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Economics - Chapter 8 > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Name a monopoly power?

A

Google

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2
Q

What is a pure monopoly?

A

When only one firm supplies the market

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3
Q

What can large profits enable firms to do?

A

R&D, that then leads them to gain more customers
Pay out higher returns to shareholders, which may encourage more people to buy shares in the company, or to help boost the share price

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4
Q

What is the profit-maximising rule?

A

MC = MR

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5
Q

What are the possible consequence of a divorce of ownership of control?

A

May lead to conflicting objectives between the manager and the shareholder

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6
Q

What are possible objectives of directors?

A

Growth maximisation
Sales revenue maximisation
Satisficing

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7
Q

What is satisficing?

A

Making do with a satisfactory, sub-optimal level of profit

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8
Q

What can help a firm benefit from economies of scale?

A

Sales maximisation

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9
Q

What might be alternative strategies of firms in a market, other than profit maximisation?

A

Survival
Growth
Sales Maximisation
Increasing market share
Stakeholder objectives

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10
Q

What is the growth focus of a firm?

A

Once a firm has survived its first few critical years, its owners are likely to pursue growth. The firm will increase its output and scale of operation = might be able to take advantage of various economies of scale. Will also help a business fend off takeover bids from rival companies

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11
Q

Explain the strategy of increasing market share

A

Linked to the aim of growth. Having the highest market share for a particular product = can give the firm benefits of monopoly power. Consequences are that the gov may notice, and fear abuse of power.

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12
Q

Explain the modern view of firms

A

That they may achieve financial and non-financial objectives at the same time i.e. looking after employee needs is at least as important as maximising profit

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13
Q

What is a price taker?

A

A firm which is unable to influence the ruling market price and thus has to accept it

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14
Q

What is a stakeholder?

A

Any individual or group with an interest in how a business is run

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15
Q

What are the advantages of perfect competition?

A

Static efficiency, which is made from productive and allocative efficiency

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16
Q

What is static efficiency?

A

Efficiency measured at a point in time. Productive + allocative

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17
Q

What are the features of monopolistic competition?

A

Large number of producers
Similar products differentiated from one another by i.e. branding, quality etc

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18
Q

Examples of monopolistic competition?

A

Hairdressers, fast-food takeaways

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19
Q

What are the features of an oligopoly?

A

Small number of relatively powerful firms compete for market share
Highly concentrated markets
Interdependent

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20
Q

What is concentration ratio?

A

A measurement of how concentrated a market is

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21
Q

What is a cartel?

A

A collusive agreement among a group of oligopoly firms to fi prices and/or output between themselves

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22
Q

What is tacit collusion?

A

A collusive relationship between firms without any formal agreement having been made

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23
Q

What is overt collusion?

A

A collusive relationship between firms involving an open agreement

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24
Q

What is interdependence?

A

How firms in competitive oligopolies are affected by rival firms’ pricing and output decisions

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25
What is a famous example of a cartel?
OPEC - Organisation of the Petroleum Exporting Countries
26
What do collusive agreements allow?
Inefficient firms to survive
27
What are some examples of non-price competition?
Product differentiation Customer service Loyalty products
28
What happens if a firm increases its price and the rivals don't follow suit?
It loses some, but not all, market share
29
What happens if a firm cuts its price?
Other firms have to follow suit. It then leads to a small expansion of market size, but no increase in market share for the individual firm. Hence, firms prefer non-price forms of competition in an oligopoly.
30
What is a pure monopoly?
A monopoly that has 100% market share. The firm is a price maker.
31
What are the 5 types of barriers to entry?
Natural barriers Economies of scale Legal Barriers Product differentiation Sunk costs
32
Explain natural barriers
Include naturally-occurring climatic, geographical or geographical factors that make the product difficult to replicate elsewhere. Wine-growing regions
33
Explain economies of scale as barriers to entry
When a firm's average costs of production fall as output increases. Large firms can set their prices below those of any potential new entrant firms to the market, and still make a supernormal profit.
34
Explain legal barriers
Factors which give a single firm or individual the right to have a monopoly over a new product, process or other intellectual property, either forever or over a given time.
35
Explain product differentiation
Existing firms in a market may have spent considerable sums of money over many years on advertising and branding in order to build up a significant consumer loyalty and marketing profile. i.e. the large advertising budgets of major soft drinks firms
36
Explain sunk costs
Costs that cannot be easily recovered if a firm is unsuccessful in a market and has to exit, i.e. these financial commitments are essentially lost, or sunk. i.e. market research costs
37
What are the advantages of a monopoly?
Economies of scale: financial, technical, marketing, managerial Innovation
38
What are the disadvantages of a monopoly?
Productive and allocative inefficiency X-inefficiency Diseconomies of scale
39
What is X-inefficiency?
The lack of willingness of firms with monopoly power to control their costs of production
40
Explain the features of a natural monopoly
Natural monopolies occur when it is uneconomic for more than one firm to supply a market because that firm enjoys continuous economies of scale i.e. utilities such as household gas It is productively efficient for a single firm to supply the market, as several individual firms cannot achieve the low costs of the single firm If the market were broken up, average costs would be higher than for a single firm, meaning prices may be higher
41
What are the conditions necessary for price discrimination to occur?
Firms must have a degree of monopoly power Different sub-markets of consumers with different elasticities of demand No 'seepage' between markets - consumers being charged higher prices mustn't be able to access cheaper prices
42
What is price discrimination?
Where firms with monopoly power charge different groups of consumers different prices for the same product
43
What is consumer surplus?
The difference between what a consumer would be prepared to pay and the price they actually pay for a good or service
44
What is producer surplus?
The difference between what a producer would be prepared to accept a good for and what they actually receive
45
What makes up economic welfare?
Consumer and producer surplus
46
What are the advantages of price discrimination?
Supernormal profits may be reinvested, leading to better quality products Extra profits can 'subsidise' those paying a lower price Those on lower incomes can access services i.e. lower priced off-peak train fares
47
What are the disadvantages of price discrimination?
Earning or increasing supernormal profit can be seen as inequitable Increases producer surplus at the expense of consumer surplus May be seen as exploiting those in greatest need who have no choice about using peak-time services
48
How do firms in concentrated markets behave with price competition?
Firms may benefit from economies of scale, so they could reduce prices whilst still making supernormal profits. Firms may use these profits to reinvest in R and D. Dynamic efficiency would lead to a reduction in the firms' costs at every given output level. If a firm wishes to take market share from rivals, it might initiate a price war by undercutting others
49
What is a price war?
Were firms in an industry repeatedly cut prices below those of competitors in order to win market share
50
What is price competition?
Reducing price of a good/service in order to make it more attractive than those of it's competitors
51
Over time, what happens in competitive markets?
Creative destruction. Firms in monopolies use innovation to overcome existing barriers to entry.
52
What is a contestable market?
A market with freedom of entry and exit.
53
What would happen if a market was made more contestable?
Incumbent firms would behave in more economically desirable ways with regard to pricing and static efficiency.
54
What are the features of a perfectly contestable market?
Freedom of entry/exist No sunk costs Perfect info Firms produce where P = MC
55
What is the impact of contestable markets?
Incumbent firms would behave in more economically desirable ways with regard to pricing and static efficiency, otherwise new entrants would be taking a share of any supernormal profits (hit and run competition)
56
What is hit and run competition?
Where new entrants take a share of the supernormal profits and then exit the industry
57
What is dynamic efficiency?
Improvements in productive efficiency over time. Can be R&D, investment in human and non-human capital, technological change
58
What type of competition performs well in static efficiency, but not dynamic?
Perfect competition
59
How does dynamic efficiency arise?
Through improvements in productive efficiency - i.e. technology.
60
Why can't perfectly competitive firms be dynamic efficient?
Because they don't have access to supernormal profits, or high profits needed for R and D etc. They also don't want to take risks in R and D or invest in new technology, as they earn only normal profit, and only do it for adequate reward.
61
What is a duopoly?
Extreme case of oligopoly with only 2 dominant firms in the market
62
Monopolies exercise what?
Producer sovereignty
63
What is producer sovereignty?
When firms have the power and ability to influence consumer decisions
64
When is monopoly power greatest?
When there are no substitutes in the market, as the monopoly is producing an essential good.
65
What does allocative inefficiency lead to?
Resource misallocation
66
What is market conduct?
The way that firms behave in a particular market structure i.e. whether they collude etc
67
What is the deadweight loss?
The cost to society created by market inefficiency or the inefficient allocation of resources
68
What happens to the degree of product differentiation as number of firms in a market increases?
There is more differentiation
69
How can barriers to entry be created by the governent?
Through regulation and licencing. If an activity requires a license, it restricted speed and number of new entrants New factories may need planning permission before building There's also regs with health and safety for employees of firms
70
In a perfect market, what are the 3 signals?
Rationing, Signalling and Incentive functions work perfectly together.
71
If a firm in perfect competition makes AR that's less than the firm's AC, what is happening?
It's making less than normal profit.
72
A firm has to leave the market if it's not making normal profit, but in the short run, what are the 2 possibilities?
If the market price (AR) is above the firm's AVC, then they may continue trading temporarily If the market price (AR) is below the firm's AVC, then they leave the market immediately
73
Productive efficiency only occurs if what is assumed?
That there's no economies of scale
74
What are the limitations of the kinked demand curve model?
It doesn't explain how the price was arrived at in the first place. Firms may engage in price competition. It also only describes one possible outcome.
75
What is the kinked demand curve?
Shows why prices are quite stable, even in competitive oligopolies. 2 assumptions to the model: - if one firm raises it's prices, the other firms will not (due to substitutes being cheaper) - if one firm drops it's prices, all will do so ( but lowering price lowers market share) The outcome is that firms have no incentive to change prices, and if they raise/lower their prices, they lose out. = therefore, price stability for prolonged periods of time.
76
How can sunk costs be reduced by hit and run tactics?
Leasing of equipment
77
When are barriers to entry high in contestable markets?
Patents or production methods that stop other firms copying Brand loyalty Threat of predatory pricing Trade restrictions - tariffs or quotas Sunk costs are high
78
What can technological change have an impact on?
Structure of market Production methods Consumption of goods/services
79
What can innovation and invention lead to?
Improvements in capital equipment - leading to better quality products Barriers to entry are reduced or increased Monopoly power to firm who invented innovation Larger economies of scale
80
What can creative destruction lead to?
Job losses, but then new jobs will be made in new markets.
81
Define the MES
The lowest level of output at which average total costs of production are minimised
82
What are external economies of scale?
Reductions in long-run average total costs arising from the growth of the industry in which a firm operates
83
What are diseconomies of scale?
Increases in average total costs that firms may experience by increasing output in the long run
84
What are the 2 types of diseconomies of scale?
Co-ordination and control Communication

Economics - Chapter 8 (10 decks)

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