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5 views

Quick Revision Notes

Uploaded by

maeemariyam395
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Quick Revision Notes

1. In perfect competition, firms can earn supernormal profits or incur

😎
losses in the short run but in the long run firms will earn only
NORMAL PROFITS due to freedom of entry and exit.
2. The AR curve is horizontal in perfect competition and AR=MR.

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3. Firms enjoy allocative efficiency in both short run and long run in a

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perfectly competitive market but productive efficiency is there only
in the long run and not the short run
4. In a monopolistically competitive market, firms can earn supernormal

😎
profits or incur losses in the short run but in the long run firms will
earn only NORMAL PROFITS due to freedom of entry and exit.

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5. Monopolistic competition is neither allocatively efficient nor
productively efficient in both short run and long run.
6. Condition for allocative efficiency is AR(P)=MC
7. Condition for productive efficiency is operating at Minimum AC
8. Normal profit condition is AR=AC means AC curve is tangential to the
AR curve.

9. Conditions
Profit maximisation : MR=MC
Revenue maximisation : MR=Zero or TR is maximum
Sales maximisation/ Sales volume maximisation : AC=AR or TR=TC

10. Horizontal integration is between two businesses in the same


industry at the same stage of production
Advantages of horizontal integration
​ 1. Exploit internal economies of scale including bulk-buying, technical
economies and financial economies.
​ 2. Cost savings from the rationalization of the business – however,
this often involves heavy job losses.
​ 3. Potential to secure revenue synergies by creating and selling a
wider range of products - (i.e. diversification) – this creates
opportunities for a larger business to benefit from economies of
scope.
​ 4. Reduces competition by removing key rivals – this increases
market share and lifts a firm’s pricing power.
​ 5. Buying an existing and well-known brand can be cheaper in the
long-run than organically growing a brand – this can then make entry
barriers higher for potential rivals and lead to higher long-run
monopoly profits.
​
Disadvantages of Horizontal Integration
​ 1. Risk of diseconomies of scale from the enlarged businesses
especially if there are clashes of management style and culture, and
wider problems with integrating businesses that operate in very
different ways
​ 2. Reduced flexibility– the addition of more personnel and processes
means the need for more transparency and therefore, more
accountability and red tape which can slow down the rate of
innovation / getting new products to market
​ 3. Mergers risk destroying shareholder value rather than creating it:
This often happens because the synergies never materialize despite
the potential benefits of the horizontal integration. Most large-scale
mergers fail to achieve the gains in shareholder value that were
forecast before it happened
​ 4. Risk of attracting investigation from the competition authorities who
might be worried that a horizontal merger might lead to a substantial
lessening of competition in a market which could then lead to a fall in
consumer welfare. A horizontal merger such as Sainsbury and Asda
can be blocked on competition grounds.
​
11. Reasons why some firms tend to remain small and why
others grow:
1. Economies of Scale:
​ Definition: Economies of scale are cost advantages that a firm can
achieve as it increases its level of output.
​ Example: A large manufacturing company can produce more units of
a product at a lower cost per unit compared to a small, local producer.
This cost advantage can allow large firms to expand and grow.
2. Market Demand:
​ Explanation: Firms may remain small if the market demand for their
product or service is limited. In contrast, those with high demand may
grow to meet it.
​ Example: A niche gourmet chocolate shop may stay small due to a
niche market, while a fast-food chain like McDonald's grows due to
widespread demand.
3. Access to Capital:
​ Point: Availability of funds plays a crucial role in growth.
​ Example: Small startups may struggle to secure investment, while
established companies with a proven track record can easily raise
capital to expand.
4. Managerial Capacity:
​ Definition: Some entrepreneurs may lack the skills or resources
required to manage a large organization effectively.
​ Example: A skilled craftsman might prefer to run a small boutique
shop rather than a large factory.
5. Government Regulations:
​ Explanation: Regulatory barriers can hinder or promote growth in
specific industries.
​ Example: Taxi companies may remain small due to government
regulations, while tech startups can grow rapidly with fewer
restrictions.

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