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Economics > Microeconomics > Flashcards

Microeconomics Flashcards

1
Q

Which countries, due to competition from Japan in the 1970s and 80s, looked towards TQM as a way to gain more competitive exports?

A

USA and UK

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2
Q

Define - Total Quality Management

A

An effort to install a climate in which a firm improves its ability to deliver high-quality products and services to customers

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3
Q

Define - Product-line Pricing

A

The practice of pricing a core product at below average cost and pricing complementary goods and accessories at a high mark-up

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4
Q

Define - Price Dripping

A

A practice of disclosing only incrementally the various fees and charges consumers must pay for goods or services

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5
Q

Price _ allows a firm to recover its sunk costs quickly before competitions steps in and lowers price

A

Skimming

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6
Q

Define - Price Skimming

A

A pricing strategy which sets a relatively high price for a product at first, then lowers the price over time

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7
Q

Define - Penetration Pricing

A

A pricing technique which sets a relatively low initial entry price to attract new customers (requires low customer loyalty)

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8
Q

Define - Price Discounts

A

A pricing strategy a firm may engage in to stimulate sales (BOGOF, two for the price of one)

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9
Q

Define - Cost-plus Pricing

A

Where a firm sets its price by adding a certain percentage for profit on top of average cost

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10
Q

Define - Limit Pricing

A

Where a monopolist, or oligopolist, charges a price below the new entrant’s AC to deter entry

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11
Q

Define - Predatory Pricing

A

Where a firm sets its prices below its own AC in order to drive competitors out of business

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12
Q

We cannot tell whether a monopolist charges low prices because he fears market entry or he exploits _ which let him set low prices

A

Economies of Scale

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13
Q

Give three things which make a market less contestable

A
  1. Information asymmetry
  2. Limit pricing
  3. Customer loyalty
  4. High sunk costs (and other barriers to entry)
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14
Q

The more contestable a market is, the more likely that an _ efficient outcome is achieved

A

Allocatively

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15
Q

Lidl and Aldi having most of their products as own-label gives them purchasing power with _

A

Suppliers

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16
Q

Define - Hit and run entry

A

When a business enters an industry to take advantage of temporarily high (supernormal) market profits

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17
Q

Define - Contestable Market

A

Where an entrant has access to all production techniques available to incumbents and entry decisions can be reversed without cost

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18
Q

High _ costs act as a barrier to entry of new firms because they risk making significant losses if they decide to exit the sector

A

Sunk

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19
Q

In 2015 Porsche revealead a £544 million project to challenge _ dominance in the battery-powered sports car market

A

Tesla’s

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20
Q

Define - Disruptive innovation

A

An innovation that disrupts an existing market, displacing established market leaders and alliances

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21
Q

From 2013-2015 Peer to Peer Lending through Funding Circle lent _ more to startup businesses

A

285 million

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22
Q

By how much did Netflix’s revenue increase from 2013-2015?

A

2.3 billion

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23
Q

As of January 2016 one of the last countries to not have Netflix streaming service available to them was _

A

China

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24
Q

What universal factor has contributed to making all markets more contestable to some degree?

A

Technology

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25
Q

Define - Surge-pricing model

A

Charging higher fares when demand is rising (such as at peak times during the day)

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26
Q

Which taxi firm has recently entered the mini-cab market to show that barriers to entry in Monopolistic Competition are low?

A

Uber

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27
Q

In the short run what is the state of the three economic efficiencies in Monopolistic Competition?

A
  1. Produce above minimum AC and hence productively inefficient
  2. Allocatively inefficient
  3. Dynamically efficient
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28
Q

In the long run what is the state of the three economic efficiencies in Monopolistic Competition?

A
  1. Produce above minimum AC and hence productively inefficient
  2. Less Allocatively inefficient
  3. Dynamically inefficient as normal profits are made
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29
Q

Give five characteristics of a monopolistically competitive market

A
  1. Contestable (Low barriers to entry and exit)
  2. Firms have some degree of price setting power
  3. Normal profits made in long run, however market always in flux
  4. Imperfect information
  5. Low concentration ratio
  6. Independent decision making]
  7. Product differentiation
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30
Q

Give three examples of monopolistically competitive industries

A
  1. Hairdressers
  2. Minicabs
  3. Restaurants
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31
Q

Why, if supernormal profits are made in the short run, are normal profits made in the long run in monopolistic competition?

A

If profits are made in the short run, more firms join the market (because of low barriers to entry), which decreases each firm’s individual demand until AR is tangential to AC.

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32
Q

Why, if losses are made in the short run, are normal profits made in the long run in monopolistic competition?

A

If losses are made in the short run, firms leave the market (because of low barriers to exit), which increases each firm’s individual demand until AR is tangential to AC

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33
Q

Give the four types of product differntiation

A
  1. Distribution differentiation
  2. Human capital differentiation
  3. Marketing differentiation
  4. Physical differentiation
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34
Q

Define - Distribution Differentiation

A

Including distribution via internet shopping, such as Amazon, which differentiates from bookstores by selling online

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35
Q

Define - Human Capital Differentiation

A

Where the firm creates differences through the skill of its employees, the level of training received, distinctive uniforms

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36
Q

Define - Marketing Differentiation

A

Where firms try to differentiate their product by distinctive packaging and other promotional techniques

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37
Q

Define - Physical Differntiation

A

Where firms use size, design, colour, shape, performance, and features to make their products different

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38
Q

Give three costs of advertising

A
  1. Creates materialism
  2. Brand loyalty acts as a barrier
  3. There are opportunity costs
  4. Misleads consumers
  5. Packaging causes environmental damage
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39
Q

Give three advantages of advertising

A
  1. Provides new information
  2. Helps firms grow and benefit from Economies of SCale
  3. Encourages price competition through revealing prices
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40
Q

Give an example of a first mover

A
  1. eBay - Online Auction
  2. Kleenex - Facial tissues
  3. Amazon - Online bookstore
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41
Q

Coca-Cola, invented in 1886 was a first mover. When Pepsi-Cola was invented 13 years later coke was already selling _

A

1 million gallons p.a.

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42
Q

Give three disadvantages to being a first mover opposed to a follower

A
  1. First movers sometimes rigidly adhere to their original path, even when it isn’t working
  2. Followers can utilize newer technologies that become available, while first movers may be heavily invested in older ones
  3. Followers may be able to examine the processes of first movers and modify them for greater efficiency
  4. Followers to first movers into a market can learn from the mistakes of the first movers
  5. First movers bear the economic burden of developing a new market that followers into the market can exploit
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43
Q

Give three advantages to being a first mover opposed to a follower

A
  1. First movers may have a sustainable advantage when there is a high cost involved for customers to switch brands at a later date
  2. First movers may have an advantage in controlling resources, such as a strategic location or a contract with key suppliers
  3. First movers have more time to refine their processes and to perfect their products or services
  4. First movers have the potential to make a lasting impression on customers, leading to brand loyalty
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44
Q

Give your default game theory values

A

Cell A: Airline A raise price, Airline B raise price - £10+£10 = £20
Cell B: Airine A raise price, Airline B lower price - £3+£12 = £15
Cell C: Airline A lower price, Airline B raise price - £12+£3 = £15
Cell D: Airline A lower price, Airline B lower price - £6+£6 = £12

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45
Q

In a game theory matrix, each firm independently wishes to lower price, as this has the greatest potential for them to maximise single profits, however what is the implication of this?

A

Both firms will lower price which in turn will mean they reach Nash Equilibrium and earn the lowest possible joint profits. To maximise joint-profits the firms would both need to collude, and raise prices together

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46
Q

With the _ it is in both prisoner’s best interests to confess. However if both confess they both get the maximum number of years in jail

A

Prisoner’s Dilemma

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47
Q

Why won’t rivals follow a price increase by an oligopolist?

A

Because PED will be greater than 1, and if you raise price when PED is greater than 1 demand will for more than proportionally meaning less revenue. Thus to gain market share rivals would avoid raising price

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48
Q

Why will rivals match price cut of an oligopolist?

A

Because PED will be less than 1, and if you cut price when PED is less than 1 demand will rise more than proportionately. Thus to avoid losing market share rivals must also cut prices

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49
Q

The Kinked Demand Curve explains why there is _ in an oligopoly

A

Price Rigidity

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50
Q

What happens on a Kinked Demand Curve if MC decreases or increases?

A

Prices don’t change

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51
Q

The rule of thumb existence for an oligopoly is when the five firm concentration ratio is greater than or equal to _

A

60%

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52
Q

Define - Price Fixing

A

A practice whereby rival companies come to an illicit agreement not to sell goods or services below a certain price

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53
Q

Define - Price War

A

A battle between two or more firms that involve the constant dropping of prices to match the drop of competitors

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54
Q

Define - Price Leadership

A

When a firm that is the leader in its sector determines the price of goods or services (illegal)

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55
Q

From 1973 to 1979, the price of oil increased by _ per barrel

A

$70

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56
Q

There is a risk with collusion to be exposed for _ by market regulators

A

Illegal Price Fixing

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57
Q

Give three factors favouring collusion

A
  1. Dominant firm to follow
  2. Barriers to entry
  3. Little government intervention
  4. Small number of firms
  5. Firms don’t keep secrets
  6. Firms have similar ACs
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58
Q

Give three examples of cartels

A
  1. OPEC - Oil
  2. De Beers - Diamond Exploration
  3. International Tea Producers Forum
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59
Q

Define - Cartel

A

A formal organisation of producers (oligopolists) which set prices/divide the market to maximise joint-industry profits

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60
Q

Give five characteristics of a cartel

A
  1. Combines firms’ MC curves and produces where MC=MR to maximise profits
  2. Illegal
  3. Firms compete typically through non-price competition
  4. Sometimes output quotas are set per firm
  5. May find it hard to share out profits
  6. Firms have to have similar ACs otherwise some firms may want to lower output
  7. If market crashes individual firms would want to reduce price
  8. Undermined by entry of new firms
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61
Q

Give two reasons for collusion

A
  1. Deter new entrants

2. Maximise joint profits

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62
Q

Define - Tacit Collusion

A

When a dominant firm in an industry becomes a price leader. Or firms agree to avoid price wars. Not explicitly colluding, but rather doing in a way that is unspoken

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63
Q

Define - Covert Collusion

A

When firms try to hide the results of their collusion and avoid detection by regulators

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64
Q

Define - Over Collusion

A

When firms form trade associations and hence collusion becomes easy to detect or trace

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65
Q

Define - Non-cooperative oligopoly

A

An oligopoly where firms compete against each other for a bigger market share

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66
Q

Define - Co-Operative oligopoly

A

An oligopoly where firms collude with each other

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67
Q

Give three characteristics of an Oligopoly

A
  1. Differentiated products and brand proliferation
  2. Price rigidity
  3. Avoiding price wars
  4. High concentration ratios (dominated by a few large firms)
  5. High barriers to entry (partly naturally exploited and partly imposed overtly by incumbent firms)
  6. Non-price competition
  7. Interdependence
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68
Q

Give three examples of non-price competition

A
  1. Advertising
  2. Free installation/delivery
  3. After-sales service
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69
Q

Define - Interdependence

A

Where firms must take into account the likely reactions of their rivals to any change in price, output or forms of non-price competition

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70
Q

Define - Resale Price Maintenance

A

A common practice for manufacturers to set a minimum price for retailers to sell their goods

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71
Q

Define - Bid Riggin

A

A form of fraud where a commercial contract is promised to one party even though for appearance several present a bid

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72
Q

Define - The Groceries Code

A

A code which aims to regulate supermarkets’ relationships with their suppliers

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73
Q

In 2015 what percentage of Aldi’s suppliers said that Tesco were rarely or never obeying the Groceries Supply Code of Practice?

A

5%

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74
Q

In 2015 what percentage of Tesco’s suppliers said that Tesco were rarely or never obeying the Groceries Supply Code of Practice?

A

34%

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75
Q

Give three examples of monopsonies

A
  1. Government - Military equipment
  2. Low-cost airlines - Aircrafts
  3. Amazon - Book suppliers
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76
Q

Give four advantages to monopsony power

A
  1. Improved value for money
  2. Lower prices for consumers
  3. Good counter weight to monopoly power
  4. Higher profits for producer
  5. More R&D capabilities
  6. Purchasing Economies of Scale
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77
Q

Give three disadvantages of monopsony power

A
  1. Suppliers get lower profits
  2. Suppliers have lower incomes
  3. Profits may not be reinvested
  4. Suppliers may shut down in long run leading to lower supply and higher prices
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78
Q

Give three characteristics of a monopsony

A
  1. Perfect information such that the buyer knows which competing sellers to exploit
  2. Sellers are price takers and buyers are price makers
  3. Output of sellers must be homogeneous, otherwise a monopsonist could not freely switch from a high price seller
  4. Many sellers
  5. Maintains positions through raising barriers to entry
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79
Q

Give three advantages to price discrimination

A
  1. If market segment demand is elastic consumers benefit through lower prices
  2. Added profits from submarkets may be greater than that of combined market (higher producer surplus)
  3. Satisfy shareholders
  4. May raise enough revenue to ensure the survival of another product or service
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80
Q

Give two disadvantages to price discrimination

A
  1. If market segment demand is inelastic consumers pay through higher prices
  2. Price discrimination is not always valid as it does not always maximise profits
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81
Q

Define - Third Degree Price Discrimination

A

Charging a different price to different consumer groups (i.e. Youth and Adult, Off-peak and Peak)

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82
Q

Define - Second Degree Price Discrimination

A

Charging a different price for different quantities, such as quantity discounts for bulk purchases (i.e. discounted tickets for empty seats on last minute flights)

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83
Q

Define - First Degree Price Discrimination

A

Occurs when a firm charges a different price for every unit consumed and thus can capture all available consumer surplus

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84
Q

Give three conditions required for price discrimination

A
  1. Consumers can’t buy from the lower price market and sell to the higher price market
  2. Firm must be a price setter
  3. Each market must have a different PED
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85
Q

Define - Price Discrimination

A

When a firm charges a different price to different groups of consumers for an identical good or service

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86
Q

Define - Cross-subsidization

A

The practice of charging higher prices to one group of consumers in order to subsidize lower prices for another group, increasing the range of goods available over all

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87
Q

Give three advantages of monopoly power

A
  1. Economies of Scale means lower AC and potentially lower prices
  2. There are few permanent monopolies
  3. Avoid undesirable duplication of goods and services
  4. Funds for R&D
  5. Can compete internationally
  6. May not raise prices too much in fear of government intervention
  7. Big firms are big employers
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88
Q

Give four disadvantages of monopoly power

A
  1. Mostly higher prices and lower output
  2. X-Inefficiency and organisational slack
  3. Productively inefficient
  4. Allocatively inefficient
  5. Economic rent is wasteful
  6. Price discrimination sometimes
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89
Q

Define - Economic Rent

A

A payment made to a factor of production (entrepreneurship) over and above what is required to keep the factor in employment

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90
Q

Define - Producer Surplus (Profit)

A

The difference between what producers are willing and able to supply a good for and the price they actually receive

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91
Q

Perfection Competition produces where MC=P. Drawing this on a monopoly diagram gives you an equilibrium. Then, drawing the price where MC=MR and output level gives you another equilibrium. What lines bound the area of welfare loss?

A

To the right of the quantity in monopoly, above the MC curves and beneath the demand curve

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92
Q

_ surplus is between the price, supply curve and up to quantity produced

A

Producer

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93
Q

_ surplus is between the price, demand curve and up to quantity produced

A

Consumer

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94
Q

Define - Consumer Surplus

A

The difference between the amount that consumers are willing and able to pay and the amount that they actually pay

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95
Q

In the short run and long run what is the state of the three efficiencies in a monopoly?

A
  1. P > Minimum AC and hence productively inefficient
  2. P > MC and hence allocatively inefficient
  3. Large profits grants dynamic efficiency
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96
Q

Give three examples of organisation slack

A
  1. Over staffing
  2. Inefficient production methods
  3. Lack of innovation
  4. Principal-Agent Problem
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97
Q

Give three examples of natural monopolies

A
  1. Water provision firms
  2. Land line phones
  3. Railway tracks
  4. Electricity and gas generation
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98
Q

Define - Natural Monopoly

A

A firm which experiences continually falling LRAC over a very large output range, has high setup costs, which are usually sunk costs as well

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99
Q

Define - Monopsony

A

A market structure where one firm has ultimate buying power

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100
Q

Define - Monopoly

A

A market structure where one firm has ultimate selling power

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101
Q

A price maker can only ever set the _ or quantity, however never both

A

Quantity

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102
Q

Pure monopolies differ from legally defined monopolies in that they have _ of the market share opposed to more than 25%

A

100%

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103
Q

Give three characteristics of a monopoly

A
  1. Maintain supernormal profits in long run
  2. Price discrimination
  3. High barriers to entry and exit
  4. Price maker
  5. Single firm
  6. Inelastic demand due to lack of substitutes
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104
Q

In a monopoly what is PED when TR is increasing, decreasing and constant?

A
  1. Increasing is where PED > 1
  2. Constant is where PED = 1
  3. Decreasing is where PED
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105
Q

Give three sources of monopoly power

A
  1. Control of raw materials
  2. Control of retail outlets
  3. Product differentiation
  4. Brand proliferation
  5. Barriers to entry
  6. Imperfect Information
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106
Q

In the short run what is the state of the three efficiencies in a perfectly competitive market?

A
  1. Allocatively efficient
  2. Can be dynamically efficient, although not drastically
  3. Productively inefficient
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107
Q

In the long run what is the state of the three efficiencies in a perfectly competitive market?

A
  1. Allocatively efficient
  2. Dynamically inefficient as normal profits are made
  3. Productively efficient
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108
Q

In which market is AR=D=MR?

A

Perfect Competition

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109
Q

What is a firm’s long-run supply curve?

A

MC above AC

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110
Q

What is a firm’s short-run supply curve?

A

MC above AVC

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111
Q

Give three characteristics of perfect competition

A
  1. Perfect Information
  2. Homogenous Goods
  3. All price takers
  4. Many firms
  5. No externalities
  6. Normal profits in long-run
  7. No barriers (freedom of entry and exit)
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112
Q

Why, if profits are being made in the short run, are normal profits made in the long run in perfect competition?

A

Because they are price takers they take the market price. If there are supernormal profits and no barriers to entry, firms will enter the market increasing market supply and lowering market price up until P is tangential to AC

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113
Q

Why, if losses are being made in the short run, are normal profits made in the long run in perfect competition?

A

Because they are price takers they take the market price. If there are losses and no barriers to exit, firms will leave the market decreasing market supply and raising market price up until P is tangential to AC

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114
Q

In the UK give an industry which has a five-firm concentration ratio below 10%

A
  1. Metal Forging
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115
Q

In the UK give an industry which has a five-firm concentration ratio above 70%

A
  1. Sugar
  2. Tobacco
  3. Gas Distribution
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116
Q

A problem with concentration ratios is that given two equal ratios, the makeup of the market share could be _

A

Different

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117
Q

Aside from an oligopoly, an extremely high n-firm concentration ratio is likely to indicate a _ market

A

Monopolistic

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118
Q

Define - N Firm Concentration Ratio

A

Measures the combined market share of the top ‘n’ firms in the industry

119
Q

Define - Market Concentration

A

Measures the extent to which sales in a market are dominated by one or more businesses

120
Q

Explain the proof to the point of profit maximisation

A

At an output level x1 after profit maximisation it is clear MC > MR and hence it is not profitable to produce another unit. However at output level x2 before profit maximisation MC

121
Q

Define - Productive Efficiency

A

Occurs when output is supplied at minimum unit (average) cost either in the short or the long run (P=Minimum AC)

122
Q

MC always crosses AC at its _

A

Minimum point

123
Q

Define - Dynamic Efficiency

A

Focuses on changes in the choice available in a market together with the quality/performance of products that we buy - boosted by R&D

124
Q

Define - Allocative Efficiency

A

This occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences (P=MC)

125
Q

The price that consumers are willing to pay is equivalent to the _ that they get

A

Marginal Utility

126
Q

Define - The Principal-Agent Problem

A

When one person (the “agent”) is able to make decisions on behalf of, or that impact, another person: the “principal”

127
Q

Give three examples of internal Diseconomies of Scale

A
  1. Low motivation of workers in large firms which lead to productivity loss
  2. “X-Inefficiency” arising from large firms in noncompetitive markets (perhaps overpaying managers)
  3. A large firm which has too many departments and divisions and thus suffers from coordination issues
128
Q

F1 has seen a cluster of teams produce in the UK and thus brought component suppliers to the UK as well, resulting in _

A

External Economies of Scale

129
Q

Give an example of external Diseconomies of Scale

A
  1. An industry growing so fast that the supply of workers runs dry
130
Q

Define - Diseconomies of Scale

A

Disadvantages which arise when a firm becomes too large and thus cost per unit begins to increase

131
Q

Give three examples of external Economies of Scale

A
  1. Relocation of component suppliers and other support businesses close to the main centre of manufacturing
  2. Spending by a local authority on improving the transport network for a local town
  3. The development of research facilities in local universities that firms n the area can benefit from
132
Q

Define - External Economies of Scale

A

Economies of scale which occur within an industry

133
Q

Give four different types of economies of scale

A
  1. Risk-Bearing Economies (diversification)
  2. Networking Economies (adding zero-cost consumers to a network)
  3. Financial Economies (Borrow at favourable interest rates)
  4. Commercial Economies (Bulk buy)
  5. Managerial Economies (Employ specialised staff)
  6. Marketing Economies (Spread advertising budget over large output)
  7. Technical Economies (Large and specialised capital i.e. containers/assembly line techniques)
134
Q

Define - Internal Economies of Scale

A

Economies of scale which arise from the growth of the business itself

135
Q

Define - Constant Returns to Scale

A

When LRAC remains constant with an increase in output i.e. when output and costs rise at the same rate

136
Q

Define - Economies of Scale

A

The Average Cost advantages that a business can exploit by expanding their scale of production

137
Q

AFC decreases as output increases because a fixed amount is spread over _ output, and is the difference between AC and AVC

A

Greater

138
Q

The Law of Diminishing Returns is a _ phenomenon

A

Short-run

139
Q

What happens to marginal cost as marginal product falls?

A

Rises

140
Q

What happens to marginal cost as marginal product rises?

A

Falls

141
Q

Why does marginal cost initially fall, and then why does it rise

A

It could fall initially perhaps due to more cooperation and expertise. However eventually if you don’t have enough capital for labour to utilise, and you employ more labour, it is likely to rise

142
Q

Define - Diminishing Marginal Returns

A

Where increasing a variable input while others are held constant eventually leads to increasing marginal costs

143
Q

Short-run average cost curves are _ to the long-run average cost curve

A

Tangential

144
Q

What happens to all factors of production in the long run?

A

They become variable

145
Q

If variable costs rise, which out of Average Fixed Costs, Marginal Costs, Average Costs and Total Costs don’t change?

A

Average Fixed Costs

146
Q

If fixed costs rise, which out of Marginal Costs, Average Costs, Fixed Costs and Average Fixed Costs don’t change?

A

Marginal Costs

147
Q

Define - Marginal Cost

A

The additional cost incurred by a firm as a result of producing one more unit of output (Change in TC/Change in Q)

148
Q

Define - Total Cost

A

The total cost to the firm of producing a given number of units (TFC+TVC)

149
Q

Define - Average Cost

A

The cost, on average, per unit of output produced (TC/Q)

150
Q

Define - Sunk Costs

A

Costs the firm cannot avoid paying, even if it produces no output

151
Q

Define - X-Inefficiency

A

When a lack of effective / real competition in a market or industry means that average costs are higher than they would be with competition

152
Q

Define - Marginal Revenue

A

The extra total revenue gained by selling one more unit per time period (Change in TR/Change in Q)

153
Q

Define - Total Revenue

A

The total earnings per period of time from the sales of a particular amount of output (PxQ)

154
Q

Define - Average Revenue

A

The amount earned by the firm per unit sold (PxQ/Q)

155
Q

You have a horizontal line representing a cost, a diagonal line from the origin representing a cost and a diagonal line from where the horizontal crosses the y-axis representing a cost. Which is which?

A

Horizontal: Fixed Cost
From Origin: Variable Cost
From Horizontal: Total Cost

156
Q

The fish diagram is TC and TR for imperfect competition. What is TR like in perfect competition?

A

Diagonal and with a gradient of 1

157
Q

Define - Long Run Shutdown Price

A

The amount below which a firm would have to exit the market in the long run (Minimum AC)

158
Q

If PED is inelastic, what happens to TR when price decreases?

A

Falls

159
Q

If PED is elastic, what happens to TR when price decreases?

A

Rises

160
Q

If PED is inelastic, what happens to TR when price increases?

A

Rises

161
Q

If PED is elastic, what happens to TR when price increases?

A

Falls

162
Q

If MR 0 what is true of PED in each case

A
  1. MR 0 then PED > 1
163
Q

What is the gradient of TR equal to?

A

MR

164
Q

What is the gradient of TC equal to?

A

MC

165
Q

In a perfectly competitive market MR=D=AR which is _ and MC and AC are normal

A

Horizontal

166
Q

In an imperfect market AR=D which is _, MR is halfway in between the y-axis and AR, and MC and AC are normal

A

Downward sloping

167
Q

MR and AR must start at the same point, however AC and MC don’t. True or false?

A

True

168
Q

Revenue at Output 1 = $20, Revenue at Output 6 = $25, Marginal Revenue = _

A

$1

169
Q

Given a firm has a total revenue of $400 at an output of 2, what is their average revenue?

A

$200

170
Q

Define - Asset Stripping

A

Taking over a company and selling each of its assets separately at a profit without regard for the company’s future

171
Q

Give two reasons for de-mergers

A
  1. A defensive tactic to avoid attention of competition authorities
  2. Diseconomies of scale from organisational slack
  3. Forced to because market share too big
172
Q

When did Lloyds-TSB officially de-merge?

A

2013

173
Q

Define - Inorganic Growth

A

Growth of a business by increasing output by acquiring new businesses by way of mergers, acquisitions and take-overs

174
Q

Give four reasons why firms grow

A
  1. Increase Economies of Scale
  2. Maintain Market Presence
  3. Satisfy Stakeholders
  4. Increase Market Share
  5. Benefit from Profit Gains
  6. Increase Sales
175
Q

Give four reasons why firms don’t grow

A
  1. May exceed tax thresholds which means they pay less tax overall, making their costs proportionally lower
  2. Growing attracts competition and gains attention
  3. May profit satisfice (settle for lower profits in exchange for other motivation)
  4. Lack of motivation
  5. Lack of resources
  6. May be at minimum efficient scale, thus growing would cause diseconomies of scale
  7. May exist in a niche market with little scope for growth
176
Q

Define - Minimum Efficient Scale

A

The level of output at which long-run average cost stops falling as output increases

177
Q

Give four barriers to entry/growth

A
  1. Marketing Barriers (marketing too expensive)
  2. Technical Barriers (other firms benefit from technical economies of scale)
  3. Pricing Barriers (Other firms could use limit pricing)
  4. Legal Barriers (Patents and licenses)
178
Q

Which form of barrier to entry led to the Dasani water brand failure (Coca-Cola) in the UK in 2004?

A

Marketing Barriers

179
Q

In Q2 of 2013 how much of the Smartphone Market Share was owned by Android OS?

A

52%

180
Q

In 2011 how much of the Smartphone Market Share was owned by Android OS?

A

36%

181
Q

Why was the Google-Motorola Mobility merger delayed into 2012 in Europe?

A

Fear of monopoly power

182
Q

The acquisition of 17,000 patents was a motive for the Google-Motorola Mobility merger, what was another motive?

A

Expansion of ‘Android’

183
Q

How much did Google buy Motorola Mobility for in 2011?

A

$12.5bn

184
Q

Facebook’s temptations to monetize WhatsApp with adverts whereas it was previously offered without adverts is an example of what?

A

Culture Clash

185
Q

What was the major benefit to the Facebook acquisition of WhatsApp?

A

Inroad to international markets

186
Q

For how much did Facebook buy WhatsApp?

A

$19 billion

187
Q

For how much did Facebook buy Instagram?

A

$1 billion

188
Q

When and for how much did TNT acquire UPS?

A

2012 - $6.8 billion

189
Q

When and for how much did Kellogg’s acquire Pringles?

A

2012 - $2.7 billion

190
Q

When and for how much did Apple acquire Beats?

A

2013 - $3.2 billion

191
Q

Define - Vertical Backwards Merger

A

A merger (from later to earlier stages of production) between two firms operating at different stages of production

192
Q

What industry did the tobacco company BAT move into through a series of mergers to diversify their product base in the 1960s?

A

Food

193
Q

Who did GlaxoWellcome merge with horizontally in 2000?

A

SmithKline Beecham

194
Q

Give three mergers that have undergone demergers

A
  1. Dunlop-Pirelli
  2. Carphone Warehouse-TalkTalk
  3. Ny Central-PA Railroad
195
Q

Give three disadvantages of conglomerate mergers

A
  1. Chances of mismanagement
  2. Risk to core business/abandonment of core business model
  3. Culture Clash
196
Q

Define - Mixed Conglomerate Merger

A

A merger between firms looking for product or market extension

197
Q

Define - Pure Conglomerate Merger

A

A merger between two firms with no production in common

198
Q

Give three advantages to conglomerate mergers

A
  1. Economies of Scope
  2. Higher customer base
  3. Ability to cross-sell products
  4. Spreads risk/Risk Bearing Economies of Scale
199
Q

Give three disadvantages of horizontal mergers

A
  1. Could create a monopoly
  2. Cultural clash
  3. Economies of Scale may not materialize
200
Q

Give three advantages of horizontal mergers

A
  1. Extra synergies
  2. Economies of scale
  3. Economies of scope
  4. Reduced competition
201
Q

Give three disadvantages of vertical mergers

A
  1. Could be anti-competitive
  2. Limited Economies of Scale because Vertical
  3. Could lead to monopsony power, especially with backwards integration
202
Q

Give three advantages of vertical mergers

A
  1. Secure raw materials
  2. Absorb profit margins
  3. Control price and delivery of supply and retail
  4. Some cost savings with Economies of Scale
203
Q

Define - Conglomerate Merger

A

A merger between two firms operating in different markets

204
Q

Define - Horizontal Merger

A

A merger between two firms that are operating at the same stage of production in the same industry

205
Q

Define - Vertical Forward Merger

A

A merger (from early to later stages of production) between two firms operating at different stages of production

206
Q

Define - Corporate Social Responsibility

A

Ensuring that all business stakeholders’ interests are taken into account, especially the environment and society in general

207
Q

Give three examples of X-Inefficiency

A
  1. Excess workers
  2. Not finding cheapest suppliers
  3. Lack of management control
208
Q

Give three causes of X-Inefficiency

A
  1. Monopoly Power
  2. Lack of competition control
  3. A nationalised firm
209
Q

Define - X-Efficiency

A

When competitive pressures cause firms to operate on the AC curve

210
Q

Stakeholders imply an additional _ to a firm

A

Cost

211
Q

Profit Satisficing output lies between

A

Profit Max and Sales Max

212
Q

Define - Stakeholders

A

People with a direct interest in a firm

213
Q

Give three reasons to profit satisfice

A
  1. Satisfy needs of stakeholders
  2. Prevent takeovers
  3. Just not aware of profit maximising output
214
Q

Define - Profit Satisficing

A

Settling for less than maximum profit

215
Q

Define - Sales Maximisation

A

The objective to produce the maximum output possible without making a loss (AR=AC or TR=TC)

216
Q

Give a benefit to sales maximisation

A
  1. Increase market share to defend position

2. Increase market share to increase profits in long run

217
Q

Give a benefit to revenue maximisation

A
  1. Good for established businesses marketing a new product

3. Good to establish presence in a market

218
Q

Define - Revenue Maximisation

A

An objective used to maximise total revenue (where MR = 0, maximum Tr and hence PED is unitary elastic)

219
Q

Give three benefits of higher profits

A
  1. More research and development
  2. Less vulnerable to takeovers
  3. Higher salaries for workers
220
Q

To find profit maximising price and cost what do you do?

A

Go to where MC=MR, find profit maximising quantity by drawing a line down, then draw up until it hits AR and AC. Drawing across from AR is profit maximising price and drawing across from AC is profit maximising output

221
Q

Define - Explicit Costs

A

Monetary Costs

222
Q

Define - Implicit Costs

A

Costs which do not require any money payment for their use

223
Q

Supernormal Profit exists in which two circumstances?

A

TR>TC and AR>AC

224
Q

Normal Profit exists in which two circumstances?

A

TR=TC and AR=AC

225
Q

Define - Fixed Costs

A

Costs which do not vary as output increases

226
Q

Define - Long Run

A

A time when all factors of production can be varied

227
Q

Define - Variable Costs

A

Costs that vary as output increases

228
Q

Define - Supernormal Profits

A

Profit in excess of that required to keep a firm in an industry

229
Q

Define - Short Run

A

A period of time when at least one factor of production remains fixed, usually land and capital

230
Q

Define - Short Run Shutdown Price

A

The amount below which a firm would have to exit the market in the short run (Minimum AVC)

231
Q

If firms are price takers, MR is _

A

Perfectly Elastic

232
Q

What is true if a firm’s AC curve is above their AR curve?

A

They are making a loss

233
Q

Define - Product Development

A

A growth strategy where a business aims to introduce new products into existing markets

234
Q

Define - Market Development

A

A growth strategy where the business seeks to sell its existing products into new markets

235
Q

Which strategy in Ansoff’s Matrix have Microsoft used through bundling its browser and media player with its operating system?

A

Product Development

236
Q

Define - Organic Growth

A

Growth in the size of a business throughout the expansion of its own sales (not through mergers or takeovers)

237
Q

In Ansoff’s Matrix Tesco have famously undertaken market development and _

A

Product Development

238
Q

Define - Market Penetration

A

A growth strategy where the business focuses on selling existing products into existing markets

239
Q

Define - Normal Profit

A

Profit that covers the opportunity cost (implicit cost) of capital and is just sufficient to keep the firm in the market

240
Q

Define - Firm

A

An organisation that brings together factors of production in order to produce output

241
Q

Define - Diverisifaction

A

A growth strategy where a business markets new products into new markets

242
Q

A firm can’t increase their market share if their competitors maintain their market positions and the market is _

A

Saturated

243
Q

The conditions for Profit Max are MC=MR and the _ between TR and TC

A

Greatest Distance

244
Q

Define - The Ansoff Matrix

A

A marketing planning tool that helps a business determine its product and market growth strategy

245
Q

While consumers benefit from price wars, suppliers and _ are most likely to lose out

A

Shareholders

246
Q

Define - Privatisation

A

​The transfer of assets from the public (government) sector to the private sector

247
Q

​

When did most privatisation in the UK occur?

A

1980s and 1990s

248
Q

Give three ex public sector industries recently privatised

A
  1. British Telecom
  2. British Gas
  3. Regional Water Companies
249
Q

​With the fall of the soviet union, Eastern European economies turned to _ in the 1990s to boost competition

A

Privatisation

250
Q

​Countries with high public sector debt such as Spain, Greece and Cyprus, have been encouraged to _ from IMF

A

Privatise

251
Q

Give three public sector industries

A
  1. The Police
  2. The Treasury
  3. The Environmental Agency
  4. BBC (public corporation)
252
Q

Give five benefits to privatisation

A
  1. Increases competition and leads to a reduction in price which increases consumer welfare
  2. Profit motive ensures more productive efficiency
  3. Nationalised firms may employ purely to alleviate unemployment figures
  4. Nationalised firms may be rent-seeking and don’t look to improve long term growth
  5. Privatised firms have pressure from shareholders to behave efficiently
  6. Higher profits means dynamic efficiency
  7. Generate extra revenue for the government
  8. Privatised companies more response to needs of consumers
253
Q

Give five costs to privatisation

A
  1. If industry is natural monopoly there will still be high barriers to entry
  2. Nationalised industries focus on allocative efficiency and universal provision
  3. Only generates a one off increase in revenue, prevents future profit gains
  4. Profit motive unnecessary in industries like health and education
  5. Could create private sector monopolies to be regulated, which is an extra cost
  6. Can make an industry more complex
  7. Shareholder desire for dividends mean long term investment may suffer
254
Q

Define - Rent-Seeking

A

​The use of a firm’s resources to obtain economic gain from others without reciprocating any benefits to society through wealth creation

255
Q

​TFL reinvest all their _ into the company

A

Supernormal

256
Q

Define - Regulation

A

​Imposition of rules intended to modify the economic behaviour of individuals and firms in the private sector

257
Q

Give three regulatory bodies in the UK

A
  1. Postcomm - Post
  2. Ofwat - Water
  3. Ofcom - Communications
  4. ORR - Railway
  5. Ofgem - Gas and electricity markets
258
Q

Define - Price Capping

A

​Where an industry regulator imposes a limit on price increases on services offered by their regulated industry

259
Q

​RPI-X means price can rise in line with inflation but fall with expected _ (x)

A

Efficiency savings

260
Q

Give three benefits of price capping

A
  1. Useful when hard to reduce barriers to entry naturally
  2. Providing X is positive, price falls, increased producer surplus
  3. Encourages X-Efficiency and Productive Efficiency
  4. Successfully controls monopoly power of natural monopolies, which privatisation can’t do
  5. X and K are flexible and thus can be changed according to circumstance
261
Q

​RPI-X+K is used in the water industry where K is based on _

A

Capital investment requirements

262
Q

​In RPI-X, if X is a positive value then real price _

A

Falls

263
Q

Define - Rate of Return Regulation

A

​A method of regulating the average price of private or privatised public utilities

264
Q

What is the formula for profit capping

A

​AC + % of profit = Price

265
Q

Give three disadvantages of regulators

A
  1. They are unlikely to have perfect information regarding the costs in their regulated industries
  2. Could be the victim of regulatory capture
  3. Becomes a game between them managers and regulators
  4. Increased exposure of regulator to regulated encourages them to lose their impartiality
  5. Some large corporations can outwit regulatory bodies
266
Q

Give a disadvantage of rate of return regulation

A
  1. Because it fixes profits above AC, there is no incentive to control costs
267
Q

Define - Performance Targetting

A

​When a regulator compares the performance of some regulated firm to a comparator

268
Q

Give two disadvantages of price capping

A
  1. If they are too lax they encourage inefficiency and complacency, and fail to reduce prices
  2. If they are too tight they ensure efficiency but discourage investment
269
Q

Give a benefit of organised regulators

A
  1. An organised and dedicated regulator means they know their industry well enough to make informed decisions
  2. Acts as a suitable repair for bad privatisation
270
Q

Define - Regulatory Capture

A

​When a regulator is hijacked by the regulated

271
Q

​The FSA and Bank of England became victims of regulatory capture by the _

A

Banking industry

272
Q

​HMRC were victims of _ when Vodafone negotiated a £6bn tax reduction from 2009-10

A

Regulatory Capture

273
Q

​The last 10 years has seen a movement away from price regulation and towards improving information and _ in markets

A

Transparency

274
Q

Define - Windfall Tax

A

​A tax on excess profits over and above that taken by corporation tax

275
Q

What are the two conditions under which a merger will be investigated?

A
  1. If the business being taken over has a turnover of £70 million or more
  2. If the combined market share of the company will be 25% or more
276
Q

Give two benefits of performance targets

A
  1. Gives a firm clear profit, price or output goals
  2. Ensures consumers get the best possible service (time targets)
  3. Eliminates x-inefficiencies
277
Q

Give two costs of performance targets

A
  1. Setting targets too high may deflate company and morale
  2. Targets have to be followed up on or could prove useless
  3. Setting targets to low have little effect on improving efficiency
278
Q

Define - Outsourcing

A

A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally (i.e a public sector organisation transferring portions of work to private sector companies)

279
Q

Give two benefits of outsourcing

A
  1. Opening public services up to competition can save the tax payer money
  2. Private sector businesses more likely to achieve efficiency improvements and cost savings
  3. Businesses in the private sector might be more innovative,
  4. Businesses in the private sector might be less hierarchical
  5. Businesses in the private sector might be less prone to suffering from diseconomies of scale
280
Q

Give two costs of outsourcing

A
  1. Businesses bidding to win contracts might sacrifice quality of service as a way of lowering their costs
  2. Doubts about some employment practices of service companies e.g. low wages, poor conditions
  3. Contracting-out / outsourcing requires proper monitoring which itself involves extra spending
281
Q

Define - Competitive Tendering

A

When firms bid for the right to run a service or gain a certain contract

282
Q

What did Thatcher do in the 1980s regarding competitive tendering?

A

She wanted to introduce elements of the free market into local councils. Public services which used to be run by local councils were forced to put their services to competitive tendering, allowing private companies to win the right to run services for a fixed number of years

283
Q

Define - Public Finance Initiative

A

Under PFI, major projects including new infrastructure are built by the private sector, the government uses the resource over the long term for example between 25-30 years repaying the contract over that period

284
Q

Give two benefits to PFI

A
  1. Private sector is more efficient
  2. PFI provides private sector funds for projects which the government may not be able to immediately finance
  3. Delivery is expected to be on time as contractors experience financial consequences if late
  4. Private sector more dynamically efficient
285
Q

Give two costs of PFI

A
  1. Financing costs of PFI are typically 3-4% over that of government debt
  2. Contracts are inflexible and maintenance costs may be high for private firms
  3. No guarantee that private sector will produce better product than public
  4. Administration of contract is costly
286
Q

The Royal Institute of British Architects estimated that the cost of bidding for a PFI hospital was more than _million

A

£11

287
Q

Give the knowledge and application command words

A
  1. define, outline, and distinguish between
  2. Outline
  3. Distinguish between
288
Q

Give the analysis command words

A
  1. Analyse

2. Explain

289
Q

Give the evaluation command words

A
  1. Examine
  2. Evaluate
  3. Discuss
  4. Assess
  5. Comment Upon
  6. Justify
  7. To What Extent
290
Q

Give the mark by mark breakdown for a 14 mark question

A

7 KAA - 3 + 2 + 2

7 EV - 3 + 2 + 2

291
Q

Give the mark by mark breakdown for an 8 mark question

A

4 KAA - 2 + 2

4 EV - 2 + 2

292
Q

Give the mark by mark breakdown for a 4 mark question

A

4 KAA - 2 Theory, 2 Application

293
Q

Give the mark by mark breakdown for a 12 mark question

A

6 KAA - 2 + 2 + 2

6 EV - 2 + 2 + 2

294
Q

Give the mark by mark breakdown for a 16 mark question

A

8 KAA - 2 + 2 + 2 + 2

8 EV - 2 + 2 + 2 + 2

Economics (3 decks)

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