Unit 3: Business Behaviour

Types of businesses:; private sector organisations; state-owned enterprises (public sector); for-profit and not-for-profit organisations; co-operatives; joint ventures.

The size of businesses:; SMEs (small- and medium-size enterprises); large corporations.

How businesses grow:; organic growth; merger/takeover:; forward vertical integration; backward vertical integration; horizontal integration; conglomerate integration.

Advantages and disadvantages of each type of merger/takeover.

Constraints on business growth:; size of market; access to finance; owner objectives; government regulation and bureaucracy.

Reasons some firms tend to remain small and others grow.

Impact of growth of firms on businesses, workers and consumers.

Demergers:; reasons for demergers; impact of demergers on businesses, workers and consumers.

Different business objectives: objectives; profit maximisation; revenue maximisation; sales volume maximisation.; behavioural theories: satisficing.

The significance of the divorce of ownership from control for business objectives: the principal-agent problem.

Formulae for different business objectives:; profit maximisation; revenue maximisation; sales volume maximisation.

3.3.2.1aFormulae to calculate and understand the relationship between: • total revenue •

Formulae to calculate and understand the relationship between:; total revenue; average revenue; marginal revenue.

3.3.2.1bPrice elasticity of demand and its relationship to revenue concepts, including

Price elasticity of demand and its relationship to revenue concepts, including calculations.

3.3.2.2aDerivation of short-run cost curves from the assumption of diminishing marginal

Derivation of short-run cost curves from the assumption of diminishing marginal productivity.

3.3.2.2blaw of diminishing returns

The law of diminishing returns.

3.3.2.2cFormulae to calculate and understand the relationship between: • total cost • total

Formulae to calculate and understand the relationship between:; total cost; total fixed cost; total variable cost; average (total) cost; average fixed cost; average variable cost; marginal cost.

3.3.2.2drelationship between: • marginal product and marginal costs • average products and

The relationship between:; marginal product and marginal costs; average products and average cost; total product and total cost; short-run and long-run costs.

3.3.2.3arelationship between long-run cost curves and diseconomies of economies/diseconomies of

The relationship between long-run cost curves and diseconomies of economies/diseconomies of scale. scale

3.3.2.3bMinimum efficient scale

Minimum efficient scale.

3.3.2.3cDistinction between internal/external economies of scale

Distinction between internal/external economies of scale.

3.3.2.3dSources of internal economies of scale: • financial • technical • managerial •

Sources of internal economies of scale:; financial; technical; managerial; marketing; purchasing; risk bearing.

3.3.2.3eSources of external economies of scale: • availability of skilled labour • access to

Sources of external economies of scale:; availability of skilled labour; access to transport links; sharing knowledge.

3.3.2.3fSources of diseconomies of scale: • communication problems • coordination problems •

Sources of diseconomies of scale:; communication problems; coordination problems; X-inefficiency.

3.3.2.4adistinction between normal profit, supernormal profit and losses

The distinction between normal profit, supernormal profit and losses.

3.3.2.4bShort-run and long-run shutdown points

Short-run and long-run shutdown points.

The concepts of:; allocative efficiency; productive efficiency; dynamic efficiency; X-inefficiency; efficiency/inefficiency in different market structures.

Calculation of n-firm concentration ratios. ratio

The significance of concentration ratios.

Assumptions of perfect competition. competition

Profit-maximising equilibrium in the short run and long run.

The short-run shutdown point.

Productive and allocative efficiency in the short run and long run.

Assumptions of monopolistic competition. competition

Types of product differentiation:; physical - product features; marketing - advertising, packaging; distribution - shop, online, telephone.

Profit-maximising equilibrium in the short run and long run.

Productive and allocative efficiency in the short run and long run.

Assumptions of oligopoly.

Barriers to entry and exit:; economies of scale; limit pricing; patents; branding; sunk costs; legal.

Interdependence of firms:; simple game theory - two firm/two outcome model; reasons for collusive and non-collusive behaviour; cartels; price leadership; price wars.

Costs and benefits of collusion to producers, consumers, workers and governments.

Price competition:; price wars; predatory pricing; limit pricing.

Non-price competition: (continued); advertising and branding; quality; endorsement; product placement; after-sales service.

Costs and benefits of price and non-price competition to firms, consumers, employees and suppliers.

Assumptions of monopoly.

Barriers to entry and exit.

Profit-maximising equilibrium.

Costs and benefits of monopoly to firms and consumers.

The concept of 'natural monopoly' and its implications.

Conditions necessary for third-degree price discrimination.

Costs and benefits of price discrimination to firms and consumers.

Productive, allocative and dynamic efficiency.

Assumptions and conditions for a monopsony to operate.

Costs and benefits of a monopsony to firms, consumers and employees.

Characteristics of contestable markets.

Implications of contestable markets for behaviour of firms on:; profitability; pricing decisions (limit pricing).

Costs and benefits of contestability for firms and consumers.

The significance of sunk costs for contestability.

Factors that influence the demand for labour to a particular labour occupation:; demand for the final product (labour as a derived demand); productivity of labour; price of the product; wage rate relative to price of capital.

Factors that influence the elasticity of demand for labour.

Factors that influence the supply of labour to a particular labour occupation:; size of population; net migration; income tax rates; level of welfare benefits; government regulations; trade unions.

Factors that influence the elasticity of supply of labour.

Labour market equilibrium. of wage rates in

Causes of changes in the equilibrium wage rate and quantity of competitive and labour as a result of shifts in demand curves and supply curves. non-competitive

Wage setting in the public sector/state-owned enterprises.

Causes and consequences of the geographical immobility of the labour market labour.

Causes and consequences of the occupational immobility of labour.

The case for government intervention. intervention in

Measures to control monopolies and mergers: product markets; price regulation; profit regulation; quality standards; performance targets; referral to regulatory authorities; legislation to control mergers and takeovers.

Measures to promote competition and contestability:; tax incentives and grants to promote small businesses and FDI; deregulation; privatisation; competitive tendering for public sector contracts; trade liberalisation.

Measures to protect suppliers and employees:; local sourcing of raw materials and components; employment legislation to protect workers from; exploitation; barriers to entry of foreign firms; restrictions on the monopsony power of firms; nationalisation.

The impact of each measure on:; price; profit; efficiency; quality; choice.

Limits to government intervention:; regulatory capture; asymmetric information/information gaps; inadequate resources; lack of regulatory power.

The case for government intervention. intervention in

Evaluate maximum and minimum wage controls, direct taxes, measures addressing labour immobility, and measures reducing discrimination and exploitation.