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 by: Jade
  • Created on: 20-01-13 11:56

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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…

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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 ­…

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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.

Why might firms choose to profit maximise?

Firms will be keen to maximise profits to keep shareholders happy/maximise

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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…

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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…

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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…


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