IGCSE Economics-Business Economics

IGCSE Economics

Business Economics introduction

We
got
this!

How big
is IKEA?

Key Terms...

These we need to understand and define

Production

Factors of Production Sectors of the Economy

Productivity Causes/changes to productivity

Division of labour Business costs and revenues

Economies of scale

Diseconomies of scale Competition

Monopoly Oligopoly

Labour market Trade unions

What is Competition?

You is no
competition
Bro!

Open Ended

Explain what competition is in terms of business

What if there is no Competition...what would
we see?

Monopoly...

A monopoly is the sole supplier of a product having 100%
share of the market.

This however is only a ‘pure’ monopoly...often we think
now of businesses that dominate an industry as
behaving like a monopoly...i.e. Intel having over 90% of
the market for computer chips

Poll

Are Monopolies all bad?

• Yes

• not sure

• Depends on the nature of the monopoly

• or No

Advantages to being/having a Monopoly

There are a number of advantages and disadvantages to there being a monopoly in your country....

Let us see if we can figure some out!

What makes a monopoly (Features)

● High barriers to entry-other firms unable to enter

(laws e.g. patents, capital costs, control of natural
resources)

● Price maker-it is the market so when it changes

its supply the market price changes.

Questions...

Can monopolies continue into the future?

What happens if they are making supernormal profits?

Can a Monopoly control both price and quantity
produced?

Advantages and Disadvantages of a Monopoly...

Advantages

Disadvantages

Economies of Scale

Inefficient resource

allocation

Innovation-R + D

No competition +

Higher prices

Eliminates Wasteful

competition

Imperfect knowledge

Open Ended

Which of the advantages of a monopoly du you think is the most important (best) one?

Open Ended

Which disadvantage of a monopoly do you think is the worst one and why?

Multiple Choice

Market structure characterized by a single firm dominating the market.

• Oligopoly

• Purely Competitive

• Monopoly

• Monopolistic competition

Multiple Choice

What is not an advantage of a monopoly?

• achieving economies of scale

• high level of research and development

• Producing a greater quantity at profit-maximizing level of output

• higher prices and lower output

Multiple Choice

One of the requirements for a monopoly is that

• products are high priced

• there are several close substitutes for the product

• there is a unique product with no close substitutes

• the product cannot be produced by small firms

Multiple Choice

A barrier to entry is

• an economic term for economies of scale

• illegal in most markets

• anything that prevents new firms from entering the market

• a factor that increases competition

Open Ended

Write out as many different barriers to entry for a business that you can think of...ask Dr Google if you get stuck

Multiple Choice

An example of a local monopoly is

• a big city restaurant.

• a new dentist in a big city.

• the only veterinarian in an isolated farm community.

Open Ended

What local monopolies can you think of...come up with some real life examples

What makes up Perfect Competition? (features)

Characteristics of a PC business include:

●Many buyers and sellers-no one can influence the price. If one business increases its price customers would immediately go to a competitor

●Each firm has a very small part of the market (low market concentration)

● Free to enter and free to exit the market

●The product sold should be identical (homogeneous)

●
Buyers and sellers have perfect information

Open Ended

Can you think of any businesses that come close to being perfect competition?

How do Perfectly Competitive firms behave?

What happens if there are no barriers to enter the
industry/market and one firm is making a profit? (super normal)....

Therefore in the long run-all PC firms can only earn
(normal profits)

Let’s
Go Bro!

Perfect competition and efficiency

We generally say that a PC firm is the most efficient
form a business structure. The more competition in a market the more efficient the structure is.

Therefore PC firms offer low prices and a wider
choice...however there is no guarantee that they will
produce the best outcome for consumers just the most efficient (lowest cost).

Multiple Choice

Which market structure involves selling identical products?

• Perfect Competition

• Monopolistic Competition

• Oligopoly

• Monopoly

Multiple Choice

Which market structure did the DeBeers Diamond industry fall under?

• Monopoly

• Oligopoly

• Perfect Competition

• Monopolistic Competition

Open Ended

What do you think the main advantages of perfect competition might be?

What if there are only a few businesses-but they are very big?

Multiple Select

Google controls 67% of the web search market. The company has grown and branched off into email, online maps, GPS tracking systems, online data storage and mobile phones. There are competitors like Microsoft and Yahoo, but they own just 18% and 11% of the market, respectively. Which market structure(s) best fit Google? (There are two possible answers, pick both)

• Perfect competition

• Monopolistic competition

• Oligopoly

• Monopoly

Multiple Choice

Markets like automobiles, cell phones, film production studios, and internet providers are examples of which market structure?

• Monopoly

• Oligopoly

• Perfect competition

• Monopolistic competition

What if there are lots of this type of business but you always go to your local one!

Multiple Choice

Using the pizza store graphic, what market structure best fits the pizza industry?

• Monopoly

• Oligopoly

• Perfect competition

• Monopolistic competition

Economies of Scale-What are they?

In the long run especially with capital intensive
industries the LRAC may fall over a considerable
range of output...decrease towards the horizontal axis

Internal Vs External Economies of Scale

Internal Economies of scale (from inside the firms
control):

1 Buying Economies-bulk buying discounts-lowering AC

2. Selling Economies-lower costs involved in selling lots of
units to lots of customers

3. Marketing economies-cheaper marketing costs (more
affordable sue to the size of your business

4. Managerial Economies-able to hire more specialised
managers-due to output

Internal Vs External Economies of Scale

External economies (from outside the firms control)
will not reduce AC by changes in output rather by
changes in the industry (downward shift of AC).

External diseconomies of scale will raise the AC at
each and every level of output.

Internal Vs External Economies of Scale

5. Financial Economies-able to gain more affordable
loans/finance due to size of operation...able to access
financing possibly through the stock market.

6. Technical Economies-larger output-able to employ the
latest technology-reducing average costs

7. Research and Development Economies-larger firms can
employ R+D making business more efficient

8. Risk Bearing economies- producing a larger range of
products-spreading the risk

Open Ended

Explain with an example one type of internal Economy of Scale

Internal Diseconomies of Scale

1. Control-bigger businesses are more difficult to

coordinate/supervise-number of
meetings-administrative costs

2. Communication problems-how to ensure everyone has

the knowledge needed-training-extra costs

3. Poor industrial relations-bigger greater risk of lack

of motivation from staff

External Economies of Scale

1. Skilled labour force
2. Good reputation-
3. Specialist suppliers-local specialist suppliers
4. Specialist services-courses provided nearby
5. Specialist markets-local markets
6. Infrastructure-Govt provides roading and

infrastructure that supports your business

Real Life examples?

What does EconPlus Dal have to say?

Open Ended

Explain one type of external economy of scale with a real life example

Open Ended

How do businesses make profit?

Let us work out a businesses costs and revenues

Practice Exam Question-2005

Eric industries sells 200 hats at $9 each. Their
average fixed cost is $2 and their average variable
cost is $4. How much profit has Eric industries
made?

Practice Exam Question-2005

A major technology company ‘Brandon Tech’ announced a decline in profits for the year.

1. Explain the reasons for a fall in profits (5)
2. They may have benefited from economies of

scale-explain three types of economies of scale
that a technology company may have benefited
from (6)