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Economics Micro A LEVEL Complete > Acronyms Economics > Flashcards

Acronyms Economics Flashcards

1
Q

What is the Acronym for Internal economies of scale and what does it stand for?

A 
Really 
Fun 
Mums
Try 
Making 
Pies
Risk Bearing
Financial
Managerial 
Technical
Marketing
Purchasing
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2
Q

What are economies of scale?

A

A reduction in LRAC as output increases

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3
Q

What are examples of external economies of scale?

A

Better transport infrastructure

Component supplies moving closer

Research and development firms move closer

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4
Q

What are the 4 causes of diseconomies of scale?

A

Control
Communication
Co-ordination
Motivation

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5
Q

What is revenue?

A

Money made from sales from the business

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6
Q

What are the characteristics of perfect competition?

A

Many buyers and sellers

Homogenous goods

Firms are price takers

No barriers to entry/exit

Perfect information

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7
Q

What does an average revenue curve look like in a perfect market?

A

Horizontal straight line where AR=MR=D

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8
Q

What does a total revenue diagram look like in a perfect market

A

Horizontal line from origin directly

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9
Q

What is the characteristics of imperfect competition?

A

Few buyers and sellers

Differentitated goods

Firms are price makers

High barriers to entry/exit

Imperfect information

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10
Q

What does an average revenue curve like in an imperfect competition?

A

identical to a demand curve

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11
Q

What is average revenue equal to in a imperfect competition?

A

Demand

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12
Q

What does a marginal revenue curve look like in an imperfect competition?

A

A twice as steep demand curve that goes under the diagram.

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13
Q

What does a total revenue curve look in an imperfect competition?

A

A sad face that stops going down when marginal revenue turns negative.

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14
Q

What is included in total costs in economics?

A

Physical costs such as total fixed costs and total variable costs and opportunity costs.

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15
Q

What symbol does profit use in economics.

A

Pi

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16
Q

What is the formula for profit in economics?

A

TR-TC

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17
Q

What is included in total costs that is different from business studies?

A

The opportunity cost is also included when calculating total costs.

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18
Q

What is it called when a firm in a market is making £0 Economic profit?

A

Normal profit

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19
Q

What is it called when a firm is making £10,000 economic profit?

A

Supernormal profit.

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20
Q

What is called when a firm is making -£10,000 economic loss?

A

Subnormal profit

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21
Q

What is normal profit

A

Is the minimum level of profit required to keep factors of production in that current use.

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22
Q

What is supernormal profit

A

Is any profit made above normal profit that is an economic profit which is positive.

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23
Q

What is subnormal profit

A

Is any economic profit below normal profit, i.e an economic loss.

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24
Q

How do you know when normal profit is being made?

A

AR=AC

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25
Q

How do you know when supernormal profit is being made?

A

AR>AC

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26
Q

How do you know when subnormal profit is being made?

A

AR

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27
Q

What level is profit maximisation?

A

MC=MR

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28
Q

Why do some firms profit maximisation?

A

Re-investment

Dividends for shareholders

Lower costs + lower prices for consumers

Reward for Entrepreneurship

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29
Q

Why may some firms not profit maximise?

A

Don’t know level of MC=MR

Greater scrutiny from market authorities

Key stakeholders can be harmed when you profit maximise

Other objectives can be more appropriate

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30
Q

What is the potential objective of a firm Profit satisficing?

A

Sacrificing profit to satisfy as many key stakeholders as possible

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31
Q

What stakeholders will benefit from profit maximisation?

A

Shareholders and managers

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32
Q

What stakeholders may be against from profit maximisation?

A

Consumers (forced to pay high prices / gain bad reputation)

Workers (lower wages in order to maximise profits)

Government (investigate business actions)

Environmental groups (social media attacks leading to bad reputation)

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33
Q

What level does revenue maximisation occur?

A

When MR=0

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34
Q

Why may a firm focus on revenue maximisation?

A

Economies of scale (revenue max quantity is greater than the profit maximisation quantity so with that comes greater growth, great economies of scale and lower average costs therefore potentially lower prices for consumers)

Allows predatory pricing to take place as price level will be lower than price maximisation level due to above.

Principle agent problem

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35
Q

What is sales maximisation (growth maximisation) level?

A

AC=AR

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36
Q

Why may a firm sales maximisation?

A

Economies of scale

Limit pricing (taking away the incentive for new firms to enter the market thus limiting competition as you are selling at break-even point).

Principle agent problem (managers may use sales as leverage for greater perks in their job when they approach shareholders).

Flood the market to gain brand recognition and loyalty.

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37
Q

What is the survival objective of a firm?

A

A short term objective in hyper competitive markets, to survive in the short run trying to make consumers aware of their product, once people aware of their product they can change their objective to look for profit.

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38
Q

What are public sector organisation objectives?

A

Maximise society welfare, keeping prices low to make sure quantities are high to maximise the society welfare where P=MC at the point of allocative efficiency.

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39
Q

What is the possible objective of a firm corporate social responsibility?

A

Corporate social responsibility (CSR) is when companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders on a voluntary basis.

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40
Q

What are the four curves on an objective of a firm diagram?

A

Average cost
(Smily face)

Marginal cost(Small smily face then shoots straight up)

Average revenue(just a demand curve AR=D)

Marginal revenue (Like a demand curve but twice as steep and goes below)

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41
Q

What does an average cost curve look like?

A

Smily face

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42
Q

What does a marginal cost curve look like?

A

Small smily then rapidly goes up

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43
Q

What does an average revenue curve look like?

A

A demand curve from the highest point on the diagram, making sure to write AR=D

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44
Q

What does a marginal revenue curve look like?

A

A twice as steep demand curve that starts at the top of the diagram and goes below the diagram.

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45
Q

Where is profit satisficing on an objective of a firm diagram?

A

Occurs at any point between profit maximisation and sales maximisation.

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46
Q

What are the four types of efficiency’s?

A

Allocative
Productive
X
Dynamic

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47
Q

What are barriers to entry?

A

Any obstacle that prevents a new firm entering a market can also be a source of monopoly power.

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48
Q

What is the acronym for the barriers to entry?

A 
Lloyds TSB
Legal
Technical
Strategic
Brand Loyalty
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49
Q

What are the legal barriers to entry?

A 
Patents
Licenses/Permits
Red tape (Excessive paperwork or bureaucracy)
Standardards or Regulations
Insurance
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50
Q

What are technical barriers to entry? (Industry specific barriers)

A

Start up costs

Sunk costs

Economies of scale of other firms

Natural monopoly

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51
Q

What are strategic barriers to entry?

A

Predatory pricing

Limit pricing

Heavy advertising

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52
Q

What is the barrier to entry brand loyalty?

A

This occurs when consumers have a strong preference for a particular type of good or brand. It means that the consumer will be willing to make repeat purchases and is much less likely to experiment with other goods.

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53
Q

What are barriers to exit?

A

Any obstacle that prevents a firm leaving a market, a s

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54
Q

What are examples of barriers to exit?

A

Under valuation of assets

Redundancy costs

Penalties for leaving contracts early

Sunk costs

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55
Q

What are possible locations of allocative efficiency?

A

Where resources follow consumer demand.

Where society surplus is maximised

Where net social benefit is maximised.

Demand=Supply

Marginal social benefit=Marginal social cost

Price=Marginal cost

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56
Q

What is productive efficiency?

A

Maximising output of the lowest possible average cost.

There is a full exploitation of economies of scale.

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57
Q

What is x-inefficiency?

A

X Inefficiency occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary. When there is this lack of incentives, the firm will not be technically efficient.

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58
Q

Where does x-efficiency occur?

A

When a firm is producing higher on its average cost curve than necessary.

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59
Q

What is dynamic efficiency?

A

Re-investment of long run supernormal profit back into the business.

There must be supernormal profit being made over time in the long run for a firm to be dynamically efficient.

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60
Q

How do you show a firm being dynamically efficient?

A

You show long supernormal profit on a business diagram (the one used to show business objectives).

To do this you show a firm operating at profit maximisation level and the box above the equilibrium is the supernormal profit.

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61
Q

What is the difference between static and dynamic efficiencies?

A

Static includes allocative, productive and x efficiency these are all efficiencies that occur at one specific production point whereas dynamic efficiency occurs over time.

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62
Q

What are the static efficiencies?

A

Allocative, Productive, X

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63
Q

What is allocative efficiency?

A

This occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences at an output level where the price equals the Marginal Cost (MC) of production.

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64
Q

What is supply on a business diagram?

A

Marginal cost

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65
Q

How does being allocative efficient effect a consumer?

A

Resources follow consumer demand

Low prices

Maximisation of consumer surplus

High choice

High quality

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66
Q

How does being Allocatively efficient effect a producer?

A

Allows a producer to retain or increase market share.

Allows them to stay ahead of rivals

increase profit

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67
Q

What point does productive efficiency occur?

A

MC=AC

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68
Q

Why is productive efficiency potentially good for consumers?

A

Potential lower prices leading to higher consumer surplus as there is full exploitation of economies of scale.

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69
Q

Why is productive efficiency good for firms?

A

More production at lower average cost leading to higher profit.

Lower prices if decided will allow a firm to retain or increase market share.

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70
Q

What is needed for dynamic efficiency to occur?

A

Supernormal profit in the long run

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71
Q

Why is dynamic efficiency good for consumers?

A

New innovative products being made

Potential lower prices over time due to innovation of new production techniques

Resulting in higher consumer surplus.

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72
Q

Why is dynamic efficiency good for firms?

A

Long run profit due to new innovation and staying ahead of rivals allowing a firm to keep up its price making ability.

Lower costs over time allowing a firm to keep prices low and increase profits.

Retain or increase market issue stay ahead or rivals as innovation will allow firms to gain patents which can allow them to have a degree of monopoly power over supply.

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73
Q

What is X-efficiency?

A

Production with no waste, no excess costs above the average cost.

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74
Q

What must occur for a firm to be x-efficient?

A

Production must be on the average cost curve.

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75
Q

Why is it good for consumers for a firm to be x-efficient?

A

Consumers may get lower prices if the lower costs are passed onto consumers causing higher consumer surplus.

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76
Q

Why is it good for a firm to be x-efficient?

A

Lower costs therefore higher profit.

Lower prices can be passed onto consumers to increase market share if that is an objective of a firm.

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77
Q

What are the characteristics of a perfect competition?

A

Many buyers and sellers (infinite)

Homogenous goods- firms are price takers

No barriers to entry/exit

Perfect information

Firms are profit maximisers

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78
Q

Why do you have to draw two diagrams for perfect competition?

A

As in perfect competition they are price takers as a result you have to draw a diagram to show the market price.

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79
Q

How do you show the amount of supernormal profit being made?

A

The difference between average cost and average revenue, if average revenue is greater than average cost supernormal profit is being made.

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80
Q

Why can supernormal profit only be made in the short run in perfect competition?

A

As there is no barriers to entry and perfect information of market conditions so new firms enter causing the supply curve to shift outwards resulting in a lower market price causing normal profit to be made.

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81
Q

What does the diagram or diagrams look like that shows supernormal profit only lasts in the short run in perfect competition?

A

Market price diagram (Typical supply and demand in equilibrium) which supply shifts outwards when new firms enter when they see supernormal profit being made, in parallel to P2 of 2nd diagram.

Then a diagram showing the average cost, marginal cost and a horizontal AR=MR=D curve showing supernormal profit, then showing supernormal fall as new firms enter by a 2nd AR=MR=D curve.

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82
Q

For price takers why does AR=MR=D?

A

As the demand at that price point, is equal to the average revenue and marginal revenue as a firm can’t decide on the price so all three are the same.

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83
Q

If a firm is a price taker what is demand equal to?

A

Average revenue=Marginal revenue=demand.

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84
Q

Why can a firm only make subnormal profit in a perfect competition in the short run?

A

This is because firms will be making a loss due to average cost being higher than average revenue as a result this incentives firms to leave the market which thus reduces the supply in the market which causes a price increase, this price increase will keep increasing until there are no more incentives for a firm to leave the market, at which point normal profit will be made.

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85
Q

What does the diagram or diagrams look like showing subnormal profit only lasting in the short run in perfect competition?

A

A normal supply and demand diagram showing supply decrease in a market due to opportunity cost of resources have better use else where and as a result the supply in the market decreases and thus the price in the market increases.

The 2nd diagram needed is to show the level of profit being made, for this an Average cost curve, marginal cost and demand curve is needed. As in perfect competition firms are price takers demand will be equal to marginal revenue and average revenue. Demand is a straight horizontal line as no matter the quantity in the market price stays the same. Average cost curve will be above the demand curve as the average cost is higher than average revenue being made as a result subnormal profit is being made.

As a result firms have better opportunity costs of their resources so they leave the market until there is no more incentive to leave at which point the supply curve has shifted inwards of the previous diagram. This causes a new average revenue curve higher than the previous where average revenue is equal to average cost so normal profit is being made.

86
Q

What level of profit is being made in long run equilibrium in perfect competition?

A

Normal profit

87
Q

What efficiency’s is perfect competition in the long run?

A

Allocative efficient (P=MC)

Productively efficient

X-efficient

88
Q

What is perfect competition not dynamically efficient?

A

Perfect competition is not dynamically efficient as no supernormal profit can be made in the long run for perfect competition and as a result it is impossible to be dynamically efficient as a requirement is to make supernormal profit in the long run.

89
Q

What is the shutdown condition (when should firms considering shutting down in perfect competition)?

A

When AR=AVC

90
Q

What is the breakeven condition (breakeven point)?

A

When AR=AC

91
Q

If AR is less than AVC in perfect competition what should a firm do?

A

Shutdown and move on to do something else

92
Q

If AR is greater than AVC in perfect competition but a loss is still being made what should a firm do?

A

The firm should continue producing for a short while, to see if other firms leave the market reducing supply thus raising price as there is still a contribution to the fixed costs present.

93
Q

How do you show a firm in perfect competition making subnormal profit but shouldn’t shutdown as their average revenue is greater than average variable costs?

A

A demand curve for a price taker, followed by a AVC curve that goes through the demand curve (same as AC diagram shape) then a average cost curve that grows closer to AVC which is above demand.

Then a MC curve cutting through the lowest point of both these curves.

Shading in the box a above the demand curve and below the average cost curve subnormal profit.

94
Q

How do you show a firm in perfection competition making subnormal profit and should shut down as their average variable cost is greater than average revenue.

A

Demand curve which is equal to AR=MR

AVC curve above the demand curve

AC curve above AVC curve

MC curve the cuts AVC and AC at lowest point

Equilibrium at MC=MR, as the firm is a profit maximiser.

Subnormal profit box at AR to AC to Price

95
Q

What is the objective of all firms in perfect competition?

A

Price maximiser

96
Q

What goes on the X axis of business diagram? (AC,MC,AVC etc)?

A

Quantity

97
Q

What goes on the Y axis of business diagram? (AC,MC,AVC etc)?

A

Price/costs/revenue.

98
Q

What are the characteristics of a monopoly market?

A

One seller dominating the market

Differentiated products

Firm is a price maker

High barriers to entry/exit

Imperfect information

Firm is a profit maximiser (so produces at mc=mr)

99
Q

What are the two types of monopoly?

A

Pure monopoly one firm has 100% market share where one firm is the entire industry.

Legal monopoly when a firm has the power to act as a monopoly legally defined as a firm with over 25% market share.

100
Q

If a firm is a price maker what does their demand curve looks like?

A

Downward sloping

101
Q

If a firm is a price taker what does their demand curve look like?

A

Horizontal

102
Q

What is demand equal to in a monopoly market?

A

Average revenue.

103
Q

Where do you read the price from on a monopoly diagram?

A

On the demand curve.

104
Q

How do you show the supernormal profit on a monopoly diagram?

A

Distance between AC and AR (Demand curve)

105
Q

What is the demand curve equal to on market structure diagrams?

A

Price

106
Q

Is a monopoly allocatively efficient?

A

No, they are charging a price higher than marginal cost exploring consumers.

107
Q

Is a monopoly productively efficient?

A

No, they are voluntary foregoing economies of scale by not producing at the minimum point or can be producing at to high a level where they are receiving diseconomies of scale.

108
Q

Is a monopoly generally going to be x-efficient?

A

We assume they don’t, they may have become complacent with a lack of competitive drive.

It is also very difficult to reduce waste to absolute minimum and if they have monopoly power they don’t need to do so, so they’re not necessarily going to do so.

109
Q

Is a monopoly statically efficient or inefficient?

A

Inefficient

110
Q

Is a monopoly dynamically efficient?

A

Yes, there is long-run supernormal profits being made no firms can come in because of high barriers to entry and also there is imperfect information these keep other firms out of the market which allows these supernormal profits to persist in the long term.

As a result of this they could reinvest those profits back into the company in the form of new capital investment.

111
Q

What does a monopoly diagram look like?

A

Market diagram with a downward sloping demand curve which is equal to AR.

Including a MC, AC, MR

Price/costs/revenue on Y axis

Supernormal profit being made

(Look up diagram if not sure)

112
Q

What does deadweight mean?

A

Not recovered.

113
Q

What do we mean by welfare?

A

Society surplus, the sum of consumer and producer surplus

114
Q

What is a deadweight welfare loss?

A

Compared to competitive outcomes monopolies are reducing the total level of society surplus.

115
Q

What is the marginal cost curve equal to on a monopoly diagram?

A

Supply

116
Q

How do monopolists cause deadweight welfare loss?

A

In a monopolist market producers produce at the price MC=MR, this is a lower level than what would be produced in a competitive market and a higher price.

This causes a reduction in consumer and producer surplus in the economy as a result society surplus is lower causing a deadweight welfare loss.

117
Q

How do we draw a diagram to show a monopoly causing deadweight welfare loss?

A

AR=D curve for monopoly

MC=S curve

MR curve

Quantity being produced in a monopoly market (MC=MR)

Quantity being produced in a competitive market (MC=AR)

Show the deadweight loss in consumer and producer surplus for monopoly production by showing producer and consumer surplus in competitive and monopoly markets.

118
Q

Where is consumer surplus on a diagram?

A

The area above the price line and below the demand curve.

119
Q

Where is producer surplus on a diagram?

A

The area beneath the price line but above the supply curve.

120
Q

What is price discrimination?

A

Where a firm charges difference prices to different consumers for an identical good/service with no differences in costs of production.

121
Q

What are the conditions necessary for price discrimination?

A

Price making ability

Information to separate the market

Prevent re-sale of goods
(Market seepage)

122
Q

What is 1st degree price discrimination?

A

It occurs when consumers are charged the exact price they are willing and able to pay for a good or service.

123
Q

What is the result of 1st degree price discrimination?

A

All consumer surplus is gone and is turned into monopoly profit.

124
Q

What is consumer surplus?

A

This is the difference between what the consumer pays and what he would have been willing to pay.

For example: If you would be willing to pay £50 for a ticket to see the F. A. Cup final, but you can buy a ticket for £40. In this case, your consumer surplus is £10.

125
Q

What is producer surplus?

A

This is the difference between the price a firm receives and the price it would be willing to sell it at.

If a firm would sell a good at £4, but the market price is £7, the producer surplus is £3.

126
Q

What does a diagram showing 1st degree price discrimination look like?

A

Price Y
Quantity X

Demand curve, with consumer surplus labelled turning into monopoly profit as consumers pay the exact price they are willing able to pay.

127
Q

What is 2nd degree price discrimination?

A

This involves businesses selling off packages or blocks of a product deemed to be surplus capacity at lower prices than the previously published or advertised price

128
Q

What does the diagram for 2nd degree price discrimination look like?

A

X-Quantity Y-Price costs revenue

AR=D Curve

MR=Curve

MC in a backwards L shape.

Show output at profit maximisation (MR=MC) and then quantity capacity (the point before MC starts to increase).

Then a price point where MC=AR showing a lower cost, then shading in the gain in consumer surplus.

129
Q

What is 3rd degree price discrimination?

A

3rd degree price discrimination occurs when a firm is able to segment the market into different price elasticity of demand.

One group of price inelastic demand and one group of price elastic demand e.g. a rail company ticket prices.

130
Q

What does the diagram or diagrams look like for 3rd degree price discrimination?

A

Two diagrams one showing inelastic group and one showing elastic group.

Price costs revenue on the Y curve, X curve=quantity

Both diagrams have a constant MC curve that goes through both diagrams.

Inelastic diagram has:
Steep AR=D curve
MR curve
Showing profit maximisation point Q1

Elastic diagram has
Not steep AR=D curve
MR Curve
Profit maximisation output Q2

131
Q

What are the negatives to an economy of price discrimination?

A

Allocative inefficiency, consumers being exploited with such high prices.

Inequalities occur can widen income inequality in society

Anti-competitive pricing can leave firms with pure monopoly power as it can force competitors out of the market.

132
Q

What are the positives of price discrimination?

A

Dynamic efficiency

Economies of scale can occur

Some consumers benefit from price discrimination such as in second and third degree price discrimination

Cross subsidisation can occur where other goods or services elsewhere in the business that are making a loss can still function and be provided.

133
Q

What are examples of natural monopolies?

A

Railway
Internet distribution
Water providers

134
Q

What are characteristics of a natural monopoly?

A

Huge fixed costs

Enormous potential for economies of scale

Rational for 1 firm to supply the entire market, competition is undesirable as competition would result in a waste duplication of resources and non exploitation of full economies of scale causing allocative and productive inefficiency.

135
Q

Why are natural monopolies okay if they are regulated?

A

Because it is rational for only 1 firm to supply the entire market as competition is undesirable.

This is because competition would result in a wasteful duplication of resources and non exploitation of full economies of scale leading to allocative and productive inefficiency.

136
Q

What does the LRAC look like for a natural monopoly?

A

Costs Y
Quantity X

Slowly falling over a massive amount of quantity minimum efficient scale should occur near to where quantity is wrote.

137
Q

What does the diagram of a natural monopoly that is regulated look like?

A

Y Price costs revenue
X Quantity

LRAC
LRMC (exactly the same shape as LRAC but below it)
AR=D (Price maker so downwards sloping)
MR

Show price at profit max (MR=MC), show supernormal profit with cost 1 and profit 1.

Then show regulated to (MC=AR) showing price at regulated level, costs at regulated level and subnormal profit being made.

Arrows for Q and P

Subsidy at the difference between LRAC AND LRMC at regulated level to ensure normal profits made.

138
Q

What are the negatives of monopolies?

A

Allocative inefficiency prices is higher than marginal cost meaning consumers are exploited paying more than it costs to produce, lower consumer surplus restricting choice and output. DWL CS Diagram.

Productive inefficient, they voluntary forgo economies of scale they don’t operate on the lowest cost on their average cost curve or they are to big and suffer diseconomies of scale costs are higher than they could be in a competitive market.

X-inefficient they allow for waste in their production process, they are complacent due to lack of competitive drive.

Inequality in necessity markets, poor could suffer the most from high prices in market increasing income inequality.

139
Q

What are the positives of monopolies?

A

Dynamic efficiency, being able to reinvest supernormal profit back into the business is good for consumers they get innovative brand new products of higher quality. Potentially lower prices over time, good for both producers and consumers.

Greater economies of scale, despite the productive inefficiencies of monopolies compared to competitive firms they may still be exploiting greater economies of scale purely because of their size. (DIAGRAM SHOWING MC of monopoly to the right of MC of competitive market with AR=D and MR)

Natural monopoly regulated, gives society desirable outcomes.

Monopolies can cross subside goods and services, they can use the supernormal profits to subsidise a loss making good or shrive that they are also producing but is socially desirable.

140
Q

Evaluate a monopoly?

A

Dynamic efficiency might not occur, a monopoly may decide to give money to shareholders, pay off debts, save it, pay their workers higher salaries none of which is reinvesting into capital in the business.

Which is more likely EoS or DoS?

What is the objective of the monopoly? It might not always be profit maximisation.

Is the monopoly regulated?

Is there competition or threat of competition? Tesco e.g.

Is it a natural monopoly or not?

Type of good or service? Necessity should not be monopoly, luxury goods however can be?

141
Q

What are the benefits of a market being competitive?

A

Allocative efficiency

Productive efficiency

X-efficiency

More jobs

142
Q

What are the negatives of a market being competitive?

A

Lack of dynamic efficiency

Lack of economies of scale

Cost cutting due to X-efficiency can occur in dangerous areas such as health and safety

Creative destruction

143
Q

What is the diagram that shows monopoly firms supplying cheaper than competitive firms even when they are profit maximisation?

A

MC (of monopoly) starts near origin ends half way
MC (of competitive market) starts near top left and only a small increase
MR Curve

Showing monopoly operating at MC=MR and competitive operating at MC=AR and monopoly having cheaper prices.

144
Q

Evaluate (judgement last paragraph) competitive markets?

A

Dynamic efficiency could still occur as firms still make profit.

Level of EoS firms can produce.

Natural monopoly regulated could be more productively efficient

Where is the cost cutting taking place, is it comprising on quality?

Role for regulation? Making sure firms are taking short cuts to protect society

What is more important to society static or dynamic efficiency? Depends on the type of good made, we would rather have static efficiency in necessity markets as they are much more desired by society. Dynamic may be more important in certain markets were consumers will be willing to pay a slightly higher price for differentiation, variety, reinvestment and new technologies and innovations e.g. electronic markets.

145
Q

What are the characteristics of monopolistic competition?

A

Many buyers and sellers

Slightly differentiated goods

Firms are price makers

Price elastic demand

Low barriers to entry and exit

Good information

Non-price competition

Firms are profit maximisers.

146
Q

What are examples of monopolistic competition?

A

Taxis
Clothing
Fast Food
Restas

147
Q

How do you show profit on a market diagram?

A

Difference between average revenue and average cost multiplied by the quantity.

148
Q

What level of profit is present in the short run in monopolistic competition?

A

Supernormal

149
Q

What does the short run monopolistic competition diagram look like?

A

A market diagram showing supernormal profit.

150
Q

What level of profit is present in the long run in monopolistic competition?

A

Normal profit

151
Q

What does the diagram look like for monopolistic competition?

A

AR/MR

MC

Profit maximisation point

Average cost touching the average revenue curve at normal profit price and making sure MC is going through the lowest point of it.

152
Q

What efficiencies are present in monopolistic competition?

A

Monopolistic competition is not efficient in any of the three efficiencies.

153
Q

Although monopolistic competition is not allocative efficient, why can it still be okay?

A

There is good competition in the market, this means that the price making ability of these firms is lower, the price exploitation is no where near as great as monopoly.

The loss of consumer surplus is nowhere near as bad as a monopoly competition.

Compared to perfect competition where there is allocative efficient, in perfect competition there is homogeneous goods, consumers don’t desire these goods in many markets such as clothing or restaurants. Consumers like differentiation, who are willing to pay more for this and sacrifice consumer surplus to have the ability to make a choice.

154
Q

Although monopolistic competition isn’t productively efficient, evaluate why this is okay?

A

There is good substitutes in monopolistic competition, firms cannot afford to forgo economies of scale to the same extent as monopolies.

The productive inefficiency in monopolistic competition may be due to the product differentiation demands of consumers whom like variety, this may make it harder to exploit economies of scale as they are producing a wide range of different goods. Thus the productive inefficient might be coming from the consumer desire for differentiation in which case consumers are willing to pay a higher price for it.

155
Q

Although in theory dynamic efficiency doesn’t occur, in practically argue how it could occur?

A

If short-run supernormal profits are enough to reinvest we can get dynamic efficiency.

Dynamic efficiency can occur in practicality even if normal profits are being reinvested, it could be part of competition in the market for firms to have to reinvest, e.g. clothing if they don’t reinvest and bring in new fashion lines they are going to fall behind massively.

156
Q

What is concentration ratio?

A

The collective market share of the largest firms in an industry.

157
Q

Four firms have 70% total market share, how would you write this down in an exam?

A

4:70

158
Q

What are the characteristics of an oligopoly?

A

Few firms dominate the market

High concentration ratio

Differentiated goods

Firms are price makers

High barriers to entry and exit

INTERDEPDENCE

Price rigidity

Non-price competition

Profit maximisation not the sole objective, firms are in a ‘dog fight’ for market share.

159
Q

What are examples of oligopoly?

A

UK Supermarket industry

UK Fuel providers

UK airlines

160
Q

In oligopoly it is assumed that firms don’t want to and need to???

A

Firms don’t want to change price

Firms don’t need to change price

161
Q

What diagram shows that firms in an oligopoly don’t want to change price?

A

Kinked demand curve

162
Q

What does a kinked demand curve look like?

A

Starts of elastic then goes inelastic demand curve.

163
Q

What would a firm in an oligopoly not want to change price?

A

Raising price they will lose market share what is their main objective and reducing price they won’t gain any market share in the long run and will lose revenue in both cases, thus there are no incentives for a firm in an oligopoly to want to change price due to interdependence between firms.

164
Q

What diagram can you draw to show why firms in an oligopoly don’t need to change price?

A

Kinked demand curve with a MR curve that has a vertical gap at the point in which the kinked demand curve turns inelastic.

Marginal cost shifting outwards inside the vertical gap in MR curve.

165
Q

Why do oligopoly firms not to change price?

A

Assuming that the oligopolist is a profit maximiser, producing where MC=MR a firm will always charge P1 as firms potentially don’t need to change their price if costs were to change within the vertical gap.

166
Q

Is it possible for price competition to occur in oligopoly markets though?

A

Yes, firms may try and reduce their prices to try and gain market share, supermarket providers have price wars regularly.

167
Q

What does interdependence in oligopoly markets tempt firms to do?

A

Temptation to collude, to fix price to make supernormal profits.

168
Q

Why may collusion not last in the long run?

A

There is incentives for firms to cheat on collusive agreement, as they will make greater profits at lower price levels so they may be tempted by the higher profits although int he long run they will fall.

They may feel as if competition authorities may become aware of collusion so out of fear of repercussions reduce price.

169
Q

What is a competitive oligopoly?

A

An oligopoly that is based on price or non-price competition.

170
Q

What is a collusive oligopoly?

A

Collusive oligopoly is where firms either overt or tacit collude to fix prices or quantities.

There can also be price leadership, where there is one dominant firm in the market that decides the price and all the other firms follow it.

171
Q

What factors are likely to promote competitive oligopoly?

A

Large number of firms as organising collusion when there is lots of firms is difficult.

If new market entry is possible, takeaway incentives to collude.

One firm with significant cost advantages.

Homogeneous goods firms don’t have the price making power to fix prices

Saturated markets, incentives to cheat on collusion is very high.

172
Q

What are the factors that promote collusive oligopoly?

A

Small no. of firms much easier for firms to get together for collusive agreements

Firms have similar costs

High entry barriers, will deter new firms from entering the market if collusion is taking place, meaning the benefits of collusion can occur in the long run.

If there is ineffective competition policy

Less cheating incentives on collusive agreements in the market such as consumer loyalty and consumer inertia.

173
Q

How do you evaluate the performance of a competitive oligopoly?

A

The pros and cons of operating in a competitive market.

(Basically look at the competitive market structure and list the benefits of market operating this way and the drawbacks)

174
Q

How do you evaluate the performance of a collusive oligopoly?

A

The pros and cons of monopoly outcomes.

(Basically look at the monopoly market structure and lists the benefits of a market operating this way and the drawbacks with a monopoly diagram).

175
Q

What is a contestable market?

A

A market where there is a threat of competition, this threat could be enough to affect the behaviour of firms in the market.

176
Q

What conditions does there have to exist for there to be a threat of competition?

A

Low barriers to entry/exit

Large pool of potential entrants

Good information

Incumbent firms subject to hit and run competition

177
Q

How has technology reduced barriers to entry and made markets more contestable?

A

Technology has massively reduced barriers to entry and exit because businesses don’t have to be physical anymore this reduces start up and sunk costs.

This also means that firms don’t have to hire as many workers potentially and therefore don’t need to meet as many regulations.

Technical economies are more easy to achieve than before.

Advertising is easier therefore brand loyalty is more easily overcome.

178
Q

How has technology increased pool of potential entrants and thus made markets more contestable?

A

Technology has allowed for greater innovation and therefore for new firms to come up with something brand new to disrupt markets, e.g. UBER.

Technology has allowed firms to find cheaper ways of producing things so therefore new firms don’t have to necessarily be offering something new because of technology as technology has allowed firms to find lower cost of production methods to disrupt existing firms therefore increasing the pool of potential entrants.

179
Q

How has technology improved information and thus made markets more contestable?

A

The internet is now available to everyone therefore firms can find out easier about costs and technology in the market.

Communication has improved and therefore it is easier to get that key information to.

180
Q

What are the 3 ways technology has made markets more contestable?

A

Reduced barriers to entry/exit

Increased pool of potential entrants

Improved innovation.

181
Q

What would a monopolist do if the market became contestable?

A

Move production to the point where AC=AR the break-even point where normal profit is achieved, is called the limit price.

182
Q

Why would a monopolist move to the break-even point just because of a threat of competition?

A

To eliminate the threat by taking away the incentive for firms to enter the market.

Prepared if a threat becomes real, allows the firm to be able to compete with lower prices and high quantities.

183
Q

What are the benefits y of a threat of entrants causing a shift towards AC=AR in a monopoly competition?

A

Allocative efficiency Productive efficiency
X-efficiency
Job creation

184
Q

What are the downsides of a threat of entrants causing a shift towards AC=AR in a monopoly competition?

A

Lack of dynamic efficiency

Cost cutting may occur in dangerous areas such as health and safety

Creative destruction, causing job losses. (Counter-point output is still greater in the economy so those who lose jobs can join new firms in the same industry).

Anti-competitive strategies may result in the threat of a contestable market not lasting over time.

185
Q

Evaluate weigh ups the downsides and positives of a contestable market?

A

Length of contestability

Technology can decrease contestability as well as increase patents. As well technology can help firms in acquiring consumer data and therefore firms can therefore practice price discrimination.

Regulation can reduce the cons of contestable markets by reducing anti-contestable strategies and ensure cost-cutting doesn’t occur in dangerous areas.

Dynamic efficiency although it may it not occur as supernormal profit is not taking place, new firms can offer innovation and thus dynamic efficiency doesn’t need to occur for new innovation to take place.

186
Q

Who enacts competition policy in the UK?

A

Competition and markets authority

187
Q

Who enacts competition policy in the EU?

A

European competition commission

188
Q

What are regulatory bodies?

A

Specialised regulators who look over specific industries and companies operating in these industries this occurs in the UK.

189
Q

What are the aims of competition policy?

A

To ensure public interest is protected by:

Prevent excessive pricing

Promote competition

Ensure quality, standards and choice

Regulate natural monopolies, ensure effective privatisation of natural monopolies

Ensure supernormal profits are being used to promote technological innovation if present, not just for shareholder dividends.

190
Q

When will competition authorities intervene?

A

Collusive / Cartel agreements

To investigate mergers

Liberalise concentrated markets

Monitor state aid control (subsidies) to ensure it doesn’t distort competition.

191
Q

What are different ways of regulating a monopoly?

(8 Different ways?

A

Price regulation

Quality control/performance targets

Profit control

Windfall taxes on profit

Merger policy

Privatisation

Deregulation

Reducing trade barriers

192
Q

How does price regulation, regulate a monopoly?

A

Price regulations are regulations that limit the price a monopoly can increase prices next year.

There are three limits that can occur:

Prices are not allowed to be increased the next year beyond RPI

Prices are not allowed to be increased the next year beyond RPI minus X(variable number), this is to promote incentives to be more efficient and cut costs.

Prices are not allowed to be increased the next year beyond RPI+/- k, k represents a value whereby enough profit can be made to allow capital investment.

193
Q

What diagram can you draw to show price regulation on a monopoly?

A

Monopoly diagram with monopoly profit maximisation output and then MC=AR
output labelling it maximum price.

194
Q

What are the problems with the possible price regulations on a monopoly?

A

Information gaps, how is the level of X or the level of K going to be generated? If information is not perfect it can be hard to determine the level required.

Highly costly and time consuming for regulatory bodies to investigate, there is a significant opportunity cost of the tax payers money.

Incentive to keep increasing x percentage each year on the firm which is not fair on the firm as they are being punished each year for cutting costs.

Risk of regulatory capture, firms may contacts or good relationships with the regulators who may try to reduce the extent of the regulation not changing the competitive nature of the market.

195
Q

What is the monopoly regulation quality control/performance targets?

A

Setting targets that a must be achieved, e.g. GP seeing a set number of patients in an hour.

196
Q

What is the problem with performance targets and quality controls?

A

Unintended consequences can occur, e.g. GP seeing a set number of patients an hour may lead to may lead to GP not diagnosing appropriately taking shortcuts in their appointments.

‘Game the system’, e.g. train companies if they are only allowed a certain number of delays a day they may extend journey times to take longer than they actually would to prevent delays taking place.

197
Q

What is the monopoly regulation windfall taxes on profit?

A

Taxing the profits of a monopoly

198
Q

What is the problem with the monopoly regulation windfall taxes on profit?

A

Worsen monopoly outcomes, a increase in tax with shift MC leftwards and reduce quantity.

Monopolies may under-report profits

Less innovation and less dynamic efficiency as less supernormal profit.

199
Q

What is merger policy?

A

Mergers that take place between firms that would create over 25% market power.

Competition market authorities could break up the merger if it is against public interest.

If the merger creates monopoly outcomes in certain locations then in those locations they could force this new merger to seller off stores or outlets in those locations to competitors to promote more competitive outcomes.

200
Q

What are the 3 market liberalising policies? (Competition promoted policies)

A

Privatisation

Deregulation

Reducing trade barriers

201
Q

What must be considered before a monopoly is regulated?

(EVALUATION POINTS ON MONOPOLY REGULATION)?

A

Level of information that regulation bodies have on the market. To strict percentages could lead firms shutting down, to lax monopoly outcomes may prevail.

Costs of regulation paid by tax payer with not necessarily get benefits if information is not perfect, this can lead to government failure if costs of intervention and greater than rewards of intervention

Regulatory capture may occur.

There are benefits of monopolies existing, if you regulate them to harshly these may go, e.g. dynamic efficiency, natural monopoly existence without competition.

202
Q

What is privatisation?

A

Privatisation is when state run organisations or state run activity is sold off to the private sector.

The idea behind this is to see greater efficiency gains as there is more competition and profit motive.

203
Q

How do you show the effects of privatisation on a diagram?

A

Market diagram showing output shifting towards competitive outcomes e.g. equilibrium going from MC=MR to MC=AR

204
Q

What are the advantages of privatisation?

A

Increase in allocative efficiency.

Decrease in x inefficiency, reduction in waste as firms are driving down costs to maximise profits.

Efficiency incentive which drives dynamic efficiency.

205
Q

What are the disadvantages of privatisation?

A

Limited competition may occur, which results in productive and allocative inefficiency as not many firms enter the market.

Loss making services cut even if socially socially desirable.

Loss of natural monopoly resulting in loss of economies of scale by privatising the market costs actually increase as economies of scale of each firm will be less than economies of scale of a natural monopoly causing productive inefficiency.

206
Q

What factors determine whether privatisation will be successful or not?

A

The level of competition post privatisation.

Level of government regulation, if strong competitive outcomes, if weak less competitive outcomes.

How do we define success of privatisation? Consumer or firm profits?

207
Q

What is deregulation ?

A

Deregulation is when governments reduce legal barriers to entry in given industries, to incentive more firms entering the market to promote competition and efficiency.

208
Q

What does the deregulation diagram look like?

A

Market diagram with AC,MC,AR,MR.

Showing the market diagram with price/costs on Y, showing output at MC=MR then moving to output to MC=AR to show more competitive output in the market showing the increase consumer surplus.

209
Q

What are the advantages of deregulation?

A

More firms will increase consumer choice, also increases incentives for firms to be allocatively efficient to satisfy consumers and to stay ahead of their competitors.

Productive and x efficiency are more likely to occur as they are increased incentives to now stay ahead of their competitors to produce on the minimum point on the average cost is desirable as is reducing waste.

Dynamic efficiency may increase, high competition any chance to get ahead of competition will be taken.

210
Q

What are the disadvantages of deregulating markets?

A

Loss of natural monopoly causing average costs to increase, decreasing productive efficiency because the economies of scale benefits are not going to be seen anymore as more firms have entered the market. Continually, there may be a wasteful duplication of resources causing allocative inefficiency.

Deregulation is not guaranteed to increase competition everywhere in a country, you may have local monopolies or oligopolies being formed which could abuse their power and cause higher prices and lower quantities. This may cause allocative and productive inefficiency to occur.

211
Q

What does the success of deregulation dependent on?

A

The short run vs long run outcomes of deregulation, if you have local oligopolies or monopolies then in the long run contestability will fall which is not the desired outcome.

Height of the other barriers to entry, other barriers to entry can still be high which may disincentive new firms entry in the market as a result there will not be a huge increase in competition.

Level of government regulation, to regulate against anti competitive behaviour occurrence of local monopolies and oligopolies.

Economics Micro A LEVEL Complete (6 decks)

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