Bulleted Chains of Analysis Flashcards
Advantages of Specialisation / Division of Labour
-Tasks separated in production process.
-Workers gain more practice in specific tasks.
-Skills improve + productivity rises.
-Lower unit costs.
-Firms can set lower prices - consumer welfare improves/surplus analysis.
-Or just make more profit - potential for dynamic efficiency.
Disadvantages of Specialisation / Division of Labour
-Tasks separated in production process.
-Workers repeat the same task the whole time.
-Workers get bored + feel alienation (don’t feel part of the final product).
-Increased levels of absenteeism and inactivity / high turnover rates.
-Higher unit costs.
Change in Conditions of Demand
Increase Yd >
Rise in effective demand
D1 to D2
Excess demand
Extension of supply
(firms raise prices to P2 > contraction of demand > new equilibrium P2
Conditions of Supply
Example: Increase in production costs lowers supply at any given price.
Price Mechanism (Rise in Price)
Signals scarcity to producers, incentivizing them to reallocate factors of production to goods, which lowers consumers’ effective demand.
Externalities
Third-party effects of production/consumption not included in private decisions, leading to misallocation of resources and reduced allocative efficiency.
Public Goods (Market Failure)
Characterized by non-excludability and rivalry, leading to a missing market and misallocation of resources.
Information Failure (Goods with Positive Externalities)
Consumers may not possess or ignore relevant information, leading to under-consumption of goods with positive externalities.
Example: Healthcare.
Utility Maximisation
Consumers aim to maximize welfare by acquiring the bundle of goods/services that provide maximum utility, constrained by limited income, prices, time, and information.
Marginal Returns (Short Run)
In the short run, at least one factor of production is fixed, leading to diminishing marginal returns and rising marginal costs.
Returns to Scale (Long Run)
In the long run, all factors of production are variable. If inputs double but output less than doubles, it results in decreasing returns to scale.
Economies of Scale (Long Run)
Sources include bulk buying, managerial, financial, technical, marketing, and risk-bearing.
Example: Bulk buying lowers per unit input costs.
Profit Maximisation (MC=MR)
Occurs at the quantity of output where marginal cost equals marginal revenue, allowing for reinvestment into R&D and dynamic efficiency.
Revenue Maximisation (MR=0)
Firms may focus on increasing revenue linked to managerial pay, which can lead to increased monopoly power.
Sales Maximisation (AC=AR)
Necessary for start-up firms to survive, aiming to increase sales and market share while lowering unit costs.
Perfect Competition (AR/MR Curves)
Characterized by perfect information, perfectly elastic demand, and horizontal AR curve.
Perfect Competition (SR Supernormal Profits)
In the short run, firms can make supernormal profits, incentivizing new firms to enter the industry.
Perfect Competition (SR Losses)
In the short run, firms can incur losses, leading to a reduction in industry supply and an increase in prices.
Monopoly (AR/MR Curves)
In a pure monopoly, market quantity demanded is inversely proportional to price, with the monopolist needing to reduce price to increase quantity sold.
Sources of Monopoly Power
Include economies of scale, advertising, and barriers to entry, allowing monopolists to charge higher prices.
Monopoly Market Failure
Monopoly power restricts output and raises prices above allocatively efficient levels, leading to deadweight loss.
Monopoly (Advantage)
Can lead to economies of scale, lower production costs, and increased supernormal profits, which may be reinvested in R&D.
Oligopoly: Price Rigidity (Kinked Demand Theory)
In oligopolies, firms may not have an incentive to compete on price due to the elastic and inelastic nature of demand.
