EconomicsNotes

  Economic theory holds that competition between many small firms, with no barriers to entry or exit and an homogenous product, is an ideal state. This is because the consumer will be sovereign in such a situation, and each individual firm will face an horizonal AR and MR line corresponding to the market equilibrium price. In order to exist and make normal profit, a firm will therefore push costs down to the lowest average cost or leave the market, which is also the point where average cost will equal marginal cost and marginal revenue. This will result in allocative and productive efficiency and create an incentive for anyone with innovative ideas to temporarily push costs lower, making an abnormal profit. In the long run, however, since perfect knowledge and perfect information might exist in such circumstances, every supplier will copy the original breakout firm, and customers will gain more goods at a lower price because of the increase of supply. In this perspective, merger...

The theory of oligopoly is focussed on a stable market in which a few large firms dominate the supply of items and can have power over price or supply. This may be because of economies of scale or high barriers to entry. Barriers to entry can include sunk costs, legal and regulatory protections and requirements such as patents or performance rules, and resource availability. Within such a market, the theory assumes that the Demand curve for the individual firms corresponds to their Average revenue curves. These lines are ‘kinked.’ This means that the AR is inelastic and stable below a certain price point, because customers are not purchasing below the kink based on price, and elastic above the point, because the customers are price sensitive. Very few oligopoly models assume that the AR line is vertical below the kink, which means that there is some scope for different prices at different levels of output. Given that customers are highly inelastic, any price cuts would nevertheless...

    A firm is an economic entity engaged in business. Economic theory assumes that the firm, like the consumer, maximises its self-interest. This self interest is however the product of the interplay of market structure, business organisation, and chosen or required objective. So, for instance, some firms might choose to profit-maximise, some to profit satisfy, some to revenue maximise, and some to sales-maximise, or even engage in loss-leading predatory behaviours. Oligopoly firms might take their cue from other firms, and find that price-maximisation is only really possible if they can join a cartel; imperfectly competitive firms might sustain a loss in the short run, covering their variable costs and making a contribution to fixed ones, if they think that this will lead to ultimate survival in a temporarily tough market. These decisions often relate to the nature of the firms. A sole trader’s objective, for instance, may include the freedom and control that working for on...

  Nationalisation means the process whereby a business is taken into government ownership and is run by a public authority. Between 1945 and 1985, many British companies were nationalised ones. Governments, starting consistently in the 1980s, sold these companies to the private sector with the aim of changing companies which required public funding into ones that generated tax revenue. In addition, attempts were made to create or emulate markets in the areas where the firms operated, often by breaking the firms up into a number of new ones, so as to introduce choice for customers, competition, and dynamic efficiency. A trade-off was accepted in which formerly public companies made private profits, often accompanied by subsidy, for shareholders, but where shareholders invested in infrastructure and capital. This was accompanied by government regulation of price and services. It was the case, however, that many industries were originally natural monopolies. This is a situation in w...