A2 Transport: Economies of scale, barriers to entry, firms objectives, arguments for and against privatisation

The different (internal & external) economies and diseconomies of scale, barriers to entry, firms objectives (profit maximisation, sales maximisation, revenue maximisation and profit satisficing) and arguments for and against privatisation, with references to rail privatisation. 

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  • Created on: 20-01-13 11:56
Preview of A2 Transport: Economies of scale, barriers to entry, firms objectives, arguments for and against privatisation

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A2 OCR Transport
Economies of scale: the cost advantages gained through producing on a larger scale.
Internal economies of scale
Technical economies of scale: increased physical capacity or a technological
development that results in lower long run average costs of production.
Purchasing economies of scale: bulk buying inputs into a business, allows firms to
negotiate larger discounts which results in lower long run average costs of
production. E.g. bulk buying of fuel or vehicles.
Managerial economies of scale: made spreading the fixed cost of the
administration of a large firm across a higher level of output with the result of lower
average costs of production. E.g. large firms ­ specialist managers, smaller firms ­
multi task managers.
Financial economies of scale: are made by borrowing money at lower rates of
interest than smaller firms, results in lower average costs of production.
Marketing economies of scale: spreading the high cost of advertising on television
and in national newspapers across a large level of output, with the result of reduced
average costs of production.
External economies of scale: falling long run average costs that benefit ALL firms in
an industry.
A local skilled labour force is available
Specialist local back- up firms can supply parts or services
An area has a good transport network
Internal diseconomies of scale: causes of an increase in long run average costs
beyond the point of the MES.
Problems of communication: In large firms, extra costs may be incurred in
making managers aware of what is going on.
Problems of co-ordination: Large firms invariably have layers of management
and several tiers of decision making, which can sometimes hinder change.
Problems of industrial relations: As firms increase in scale, workers may feel
alienated and relationships with the employer may become more strained.
External diseconomies of scale:
Local labour becomes scarce and firms now have to offer higher wages to
attract new workers.
Land and factories become scarce and rents begin to rise.
Local roads become congested and so transport costs begin to rise.

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A2 OCR Transport
Market structure and barriers to entry
Market structure: describes the characteristics of a market.
Concentration ratio: the proportion of the total market shared between the nth
largest firms.
A barrier to entry: any obstacle that deters new firms from entering a market.
High start up costs ­ these are the costs necessary to start up a business. E.g. TOCs
require a substantial amount of capital e.g. leasing of rolling stock.…read more

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A2 OCR Transport
Firms and their objectives
Profit maximisation - Fundamental assumption ­ a firm will seek to make as high level
of profit as possible. Profit maximisation occurs where MC=MR.…read more

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A2 OCR Transport
In local bus operation, certain routes or part routes are subsidised to ensure
their continuation. If firms were working only towards profit maximisation,
these services would not operate.
Judgement points
Firms' objectives will vary depending upon who the most influential
stakeholders are
Objectives may well vary depending upon the level of
regulation/application of competition policy by the government.
Other objectives
Profit satisficing - where a firm makes reasonable level of profit that satisfies its
stakeholders without maximising profit.…read more

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A2 OCR Transport
Privatisation: is the process by which a former publicly owned organisation or
activity is sold off to the private sector.
This sale can take various forms: An outright sale to another company, Management
and/or employee buyout, Public sale of shares in a new company
Arguments for privatisation
Private sector firms have more pressure from shareholders to be more
efficient and also to be more motivated and have a greater emphasis on
customer service.…read more

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A2 OCR Transport
Arguments for nationalisation
Advocates argue natural monopolies are best owned and run by state control
to avoid abuse of market power.
Transport is a strategic industry best coordinated by government which
unlike the private sector takes account of external benefits.
Arguments against nationalisation
Privatised natural monopolies can be regulated to avoid abuse of market
power. Overall transport strategy can be coordinated by the state. Subsidies
can be used to ensure private sector firms maintain socially necessary services.…read more


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