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Edexcel Economics A2 Unit 3

Business Economics and economic efficiency

How do firms grow?

Expanding scale of operation & increasing market share
Horizontal: merger between 2 firms in the same stage of production
Vertical: merger between firms at different stages of the production
process (forward/backwards)
Conglomerate: merger between…

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imposed by existing firms
branding/ad campaigns
known as sunk costs as money cannot be recovered if fails
potential new firms will have to spend the same on market if they are
to compete on a level playing field

Pricing barriers

Predatory: p is below costs to drive out other firms…

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May result in unwanted requests from larger firms to buy

Tax thresholds & other benefits of remaining small

Small= access to grants & financial support, not liable for certain taxes

Why do some firms break up?

Too large=Diseconomies of scale
Growth of output= lose focus & control= LRAC increase

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Marketing: growth= create a central brand to advertise range at lower
extra cost
Managerial: have a better position to employ specialist= increased
productivity= lower LRAC
Increased dimensions: x2 dimensions= x8 volume


When an entire industry expands= lower LRAC
Benefiting from innovations from other firms
Retailers located close to each…

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Gov : make sure firms are allocatively efficient where P=MC
Satisficing: making just enough profit to keep stakeholders happy whilst
allowing other motives to be pursued
LR profit maximisation by aiming for market dominance in SR= profits in

Strategies to gain market share/ increase

Predatory: pricing below…

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Knowledge Perfect Imperfect Imperfect imperfect
Barriers to None Low High high
P setting P-taker Some degree Significant but P maker
powers in local interdependent

Perfect competition
Many small firms
Homogenous goods
Perfect knowledge
No barriers to entry
Price takers
SR possibility of making supernormal profits

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P war= unwanted
Characterised by non-p comp


Agreement between 2/more firms to limit comp
Illegal due to restrictive nature & - impact on consumers
Overt: openly collude
Tacit: unspoken
Always temptation to break agreement to maximise firm's sales by lowering
P & be a whistle blower thus don't get…

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Contestable markets
Low sunk costs & low barriers to entry/exit
Hit and run profits are possible

When sellers face powerful buyers
Power allows a firm to exploit its suppliers in the knowledge that
the supplier has few options beyond selling to the sole buyer
Low p can be passed…

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Direct control by gov of firms
Used when market forces are judged to be inadequate
Protect consumer interests
Gov tries to act as a surrogate for comp by making firms cut P/legal action
Fines if not followed

Controlling the monopolies created by privatisation

Gov appointed as regulator as a…

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Controls in response to the credit crisis

Banks can only lend in certain amounts to people
Several UK banks were nationalised

Controls from outside the UK

EU rules overrules UK rules


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