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WEC13 Business behaviour

Edexcel IAL Economics, Unit 3 (A2 unit, usually Year 13). 30 lessons so far, in the suggested order.

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Lessons in WEC13

  1. Types of business: sectors, ownership and purpose
    Private sector: owned by individuals or shareholders. Public sector: owned by the state (SOEs). Not-for-profit firms reinvest surpluses. Co-operatives are membe
  2. Business size and methods of growth
    Organic growth is slow but low risk. Horizontal: same stage; vertical backward: towards suppliers; vertical forward: towards consumers; conglomerate: unrelated
  3. Constraints on growth, staying small and demergers
    Growth is limited by market size, finance, owner objectives and regulation. Growth affects firms, workers and consumers in different ways. Demergers happen when
  4. Business objectives: profit, revenue and sales maximisation, satisficing
    Profit max: MC = MR. Revenue max: MR = 0. Sales volume max: AR = AC. Satisficing: a satisfactory profit while meeting other stakeholders' goals.
  5. Divorce of ownership from control: the principal-agent problem
    Principal (owner) and agent (manager) have different objectives plus asymmetric information, so managers may not maximise profit. Remedies: performance pay, mon
  6. Total, average and marginal revenue, and PED
    TR = PQ; AR = P (the demand curve); MR = ΔTR/ΔQ. For a price maker MR < AR with twice the slope. MR > 0 elastic, MR = 0 unitary (TR max), MR < 0 inelastic.
  7. Short-run costs and the law of diminishing returns
    Short run: some factor fixed. Diminishing returns: MP eventually falls, so MC rises. TC = TFC + TVC; AC = TC/Q; MC = ΔTC/ΔQ. MC cuts AVC and ATC at their minimu
  8. Linking product and cost curves; short-run and long-run costs
    MC = W/MP and AVC = W/AP, so cost curves mirror product curves. LRAC is the envelope of SRAC curves; its U shape comes from economies and diseconomies of scale,
  9. Economies of scale and minimum efficient scale
    Internal economies (technical, financial, managerial, marketing, purchasing, risk-bearing) move the firm down its LRAC. External economies (skilled labour, tran
  10. Diseconomies of scale and X-inefficiency
    Diseconomies of scale: LRAC rises with scale (communication, co-ordination, motivation, X-inefficiency). X-inefficiency: producing above the lowest possible cos
  11. Normal and supernormal profit, losses and shutdown points
    Normal profit (AR = AC) is a cost. Supernormal profit = (AR - AC) x Q. Short run: produce if P ≥ AVC. Long run: stay if P ≥ ATC.
  12. Efficiency: allocative, productive, dynamic and X-efficiency
    Allocative: P = MC. Productive: MC = AC (min AC). Dynamic: innovation over time, funded by supernormal profit. X-efficiency: no slack, on the lowest AC curve.
  13. Concentration ratios
    CRn = combined market share of the n largest firms. High ratio suggests oligopoly. Limits: hides the distribution within the top n, depends on market definition
  14. Perfect competition
    Many firms, identical products, perfect information, free entry and exit. Firms are price takers: P = AR = MR; produce at MC = MR. Long run: normal profit only,
  15. Monopolistic competition
    Many firms, differentiated products, low barriers. Short run: possible supernormal profit at MC = MR. Long run: AR tangent to AC, normal profit, excess capacity
  16. Oligopoly: characteristics and barriers to entry and exit
    Oligopoly: few dominant firms, interdependence, barriers. Barriers: economies of scale, limit pricing, patents, branding, sunk costs, legal barriers. Sunk costs
  17. Oligopoly: game theory, collusion and cartels
    Payoff matrices show interdependence. Dominant strategy: best whatever the rival does. Nash equilibrium: no firm gains by changing alone. Collusion (cartels, pr
  18. Oligopoly: price and non-price competition
    Price competition: price wars, predatory pricing (below AVC to remove rivals), limit pricing (deter entry). Non-price: advertising, quality, endorsement, produc
  19. Monopoly and natural monopoly
    Monopoly: one seller, no close substitutes, high barriers. Produce at MC = MR, price from AR: higher price, lower output, long-run supernormal profit, deadweigh
  20. Third-degree price discrimination
    Conditions: market power, separable markets with no resale, different PEDs. Set MC = MR in each market; higher price in the more inelastic market. Firms gain pr
  21. Monopsony
    Monopsony: one dominant buyer. In labour markets, MCL lies above supply; hire where MCL = MRP and pay the wage on the supply curve: lower wages and employment t
  22. Contestable markets
    Contestable market: free entry and exit, no sunk costs, so hit-and-run entry is possible. Incumbents keep prices near average cost and earn near-normal profit,
  23. The demand for labour
    Labour demand is derived demand, shown by MRP = MP x MR. Hire until MRP = wage. Demand shifts with product demand, productivity and the price of capital; it is
  24. The supply of labour
    Labour supply depends on population, migration, income tax, benefits, regulation and trade unions. Supply is inelastic when long training is needed or workers a
  25. Wage determination in competitive and non-competitive labour markets
    Competitive: wage where MRP (demand) = supply. Monopsony: lower wage and employment. Union above equilibrium: higher wage, less employment; facing a monopsony i
  26. Labour market failure: immobility of labour
    Geographical immobility: housing costs, family ties, moving costs. Occupational immobility: skills mismatch, training costs, discrimination. Result: structural
  27. Government intervention: controlling monopolies and mergers
    Tools: price caps (RPI - X), profit regulation, quality standards, performance targets, referral to the competition authority, merger control (CMA blocked Sains
  28. Promoting competition and protecting suppliers and workers
    Promote competition: grants and tax breaks for small firms and FDI, deregulation, privatisation, competitive tendering, trade liberalisation. Protect suppliers
  29. Government intervention in labour markets
    Minimum wage above equilibrium in a competitive market: higher pay, lower employment. In a monopsony it can raise wages and employment. Other tools: maximum wag
  30. WEC13 exam technique: Business behaviour paper
    WEC13: 2 hours, 80 marks: 6 MCQs, a 34-mark data response, two 20-mark essays from three. Essays: 12 marks KAA + 8 evaluation. Always draw a diagram and use the

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