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Economics Aqa A Level > Chapter 5 > Flashcards

Chapter 5 Flashcards

(61 cards)

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1
Q

Market structure

A

The number and size of firms within a market for a particular good or service

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2
Q

Imperfect competiton

A

Any market structure that’s not perfect competition

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3
Q

Pure monopoly

A

When only one firm supplies the market

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4
Q

Profit maximisation

A

When a firm seeks to make the largest positive difference between total revenue and total costs

MC = MR

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5
Q

Why do firms profit maximise

A

• Reinvest funds into developing new products to gain more customers

• Pay out higher returns to shareholders (dividends) to encourage more people to buy shares in the company or boost share price

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6
Q

Divorce of ownership from control

A

Separation that exists between owners of the firm (shareholders) and directors in large public limited companies

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7
Q

Objectives of directors:

A

• Growth maximisations (growth of a firm boosts profile and CV and media publicity, may reduce take over)

• sales revenue maximisation ( executive pay and bonuses may be linked to annual sales revenue than profit)

• satisficing ( suboptimal level of profit rather than maxmimal as it’s hard to achieve)

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8
Q

Shareholders objective

A

Profit maximise for increase in dividends

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9
Q

Satisficing

A

Making do with a satisfactory, suboptimal level of profit

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10
Q

Sales maximisation

A

Level of output at which the sale of one more unit wouldn’t add to overall revenue
(Can help the firm benefit from economies of scale)

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11
Q

Survival

A

Key objective of a firm to survive the critical period (first few years) ,before it establishes a customer base and repeat sales, to cover costs

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12
Q

Growth

A

Firm Increasing its output and scale of operation, expanding its productive base and size of work force
(Helps fend off takeover bids)

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13
Q

Increasing market share

A

When a firm seeks to maximise its percentage share of a market in terms of sales value or number of units sold

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14
Q

Stakeholder

A

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

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15
Q

Objective of firms

A

Profit maximise

Possible consequences of a divorce of ownership from control

Sales maximisation

Survival

Growth

Increase market share

Stakeholder objectives

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16
Q

Price taker

A

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

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17
Q

What does perfect competition cause in the short run

A

Potential supernormal/abnormal profit

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18
Q

What does perfect competition cause in the long run

A

Normal profit

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19
Q

Advantages of perfect competition

A

Productive efficiency (goods and services are produced at minimum average cost or that minimum inputs produce maximum outputs)

Allocative efficiency (highly competitive markets will lead to firms producing what consumers demand, if they don’t they lose market share, leading to consumer sovereignty)

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20
Q

Static efficiency

A

Efficiency measure at a point in time

Components are productive and allocative

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21
Q

Monopolistic competition

A

Form of imperfect competition with a large number of firms producing slightly differentiated products

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22
Q

Example of monopolistic competition

A

Independant fast food takeaways

Plumbers

Hairdressers

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23
Q

Oligopoly

A

Market structure dominated by a small number of powerful firms

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24
Q

Concentration ratio

A

Measurement of how concentrated a market is
The total market share held by the largest firms in the market

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25
Characteristics of oliogopoly
Similar products Few firms High barriers to entry
26
Cartel
A collusive agreement among a group of oligopoly firms to fix prices and/or output between themselves
27
Tacit collusion
A collusive relationship between firms without any formal agreement having been made
28
Overt collusion
A collusive relationship between firms involving an open agreement (Usually illegal, decreases competition)
29
Interdependence
How firms in competitive oliogopoly are affected by rival firms’ pricing and output decisions
30
Methods of non price competition
• product differentiation (marketing, packaging, advertising) • Customer service (point of sale and after sales service •Loyalty products (loyalty cards, warrantees and guarantees)
31
Monopoly power
Power of a firm in a market to act as a price maker
32
Price maker
A firm with the power to set the market price
33
Barriers to entry
Any feature of a market that makes it difficult or impossible for new firms to enter
34
What are the kinds of barriers to entry
Natural barriers Economies of scale Legal barriers Product differentiation Sunk costs
35
Natural barriers to entry
Climate, geographical or geological factors such as soil and weather to grow raw materials
36
Economies of scale (as a barrier to entry)
Large firms can set their prices below those of new firms to the market and still make a supernormal profit (Tesco can have bulk buy discount than a smaller store)
37
Legal barriers
Patents, copyrights and trademarks that gives a single firm or individual the right to have a monopoly over a new product
38
Product differentiation
Using advertising or product design to make a product seem different from those of competitors
39
Sunk costs
Costs that cannot easily be recoverable if a firm is unsuccessful in a market and has to exit (Adverts + specialised equipment)
40
Concentrated market
A market dominated by a small number of firms
41
Disadvantages of monopoly
Produce and allocative inefficiency (monopolies don’t have to produce at minimum average total cost as they don’t have competition and they don’t have to produce the best goods or services) X-inefficiency Diseconomies of scale (very large forms may suffer from problems of control or communication)
42
X-inefficiency
When firms with monopoly power don’t want to control their costs of production (Because they don’t need to they don’t have competition)
43
Possible advantages of monopoly
Economies of scale (monopoly can gain advantages) Innovation ( more funding avaliable to invest in research and development)
44
Innovation
New products and production processes that are developed into marketable goods or services
45
Natural monopoly
A market where a single firm can benefit from continuous economies of scale National grid - gas supply Thames water - water
46
Price discrimination
Where firms with monopoly power charge different groups of consumers different prices for the same product
47
Conditions necessary for price discrimination
Must have degree of monopoly power Different sub markets of consumers with different elasticities of demand Those consumers being charged the higher price must not be able to access the cheaper prices
48
Consumer surplus
The difference between what a consumer would be prepared to pay and the price they actually pay for a good or service
49
Producer surplus
The difference between what a firm would be willing to sell a good or service and the price they recieve
50
Advantages of price discrimination
Supernormal profits may be reinvested to a better quality product for consumers Subsidising those paying a lower price ( children’s and senior citizens rail travel) Those on lower incomes may now be able to access services (priced off peak)
51
Disadvantages of price discrimination
If a monopoly firm is able to earn supernormal profit it may be seen as equitable Increases producer surplus at the expense of consumer surplus May be seen as exploiting those in greatest need
52
Price competition
Reducing the price of a good or service to make it more attractive than those of competitors
53
Dynamic efficiency
Improvement in productive efficiency over time
54
Price war
Where firms in an industry repeatedly cut prices below those of competitors to win market share
55
Non price competition
Competition on the basis of product features other than price, such as quality, advertising or after sales service
56
Contestable market
A market with freedom of entry and exit
57
Features of perfectly contestable markets
Freedom of entry to and exit from the market No sunk costs Perfect information Firms produce where P = MC
58
Impact of contestable market
Hit and run competition
59
Hit and run competition
New entrants take a share of the supernormal profits and then exit the industry
60
Dynamic efficiency
Improvements in productive efficiency over time
61

Economics Aqa A Level (15 decks)

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