Perfect Competition (Long-run Equilibrium) 

As we already know, a perfectly competitive market structure attains freedom to entry and exit. This, therefore results in firms only receiving normal profit in the long run, as opposed to supernormal profit in the short term.

The supernormal profit acts as an incentive for other firms to enter the market, switching factors of production into the prosperous industry, as a result, supply is increased, and thus shifts to the right from MS to MS in the diagram below. This alters the original market price.

*Note: this image is from tutor2u and is not my own.

The new market price (P2) has meant that the individual firm no longer makes supernormal profit where Average Revenue/Marginal Revenue were substantially greater than Average Costs, and is now only making normal profit where AR=MR. This situation is more productively, and allocatively efficient.
Even if the individual firm restricts output as to increase price, the price will not alter.


Note: These notes are formulated with credit to the website Tutor2u, AQA Economics Textbook by Lawrence and Stoddard, and Business Microeconomics by Nutter. 

Perfect Competition (Short-Run Equilibrium)

Market structure is highly important in economics. Different market structures provide diverse situations in terms of assumptions behind the structure and their implications upon firms and households.

Perfect competition is considered to be the opposite to a monopolistic market structure. Perfect competition is also considered to be highly competitive and thus highly theoretical. The assumptions behind this type of market structure are:

• Infinite number of both buyers and sellers
• 'Homogeneous' products. This just means that all the products are the same. This assumption stems from the matter that there is no asymmetrical knowledge, all stakeholders in the market are subjected to all the information, and thus, no innovation can occur due to this perfect knowledge. Therefore, all products are perfect substitutes for each other. 
• Freedom of entry and exit barriers in the long run - lack of patents, sunk costs and high start up costs, bureaucracy etc. These markets are said to be perfectly contestable  as cost advantages are said to create a barrier to entry (such as a firm benefiting from economies of scale) and therefore it assumes that all firms cost structures are the same. 
• Firms are 'price takers' whereby firms have to succumb to the price 'ruling' in the market. 
• Firms have equal access to fully mobile factors of production.

Obviously, such assumptions mean that this structure is theoretical. However, there are some close approximations. Such as Forex and fruit sellers at a local market. 

Perfect Competition and the short run equilibrium

*Note* This image is from tutor2u

As the diagram depicts, the left hand side displays exactly what is happening holistically in the industry alongside the effect upon the firm. 

The firm accepts the price as set by the forces of demand and supply in the industry (hence, price takers) and as a result both the average and marginal revenue curves converge as set by the industry. In the short run, it is possible that the firm can achieve 'super-normal' profits, where MC = MR, which is illustrated by the shaded blue box. (We are assuming here that these firms are profit maximisers and will produce at output Q1, P1). The supernormal profit is achieved as the Average Revenue is > than the Average Cost. 

At the point Q1, the firm is productively inefficient and allocatively inefficient in the short run. 

What happens in the long run will be covered next time. 

Note: These notes are formulated with credit to the website Tutor2u, AQA Economics Textbook by Lawrence and Stoddard, and Business Microeconomics by Nutter. 

Technological change and the impact upon firms

Technical change attempts to raise the productivity of capital, leading to a potential greater return of output compared to the inputs. Technological change appears to improve quality of life for new generations. 

According to the textbook, technical progress has three main 'components'

1. 'More output can be produced with the same inputs'
2. 'Existing outputs undergo an improvement in quality'
3. 'Completely new goods or services become available' 

Technological change has two main features:

• Innovation - This refers to changes to original products or ideas as to put them into commercial use. They are often subtle changes to change performance of a product. A well known example is Apples ever improving IOS capacity and obviously, the iphone models. 
• Invention -  Discovering completely new ideas or concepts, ready to be patented.

Product invention and innovation act to create new markets and markets segments, with 'synergy demand' being incredibly relevant in today's ever modernizing world. This refers to extra demand being created for existing products as a result of an innovation, such as the increasing demand for oils and balms for a new razor which are both owned by one firm. 

Innovation can lead to 'disruptive innovation' however, whereby innovation can act to upset all that is known in the market so far. An example is the prevalence of downloading music online, which majorly disrupted the music industry - which was witnessed with the closure of HMV's nationally as the company attempted to 'streamline' the business as to not make huge losses. 

Joseph Schumpeter stated that innovation and 'created destruction' are related. He describes creative destruction as a process of destroying all that is known in the market and subsequently replacing it with new and better goods or services. 

Innovation = dynamic efficiency as changing consumer needs and wants are met temporally. 

Innovation can act to lower the unit costs of firms, as a result, the LRATC is said to have shifted downwards underneath, still keeping intact its downwards sloping nature. As a result, firms can relieve pressure on prices and potentially gain increased demand. Firms that have not benefited from the innovation may find competition intense as they may not be able to relieve pressure on prices, making their firm possibly undesirable to consumers. 

However, innovation can act as a barrier to entry within a market with the introduction of patents and copyright. Innovation could lead to a firm gaining monopoly power- this is especially prevalent in the pharmaceuticals market, such as Pfizer's Viagra. 

Note: I am using notes from Tutor2u and the AQA Economics Textbook to formulate this blog. I do not claim that some of these notes are entirely my own. 

The growth of firms.

I have decided to not run in a chronological order as such, with these notes being a little everywhere. But i felt like catching up on growth today.

So.. growth..

Growth is absolutely vital for firms, not only to allow them to work towards the MES (minimum efficient scale) but to allow them to increase market share and allow them to gain a dominant position in the market. 

Firms seek to grow to raise returns for shareholders, known as dividends. Tutor2u claims that 'the the the stock market valuation of a firm is influenced by expectations of future sales and profit streams so if a company achieves disappointing growth figures, this may be reflected in a fall in the share price' And so, increases the risk of a take over and makes it more expensive to raise fresh capital by attempting to sell more shares.

Firms may also want to grow for reasons driven by managers, such as expansion or increasing sales revenue, rather than reasons driven by shareholders. 

Lastly, firms may intend to grow to enable a diversification of their products, so that if sales fall in one market segment, stronger demand in another may act as compensation, to protect a company from failure or a saturated product. 

Growth can be organic (internal), or inorganic (external)

The former refers to growth stimulated by retained and internal profits or loans, which can be used to finance expansion over a period of time. 

Organic growth can be stimulated by: 

• Extending an organisations geographical reach, e.g exporting
• Expanding into new products in order to increase the size of its available market 
• Using marketing to expand the customer base
• Expansion of production capacity through investment and machinery

An example of organic growth is Poundland, (taken from Tutor2u's growth of firms site)

"Poundland was formed in 2000 and has grown strongly due to a focus on a constantly rotating product range sold at a single price point. Ten years after starting-up, Poundland was sold to a US venture capital firm for £200 million, when its revenues had grown from nothing to over £400m per year. The organic strategies was to open new stores in suitable locations and repeat the formula of offering heavily discounted products to a mainly female customer base. Poundland’s profits grow 26.5% in the year to April 2012. It will open 60 new stores in 2012" 

Organic growth can be impeded by a lack of retained profits, and is typically a slow process, as the market may be saturated or highly competitive. 

The other type of growth is inorganic/external growth.

This can be a much more rapid process in comparison to organic growth where companies can carry out mergers, intergrations or acquisitions. Mergers can be amicable or hostile, where a takeover may have to be accepted as a deal by its current owners. 

There are four types of merger:

1. Horizontal - Refers to integration between firms at the same stage of production. In example, the merger between ITV companies Carlton and Granada in 2003. The decision to merge was justified by the 'changing nature of television' and the emergence of digital broadcasting, and threats from both cable and satellite channels. Other horizontal merger examples - When Morrison's bought safeway in 2003. Banco Santander purchasing Abbey National in 2004. More recent mergers (Virgin Active buying Esporta gyms in 2011). Advantages of horizontal integration: synergy (2+2-5..) Making the most of the benefits from both companies to produce a supposedly better firm. There is also room for rationalization - such as streamlining the company to make it more competitive. Secondly, monopoly power could possibly be attained. Thirdly, as the merger has increased the size of the business, there is opportunity for internal economies of scale to be had. 
2. Vertical - refers to integration between firms at different stages of production. Vertical backwards integration occurs when the firm takes over a firm in the previous process, i.e a firm in the tertiary sector takes over a firm in the secondary (manufacturing sector). An example of this is Sony, who own MGM with 4,000 films to their name. Sony can make use of the films for video on demand. Vertical forward integration refers to a firm taking over a firm in the next process, e.g a farm taking over a farm shop. It is argued that some businesses can integrate both backwards and forwards, an example is BP - involved in crude oil refinement, the distribution of oil and 'oil exploration' Advantages: Control of the supply chain, or a way into a market i.e a brewery could sell the beer in a newly bought pub - more control over retail channels. 
3. Conglomerate - considers a situation where the firms don't appear to have a blatant relationship, and may be in unrelated industries. In essence, they are diversified. A modern day example is the Indian 'giant' Tata Group which is involved in different market sectors such as tea, construction and cars, it operates in more than 80 countries. 
4. Lateral - Integration between firms which are in different but related industries. Proctor and Gamble and Gillette both sold household goods, and merged laterally in 2004. In 2008 there was a merger between Mars and Wrigley. Google and Youtube. An advantage of lateral integration is the advantage of economies of scope. 

Firms can also co-operate in joint ventures. This gives firms the opportunity to benefit from the strengths of mergers, whilst being able to maintain their legal entity and pursue common projects. Examples of joint ventures are Google and NASA, and Hugo Boss and Proctor & Gamble. 

Why don't mergers always work?

Integration is not always successful. Diseconomies of scale (Control, co-ordination etc) can occur and influence post merger profitability. There was a lack of synergy between Morrison's and Safeway (financial and managerial culture differences). 

Nutter's book claims that the most famous 'demerger' was Daimler-Chrysler. The former bought the latter for approx 36 billion dollars but the managerial culture clash resulted in a failure of this 'marriage'. Nine years later, Daimler sold Chrysler to Cerebus. 

"We overestimated the potential of synergies" - Dieter Zetsche, senior Daimler exec. 

Integration is not always favoured by the economy. It can produce monopoly power, whereby the consumer can be exploited with inefficiency occuring statically, productively and allocatively. Streamlining after the merger can also result in a loss of jobs. And lastly, research conducted by Geoffrey Mees found that two-thirds of all mergers in the US reduced shareholder value. 

Governements however, can favour mergers as they are able to export and compete in international trade, which as we learnt in AS economics can benefit the domestic economy in terms of an increase in national income. 

Note, i am using notes from Tutor2u, The AQA Economics A2 Textbook by Lawrence and Stoddard and Business Economics Microeconomics for AS by Nutter. Some of the notes are not my own. 

Monday 13th October 2014. The effect of Trade Unions.

I am aware that i am starting rather late in the course, and that i will be mixing up the sections of the course as i have two different teachers whom start at different places on the spec. So, it's probably best to chose which blog you are interested in or want to know about and start from there.

- Today we looked at the effect of Trade Unions in the imperfectly competitive market. From here we can remember what sort of imperfections there are in the labour market:

• Immobility - The two main ones are Geographical and Occupational. Workers aren't always fully mobile due to factors beyond their immediate control such as the difference between where they live, and where the jobs are. An example of this is within the manufacturing and mining closures in the late 20th century in parts of Northern Britain, such as mining in Durham and the immediate unemployment which followed. This unemployment was as a result of the demand for labour was simply not found in these areas after these closures and so geographical immobility occurred. Occupational immobility refers to a mismatch of qualifications to the jobs in which require them, for example, those may wish to become a dentist, however may not have the necessary qualifications to become one, and so occupational immobility occurs. 
• Exploitation - Workers are not always paid to what they are worth in terms of productivity and their value, this concept delves into that of MRPL. Which is the Marginal Revenue Product of Labour and considers the extra revenue to the firm that one extra worker brings in in terms of the marginal cost that they consume (wages, etc). I will come back to this later. 
• Imperfect Knowledge - You should be familiar with this one after your AS course after covering it as a way in which the market 'fails'. Imperfect knowledge surrounds the labour market too where workers may not simply be aware of what jobs are available. 
• Monopsonistic demand for labour - This simply looks at how there can be one buyer/employer of labour in the market.. Instead of lots of little firms, which we would expect in a highly theoretical perfect comp market structure. 

So, Trade Unions.

British history is littered with the presence of them. But what actually are they?

Wikipedia spouts that Trade Unions are: 

'An organised association of workers in a trade, group of trades, or profession, formed to protect and futher their rights and interests'

Trade Unions are there to represent their employees in terms of the protection of their wages and job security and the protection of the working conditions that their workers will be employed in. This gives power to the workers, as they act as a collective, rather than on their own.

Some examples of Trade Unions in the UK are:

NUT - National Union of Teachers
NAPO - National Association of Probation Officers
BECTU - Broadcasting, Entertainment, Cinemaograph and Theatre Union 

The two famous stances Trade Unions take is; Collective Bargaining (only going to accept the wage rate in which they push for) and Closed Shop (The union says only members of the TC can be employed)

TBC

Note, i am using notes from Tutor2u, The AQA Economics A2 Textbook by Lawrence and Stoddard and Business Economics Microeconomics for AS by Nutter. Some of the notes are not my own.