural unemployment..
• Technological change can affect methods of production, productivity, destruction is linked to technological change.
efficiency and firms’ costs of production.
• Technological change can lead to the development of new products, the More division of labour = more STANDARDISDED G/S.. Little innovation and INTRAPRENEURSHIP* 2) Reward for risk taking and Entreprene
development of new markets and may destroy existing markets. CURRENT FOPS to generate new PROD
Interrelated R&D with other nations ( UK pre
• Technological change can influence the structure of markets.
currency areas….freer flow of goods and serv
4) PRICE MECHANISM EFFICIENT IN RESO
- Sira.. Profit-motivated firms keep costs
- MAXIMISE all internal Economies of Sc
- STATIC AND DYNAMIC EFFICIENCY GAI
Increasing, Constant, Decreasing RETURNS TO SCALE LONG RUN
LAW OF DIMINISHING MARGINAL RETURNS SR analysis: ANALYSIS :
- "In the short run there are at least q fixed factor of production.. As there are more variable - In the LR- All FOPS are variable…
factors of production added to a STOCK of fixed FOPs.. Total product/Marginal product rises - LRAC: shows RETURNS TO SCALE ( Economies of scale = Increasing R.T.S)
then Falls"***
MES: Full Economies of Scale exploited at the lowest level of output possible
1) INCREASING RETURNS TO SCALE: %CHANGE inputs< %Change output
ECONOMIES OF SCALE:
Financial: Big firms negotiate lower IRs for investment… good credit history
Marketing: Use size to negotiate Bulk deals and discounts.. TC RISING SLOWER THAN OUTPUT
Technical: Specialist machinery.. Marginal productivity of capital rise.. Output rising more than TC
Managerial: Specialist managers to manage the organisation… OUTPUT RISE FASTER THAN TC
Purchasing: Bulk buying.. Discounts… Cost of production FALL
Land = variable FOP…
INITIALLY: More labour.. Productivity improvements::: UNDERUTILISED FIXED FOPS used up***
SPECIALISATION gains = INCREASE IN MP and
decrease in MC** External Es of S:
- Transport infrastructure improvement: Larger firm can get easier footfall access.. ACCESIBILITY
More HIRED: FIXED FOP a CONSTRAIN ON PRODUCTION** = Labour productivity fall Strategic suppliers move closer to a firm: MATERIAL suppliers closer… more access to raw materials at
- MP fall… MC increase LOWER TRAMSPORT COST… TC and Unit cost fall
R&D firm closer to firm: Decrease TC and increase productivity of capital…. PROCESS AND PRODUCT
INNOVATION (cheaper DYNAMIC EFFICIENCY GAIN)**
2) Constant RETURNS TO SCALE ( %Change inputs = %Change output)
3) DECREASING RETUERNS TO SCALE ( %CHANGE INPUTS> %CHANGE OUTPUT)
DISECONOMIES ( LRAC RISING MORE THAN OUTPUT)
- Communication: Size growth.. More decentralisation.. Wider spans of control. No hierarchical
harmony.. Conflated objectives and strategy
- Coordination: More bureaucracy and red tape… complex management layers.. LESS SMOOTH
COMMAND CHAIN= NO STREAMLINED PRODUCTION
- Control: Mergers/takeover's/ offshoring. Franchising/ Horizontal integration/ backward vertical
integration… CLASH OF CUTUTRES OF MAGAEMENT. Franchisee do not implement core Objective
and strategy of parent company .. LOSS OF CONTROL)
- MOTIVATION: Workers alienated.. Feel less valued.. DEMOTIAVATIONAL= AC rise due to labour
turnover// FASTER THAN OUTPUT***
MONOPSONY PRODUCT MARKET
" One dominant buyer with price making power
Use buying power to DRIVE DOWN SUPPLIER PRICES
- PROFIT MAXIMISE
- SMALL NO. SELLERS TO THE MONOPSONIST ( PRICE TAKERS, high entry barriers)
i) CONSUMER IMPACT:
Lower prices: monopsonist use buyer power to drive input prices down
REDUCE PRODUCTION COSTS
CS increase.. Affordability of essential goods ( EQUITY)
EVAL
- No guarantee of TRANSLATED PRICE CUTS
Firms use excess funds to REWARD SHAREHOLDERS, higher wages, reinvestment or DELEVERAGE
- Consumer suffer from lower quantity.. MONOPSONIST DRIVE SUPPLUER PRICE DOWN HEAVILY
Suppliers less willing and able to supply good.. Reduce Quantity available.. SHORTAGES of essentials**
Ii) Firm impact:
Economics Page 1
, OBJECTIVES OF FIRMS:
PROFIT SATISFYING
1) PROFIT MAXIMISATION: MC=MR/ /
Shareholder free market primary goal.. Receive dividends and REINVEST to innovate for
DYNAMIC GAIN
- Retained profit: Source of non-leveraged investment… SR and LR growth.. JOB
CREATION and PROFITABILITY RISE
- Profit the REWARD FOR RISK TAKING, ENTREPRENERURIAL BEHAVIOUR
- R&D for product development and NON-PRICE INTERNATIONAL COMPETITIVENESS
Firms benefit via lower prices.. ALWAYS KEEP REVENUE OVER COSTS. ( no x-inefficiency…
ALLOCATIVE EFFICIENCY -- CONSUMER SURPLUS AND CHOICE)
EVALUATION:
1) IMPERFECT INFORMATION ON MC&MR value: Incorrect point.. PROFIT MAX STILL
HOLDS** if adopt COST PLUS PRICING (price differential + Cost of production)
2) SCRUTINY: from CMA if large unregulated SNPs made ( Excessive pricing , P>MC?,,
collusion and monopoly labelling)..
Forced PRICE REDUCTION.. FORCED SHUTDOWN OF ASSETS… PROFIT REGULATION, PRICE
REGULATION, WINDFALL TAX ON PROFITS, ROCE added to a Percentage of costs
3) Profit maximisation not the best strategy/: MARKET SHARE? Flooding the market ?
BRAND AWARENESS?
Overwhelming Cost advantage holder?
2) PROFIT SATISFYING : Sacrificing profit to satisfy ALL STAKEHOLDERS*
Profit max benefit internal stakeholders, but HARM WORKERS ( low wages, consumer's face
high prices)
ENVIRONMENTAL GROUPS believe in ETHICAL AND MORAL DECISIONS… FIRMS REDUCE SNP
generation to satisfy needs of ALL STAKEHOLDERS
3) REVENUE MAXIMISATION: MR=0 .. Low price and Higher Quantity
PREDATORY PRICING: drive out contestability/rivals,, impose greater MARKET DOMINANCE
ECONOMIES OF SCALE: Higher quantity than profit max.. INCREASING RETURNS TO SCALE
AND COST-LEADER IN THE MARKET**
EVALUATION:
- PRINCIPLE AGENT ISSUE*: Divorce ownership of control: managers make revenue maximising
decisions to maximise their OWN BENEFITS.. Justify HIGH SALARIES, LONGER OFFICERS
ource of investment for firms into product and process
pple's annual iPhone model designs… Ability to act as price-
nopoly power if get 1st MOVERS ADVANTAGE in
amic gains*** IMPROVE INTL COMPETITIVINESS and 4) SALES MAXIMISATION: AC=AR..
ORT-LED GDP GROWTH.. CA deficit improvement… Strong Lower price and Higher Quantity then P max and Rev max
S CHEAPER.. Improved material living standards** i) FLOOD THE MARKET: in highly competitive.. Establish market presence.. Allow BRAND
LOYALTY BUILD UP.. LONG RUN STRATEGY CHANGE TO PROFIT MAXIMISATION DUE TO
MONOPOLY POWER GAIN*****
eurial behaviour: Incentive for risk taking with the USE OF ii) ECONOMIES OF SCALE: AC falls as Quantity rises.. Market share increasing.. More price
UCTS and new TECH ( Driverless car technology globalised) competitive
-Brexit) .. Allow for greater INTERGRATION= Optimal
ices.. CHOICE INCREASES FOR DOMESTIC CONSUMERS** EVALUATION:
I) Divorce ownership of control: Managers justify benefits for themselves based off High
sales quantity figures
OURCE ALLOCATION* II) ALLOCATIVE EFFICIENCY: ( AR=MC/ P=MC)… consumer and producer surplus
minimal and turnovers high ( NO X-INEFFICIENCY).. MAXIMISATION
ale and CONSISTENT INVESTMENT to be AHEAD of rivals Resources perfectly following consumer demand
NS from effective functioning of SIRA price mechanism*
6) SURVIVAL: highly competitive market.. Survive introductory days of market entry..
BUILD REPUTATION, PRESENCE, DIFFERENTIATION, PRICE ,MAKING ABILITY ,, LONG RUN
OBJECTIVE CHANGE***
7) CSR: Going above the legal requirements. ECONOMIC, LEGAL L, ETHICAL ,
Barriers to Entry and Exit : PHILANTHROPISM
Environmental acknowledgement: Issuing MINIMUM PRICES FOR SUPPLIERS
Charity and work benefits
1) Economies of Scale ( Natural monopoly): Improve image of the economy
HUGE MINIMUM EFFICIENT SCALE of production ( Huge level of output needed to maximise EOS at
lowest level)
- Huge economies of scale.. OVERWHELMING COST ADVANTAGE… New firms are EASILY priced out
and CANNOT COMPETE due to size of the MES ( would be wasteful duplication of resources)
EFFICIENCIES :
2) High SUNK and SINK costs: deterrent to entry.. Costs that cannot be recovered ( STRATEGIC
B.exit)
Allocative: (P=MC)
Contractual agreements on capital machinery utilisation ( Sale and leaseback/ Leasing equipment)…
Consumer surplus and producer surplus maximisation… IN HIGHLY
Early leaving fee/charge..
COMPETITIVE INDUSTRY
Consumers receiving exactly what they are willing and able to pay for
3) Legal barriers:
***
PATENTS.. Strict health and product safety laws… excessive border checks due to imported raw
HIGH CHOICE,, LOW PRICE,,,, MAX C.S
materials ( increased by more protectionist, non -conventional methods,, Red-tape)
- Producers AHEAD OF RIVALS not meeting consumer DEMAND.
Increase market share and INCREASE PROFITS*
4) Strategic barriers:
PREDATORY PRICING… Price below PROFIT Mx price to draw out competition and LIMIT PRICING TO
PRODUCTIVE ( minimum AC)
normal profit levels
- ALL POSSIBLE ECONOMIES OF SCALE EXPLOITED ( MES)
HEAVY CONSUMER INERTIA TO 1 BRAND
- High output, low cost, LOW AC translated into LOWER PRICES..
HEAVY N0N-PRICE COMPETITION ( IN Collusive oligopolies… similar costs.. Products.. Barriers to entry
Market share gain ( SALES MAXIMISATION/REVENU MAX)
and exit. High consumer inertia).. Due to PRICE RIGIDITY ( tacit - informal / overt-formal agreements to
fix a price and a quantity)
**DYNAMIC EFFICIENCY: Long RUN SUPERNORMAL PROFIT-
GENERATION
- Reinvested into R&D product and process development..
Competitive advantage in terms of CONSUMER CHOICE OF
Barriers to EXIT:
PLETHORA OF INNOVATIVE, NEW PRODUCTS and
- Redundancy cost
INTERNATIONAL COMPETITIVENESS
- ASSET SALES: if cannot get price higher than price paid for.. Do not leave
- ( ECONOMIES OF SCOPE)
- CONRRACTUAL AGGREMENTS: Utilities.. Cancellation fee large with EARLY CONTRACT
- Tech advances, innovation
DISSOLUTIONS*
- INVESTMENT INTO EFFIEICNT PRODUCTION PROCESSES
( OPERATIONS)… Help achieve lower operational costs,
overheads.. Help achieve productive efficiency and COST
ADVANTAGE (Automation, robotics, AI implementation)
Product development= MONOPOLY POWER : [PATENTABLE artificial
barriers to entry can be made ***]
USP in competitive markets…
X-EFFICIENCY: Producing on the AC curve.. No wasteful resources and
MINIMISING UNIT COSTS
- In highly competitive industry.. To CHARGE LOWEST PRICE
MARKET STRUCTURES:
STATIC EFFICIENCY:
Allocative. Productive, X-efficiency
1) PERFECT COMPETITION: DYNAMIC IS ONLY THE LR assuming SNPs are
REINVESTED not used to deleverage*
Many buyers and sellers: 0 concentration
ratio
Homogenous goods: Price takers/ No
differentiation.. Price rise would get no
influence, lose ALL customers. Firms
FOLLOW price fall
NO barriers to enter/exit: COSTLESS… SNP
attraction can attract entry and ALLOW
entry instantaneously.. ONLY SR SNPS
PERFECT KNOWLEDGE: on prices , costs and
tech used
FIRMS PROFIT MAXIMISE MC=MR
Short run Perfect competition:
i) SUPERNORMAL PROFIT
Economics Page 2
, MONOPOLY
1) 1 dominant firm: Pure monopoly is 100% share.. Theoretical is 25%
2) Differentiation: Firms are price makers.. Downward sloping PED inelastic AR curve.
Governed by demand curve ( only set 1 price and quantity)
3) High entry and exit barriers #: Difficult and costly.. SNP attraction.. Unable to
penetrate the market.. LR SUSTAINED SNP by monopolist only
4) Imperfect info: of prices and market conditions… for consumers and producers.
1) FIRMS PROFIT MAXIMISE: MC=MR
Economics Page 3
, Economics Page 4
12 February 2026 08:58
4.1.4.1 Production and productivity
Content Additional Production and productivity
information
• Production converts inputs, or the services of factors of production such as capital and labour, into final
output.
Specialisation: concentrating on a narrow range of g/s
• The meaning of productivity, including labour productivity.
4.1.4.2 Specialisation, division of labour and exchange Division of labour: Breaking down production into separate tasks
Content Additional
information
• The benefits of specialisation and division of labour. Strategies to increase Productivity:
• Why specialisation necessitates an efficient means of exchanging goods and services, such as the use of money
as a medium of exchange.
- In-work-training for specific skills to boost production. Output per worker per hour increasing
4.1.4.3 The law of diminishing returns and returns to scale
Content Additional information
- Motivate: Perks, worker appraisals, job security, self-actualisation, enrichment
• The difference between the short run and the long Students should appreciate
run. that both the law of diminishing returns and returns to scale explain
• The difference between marginal, average and total relationships between inputs and output. - Specialist capital machinery: Cost-effective.. Increase output and QUALITY
returns. They should also understand that these relationships have implications for
• The law of diminishing returns. costs of production. - Improved raw material quality: Less time in quality assurance, inspecting and rejecting defunct products.. LABOUR spent in productive areas
• Returns to scale.
• The difference between increasing, constant and
decreasing returns to scale.
4.1.4.4 Costs of production Advantage specialisation:
Content Additional information - Increase output: Concentrate on what they are specialist in..
• The difference between fixed and variable costs. Students should be able to calculate different costs from given data. - Goods and Services diversified:
• The difference between marginal, average and total costs. They should also be able to draw and interpret cost curves. - Allocative Efficiency: follow consumer demand.. Non-wasted products ( Static efficiency)
• The difference between short-run and long-run costs. - COMPARATIVE ADVANTAGE: lowest opportunity cost of production.
• The reasons for the shape of the marginal, average and
total cost curves.
• How factor prices and productivity affect firms’ costs of
production and their choice of factor inputs. CONS specialisation:
4.1.4.5 Economies and diseconomies of scale - FINITE RESOURCES: Primary Resource Dependency/ inelastic supply of raw materials. If currency appreciation leads to higher demand of raw commod ity exports…
Content Additional information make other exports less price-competitive ( GDP growth decrease and DIVERSIFICATION decrease) " Dutch disease"
• The difference between internal and external economies of Students should be able to categorise and give examples of both
scale. internal and external economies of scale. - Constant tastes changing: reliant on fashionable tastes.. Need DIVERSIFICATING OF SPECIALISATION. MOBILE FOPS
• Reasons for diseconomies of scale. Students should understand the significance of the minimum
• The relationship between returns to scale and economies or efficient scale for the structure of an industry and barriers to entry.
diseconomies of scale. - De-industrialisation: If another country that specialises had the absolute advantage… RE-STRUCTURING OF ECONOMY meant more focus on non-specialised sectors ( financial)>.
• The relationship between economies of scale, diseconomies of - . GLOBAL PRICE FOR MANUFACTURED GOODS DOMINATE UK MARKETS= UK firms downsize/ structural unemployment
scale and the shape of the long-run average cost curve.
• The L-shaped long-run average cost curve.
• The concept of the minimum efficient scale of production.
Pros division of labour:
4.1.4.6 Marginal, average and total revenue
- Workers very good at current role= TIME SAVED: Productivity increase= wage rise = QUALITY IMPROVEMENT.. Productive efficiency
Content Additional information
• The difference between marginal, Students should be able to calculate marginal, average and total revenue from given data.
average and total revenue. They should also be able to draw and interpret revenue curves. - Given specialist machinery: cost effective.. Productivity rise… wages rise
• Why the average revenue curve is the
firm’s demand curve. - LOWER PRICES: of divided labour goods.. Productivity rise and time saving.. Capital machinery utilisation.. Cost of production rise.. Low prices and CONSUMER SURPLUS INCREASE
• The relationship between average and
marginal revenue.
• The relationship between marginal
revenue and total revenue. CONS division of labour:
4.1.4.7 Profit FUNCTIONS OF PROFIT:
Content Additional information - Quality suffer: VALUE WORK LESS.. Long hours.. Demotivational
• Profit is the difference between total revenue and total costs. 1) Incentive to invest: retained profits.. S
• The difference between normal and abnormal (supernormal) profit. - High labour turnover|: Boring repetitive tasks.. Move to job that’s more enriching innovation ( DYNAMIC EFFICIENCY)), A
• The role of profit in a market economy. makers and withhold a DEGREE of Mo
- Increased administration and recruitment cost
4.1.4.8 Technological change DIFFERENTIATING A PRODUCT
Key source of non-leveraged finance for dyn
Content Additional information develop a COMPARATIVE ADVANTAGE… EXP
• The difference between invention and innovation. Students should understand how the process of creative pound to to higher pound demand = IMPORT
- HYSTERESIS: LR unemployment… over-specialisation= occupationally immobile.. Tech improvement.. COMPARATIVE ADVANTAGE:; increase structural unemployment..
• Technological change can affect methods of production, productivity, destruction is linked to technological change.
efficiency and firms’ costs of production.
• Technological change can lead to the development of new products, the More division of labour = more STANDARDISDED G/S.. Little innovation and INTRAPRENEURSHIP* 2) Reward for risk taking and Entreprene
development of new markets and may destroy existing markets. CURRENT FOPS to generate new PROD
Interrelated R&D with other nations ( UK pre
• Technological change can influence the structure of markets.
currency areas….freer flow of goods and serv
4) PRICE MECHANISM EFFICIENT IN RESO
- Sira.. Profit-motivated firms keep costs
- MAXIMISE all internal Economies of Sc
- STATIC AND DYNAMIC EFFICIENCY GAI
Increasing, Constant, Decreasing RETURNS TO SCALE LONG RUN
LAW OF DIMINISHING MARGINAL RETURNS SR analysis: ANALYSIS :
- "In the short run there are at least q fixed factor of production.. As there are more variable - In the LR- All FOPS are variable…
factors of production added to a STOCK of fixed FOPs.. Total product/Marginal product rises - LRAC: shows RETURNS TO SCALE ( Economies of scale = Increasing R.T.S)
then Falls"***
MES: Full Economies of Scale exploited at the lowest level of output possible
1) INCREASING RETURNS TO SCALE: %CHANGE inputs< %Change output
ECONOMIES OF SCALE:
Financial: Big firms negotiate lower IRs for investment… good credit history
Marketing: Use size to negotiate Bulk deals and discounts.. TC RISING SLOWER THAN OUTPUT
Technical: Specialist machinery.. Marginal productivity of capital rise.. Output rising more than TC
Managerial: Specialist managers to manage the organisation… OUTPUT RISE FASTER THAN TC
Purchasing: Bulk buying.. Discounts… Cost of production FALL
Land = variable FOP…
INITIALLY: More labour.. Productivity improvements::: UNDERUTILISED FIXED FOPS used up***
SPECIALISATION gains = INCREASE IN MP and
decrease in MC** External Es of S:
- Transport infrastructure improvement: Larger firm can get easier footfall access.. ACCESIBILITY
More HIRED: FIXED FOP a CONSTRAIN ON PRODUCTION** = Labour productivity fall Strategic suppliers move closer to a firm: MATERIAL suppliers closer… more access to raw materials at
- MP fall… MC increase LOWER TRAMSPORT COST… TC and Unit cost fall
R&D firm closer to firm: Decrease TC and increase productivity of capital…. PROCESS AND PRODUCT
INNOVATION (cheaper DYNAMIC EFFICIENCY GAIN)**
2) Constant RETURNS TO SCALE ( %Change inputs = %Change output)
3) DECREASING RETUERNS TO SCALE ( %CHANGE INPUTS> %CHANGE OUTPUT)
DISECONOMIES ( LRAC RISING MORE THAN OUTPUT)
- Communication: Size growth.. More decentralisation.. Wider spans of control. No hierarchical
harmony.. Conflated objectives and strategy
- Coordination: More bureaucracy and red tape… complex management layers.. LESS SMOOTH
COMMAND CHAIN= NO STREAMLINED PRODUCTION
- Control: Mergers/takeover's/ offshoring. Franchising/ Horizontal integration/ backward vertical
integration… CLASH OF CUTUTRES OF MAGAEMENT. Franchisee do not implement core Objective
and strategy of parent company .. LOSS OF CONTROL)
- MOTIVATION: Workers alienated.. Feel less valued.. DEMOTIAVATIONAL= AC rise due to labour
turnover// FASTER THAN OUTPUT***
MONOPSONY PRODUCT MARKET
" One dominant buyer with price making power
Use buying power to DRIVE DOWN SUPPLIER PRICES
- PROFIT MAXIMISE
- SMALL NO. SELLERS TO THE MONOPSONIST ( PRICE TAKERS, high entry barriers)
i) CONSUMER IMPACT:
Lower prices: monopsonist use buyer power to drive input prices down
REDUCE PRODUCTION COSTS
CS increase.. Affordability of essential goods ( EQUITY)
EVAL
- No guarantee of TRANSLATED PRICE CUTS
Firms use excess funds to REWARD SHAREHOLDERS, higher wages, reinvestment or DELEVERAGE
- Consumer suffer from lower quantity.. MONOPSONIST DRIVE SUPPLUER PRICE DOWN HEAVILY
Suppliers less willing and able to supply good.. Reduce Quantity available.. SHORTAGES of essentials**
Ii) Firm impact:
Economics Page 1
, OBJECTIVES OF FIRMS:
PROFIT SATISFYING
1) PROFIT MAXIMISATION: MC=MR/ /
Shareholder free market primary goal.. Receive dividends and REINVEST to innovate for
DYNAMIC GAIN
- Retained profit: Source of non-leveraged investment… SR and LR growth.. JOB
CREATION and PROFITABILITY RISE
- Profit the REWARD FOR RISK TAKING, ENTREPRENERURIAL BEHAVIOUR
- R&D for product development and NON-PRICE INTERNATIONAL COMPETITIVENESS
Firms benefit via lower prices.. ALWAYS KEEP REVENUE OVER COSTS. ( no x-inefficiency…
ALLOCATIVE EFFICIENCY -- CONSUMER SURPLUS AND CHOICE)
EVALUATION:
1) IMPERFECT INFORMATION ON MC&MR value: Incorrect point.. PROFIT MAX STILL
HOLDS** if adopt COST PLUS PRICING (price differential + Cost of production)
2) SCRUTINY: from CMA if large unregulated SNPs made ( Excessive pricing , P>MC?,,
collusion and monopoly labelling)..
Forced PRICE REDUCTION.. FORCED SHUTDOWN OF ASSETS… PROFIT REGULATION, PRICE
REGULATION, WINDFALL TAX ON PROFITS, ROCE added to a Percentage of costs
3) Profit maximisation not the best strategy/: MARKET SHARE? Flooding the market ?
BRAND AWARENESS?
Overwhelming Cost advantage holder?
2) PROFIT SATISFYING : Sacrificing profit to satisfy ALL STAKEHOLDERS*
Profit max benefit internal stakeholders, but HARM WORKERS ( low wages, consumer's face
high prices)
ENVIRONMENTAL GROUPS believe in ETHICAL AND MORAL DECISIONS… FIRMS REDUCE SNP
generation to satisfy needs of ALL STAKEHOLDERS
3) REVENUE MAXIMISATION: MR=0 .. Low price and Higher Quantity
PREDATORY PRICING: drive out contestability/rivals,, impose greater MARKET DOMINANCE
ECONOMIES OF SCALE: Higher quantity than profit max.. INCREASING RETURNS TO SCALE
AND COST-LEADER IN THE MARKET**
EVALUATION:
- PRINCIPLE AGENT ISSUE*: Divorce ownership of control: managers make revenue maximising
decisions to maximise their OWN BENEFITS.. Justify HIGH SALARIES, LONGER OFFICERS
ource of investment for firms into product and process
pple's annual iPhone model designs… Ability to act as price-
nopoly power if get 1st MOVERS ADVANTAGE in
amic gains*** IMPROVE INTL COMPETITIVINESS and 4) SALES MAXIMISATION: AC=AR..
ORT-LED GDP GROWTH.. CA deficit improvement… Strong Lower price and Higher Quantity then P max and Rev max
S CHEAPER.. Improved material living standards** i) FLOOD THE MARKET: in highly competitive.. Establish market presence.. Allow BRAND
LOYALTY BUILD UP.. LONG RUN STRATEGY CHANGE TO PROFIT MAXIMISATION DUE TO
MONOPOLY POWER GAIN*****
eurial behaviour: Incentive for risk taking with the USE OF ii) ECONOMIES OF SCALE: AC falls as Quantity rises.. Market share increasing.. More price
UCTS and new TECH ( Driverless car technology globalised) competitive
-Brexit) .. Allow for greater INTERGRATION= Optimal
ices.. CHOICE INCREASES FOR DOMESTIC CONSUMERS** EVALUATION:
I) Divorce ownership of control: Managers justify benefits for themselves based off High
sales quantity figures
OURCE ALLOCATION* II) ALLOCATIVE EFFICIENCY: ( AR=MC/ P=MC)… consumer and producer surplus
minimal and turnovers high ( NO X-INEFFICIENCY).. MAXIMISATION
ale and CONSISTENT INVESTMENT to be AHEAD of rivals Resources perfectly following consumer demand
NS from effective functioning of SIRA price mechanism*
6) SURVIVAL: highly competitive market.. Survive introductory days of market entry..
BUILD REPUTATION, PRESENCE, DIFFERENTIATION, PRICE ,MAKING ABILITY ,, LONG RUN
OBJECTIVE CHANGE***
7) CSR: Going above the legal requirements. ECONOMIC, LEGAL L, ETHICAL ,
Barriers to Entry and Exit : PHILANTHROPISM
Environmental acknowledgement: Issuing MINIMUM PRICES FOR SUPPLIERS
Charity and work benefits
1) Economies of Scale ( Natural monopoly): Improve image of the economy
HUGE MINIMUM EFFICIENT SCALE of production ( Huge level of output needed to maximise EOS at
lowest level)
- Huge economies of scale.. OVERWHELMING COST ADVANTAGE… New firms are EASILY priced out
and CANNOT COMPETE due to size of the MES ( would be wasteful duplication of resources)
EFFICIENCIES :
2) High SUNK and SINK costs: deterrent to entry.. Costs that cannot be recovered ( STRATEGIC
B.exit)
Allocative: (P=MC)
Contractual agreements on capital machinery utilisation ( Sale and leaseback/ Leasing equipment)…
Consumer surplus and producer surplus maximisation… IN HIGHLY
Early leaving fee/charge..
COMPETITIVE INDUSTRY
Consumers receiving exactly what they are willing and able to pay for
3) Legal barriers:
***
PATENTS.. Strict health and product safety laws… excessive border checks due to imported raw
HIGH CHOICE,, LOW PRICE,,,, MAX C.S
materials ( increased by more protectionist, non -conventional methods,, Red-tape)
- Producers AHEAD OF RIVALS not meeting consumer DEMAND.
Increase market share and INCREASE PROFITS*
4) Strategic barriers:
PREDATORY PRICING… Price below PROFIT Mx price to draw out competition and LIMIT PRICING TO
PRODUCTIVE ( minimum AC)
normal profit levels
- ALL POSSIBLE ECONOMIES OF SCALE EXPLOITED ( MES)
HEAVY CONSUMER INERTIA TO 1 BRAND
- High output, low cost, LOW AC translated into LOWER PRICES..
HEAVY N0N-PRICE COMPETITION ( IN Collusive oligopolies… similar costs.. Products.. Barriers to entry
Market share gain ( SALES MAXIMISATION/REVENU MAX)
and exit. High consumer inertia).. Due to PRICE RIGIDITY ( tacit - informal / overt-formal agreements to
fix a price and a quantity)
**DYNAMIC EFFICIENCY: Long RUN SUPERNORMAL PROFIT-
GENERATION
- Reinvested into R&D product and process development..
Competitive advantage in terms of CONSUMER CHOICE OF
Barriers to EXIT:
PLETHORA OF INNOVATIVE, NEW PRODUCTS and
- Redundancy cost
INTERNATIONAL COMPETITIVENESS
- ASSET SALES: if cannot get price higher than price paid for.. Do not leave
- ( ECONOMIES OF SCOPE)
- CONRRACTUAL AGGREMENTS: Utilities.. Cancellation fee large with EARLY CONTRACT
- Tech advances, innovation
DISSOLUTIONS*
- INVESTMENT INTO EFFIEICNT PRODUCTION PROCESSES
( OPERATIONS)… Help achieve lower operational costs,
overheads.. Help achieve productive efficiency and COST
ADVANTAGE (Automation, robotics, AI implementation)
Product development= MONOPOLY POWER : [PATENTABLE artificial
barriers to entry can be made ***]
USP in competitive markets…
X-EFFICIENCY: Producing on the AC curve.. No wasteful resources and
MINIMISING UNIT COSTS
- In highly competitive industry.. To CHARGE LOWEST PRICE
MARKET STRUCTURES:
STATIC EFFICIENCY:
Allocative. Productive, X-efficiency
1) PERFECT COMPETITION: DYNAMIC IS ONLY THE LR assuming SNPs are
REINVESTED not used to deleverage*
Many buyers and sellers: 0 concentration
ratio
Homogenous goods: Price takers/ No
differentiation.. Price rise would get no
influence, lose ALL customers. Firms
FOLLOW price fall
NO barriers to enter/exit: COSTLESS… SNP
attraction can attract entry and ALLOW
entry instantaneously.. ONLY SR SNPS
PERFECT KNOWLEDGE: on prices , costs and
tech used
FIRMS PROFIT MAXIMISE MC=MR
Short run Perfect competition:
i) SUPERNORMAL PROFIT
Economics Page 2
, MONOPOLY
1) 1 dominant firm: Pure monopoly is 100% share.. Theoretical is 25%
2) Differentiation: Firms are price makers.. Downward sloping PED inelastic AR curve.
Governed by demand curve ( only set 1 price and quantity)
3) High entry and exit barriers #: Difficult and costly.. SNP attraction.. Unable to
penetrate the market.. LR SUSTAINED SNP by monopolist only
4) Imperfect info: of prices and market conditions… for consumers and producers.
1) FIRMS PROFIT MAXIMISE: MC=MR
Economics Page 3
, Economics Page 4
