aqa year 2 micro companion - amazon s3€¦ · salons addiction to painkillers & other drugs...

Copyrighttutor2u:www.tutor2u.net/economics

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AQAALevelEconomicsCourseCompanionYear2Topics

Microeconomics

Author:GeoffRiley

www.tutor2u.net


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Individualeconomicdecisionmaking................................................................................................4ImperfectInformation........................................................................................................................6BehaviouralEconomics......................................................................................................................8PublicandPrivateSectorOrganisations......................................................................................15ProfitandNot-for-ProfitOrganisations........................................................................................15

Productionandproductivity............................................................................................................18Specialisation,divisionoflabourandexchange...............................................................................18TheLawofDiminishingReturns.......................................................................................................21LongRunReturnstoScale............................................................................................................22

CostsofProduction..........................................................................................................................24Costsofproductionintheshortrun............................................................................................24

EconomiesandDiseconomiesofScale............................................................................................31Longrunaveragecost(LRAC).......................................................................................................31

Marginal,averageandtotalrevenue...............................................................................................38Priceelasticityofdemandandtherelationshiptototalrevenue................................................40

Profit.................................................................................................................................................43Profitmaximisationintheshortrun............................................................................................45

Technologicalchange.......................................................................................................................47EconomicEfficiency(StaticandDynamic)........................................................................................50MarketStructures............................................................................................................................53BusinessObjectives..........................................................................................................................56ProfitMaximisation......................................................................................................................57RevenueMaximisation.................................................................................................................57SalesMaximisation.......................................................................................................................58ProfitSatisficing............................................................................................................................59DivorcebetweenOwnershipandControl&thePrincipalAgentProblem..................................61

PerfectCompetition.........................................................................................................................65AssumptionsoftheModel...........................................................................................................65Profitmaximisationintheshortrun............................................................................................67Profitmaximisationinthelongrun..............................................................................................67Shutdownpriceandbreak-evenprice........................................................................................69PerfectCompetitionandEfficiency..............................................................................................70

MonopolisticCompetition...............................................................................................................72Assumptionsofthemodel...........................................................................................................72Revenuecurvesinmonopolisticcompetition..............................................................................73Profitmaximisationintheshortrun............................................................................................73Profitmaximisationinthelongrun..............................................................................................73Non-pricecompetition.................................................................................................................74Monopolisticcompetitionandeconomicefficiency....................................................................75

Oligopoly..........................................................................................................................................77Assumptionsofthemodel...........................................................................................................77MeasuringMarketConcentration–TheN-FirmConcentrationRatio.........................................78Non-collusiveoligopoly................................................................................................................79GameTheoryinOligopoly............................................................................................................83ThePrisoners’Dilemma...............................................................................................................85PotentialBenefitsfromCollusion–AGameTheoryExample.....................................................87FirstMoverAdvantageinMarkets...............................................................................................87Open/FormalCollusioninanOligopoly......................................................................................89CollusionandEfficiency................................................................................................................92


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Tacit/informalcollusion...............................................................................................................93Monopoly.........................................................................................................................................94NatureofMonopolyPowerinMarkets.......................................................................................94MonopolyandProfitMaximisation.............................................................................................95RevenueMaximisation.................................................................................................................97NaturalMonopoly........................................................................................................................97MonopolyandEfficiency..............................................................................................................99PoliciestoRegulateMonopolyPower.......................................................................................101

PriceDiscrimination.......................................................................................................................103Necessaryconditionsforpricediscrimination...........................................................................103MainAimsofPriceDiscrimination.............................................................................................103TypesofPriceDiscrimination/DynamicPricing........................................................................104PriceDiscriminationandEfficiency/Welfare............................................................................107

Contestableandnon-contestablemarkets....................................................................................108PricesandProfitsinaContestableMarket................................................................................111

TheLabourMarket.........................................................................................................................113DemandforLabour....................................................................................................................113LabourSupply.............................................................................................................................116LabourImmobility......................................................................................................................120Wagedeterminationincompetitivelabourmarkets.................................................................121Wagesandemploymentinimperfectlycompetitivelabourmarkets........................................123MonopsonyintheLabourMarket.............................................................................................123DiscriminationintheLabourMarket.........................................................................................125TradeUnionsintheLabourMarket...........................................................................................127LabourMarketFailure&GovernmentIntervention..................................................................131MinimumWagesintheLabourMarkets....................................................................................132KeyLabourMarketIssuesandDatafortheUK..........................................................................135

Thedistributionofincomeandwealth..........................................................................................141TheLorenzCurve........................................................................................................................143Governmentpoliciestoalleviatepovertyandinfluenceincomeandwealthinequality...........145

Theproblemofpoverty.................................................................................................................146Therelationshipbetweenequityandefficiency........................................................................147

GovernmentIntervention..............................................................................................................148Governmentinterventiontocontrolmergers...........................................................................149Governmentinterventiontocontrolmonopolies......................................................................150Interventiontopromotecompetitionandcontestability..........................................................153Governmentinterventiontoprotectsuppliersandemployees.................................................157Impactofgovernmentintervention...........................................................................................159


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IndividualeconomicdecisionmakingTheconceptofutility

• Utilityisameasureofthesatisfactionthatwegetfrompurchasingandconsumingagoodorservice

• Totalutility:o Thetotalsatisfactionfromagivenlevelofconsumption

• Marginalutilityo Thechangeinsatisfactionfromconsuminganextraunit

• Standardeconomictheorybelievesintheideaofdiminishingreturnsi.e.themarginalutilityofextraunitsdeclineasmoreareconsumed

DiminishingMarginalUtilityandDemandCurve

• Marginalutilityisthechangeintotalsatisfactionfromconsuminganextraunitofagoodorservice

• Beyondacertainpoint,marginalutilitymaystarttofall(diminish)• Thishappenswiththe4thunitwhereMUfallsto12• The8thunitcarrieszeromarginalutilityi.e.totalutilityisconstant• Ifmarginalutilityisfalling,thenconsumerswillonlybepreparedtopayalowerprice• Thishelpstoexplainthedownwardslopingdemandcurveforagoodorservice

QuantityConsumed TotalUtility(TU) MarginalUtility(MU)1 10 102 24 143 40 164 52 125 61 96 68 77 72 48 72 0TheParadoxofValue

Utilityisameasureofsatisfactionfromconsumption

Doestheutilitywegetaffectourwillingnessto

pay?

Cheapwater Expensivejewelry


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• TheParadoxofValueisalsoknownasthediamond-waterparadox• Weunderstandthatwaterisnecessarytosustainlifeandthatornamentssuchas

diamondsarejustthat–certainlylifesustaining.• Butwatertypicallyhasalowprice,whileapieceofdiamondjewelryhasahighmarket

price.• Onereasonisthatwaterisabundantrelativetodemandwhereasdiamondsarescarce

relativetodemando Valueinusei.e.drinkingwatertosatisfyyourthirsto Valueinexchange–whataresourcecanbesoldforinexchangeforother

products.Nothingismoreusefulthanwater:butitwillpurchasescarceanything.Thereverseisusuallytrueforexpensivejewelry

Social&EmotionalFactorsInfluencingDemand

• Socialfactors:o Socialawarenesse.g.awarenessofhealthrisksfromsmoking,gamblingo Socialnorms-changingnormsofbehavioure.g.demandforrecycledbagso Socialpressurese.g.peerpressuresaffectingdemandforlegalhighs&otherdrugs

• Emotionalfactors:o Emotionalarousalcanaffectthedemandforhealthinsuranceaftermajorincidentso Bingedrinkingandeatingattimesofpersonalinsecurityo Demandforproductssuchasfootballseasonticketsandantiquesalsohasastrong

emotionalattachmentNetworksanddemandchoicesbyconsumersIncreasinglyinthedigitaleconomy,thechoicesmadebyconsumersareinfluencedbythedecisionsofothers.Agoodexampleisthedecisionaboutwhichmessengerapptouse–thedatabelowistakenfromfigurespublishedforJuly2015.

800

700

549

300

249

211

200

91

48

0 100 200 300 400 500 600 700 800 900

WhatsApp

FacebookMessenger

WeChat

Skype*

Viber*

LINE

Kik*

BlackBerryMessenger

KakaoTalk

Monthlyactiveusersinmillions


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ImperfectInformation

• Informationfailureoccurswhenpeoplehaveinaccurateorincompletedataandsomakepotentially‘wrong’choices/decisions

• Incompetitivemarkets,itisassumedthereisperfectinformation–i.e.consumersandproducershavefullknowledgeaboutprices,benefitsandcostsofthegoodsandservicesavailable.

Therearemanycausesofinformationfailure

1. Long-termconsequences:Informationgapsaboutlongtermbenefitsofcostsofconsumingaproducte.g.consumptionoflegalhighs

2. Complexity:Informationfailurewhenaproductishighlycomplexe.g.understandingthebestpensionproducttobuy(ifatall!)

3. Unbalanced(asymmetric)knowledge:i.e.whenthebuyerknowsmorethantheseller,orthesellerknowsmorethanthebuyer

4. Priceinformation:Whenconsumersareunabletoquickly/cheaplyfindsufficientinformationonthebestpricesfordifferentproducts

Innearlyeverymarketwefindexamplesof“informationgaps”

Informationgapsandmarketfailure

Risksfromusingtanningsalons

Addictiontopainkillers&otherdrugs

Gainingentrytoelitedegreecourses

Complexityofpensionschemes

Uncertainqualityofsecondhandproducts

Knowledgeofthenutritionalcontentoffoods

Cowboybuildersorother“rip-offmerchants”

TouristBazaarsorbuyingandsellingantiques


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AsymmetricInformationinMarketsAsymmetricinformationiswhenthereisanimbalanceininformationbetweenbuyerandsellerwhichcandistortchoices,Examplesofasymmetricinformationincludethefollowing:

• Landlordswhoknowmoreabouttheirpropertiesthantenants• Mortgages:Aborrowerknowsmoreabouttheirabilitytorepayaloanthanthelender,

insufficientchecksmightbemade• Carinsurancecompaniescannottelltherisksassociatedwithsellingpremiumstoeach

singledriver–theyhavetopoolrisks• Somestudentshavesuperiorknowledgeabouthowtogetintotheelite/bestuniversities

includingwhichpriorcoursestotake• Doctorshavesuperiorknowledgeaboutdrugsandtreatments• Aused-carsellerknowsmoreaboutvehiclequalitythanabuyer• Informationadvantagesforhigh-frequencystockmarkettraders

PoliciesforAddressingInformationFailuresGovernmentactioncanimproveinformationtohelpconsumersandproducersvaluetheactualcostand/orbenefitofagoodorservice.

1. Compulsorylabellingonproducts(cigarettes)2. Improvednutritionalinformation(labellingsystems)onfood&drinks3. Hard-hittinganti-speedingadvertisingtoreducethenumberofroadaccidents4. Campaignstoraiseawarenessoftherisksofdrink-driving/drugabuse5. Campaignsondangersofgamblingaddiction6. Performanceleaguetablesforschools7. Consumerprotectionlawse.g.rightforrefundsoffaultygoods8. Industrystandards/guaranteesforsellingusedproductssuchassecondhandcars

Costs,&Benefits

£s

Output&/&quantity

MPC

P1

Q1

MPB&(limited&information)

P2

Q2

Individuals&may&have&imperfect)information)about&their&own&private&benefits.& If&they&had&better&information&on&the&benefits)to)themselves)of&consuming&a&good&or&service,& the&marginal)private)benefit)curve)would&shift&outwards&leading&to&a&higher)equilibrium)quantity

MPB&(fuller&information)

Market&demand&would&be&higher& if&consumers&had&better&information


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Theusedcarmarkethasplentyofasymmetricinformationbecausepotentialbuyersofavehicleknowlessthantheselleraboutthecar’squality.ThechartbelowtracksasurveywhichasksconsumersintheUK,“Whatinfluencesthetypeofusedcaryouwouldconsiderbuying?

BehaviouralEconomicsFormostoftheYear1microeconomicscourseweassumedthat:

• Rationalconsumerswishtomaximizetheirsatisfactionorutilityfromconsumptionbycorrectlychoosinghowtospendtheirlimitedincome.

• Producers/firmswishtomaximizeprofits,byproducingatlowestcostthegoodsandservicesthataredesiredbyconsumers.Profit=totalrevenue–totalcosts.

• Governmentwishestoimprovetheeconomicandsocialwelfareofcitizens.Behaviouraleconomicstheorieschallengetheassumptionofpurerationalityinourdecisions.Nudgingoutchoices

• BehaviouralEconomicstriestomixinsightsfromPsychologywithEconomics,andlooksatproblemsthroughtheeyeofa“Human”,ratherthanan“Econ”.

• Itusesinsightsfrompsychologytoexplainwhypeoplemakeapparentlyirrationaldecisionssuchaswhypeopleeattoomuch,taketoolittleexercise,ordonotsaveenoughforretirement.

• An“Econ”issaidtobeinfinitelyrationalandimmenselyintelligent,anemotionlessbeingwhocandocost-benefitanalysesatwill,andisnever(ever)wrong.

• Mostofusarenotinfinitelyrational,butratherface“boundedrationality”,withpeopleadoptingsimple,intuitive“rulesofthumb”insteadofcalculatingoptimalsolutionsforeverydecisiontheymake.

Boundedrationality

• Mostconsumersandbusinessesdonothavesufficientinformationtomakefully-informedjudgementswhenmakingtheirdecisions

• Theincreasingcomplexityofproductsalsomakeslifedifficult

28%26%

16%16%

11%10%10%

9%7%

6%4%4%4%4%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Personalexperiencemake/modelViewsfamilyfriends

TestdriveInternetshopping/consumersites

ClassifiedusedcarwebsitesConsumerreports

Usedcarshowrooms/sitesCarsonstreet

MotoringmagazinesDealerwebsites

CarTVshowsDealeradvice

CarmanufactureradvertsFacebook/twitter

Shareofrespondents


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• Boundedrationalitysuggeststhatconsumersandbusinessesopttosatisficeratherthanmaximise

• Theywilluserulesofthumbandapproximationswhenactiveindifferentmarkets

Heuristics

• Heuristicsarebestdescribedasmentalshortcutsorrulesofthumbfordecision-makingtohelppeoplemakeaquick,satisfactory,butperhapsnotperfect,answertoacomplexquestion.

• TheeconomistGerdGigerenzerarguesthatheuristicscanbeanoptimalwaytorespondtooccasionswherewelackinformationortime.Peoplelearnfromexperienceanddevelopmanydifferentheuristicsovertime

• Optimalbehaviourisnotthesameasmaximizingbehaviour

Defaultbiasesinchoices

• Peopleprefertocarryonbehavingastheyhavealwaysdone.• Repeatchoices/purchasesoftenbecomeautomaticbecausedefaultchoicesdon’tinvolve

muchmental(cognitive)effort• Togetpeopletochangebehaviourmayrequirecompellingincentives• Examples:

o Yourchoiceofdailybreakfastcereal/razor/sandwichpreferenceo Politicalpreferencesinelectionse.g.preferringthestatusquo

Abewilderingrangeofcleaningproducts!

Manypeopledonotunderstandcomplex

pensions

Therearesearchcostsinseekingoutall

availableinformation

Lotsofpeoplerelyonrulesofthumbwhen

makingchoices

Divingapizzausing1/n Followingthe5adayprinciple

Rulesforsearchbehaviouronline

Ijustwantaanotherburgerlikelasttime!


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Choicearchitecture

• Choicearchitecturedescribeshowthedecisionswemakeareaffectedbythelayout/sequencing/andrangeofchoicesthatareavailable

• Forexample,gettingstudentstoeatmorehelpfullymightinvolvealteringthedesignoftheschoolorcollegerestaurant

• Smartbuildingdesignsmightmakeitmoreattractive/easiertotakethestairsratherthanusealift!

• Choicearchitectureisoftenmoreeffectivewhenitencouragessimplicityinthedecisionsthatpeoplehavetomakeandinwhichthebenefitsandcostsaremadeclear.

Choicesinfluencedbysocialnorms

• Ourday-to-daybehaviourinmarketsisinfluencedbyprevailingsocialnormsorsocialcustoms

• Examples:o Thechangingsocialstigmaofdrink-drivingandspeedingontheroadso Observingwhitelinesincarparkso Queuingbehaviourinshopso Impactonpeople’sbehaviourofsmokingbansinpublicplaceso Makingseat-beltscompulsory–thisappearstohavecreatedconventionswhich

thenbecameself-sustaining• Socialnormsabout“giving”e.g.forcharitablefund-raising• Socialnetworkscanamplifydifferentformsofbehaviour(forgoodorbad)

Socialnormsbecomeacceptedbythemajorityofagivencommunityofpeople

Mostofusechoosethesamebreakfast!

OurmenuchoicesatplacessuchasNando’sare

predictable

Adefaultopt-in(orautoenrollment)canhavea

powerfuleffect

Gettingmorepeopletousethesaladbarat

lunch

Trafficflow&speedisinfluencedbytheroad

architecture

Howcanweencouragepeopletoavoidthelift

andtakemoreexercise?

Howbesttogetpeopletousehandsanitizersmorefrequently?


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Herdbehaviour

• Weareherdanimalsandweoftenmakedecisionsbasedinpartonwhoisaroundusandthechoicestheymake

• Examples:o Choosingitemsoffamenuinarestauranto Herdbehaviourofinvestorsinfinancialmarketso Bingedrinkersgoingonholidaywitheachothero Fanaticalsupportersoffootballclubs

Anchoring

• Valueisoftensetbyanchorsorimprintsinourmindswhichwethenuseasmentalreferencepointswhenmakingdecisions.

• Someanchorsestablishinourmindalowprice;othershelptoestablishahigherbasicpricethatweshouldbebepreparedtopayonaregularbasis

• Examplesofpriceanchoring:o “BigPriceDrop”campaignsbysupermarketso Refereeingdecisionsmightbeanchoredbythesizeofhomecrowdo Priceanchorsareusedinmenusatrestaurantsandincoffeeshopso Recommendedtipsusedbytaxicompanies/restaurants

Respectingseatbeltlaws Socialnormswhenqueuing

Notsmokinginpublicplaces

Socialnormsatthepubsuchasbuyingaroundof

drinks

Herdbehaviourisoftenseeninfinancialmarkets

AmazonPrime– peopledon’twanttomissoutonagreat

deal

Ratingssystemsforhotels,books,generalproducts

Offerpriceforhousesonsaleisananchorforpotentialbuyers

PricingofnewproductssuchastheAppleWatch

McDonaldshasaloweranchorpricethan

Starbucks


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Priming• Ourbehaviourbycuesthatworksubconsciouslyandprimeustobehave/choosein

certainways• Examplesofprimingtochangebehaviour:

o Playingofcertaintypesofmusicinashoppingmall/primingthrougharomao Subliminalcuesinfilms/TVadverts,subliminalcuesbeforeaninterviewo Studentssigninganhonor-codeatuniversitybeforetheyhandinassignmentso Showingpicturesofoldercitizensmaycausepeopletowalkmoreslowlyo Whenapictureofawomanappearedonamathtest,femalestudentswere

remindedtorecalltheirgenderandperformedworseonthetest(Shihetal1999)

Framing

• Framingaquestionorofferingitadifferentwayoftengeneratesanewresponsebychangingthecomparisonsetitisviewedin–smalldetailsmatter!

• Alteringwhatinformationisprovided,anditsdesigncanhelppeoplemakebetterdecisions

• Peoplewhousenarrowframingoftendrawheavilyonautomatic/defaultassumptions• Examplesofframing:

o FramingofprivacysettingsonsocialnetworkssuchasFacebooko Presumedconsentforhumanorgandonationstoincreasethesupplyoforganso Framingofreferendumquestionso Framingofinterestpaidonloanso Asymmetricframingo Involvesincludinganobviouslyinferior3rdchoiceorahyper-expensive3rdoption

ratherthanasimpleexpensive/cheapchoicecanguideconsumerstomoreexpensively-priceditems

AvailabilityBias/AvailabilityHeuristic

• Biasesaffecthowpeopleprocesscomplexinformation

Howeffectiveissubliminaladvertising?

Labellingaproductaspremiumaffectsourexpectations!

Istherelessplagiarismwithanhonourcodeatuniversity?

90%fatfreeor10%fat?Whichismosteffective inshaping

spending?

TheframingoftheGreekreferendum

ballotpapermayhavebeenimportant


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• Theavailabilitybiashappenswepeopleoftenjudgethelikelihoodofanevent,orfrequencyofitsoccurrencebytheeasewithwhichexamplesandinstancescomeeasilytomind.

• Mostconsumersarepooratriskassessments–forexampletheyover-estimatethelikelihoodofattacksbysharksorlistaccidents.

• Smokersmayseeoneelderlyheavysmokerandexaggeratethelikelyhealthylifeexpectancyofthisgroup.

• Periodsofverywarmweatheraffectbeliefsaboutcausesofclimatechange• Peoplebuymorelotteryticketsifabigwinnerhaslivedlocally

CommitmentContractsandChoices

• Thereisoftenadividebetweenintentionandactionespeciallyforpeoplewithlimitedresolveandthosevulnerabletotemptation!

• Themorepublicourposition,thelesswillingwearetochangeit• Wefeelstronglyaboutactivitieswherewehavemadeapersonalcommitment• Commitmentcontractscanreinforcedecisionstoadopthealthfulbehaviors• Theyimposeapenaltyifpeopledonotreachagoal–invokinglossaversion• Conditionalcashtransfers(CCTs)havebecomepopularinmanypoorercountries• Examples:

o Committingyourselftoadietusinganonlineappo Commitmenttojoiningalocalsavingsscheme/credituniono Commitmentsignalstoapartnerusinganexpensivegift

SomeBehaviouralEconomicsinAction

Themajorityofpeoplearepooratestimating

probability

Afteranaircrash,morepeopletakethetrain

fearinganotheraccident

Seeinganolderheavysmokerinthemediamaycausetheavailabilitybias

Pre-commitmentcancementachoice

Wearemorelikelytovalueselfassemblyfurniturewebuy

Commitmentappsarebecomingmore

popular!


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CriticalEvaluation:AreBehaviouralNudgesEffective?

• Behaviouraleconomicsmayencouragegovernmenttobecometoopaternalisticintheirpoliciesattemptingtonudgebehaviour

• Behaviouraleconomicsfocusestooheavilyonpeople’svulnerabilitytofallforfallaciesandtheirpsychologicalbiases–itcangivetheimpressionthatconsumersaredumb

• Infact,consumersusingwell-practicedrulesofthumbmightbeoperatinginarationalway• Thereareclearlimitstotheapplicationofnudgetheory–itmaybeusefulinchanging

minorbehavioursinamodestwaybutnotindeeprootedpsychologicalproblemssuchasalcoholismandstreetviolence

• Conventionalpolicyinterventionssuchastaxes,subsidiesandregulationsareoftenjustaseffectiveasnudges

OrganDonationandtheimportanceofform

design

CashincentivesfromtheNHStohelpstoppeople

smoking

“Chunking”toincreasetherateofdrug

treatmentcompletion

Lotteriestoencourageweightlossorcutspeedingonroads

Usingsimplechecklistsinhospitalstoreducenumberofx-rays

Choicearchitecturetoencouragehealthy

eating

Usingthearomaofdisinfectantgelto

encourageregularuseinhospitals

Adding£160costofappointmenttoatext

reminderreducedNHSnon-attendersby25%

“Helpyourfriendraiseevenmoremoneybysharing

theirpage”raisedgivingby28%

Auto-enrolmentcombatsstatusquobiasforpensions

Alignteacherinterestswithstudentlearningwithsocial

rewards


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PublicandPrivateSectorOrganisationsPublicsectororganisationsarewhollyorpartlyownedandrunbythestate/government.ExamplesofpublicsectororganisationsintheUK

• BritishNuclearFuelsplc.• NetworkRail• BradfordandBingley• RoyalBankofScotland• Urenco–theUKgovernmenthasa33%stakeinthisuraniumenrichmentcompany• CompaniesHouse• TheMetOffice• OrdnanceSurvey• NuclearDecommissioningAuthority• TheUKgovernmentalsohasastakeinChannel4Television,Eurostar,theRoyalMintandthe

GreenInvestmentBankPrivatisation

• Privatisationmeansthetransferofassetsfromthepublic(stateorgovernment)sectortotheprivatesectorofaneconomy–privatisationcausesachangeofownership

• IntheUKtheprocesshasledtoareductioninthesizeofthepublicsector.• State-ownedenterprisesnowcontributelessthan2percentofGDPandonly1.5%oftotal

employment.• Privatisationhasbecomeacommonfeatureofmicro-economicreformsthroughoutthe

worldnotleastinmanytransitioneconomiesincludingalargenumberineasternEurope• ButoverrecentyearsprivatisationintheUKhasgivenwaytoanewwaveof

nationalizationincludingsomehighprofilebanks,buildingsocietiesandtransportservices.PrivatizationsintheUKovertheyears

• AssociatedBritishPorts(1983)• BritishAerospace(1980)• BritishAirportsAuthority(1986)–boughtbyFerrovialin2006• BritishAirways(1987)• BritishCoal(1994)• BritishGas(1986)• BritishPetroleum–Graduallyprivatizedbetween1979and1987• BritishSteel(1988)• BritishTelecom(1984)• NationalPowerandPowerGen(1990)• Regionalwatercompanies• PlasmaResourcesUK–abloodplasmabusinesssoldtoBainCapitalin2013• BritishWaterways–whichbecameacharitabletrustin2012• TheTote–soldtoBetfredin2011• TheRoyalMail(2013)–fullyprivatizedin2016

ProfitandNot-for-ProfitOrganisationsProducerCooperatives

• Co-opsareownedandrunbytheirmembers,whocanbecustomers,employeesorgroupsofbusinesses.


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• Thesupermarkets-to-funeralsCo-opGroupisthebiggest,followedbyJohnLewisPartnership,theretailer.

• Farmers’co-opsarepopularintheUK.• Otherco-opsincludecommunitypubs,supporter-runfootballclubsandfostercareand

localchildcareproviders• Thesebusinessesarefoundedandrunonprinciplesofsharedownership,sharedvoiceand

sharedprofits.SocialEnterprises

• Asocialenterpriseisanot-just-for-profitbusinesscreatedtoaddressasocialproblem• Profitsarereinvestedforoneormoresocialpurposesinthecommunity,ratherthanthe

needtosatisfyinvestors• In2013,researchfoundthattherewere70,000socialenterprisesintheUKcontributing

over£18bntotheeconomyandemployinghundredsofthousandsofpeople.• GoodexamplesofsocialenterprisesincludeJamieOliver’sFifteenrestaurantchain,theBig

IssuemagazineandtheEdenProjectinCornwallNotforProfit&NotforDividendFirms

• Notforprofitbusinessesarecharities,communityorganisationsthatarerunoncommerciallines

• NetworkRailisagoodexampletouse:o NetworkRail’spurposeistodeliverasafe,reliableandefficientrailwayforBritaino Itisacompanylimitedbyguarantee–whosedebtsaresecuredbythegovernmento NetworkRailisa"not-for-dividend"company-profitsareinvestedinthenetwork.o TrainoperatingcompaniessuchasFirstGreatWesternandVirginTrainspay

NetworkRailforuseoftherailinfrastructurewhenrunningserviceso NetworkRailisgiventargetsforpunctualityandsafetybytheRailRegulator

TheBBCTheBBCrunsasapublicsectorenterprise,incomparisontoprivatesectorrivalslikeSkyandITV.AsizableproportionoftheBBC’sincomeisderivedfromcommercialactivities.AccordingtotheBBC's2013/14AnnualReport,itstotalincomewas£5,066millionbrokendownasfollows:

• £3,726millioninlicencefeescollectedfromhouseholders;• £1,023millionfromtheBBC'sCommercialBusinesses;• £245millionfromgovernmentgrants,ofwhich£239millionisfromtheForeignand

CommonwealthOfficefortheBBCWorldService;• £72millionfromotherincome,suchasrentalcollectionsandroyaltiesfromoverseas

broadcastsofprogrammingCorporateSocialResponsibility(CSR)Corporatesocialresponsibility(CSR)happenswhencompaniesintegratesocialandenvironmentalconcernsintotheirbusinessoperationsandintheirinteractionwiththeirstakeholdersonavoluntarybasis.SomereasonswhyfirmsareembracingCSRinclude:

1. Altruism–beingagoodcitizen2. Contractingbenefits–e.g.helpsrecruit,motivateandretaingoodqualityemployees3. Customer-relatedmotivation:attractcustomers;brandpositioning4. Improvedfinancialperformance:Sociallyresponsibleactionscanbeprofitable5. Lowerproductioncosts(i.e.lesspackaging,moreefficientenergyusage)6. Riskmanagement–addresspotentiallegalorregulatoryaction


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7. Improvedaccesstocapital–forexample,theriseethicalinvestmentfundslookingtomakeequityinvestmentsincompanieswithstrongCSRreputations

TheDebateonSocialResponsibility

• Notallbusinessorganisationsbehaveinasociallyresponsiblemanner• Somearguethatitisnotthejobofcommercialprivate-sectorbusinessestobeconcerned

aboutsocialissuesandproblemsTwoschoolsofthought:

1. Freemarketview:thejobofbusinessistocreatewealthforshareholders2. Corporatesocialresponsibilityview:businessshouldbeconcernedwithsocialissues

ThebusinesscaseagainstCSR:

• Theonlysocialresponsibilityofbusinessistocreateshareholderwealth• Theefficientuseofresourceswillbereducedifbusinessesarerestrictedinhowtheyact• Businessescannotdecidewhatisinsociety’sinterest• Extracostswillbeincurredwhichmustbepassedontoconsumers• CSRstiflesinnovation

Counter-arguments–theStakeholderView

• Businessesdonothaveanunquestionedrighttooperateinsociety• Thosemanagingbusinessshouldrecognisethattheydependonsociety• Businessreliesoninputsfromsocietyandonsociallycreatedinstitutions• Thereisasocialcontractbetweenbusinessandsocietyinvolvingmutualobligationsthat

societyandbusinessrecognisethattheyhavetoeachother

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