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Year 1 Semester 1 > Economics > Flashcards

Economics Flashcards

1
Q

Microeconomics

A

economy
-consumers decide if buying
-firms decide prices
-allocate scarce resources efficiently

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2
Q

Macroeconomics

A

GDP
unemployment
inflation

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3
Q

6 main principles of economics (micro)

A
  1. Trade offs
  2. Rationality (perfectly inform, rank happiness/profit)
  3. Opportunity costs
  4. Incentives
  5. Trade = better off = specialisation = scarcity
  6. Allocate resources (scarce)
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4
Q

Rational maximisers

A

using info efficiently - generate behaviour determined
-efficient in production and consumption
-people act independently on basis of full info
transitive preferences (more is preferred to less)

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5
Q

utility

A

consumer satisfaction/happiness
useful to obtain predictions on behaviour

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6
Q

Neo-classical economics

A

assume believe in human rationality
-unbounded rationality - rationality = no bounds

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7
Q

3 choices regarding rationality

A
  1. optimism (tendency to overestimate –> rational = accurate unbiased info)
  2. loss aversion (pain in loss vs pleasure in gains = cognitive bias)
  3. framing (how info presented)
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8
Q

rationality assumption

A

more is always better

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9
Q

consumer choice theory

A

how make consumption decisions
theory behind economic demand curve
reactions to changes in price
aim = see rational consumers chose combination of goods = maximise utility

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10
Q

understanding demand helps in 4 ways

A
  1. estimate sales
  2. type /quantity of output
  3. price to charge
  4. effect of substitutes on sales
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11
Q

factors of demand

A

function of price income, tastes = expectations of future

  1. price (MOVEMENT)
  2. income
  3. preferences
  4. expectations
    any other influence (SHIFT, RIGHT = INCREASE, LEFT = DECREASE)
    R.I
    L.D
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12
Q

consumer assumptions

A

-maximise utility
-rational economic agents = personal satisfaction
-choice = function of preferences and budget

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13
Q

2 tools to model consumer problem

A
  1. indifference curve
  2. budget constraint
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14
Q

indifference curve & features

A

-all possible combinations of 2 goods yield levels of satisfaction (combination of goods consumers are indifferent) - constant utility along curve

  1. slope downward (one increase other reduce preserve utility assume more is better)
  2. convex to origin - law of diminishing marginal utility
  3. more always better (further from origin = higher utility)
  4. curves cant intersect (2 lines = different utility levels - break law of transitive preferences)
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15
Q

marginal rate of substitution

A

magnitude of slope of indifference curve
rate at which person give up good measured on y-axis to gain additional unit of good on x-axis
remaining indifferent (total utility constant throughout curve)

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16
Q

marginal utility

A

incremental increase in utility that results from the consumption of one additional unit.

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17
Q

law of diminishing marginal utility

A

all else equal, as consumption increases, the marginal utility derived from each additional unit declines.
-extra consumption adds to utility but at diminishing rate
(assumption of utility theory)

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18
Q

budget constraint

A

show combination of goods consumers afford (income & price) range of choices affordable
(outside = unaffordable)
income = PARALLEL SHIFT
price = PIVOT

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19
Q

budget lines

A

quantity of 1 good on vertical axis
quantity of another on horizontal
shows consumption possibilities at given income and price

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20
Q

income types

A
  1. nominal (stays same)
  2. real (change - what money will buy at current price) - household income quantity of goods can be bought
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21
Q

consumer equilibrium

A

maximising utility given income and price of goods and services

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22
Q

types of goods

A
  1. inferior (demand drop income rise)
  2. normal (demand increase income rise)
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23
Q

optimal level of consumption

A

indifference curve os tangential to budget constraint

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24
Q

why consumers buy more when price decreases?
2 effects on demand

A
  1. substitution effect (swap to cheaper)
  2. income effect (buying power increased = buy more, real income rises)
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25
Q

6 determinants of demand

A
  1. price
  2. income
  3. price of related goods ( substitute// complements)
  4. tastes
  5. future expectation
  6. libertarian paternalism (nudges)
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26
Q

law of demand

A

quantity demand negative related to price
ceteris paribus - other influences = constant
-explain downward sloping demand curve

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27
Q

creative destruction

A

taste change over time
businesses shut and new emerge

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28
Q

libertarian paternalism

A

liberal - sense we think we are making choices
paternalistic - sense somebody already made choice

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29
Q

PED

A

responsiveness of QD to change in price
nature of relationship between price and quantity
% change in QD / % change in P

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30
Q

levels of elasticity

A

inelastic - steep (<1)
-0.5
large price change = small impact
move down curve
perfectly inelastic = vertical

elastic - shallow (>1)
-2
small price change = large impact
top of curve
perfectly elastic = horizontal

unitary = 1

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31
Q

marginal revenue

A

change in total revenue resulting from 1 unit increase
plotted at midpoint of output values
total rev maximised when selling extra unit = rev falls & selling 1 less = leaves revenue

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32
Q

cross price elasticity of demand

A

responsiveness of demand for 1 product to change in price of another
% change in quantity of good X demanded / % change in price of good Y

complements = -ve
substitutes = +ve

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33
Q

income elasticity of demand

A

responsiveness of demand to change in incomes
% change in quantity of good X demanded / by % change in income

normal = +ve
inferior = -ve

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34
Q

theory of producer choice

A

theory behind supply curve
-beyond certain output = costs rise more rapidly = producers need to be paid higher price = produce extra output = upward sloping

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35
Q

considerations of supply

A
  1. costs of production
  2. firms objective (profit? efficient least costly production methods - goods)
  3. production process
  4. factors of production
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36
Q

factors of production

A

land
labour
capital (physical - machines or human - training)
entrepreneurship

fixed = input cant be altered in quantity within given time period
variable = altered within given time period

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37
Q

technical efficiency

A

given level of output is done using the minimum amount of inputs (avoid waste) produce in least cost manner

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38
Q

production function 2 time frames

A
  1. short run (quantity of at least 1 factor of production is fixed -> capital = fixed, labour = variable =)
    output is a function of L and K fixed capital
  2. long run (can alter level of capital and labour to alter production - series of short run production processes
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39
Q

production in short run

A
  1. total product (TP)-> relationship between amount of labour used and output total amount produced
  2. marginal product (MP)-> change in total product resulting in 1 unit increase in variable factor all other factors are constant, MP to worker is extra output from hiring additional worker
  3. average product (AP) total product / quantity of input used - divide by units of labour = tells average productivity of workers
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40
Q

why does marginal product rise then fall?

A

-diminishing marginal returns
-more workers added to fixed capital = each worker = less capital to be productive with = total product increases at decreasing rate and marginal product starts to fall

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41
Q

increasing marginal returns

A

initially marginal product rise
total product increase at increasing rate
due to specialisation (division of labour)
boost productivity of firm

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42
Q

law of diminishing returns

A

increasing amounts of variable factor used with given amount of fixed factor
point when additional unit of variable = less extra output than previous
MP of additional worker is less than MP of previous worker

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43
Q

average product vs marginal product

A

same relationship
marginal intersects average at highest point
marginal higher than average = average product increasing

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44
Q

output and costs concepts

A
  1. total costs
  2. marginal costs = change in total cost from 1 unit increase in output (labour - producing one extra unit) = change in TC/ change in output
  3. average cost
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45
Q

average costs vs marginal costs

A

-average fixed costs slope down as output increase fixed cost spread across larger output
-AVC = u shape due to specialisation increasing marginal returns, eventually increase due to law of diminishing marginal returns
marginal cost = u shaped benefits due to specialisation but then diminishing marginal returns

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45
Q

average costs vs marginal costs

A

-average fixed costs slope down as output increase fixed cost spread across larger output
-AVC = u shape due to specialisation increasing marginal returns, eventually increase due to law of diminishing marginal returns
marginal cost = u shaped benefits due to specialisation but then diminishing marginal returns

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46
Q

long run production

A

all costs variable
flatter = firm can increase output by increasing capital rather than workers
minimise production costs
altering size of capital stock = achieve least cost means of production

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47
Q

EOS/increasing returns to scale
3 reasons why occurs

A

proportional increase in all inputs under control of firm = greater & proportional increase in production
costs per unit of output fall as production scale increase

  1. specialisation/division of labour
  2. financial economics (lower interest rates)
  3. technical EOS (specialist/expensive machines)
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48
Q

constant returns to scale

A

occurs if proportional increase in all inputs = equal proportional increase in production

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49
Q

disEOS/decreasing returns to scale
3 reasons why occurs

A

proportional increase in inputs = less than proportional increase in production
costs per unit of output increase as production scale increase

  1. difficult managing large workforce (communication)
  2. less feedback/direction
  3. management problems (coordination = complex)
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50
Q

normal profits

A

assume average costs = include payment to entrepreneur reward for deploying factors of production
opportunity cost of providing the entrepreneurship factor of production

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51
Q

abnormal profit

A

economic profit
excess profit
supernormal

profits over level of normal profit

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52
Q

short run vs long run outcomes

A

short = increasing/diminishing marginal returns
long = returns to scale & EOS/dis EOS

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53
Q

accounting vs economic costs

A

accounting = monetary costs in books
economic = those costs plus opportunity costs

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54
Q

law of supply

A

higher price = greater quantity supplied (positive relationship)
upward sloping due to costs of production - shows higher price needed to cover costs of production (higher price = more profit)
as marginal costs increase = quantity produced increases

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55
Q

determinants of supply

A
  1. price of factors of production
  2. price of related goods
  3. expected future prices
  4. number of suppliers (increase in number of centres = increase quantity supplied at every price = increase supply)
  5. technology (advances = lower costs)
  6. libertarian paternalism
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56
Q

market competition levels

A

place of sale
competitive or anti-competitive

perfect competition - designed show equilibrium is generated and how markets operate if open to extreme competition
highlight shortcomings of less competitive
more competitive = more efficient at allocating scarce resources

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57
Q

market equilibrium

A

equilibrium: opposing forces balance (supplied = demanded) - one price. sometimes temporary disequilibrium too high or too low price
surplus (excess supply); too high supplied > demanded
shortage (excess demand); too low demanded > supplied

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58
Q

surplus

A

scaling back production
not sustainable price
firms drive down price to compete to sell excess

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59
Q

shortage

A

upward pressure on price
consumers compete against each other
increase production

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60
Q

interbank lending

A

bank only option
borrow from other banks during global financial crisis 2008

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61
Q

global financial crisis 2008

A

large mortgage banks = rely on wholesale money markets = funds = amount to borrow depends upon own market valuation (share price) and standard and poor’s credit agency rating –> aggressive mortgage lending practices by banks

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62
Q

US sub prime lending

A

fears of rising bad debts = institutional lenders to withhold funds from wholesale markets

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63
Q

credit crunch

A

shortage of funds = raises London inter bank offered rate = raises cost of borrowing for banks

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64
Q

going short

A

borrowing financial asset e.g. share
assumption it will fall in price
pay for borrowing the share and then sell at current market value with assumption it will fall in price when share price falls
buy back share lower price and return to owner

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65
Q

credit crunch/squeeze/crisis

A

sudden reduction in general availability of loans or credit or a sudden tightening of conditions required to obtain a loan

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66
Q

price ceiling

A

if set above equilibrium price = not binding market attains equilibrium price & quantity as if no ceiling

if set below = binding quantity demanded exceeds quantity supplied

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67
Q

price flow

A

minimum wage = price flaws only relevant if set above prevailing equilibrium market wage

min wage below equilibrium wage = not binding = no effect = market works = no minimum wage

min wage above equilibrium wage = binding quantity of labour supplied by workers exceeds the quantity demanded by employers = surplus of labour

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68
Q

surplus of labour

A

unemployment
quantity of labour hired at minimum wage is less than quantity that would be hired in an unregulated labour market

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69
Q

market structures

A
  1. perfect comp (infinite small firms, homogeneous product, most efficient)
  2. monopolistic comp (lots small firm differentiated product)
  3. oligopoly (few large selling homo or differentiated)
  4. monopoly (1 firm supply whole market)
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70
Q

competition levels

A

more competitive = more efficient allocation
optimal production level = price and level to profit maximise
profits determined by structure
perfect comp -> monopoly = increasing profit

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71
Q

benchmarks

A

applicable to actual situations
qualitative predictions = aid decision making
understand how competition breeds efficiency

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72
Q

perfect competition

A

homogenous & fully informed
free entry and exit
all identical cost structures (no cost adv)
price takers

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73
Q

price takers

A

cant influence price
horizontal demand curve (perfectly elastic) at market price nothing above or below = no incentives
demand curve - MR price doesn’t change with output = constant mkt demand curve = downward = general demand

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74
Q

marginal revenue

A

MR
change in total revenue results from 1 unit increase in quantity

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75
Q

profit maximising rule

A

MR > MC profits rise is output expand = increase output = add more to total revenue than total cost (extra rev exceeds extra costs to produce, expand = profits increase

MR = MC profits maximised no incentive to expand or reduce

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76
Q

abnormal profit

A

difference between revenue and costs

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77
Q

short run vs long run production and options for losses

A
  1. ceasing production (loss = fixed costs)
  2. continuing production at a loss (contributes to FC of production = minimise loss = optimal strategy)
    short run - cant exit capital is fixed
    long run - leave market
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78
Q

average firms revenue = average costs means ?

A

firm is making normal profit
zero economic profit but not zero accounting profit
costs curve include normal profit = opportunity cost of supplying entrepreneurship

fixed cost = combined yellow and grey if produce grey part is covered by revenue = producing is loss minimising

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79
Q
A

making a loss
fixed cost = costs if producing = indifferent to produce or not
shut down point
marginal cost curve = supply curve in perfect competition at any given price tells us what firm supplies

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80
Q
A

making a loss
fixed cost = costs if producing = indifferent to produce or not
shut down point
marginal cost curve = supply curve in perfect competition at any given price tells us what firm supplies

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81
Q

profit maximising vs loss

A

profit maximising level of output is where marginal costs = marginal revenue

loss -> average revenue is below average costs

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82
Q
A

long run = all costs are variable
average rev > average costs = abnormal profit
encourages entry into market in long run = increase supply
normal profit = demand curve touches bottom of long run average cost curve = no incentive

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83
Q

normal profit

A

enough to persuade firms to stay in the industry
not enough to persuade new firms to enter the industry
minimum return owner must make in order to prevent decision to close down

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84
Q

long run equilibrium

A

firms producing at most efficient output
price = MC (allocative efficiency)
production at bottom of AC (technical/productive efficiency)

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85
Q

types of efficiencies

A

economic = occurs when there is both technical and allocative

technical = goods produced in least costly way, operating when ATC is minimal

allocative = resources allocated to producing mix that society wants = supply price = marginal costs of production

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86
Q

monopoly

A

inefficient & least competition
high prices
large barriers to entry
differentiated product = loyalty
steep inelastic demand curve = no subs
gain status by low price or gov legislation

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87
Q

natural barrier to entry

A

most efficient number of firms is 1
industry is governed by downward sloping average cost curve
EOS over all output levels

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88
Q

natural monopoly

A

industry most efficient for production to be concentrated in single firm

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89
Q
A

monopoly = barriers to stop entry/exit (no difference between short and long)
firm demand curve = industry curve
inelastic
abnormal profit
not efficient outcome, allocative supply = demand no
technical firm produce at bottom of average cost curve no

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90
Q
A

higher prices lower output
demand curve same as industry

91
Q

monopoly marginal revenue curve

A

falls at twice the rate of demand

92
Q

outcomes of monopolistic market

A

high price
low production
economic profit
redistribution of welfare - consumers lose out, monopolists gain abnormal profit

93
Q

is a monopoly desirable ?

A

no direct competition- no incentive to reduce average costs
monopolistic set own price consumers cant compare

efficiency concerns:
price not equal marginal costs (allocative)
dont produce at bottom of long run average costs = capacity (productive)

94
Q

consumer and producer surplus

A

consumer - total amount in excess of market price consumers would have been willing to pay (shown by demand curve)

producer - total amount of revenue in excess of marginal costs of production firm gets at market price

perfect comp = total surplus and total welfare = maximised

95
Q

governments promote competition

A

anti bodies = seek out abuse of monopoly power
anti-competitive conduct (excessive, predatory pricing, collusion)
power to fine
prevent mergers = stop very concentrated market structures emerging

96
Q

benefits of monopoly

A

provide future resources for investment/innovation
reward innovation (innovation in terms of developing new products = widens consumer choice and aids economic growth) - innovation in new production process = lower average costs of production

97
Q

monopolistic competition

A

some degree of market and some discretion on price
product diff = quality, price, marketing
freedom of entry of new firms
combined perfect comp and monopoly
same conditions of perf comp but products are differentiated
only normal profit in long run due to free entry and exit
efficiency concerns

98
Q

oligopoly

A

few firms share large proportion of industry

99
Q

mutual interdependence

A

between firms means any independent actions 1 firm takes = impact performance of rival firms in market

must consider strategic decision making

100
Q

oligopolists 2 directions

A
  1. interpedendence of firms = collude and act like monopoly = joint maximise industry profits
  2. mutual interdependence
101
Q

3 oligopoly models

A
  1. kinked demand curve
  2. cournot model
  3. prisoners dilemma model associated with game theory
102
Q

kinked demand curve model

A

-price increases from prevailing market price = not followed by competitors (no motivation to do so, competitors decide to keep as will gain customers, oligopolistic firm looses customers)
-price reductions from prevailing market price = matched by competitors = otherwise competitors lose market share, oligopolistic firm won’t gain significant customers
-leads to reduction in profits = demand curve not perfectly elastic = KINKED

103
Q

kinked demand curve and marginal revenue

A

kinked demand = discontinuous at its kink and then marginal revenue curve is discontinuous too
-MR slopes away from demand curve as rev increases due to selling extra unit of output but falls as price attained is now lower for every unit sold

104
Q
A

profit maximising level of output MC=MR

105
Q

problems with kinked demand

A

price stability - due to other factors ?
model lacks empirical observation
help explain price stability = not explain price setting

106
Q

cournot oligopoly

A

focuses upon output decisions of firms as key strategic variable
compete on amount produced decide independently compete on quantity of goods sold

107
Q

assumptions of the cournot oligopoly

A
  1. 2 firms
  2. homogeneous product
  3. equal marginal costs of production
108
Q

cournot conjecture

A

conjecture - opinion firmed on the basis of incomplete info) firm calculates optimal output assuming rival will not change output from previous period

109
Q

residual demand curve

A

amount of demand left for a firm once other firm has sold its output

110
Q

production of 2nd supplier in cournot model depends on 2 concepts

A
  1. cournot conjecture
  2. residual demand curve
111
Q

reaction functions

A

reaction curves or best response functions
tells us what 1 firms optimal (profit maximising) level of production is for every level of output of its rival
-output of first firm is sensitive to second output of each firm affects others perception about extent of residual demand curve

112
Q

cournot equilibrium

A

when the 2 lines cross
neither firm has an incentive to adjust their output as both are playing their best response given rivals actions

113
Q
A

combined profits = less than If monopoly (as oligopoly = higher output lower price)
monopoly = Q1M or Q2M
perfect comp = Q1PC or Q2PC
only normal profits with perfect competition = so won’t chose

greater under monopoly less under perfect competition

114
Q

game theory

A

allows us to explore implications of self interested (strategic) behaviour where individual decision making entities are interdependent
-understanding driver of individual decision making focus on equilibrium outcomes
-possibility firms might find it optimal to collude with each other to enhance own and joint profit

115
Q

prisoners dilema

A

each either confess or deny involvement
independent decision no collusion

real world:
1. stick to implicit agreement to charge high monopoly prices for soft drinks
2. cheating on agreement and cut price = steal rival market share

116
Q

Nash equilibrium

A

point where competitor is pursuing best possible (dominant strategy) given likely strategies of other competitors in game
no sole incentive for either competitor to move away from point

117
Q

collusion & 2 types

A

co-operative behaviour
e.g. price fix, control output, agression towards each other non price variables

  1. overt (explicit) written agreement
  2. tactic (implicit) mutually recognises through repeated interaction that cooperation is rewarded by higher profits
118
Q

collusion in practice

A

-repeated interaction - cheats in 1 round = punished later = value future profits highly sustainable collusion reputation for co-operation develops

triggers 1. grim trigger (cheat once never cooperate again) 2. tit for tat (cheated last round you cheat this round)

119
Q

traditional Neo-classical theory of markets

A

assumes market participants have complete/perfect info about underlying economic variables
-buyers and sellers = both perfectly informed about quality of goods being sold

120
Q

information in markets

A

-many models assume consumers & firms = same info
-consumers = knew competitors price
-firms = access to sam tech
-no adv = equilibrium outcomes
-free entry and exit
same price
reality = asymmetric

121
Q

asymmetric information

A

one side of transaction knows less than other
= economic inefficiency

  1. adverse selection - ex-ante = based on forecasts rather than actual results
  2. moral hazard - one side take actions other side cant observe ex-post = based on actual results not forecast
122
Q

market for lemons

A

good and reliable = peach
unreliable = lemon
cant tell the difference hidden info

123
Q

greshams law

A

circulating currency consisting of both ‘good’ and ‘bad’ money both forms are required to be accepted at equal value under legal tender law
-quickly dominated by bad money as people hand over bad coins and keep good
-bad money will drive out good money

124
Q

adverse selection

A

asymmetric info problem = adverse selection
ex-ante one cant distinguish between quality of competing goods

e.g. workers (productive?), insurance (risk?) consumer durables (quality?)

125
Q

solving the lemons problem

A

higher quality = signal true worth
-warranties, brand name, licensing
-credit references, education

126
Q

signalling job market signalling

A

solve lemons problem if cost of attaining signal significantly differs between sellers

asymmetric info = employers cant tell difference between high and low productivity = pay all the same wage
high = underpaid = won’t work
low = overpaid = will work
only low productivity workers are hired

127
Q

2 roles of education

A
  1. improves human capital
  2. signal of higher productivity (higher wage, differentiate)

-wage offers bs education
Lower levels of education = lower wage

128
Q

2 scenarios of job market signalling

A
  1. pooling equilibrium: costs of attaining level of education too high relative to rewards= no-one undertake or too low - all will undertake
  2. separating (signalling) equilibrium: high productive individuals = less costly to undertake education// costs of attaining too high vs rewards for low-productive workers refrain vs low enough to induce high productive workers to undertake = separating equilibrium exists
129
Q

benefits to workers of educational signalling

A

cost of attaining education is higher for the less productive workers therefore steeper ray

net benefits for low productive workers are BD which is less than not undertaking any education which would be A0 (zero cost and lower wage)

130
Q

reducing education costs can lead to pooling

A

cost of acquiring qualification fall
less productive workers = benefit increase as distance BE is greater than AO = acquire qualification
-degree of labour market pooling and then less differential in the wage as the wage rate will fall

131
Q

requiring a greater signal may have costs without benefits

A

pursuing higher education = greater costs = may not lead to greater benefits for the higher productive workers as benefits fall to B’F’

132
Q

how firms differentiate between equally qualified

A
  1. raise entry requirements
  2. recruit from top unis
  3. interview centres
  4. short term contracts
133
Q

moral hazard

A

arises where ex-post agents have less incentive to deliver on contract and/or develop tendency to take risk as costs could incur not felt by party taking risk

solutions- incentive = exclusion clauses

134
Q

principal agent problem

A

one party, agent, acts on behalf of other party called principal
agent = usually more info than principal as principal cant completely monitor agent agent have incentive to act inappropriately if interest of agent and principal aren’t aligned = gives rise to opportunism

135
Q

opportunism

A
  1. work place - shirk (solution = piece rates, monitoring)
  2. external contracts - not deliver on quality/time (financial rewards for compliance)
136
Q

advertising

A

public promotion (individual, firm, gov) of a particular product/service offered for consumption by economic agents

-consumer focused - private firms wanting product purchase
-gov bodies - public info

137
Q

higher advertising intensity depends on 3 factors

A
  1. degree of competition in market
    -oligopolists tend to compete on advertising, product differentiation and R&D rather than price
  2. durability of product (dont rely on advertising for significant purchases often durable goods = expensive = use other promotions, less durable = cheaper = perishable = encourage purchase
  3. brand proliferation
    -brand loyalty, excessive advertising to entice away from rivals and maintain own brand awareness intenser advertising
138
Q

expected relationship between advertising intensity and market concentration

A

inverted U
lower market concentration = each nominal portion of market = low advertising price is the competitive weapon
more concentrated markets = oligopolistic firm avoid price comp = more advertising

-does start to decrease in intensity as realise aggressive advertising will not increase market share campaigns are matched by rivals, advertising = eats into profits

139
Q

impact of advertising on demand

A

total revenue = green
advertising expenditure relatively inelastic in respect to demand
on right = demand more sensitive/elastic to advertising expenditure
more impact of advertising = greater advertising elasticity of demand

140
Q

how does advertising improve a firms market position

A

successful advertising = more sales

-shift demand curve to high (extent of shift - depend on persuasiveness and susceptibility of consumers)
-marginal gain in sales from advertising expenditure = greater the more sensitive (Elastic) the demand curve is
-advertising elasticity of demand

141
Q

advertising elasticity of demand

A

the extent to which the advertising campaign shifts demand curve to the right

142
Q

impact of advertising on brand loyalty

A

enhances it
shifts curve to right & alters the slope = steeper = firm charge higher prices = reduce price elasticity of demand = more inelastic

more market power and price discretion

143
Q

impact of advertising on brand loyalty

A

enhances it
shifts curve to right & alters the slope = steeper = firm charge higher prices = reduce price elasticity of demand = more inelastic

more market power and price discretion

144
Q
A

greater discretion over price
rice in price from Pa to Pb = lose some sales but total revenue sales will increase as firm receives higher price per unit sold

145
Q

advertising as a signal of quality

A

different types of good with different qualities
ex-ante = consumers cant distinguish between all firms get the same market price
avoid this problem = spend more on advertising of lower quality = burning money = secure higher price and repeat purchase

146
Q

advertising as an entry deterrent

A
  1. enhance market power of incumbent firms = brand loyalty = difficult to steal market share
  2. EOS (favours incumbent firms)
  3. raises set up costs and sunk costs
147
Q

economies of scales

A

average cost of advertising per unit of output
lower for large established firms

148
Q

sunk cost

A

investment cost that cant be recovered even if firm subsequently leave the market
raise entry barriers

149
Q

types of goods

A

influence advertising style
1. search (consumer establish quality by inspection before purchase)

  1. experience (consume product to determine quality) - adverts important (images)
  2. credence (cant determine quality even after consumption) - averts = hybrid of persuasiveness/info
150
Q

benefits and costs of advertising

A

benefits: provides info
1. price/location
2. expand market size space to enter
3. signal of quality

costs:
1. persuade/manipulate
2. entry barrier (sunk cost)
3. wasteful expenditure

151
Q
A

substitution effect (work for leisure)
wages rise = cost of leisure time increases (opportunity cost)
higher wages = tend to want to work longer hours
certain point = target income = satisfied = backward bending supply curve
trade off between work and leisure time

152
Q

price discrimination

A

charging different prices for same service to customers who have different willingness to pay
-profitably extend market and ensure more consumers are being served
-market segmentation (cater for different consumer types)
-firms have some power over buyers to allow varying in prices
-instance of non-uniform pricing = consumers charged different prices for same good or charged different price for good depending on amount purchased

153
Q

forms of market segmentation

A

price discrimination
product differentiation

154
Q

product differentiation

A

sell different versions (varying degrees of quality) of good to customers who can self-select product they desire

155
Q

necessary conditions for price discrimination

A

-degree of market power
-different willingness
-know valuation of good = charge right price
-markets firm charges different prices must be separate

156
Q

arbitrage

A

potential for a customer in a low price market to sell on to customers int he high price market

157
Q

first degree (perfect) price discrimination

A

-selling different price to each customer
-judge maximum buyer is willing & extract all consumer surplus
-assume constant marginal and average costs
-charge different prices along the demand curve
-carry on until MR =MC stop as beyond this point MC> MR
-competitive output produced

158
Q

consumer surplus

A

amount in excess of price paid that a customer would willingly pay if necessary to consume units purchased

159
Q

effect on total revenue selling an extra unit under uniform pricing

A
  1. increase due to another unit to sales at positive price
  2. reduction due to receiving slightly lower price on all other units

-MR curve twice the slope of linear demand curve
-under perfect price discrimination second of these effects is eliminated D = MR

160
Q

competitive output

A

MC = price

161
Q

second degree price discrimination

A

-firms selling at different prices depending on how much of the good customer buys
quantity discount

162
Q
A

profits maximised when MC =MR at the output Qu and price Pu therefore the profit is the yellow shaded area

163
Q
A

blue areas are the extra profits generated through 2nd price discrimination instead of uniform price which is the yellow area

164
Q

uniform price

A

price where MC =MR

165
Q

third degree price discrimination

A

-identify groups with different sensitivities to variations in price - separate based on relative price elasticity of demand & charge accordingly
-optimal non discriminating price
-mechanisms to stop price sensitive group reselling to price insensitive group

166
Q

kinked demand curve

A

generates a discontinuous MR curve

kinks in the opposite direction to the kinked demand curve model for oligopoly

167
Q

price discrimination and welfare

A

total welfare greater under price discrimination than under monopoly pricing
-firm welfare = higher = make greater abnormal profit
-consumer welfare = lower under price discrimination
-paying different prices, more customers are served under price discrimination - competitive output produced

168
Q

product differentiation

A

non price variables firms use to compete on
capture and expand market share and maximise profit
make consumers perceive its different

through:
1. expenditure on R&D/advertising
2. patents/laws of copyright & trademark

169
Q

product differentiation allows firms to

A

set apart from rivals - ‘market niche’
different versions of good = segment the market
not mutually exclusive = achieve both simultaneously

170
Q

types of product differentiation

A
  1. horizontal (differ but physical attributes are similar qualities) - competing firms, firms own products)
  2. vertical (real physical differences in quality - costs and prices) competing firms or own products
171
Q

successful segmentation

A
  1. consumers = clear preference over characteristics
  2. key determinant of which good consumer will buy

-identify and develop accordingly

172
Q

preferences modelled

A

using indifference curves
prefers being on higher indifference curve B and C are indifferent but both are preferable to A

173
Q

affordability

A

depends on price and income

affordable set is bounded along a-c-b
if all sellers raise prices = choice boundary shifts inwards = but same shape
price of 1 product rises alone = shape of affordable boundary changes

174
Q

solving the consumer choice problem

A

combine budget constraints with indifference curves

175
Q

introducing new products

A

-typically carries a fixed cost of development
-Firms require segments to be composed of a sufficiently large number of consumers so that revenues earned from introducing new products/packages covers this cost

176
Q

market segmentation enables firms to

A

-increase sales revenue
-reduce product space available for competitors
-enhance brand reputation
-establish degreee of monopoly power
-variety of products = reduce PED & create barrier to entry = degree of monopoly power = supernormal profits (abnormal)

177
Q

incumbent firms

A

businesses already established in market/indsutry,
adv - loyal customer base, internal EOS =average costs are lower

178
Q

new entry into market

A
  1. set up new legal entity
  2. brings new productive capacity into market

-if the new legal entity doesnt hold = investment in extra capacity by existing producers
-if the new capacity doesnt occur = takeover or merger existing industry assets are consolidated in new legal entity

179
Q

why does entry matter

A

new capacity = downward pressure on industry prices
-reduce barriers = competition

180
Q

perfect competition

A

horizontal demand curve –

prices are determined by the market forces of demand and supply
firms = price takers.
firm tries to charge more than the prevailing market price, consumers will not be willing to buy from that firm

181
Q

contestable market

A

companies with few rivals behave in competitive manner when market they operate in has week barriers to entry as long as barriers are low if only 1 or 2 firms in market price = average costs (perfect comp)
incumbents = no advantage

182
Q

barrier to entry/exit

A

anything that prevents new firms entering or costlessly exiting market and thus allowing incumbent firms to charge higher prices and make higher profits than under perfect competition

183
Q

4 main areas of barriers to entry

A
  1. absolute cost advantages
  2. EOS
  3. product differentiation
  4. barriers to exit
184
Q

absolute cost advantages

A

incumbents - lower av costs than rivals (cheap/superior tech cheaper capital = inv)
-become vertical integrated = raise cost of capital for new entrant
-force retailers to do full line forcing

185
Q

vertically integrated firms

A

conduct several stages of production process within the firm

186
Q

full line forcing

A

incumbents force retailers to buy full product line
less available retail space for competitor
control distribution channel

187
Q

EOS

A

large vol cheap low av cost per unit
eOS in advertising expenditure = deter entry
natural monopoly = entire industry output provided by 1 firm at lowest costs

188
Q

product differentiation

A

loyalty
wary of new products = quality?
high value = less inclined to experiment and importance of differentiation
segment the market = reduce space

189
Q

barriers to exit

A

anything restricting ability of incumbent firms to redeploy assets from 1 market to another

(entry could be risky)

190
Q

forms of barriers to exit

A
  1. ownership of specialised and durable assets
  2. fixed costs of exit
  3. strategic considerations
  4. government barriers
191
Q

ownership of specialised and durable assets

A

highly specific
sunk costs
cant convert to cash on exit
low resale value = optimal to remain in market

192
Q

sunk costs

A

costs associated with being involved in particular industry or line of work largely irrecoverable if exit industry

193
Q

fixed costs of exit

A

labour settlements
relocation/retraining
accountancy fees
contract breaking
loss of productivity & worker morale

194
Q

strategic considerations

A

line of business constitutes part of wider business strategy than pulling out
-loss of purchasing power/bulk buying
-loss of use of shared facilities (production synergies) - decrease EOS
-inability to meet needs of customers

195
Q

gov barriers

A

exit some circumstances - difficult/prohibited by gov = keen to preserve local employment
link to FDI = inducements to firms to locate in regions
cant exit quick if find economic circumstances different from expectations

196
Q

tenure

A

conditions under which land/buildings are held occupied

197
Q

innocent vs strategic entry deterrence

A

preserve profits (Actual and rivals)
-incumbents create conditions where excess profits are sustainable by creating barriers to entry = consistent with or part of ordinary profit = maximise behaviour
innocent –> create extra loyalty = more hurdles = barriers raised

strategic –> incur extra costs in short run = permit continued above normal profit in long run (inter-temporal substitution of profits)

198
Q

types of entry deterrence:

A
  1. joint cost raising
  2. investment in excess capacity
  3. predatory pricing
199
Q

joint cost raising

A

(incumbents incur extra costs themselves = force potential entrants to incur costs = non-optimal to enter) dirty tricks (convince unsafe), raising switching costs (reward scheme), increase input costs (raw materials, skilled workers), costs of product improvements (standard in industry)

200
Q

investment in excess capacity

A

entry occurs = fight price war = see off new entrants
undercutting to force new out
excess capacity = increase operations = operate below capacity (costly) = signal of aggressive intent of incumbent

201
Q

predatory pricing

A

incumbent lower price below cost to drive out rivals/new entrant & raise when exit occurred/threat of re-entry receded
incur loss in short run make excessive profits in Long run = build up reputation of tough competitor

P<AC (short run losses)
P> AC (long run abnormal profit)

201
Q

predatory pricing

A

incumbent lower price below cost to drive out rivals/new entrant & raise when exit occurred/threat of re-entry receded
incur loss in short run make excessive profits in Long run = build up reputation of tough competitor

P<AC (short run losses)
P> AC (long run abnormal profit)

202
Q

conditions for predation

A

high degree of strategic interdependence
deep pockets
welfare (social consumers benefits from low prices in short run lose out in long run price raised)

203
Q

corporate strategy

A

choice of strategy at level of corporation, strategic orientation determined at headquarters
-decisions relating to units that make up corporation
-broad strategic decisions relating to HR policy and practice, culture etc

204
Q

business unit strategy

A

choice of strategy at level of individual business units
-make appropriate strategic decisions given market environment faced by business unit
-decisions like pricing, advertising, product characteristic made by firms on market by market basis

205
Q

empirics themes

A
  1. some more profitable industries (average rates higher)
  2. favourable environments
  3. similar activities different profit rates
206
Q

defining a market & potential problems

A

competing products
geographical area
competitors

problems:
wrong identification = poor strategy formulation
narrow = overlook broad = irrelevant analysis

207
Q

porters 5 forces

A
  1. threat of new entrants
  2. threat of substitutes
  3. bargaining power of suppliers
  4. bargaining power of buyers
  5. intensity and form of industry rivalry
208
Q

threat of new entrants

A

a. Barriers to entry = difficult for new firms to enter
b.Advantages for incumbents over entrants e.g. loyal customer base restricts demand facing a new firm
c.Barriers are low, new firms attracted into profitable industries = adds capacity to industry and drives down prices
d. Main barriers  brand loyalty, EOS, control of inputs/distribution channels, high capital requirements, strategic action by incumbents
e. Any of these are significant = reduced threat and prosperity of market is enhanced

209
Q

threat of substitutes

A

functionally equivalent
fall outside of intial market definition adopted
fall in prices of existing substitutes or intro of new sub threaten profit of industry

210
Q

bargaining power of suppliers and buyers

A

supply chain and firms position in it
impact profit
suppliers = up prices = profit fall
buyers strong = drive down price = industry prices fall
bargaining power enhance = few sub or if switching = costly

211
Q

intensity and form of industry rivalry

A

intese = comp = reduce profit
intense: many firms, slow growth, lack of differentiation, high fixed costs = sell volume

try collude

212
Q

2 ways of gaining long term competitive advantage

A
  1. low cost
  2. differentiation

otherwise stuck in the middle

213
Q

differentiation strategy

A

extra benefits
extra costs - recoup in prices
only works if able to charge
higher prices

-identify sources of value
-willing to incur higher costs
-communication of differentiation to consumers

214
Q

low cost strategy

A

basic product = low price = reduce quality versus differentiated goods
undercut in market sell volume = key to low cost if EOS benefit from lower average cost
higher margins = reduce cost by more than price reduction

215
Q

focus strategy

A

subset of differentiation or low cost concentrate on particular buyer group

low cost = compete against market cost leader
differentiated = exploit small customer or particular specialisation more innovative than larger firms

216
Q

which strategy to chose

A
  • Choice is determined by profit drivers in environment
  • Cost leadership = price strategy = raise sales volumes by lowering prices and enhance margins by lowering costs
  • Price strategies = viable when market is sensitive to price (market PED = elastic)
  • Price reductions = attract extra sales volumes = EOS = lower costs
  • Price strategies can be poorer as customers are less concerned with price (cheap good = small proportion of income = addictive = no close substitutes = necessity)
  • Demand is inherently less influenced by price = differentiation is good way of attracting new customers and holding onto current
217
Q

critical perspectives of porter

A
  1. Externally oriented, market driven, outside in perspective on strategy formation – says little about internal organisation of firm
  2. Firms analyse their environments and position themselves with respect to the important competitive threats
  3. Relegates importance of firm specific resources, capabilities, competencies (inside out strategies perspectives) 4. Qualitatively based tool – difficult to quantify impact on industry profitability
218
Q

specific issues of porter

A

generic strategies a route to competitive advantage? (strategies that others cant imitate)

framework preclude possibility of uncovering an innovate strategy ? (constrained world, redefine way of thinking)

is being stuck in middle bad? (hybrid strategies)

government where do they fit ?

219
Q

Lancaster’s characteristics model

A

firms seek to identify key characteristics of a product they think matters to consumers
-discover characteristics through market research

220
Q

horizontal differentiation arises

A

no real differences in quality of competing products

221
Q

real price

A

value in terms of some other good, service, or bundle of goods
comparisons of different goods at same moments in time

222
Q

substitution effect

A

substitute toward the relatively cheaper good and away from the relatively more expensive

223
Q

cost curves vs product curves

A

cost curves are just inverse of product curves
increasing marginal returns = specialisation & divisionof labour = MP increase addition of extra worker contribute more to output and cost less = marginal returns and marginal costs of production is falling

diminishing marginal returns = ,ore and more use same capital, less to be productive with addition of extra = generates smaller increments of output, marginal product falls and marginal costs rise

224
Q

price floor - minimum wage

A

minimum wages are called price floors
minimum wage only relevant if set above prevailing equilibrium market wage
-if minimum wage set below equilibrium wage = not binding and no effect market works as if no minimum wage
-if minimum wage set above equilibrium wage = binding quantity of labour supplied exceeds quantity demanded = surplus = unemployment

Year 1 Semester 1 (4 decks)

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