economics

Question 1

define perfect competition

Answer 1

lots of sellers(low concentration ratio) that sell identical items

eg the market for wheat in America - thousands of farmers supply an identical good

Question 2

imperfect (monopolistic competition)

Answer 2

lots of sellers acting independently ( low concentration ratio ) selling close substitutes that are differentiated.

eg cafes, restaurants, barbers

Question 3

oligopoly

Answer 3

a few large sellers ( high concentration ratio) dominate the market and are interdependent in actions

eg commercial banks, mobile phone networks, chocolate ( Nestle , Cadburys, Mars)

Question 4

monopoly

Answer 4

one one firm supplies the whole market

eg irish rail
google (search engine)

Question 5

what is perfect competition and what are the assumptions underlying this market ?

Answer 5

perfect competition - firms are selling identical products to other firms so therefore have no advantage or way of selling at a higher price to a competitor. All firms must accept the going rate and sell at that price( they are price takers ). because of this the demand curve facing a perfectly competitive firm is horizontal or perfectly elastic (D=AR=MR)
eg most of the market of Christmas trees

assumptions underlying perfect competition
1. there are many buyers in the industry - no individual buyer can influence, by his/her own actions, the market price of the goods. each individual firm is a price taker. each individual buyer acts independently.

2. there are many sellers in the industry - no individual seller can influence, by his/her own actions, the market price of the goods. each individual firm is a price taker. each individual seller acts independently, they don’t group together to influence the price in the market through collusion.
3. the goods are homogenous - the goods, which are supplied by the producers are identical. consumers cant differentiate between different seller’s goods, therefore there is no need for any firms to spend on competitive advertising.

4.there is freedom of entry and exit in/out of the industry - firms already in the industry cannot prevent new firms from joining. no barriers to entry/exist within the industry, so firms can enter if SNP are being earned in the industry.

5. perfect knowledge of profits in the industry exist - in the market everyone concerned has perfect knowledge as to profits made by other firms in the industry. consumers are fully aware of what other firms are changing for their goods.
6. each firm is a profit maximiser - firms will choose at produce at the output where MC=MR where MC cuts MR from below, rising after that point in order to maximise profits.

Question 6

what are the advantages of perfect competition ?

Answer 6

1. the firm sells its products at the lowest possible prices( they sell at the lowest point on the AC curve, so they couldn’t sell at any lower price.

2.the firm produces at the lowest point of average costs so there is no waste of scarce resources. society benefits from no excess capacity existing- they are efficient.

3. as the goods are homogenous there is no need for wasteful advertising. therefore costs are lower than they would be, benefiting consumers/ overall output in the market.
4. because freedom of entry and exists no firm will continue to earn SNP’s in the long run as new firms will enter. there is no exploitation of consumers through higher prices as only normal profits are earned

Question 7

what are the disadvantages of perfect competition ?

Answer 7

1. output is so low for each individual firm that they don’t benefit from economies of scale which would lower average costs and potentially the selling price also.
2. consumers may prefer product differentiation so they have choices between alternatives rather than having no choice as all goods sold are identical.

3.there is little scope for research and development and innovation which might improve the quality or lower costs as firms don’t have excess profits to invest in research.

Question 8

what is monopolistic/ imperfect competition ?

Answer 8

an imperfectly competitive firm faces a downward sloping demand curve( AR curve ). goods aren’t identical because it sells a differentiated product, and as such it can decide what price to charge. each firm has a product that consumers view as somewhat distinct from the products of competing firms.

if the firm increases the product price there will be a reduction in demand as some consumers will switch to rival firms ( close substitutes ) that have become relatively cheaper following the increase in their price.

eg coffee shops, restaurants, newsagents, takeaways , barbers

Question 9

assumptions underlying imperfect competition - product differentiation exists

Answer 9

the goods supplied by the firm are not homogenous but are close substitutes. firms use branding and competitive advertising to distinguish their products from one another

eg restaurants use branding, location , services, and ingredients to differentiate

Question 10

assumptions underlying imperfect competition - there are many sellers in the industry

Answer 10

an individual seller can influence the quantity sold by changing the price it charges for its own output. each seller acts independently setting their own price and are subject to the law of demand

eg each restaurant sets their own prices based on their own cost structures

Question 11

assumptions underlying imperfect competition - there are many buyers

Answer 11

an individual buyer, by his/her own actions, cannot influence the market price of the goods

eg lots of people use restaurants - there are no large buyers that could negotiate better delas to influence the price paid

Question 12

assumptions underlying imperfect competition - there is freedom to entry and exist

Answer 12

no barriers to entry and exist within the industry/ it is possible for firms to enter/ leave the industry as they see SNP/ are making a loss

eg other entrepreneurs are allowed to open new restaurants to join the market

Question 13

assumptions underlying imperfect competition - reasonable knowledge of profits exist

Answer 13

within the industry each firm has reasonable knowledge or profits made by other firms. consumers have a reasonable knowledge of the prices being charged for different products.

eg an entrepreneur could figure out if SNP are being earned by restaurants

Question 14

assumptions underlying imperfect competition - each firm attempts to maximise profits

Answer 14

in order to achieve this firms will produce the output where MC= MR where MC has cut MR from below and rises after that point

Question 15

what are the advantages imperfect competition may offer to the consumer ?

Answer 15

1. greater choice - goods are homogenous, but are close substitutes, therefore consumers have a greater choice of goods/services between differentiated goods so they face a variety of choices
2. normal profit - in the long run consumers are not being exploited as firms are earning normal profits/
3. lower prices - competition between firms in the industry will help lower prices and make them more competitive for consumers. some items such as newspapers, magazines, sporting and music events may be cheaper due to revenues earned by the supplier from competitive advertising.

4.innovative goods/services - innovation is encouraged as firms will constantly strive to gain a competitive edge over their rivals, hence, consumers get the benefit of modern up-to-date goods/services

5. access to information - consumers may have more information available to them because of the extensive competitive advertising used within the industry

Question 16

what are the assumptions underlying the theory of monopoly ?

Answer 16

1. there is only one firm in the industry - one firm exists within the industry so there is no distinction between the firm and industry. one firm supplies the total output for the entire industry. FIRM = INDUSTRY
2. a monopolist can control price or output, not both - a firm can control price or output but not both. if it sets the price the output produced will be determined by consumers. if it sets the output the price will be determined by the market.
3. a monopolist’s aim is profit maximisation - it is possible for the firm to earn SNP’s in both the short and long run. a firm aims to make maximum profits and it achieves this when the output they sell is where MC = MR ( MC cuts MR from below and rises after that point )
4. barriers to entry exist preventing new firms from joining - when SNP are earned in the short run, new firms would like to enter to share these profits but cant due to barriers to entry. these barriers prevent the entry of new firms into the industry so the monopolist can enjoy SNP in the long run also.

eg strong brand loyalty, sole ownership of a raw material, patent/ copyright

Question 17

what is the law of demand

Answer 17

the law of demand states that as prices rise the quantity demanded will fall and vice versa, cereris paribus ( all other things being equal )
we illustrate the law of demand using a downward sloping line from left to right. there is an inverse or negative relationship between the price of a good and the quantity demanded of that good
eg if price of a bar of chocolate increased by 5c per bar then the quantity demanded or purchased would fall

Question 17

what is a complementary good / joint demand

Answer 17

goods which are consumed together/ are used in conjunction with one another/ a rise in the price of one good will lead to a decrease in the demand for another good.
eg computer consoles and software games or monitors / cars and petrol

Question 18

what is effective demand

Answer 18

effective demand is demand supported by the necessary purchasing power

Question 19

what is derived demand

Answer 19

where a factor of production is not demanded for its own sake but rather for its contribution to the production process. the demand for land will decrease if there is a decrease in the demand for housing

Question 20

explain the difference between a normal good and a inferior good

Answer 20

normal good - a good that when peoples incomes go up (increase ) they demand more of them
eg branded jaffa cakes - McVitie’s , branded pasta

inferior good - a good that when people’s incomes go up, they demand less of them. they are usually cheaper versions of a good with different alternatives
eg tesco own brand jaffa cakes , tesco value brand pasta

Question 21

factors that cause a shift of a demand curve (YSCTEUG)

Answer 21

income levels - if income rises than the demand for concert tickets will increase, assuming concert tickets is a normal good

change in price of a subsite good - if the price of tickets for an alternative concert increased then demand for tickets for this concert tickets may increase

change in price of a complementary good- if the price of a hotel accommodation near the concert venue decreased then the demand for the concert tickets may increase

taste/ preference - if the consumer preference for the artist/ event becomes stronger than the demand for concert tickets will increase

expectations about the future- if the consumers expect the performance to not be repeated they may increase their demand. if they expect ticket prices to rise in the future they may buy the ticket now and demand will increase

unplanned events - factors such as the weather may influence the current demand for tickets
eg good weather may increase demand for an outdoor event

government policies- advertising or awareness campaigns used to promote or show the effects of purchasing different goods/ services

Question 22

possible exceptions to the law of demand

Answer 22

1.status symbol/ snob items/ ostentatious goods- a rise in prices makes these goods more exclusive, and therefore more attractive to those who have the incomes to purchase them. a fall in price may lead to a fall in quantity demanded as there may no longer appear as exclusive to the rich and are still outside the price ranges of the poor

2. speculative goods - if the prospective consumers think that prices are likely to be even higher in the future, the current level of demand may not fall even if the prices increase. if a perso is considering buying a house the possibility that prices are likely to be even higher in the future will probability stimulate demand at current prices
3. goods of addiction - consumer become so addicted to a drug that in order to get the same “buzz” from the consumption of the drug, demand for the commodity may increase, even when the price of the commodity increases
4. giffen goods - as the prices falls, real incomes increase and consumers buy less of those goods and purchase more of better quality goods. as the prices rises consumers have less income to spend on other types of goods so they tend to devote more of their incomes to these goods

Question 23

what is a giffen good ?

Answer 23

a giffen god is a necessity that has very few substitutes that represent a large proportion of the expenditure of low income families. giffen goods react abnormally to changes in real income caused by a price change as such break the law of demand

Question 24

what is the law of supply ?

Answer 24

the law of supply states that as prices the quantity supplied will rise and vice versa ceteris paribus ( all other things being equal ). we illustrate the supply curve using an upward sloping line for left to right

Question 25

factors that cause a shift in supply ( ACTUNG)

Answer 25

price of an alternative good - if a firm can produce 2 gods (A&B) and sell them at a certain price. if the price a firm can sell B increases, the firm would want to increase their supply of B as they will earn more revenue. the firm would switch resources away from A to make more of B- so supply of A would fall , causing a leftward shift to the supply curve( even though A's price is the same) input costs - these are the costs of the firm to both labour and raw materials. if either of these inputs increase in costs and the firms cost of production will have risen causing an inward shift in the supply curve. conversely if input costs fall it will result in an outward shift in the supply curve the firms technology - if there is a breakthrough in technology the supply curve will have an outward shift. conversely if there is a breakdown in technology an inward shift will occur unplanned factors -eg adverse weather conditions leading to a bad harvest would result in an inverse shift in the supply curve. conversely a bump in harvest would be an example of a factor causing an outward shift number of sellers - if the number of firms in a market increases, supply will rise, causing a rightward shift of the supply curve. if fewer firms are in the market, supply will fall, causing a leftward shift of the supply curve government taxation/ subsidies - increases in government taxation on a product itself would result in an inward shift in the supply curve, while a reduction in taxation on a product would cause an outward shift in the supply curve. if a subsidy is granted in the raw materials or on the labour employed by the firm, this has the effect of reducing costs and thereby resulting in an outward shift in the supply curve

Question 26

what is the market equilibrium ?

Answer 26

market equilibrium arises at the price and quantity where the quantity demanded equals the quantity supplied and there is no tendency for price to change

Question 27

assumptions underlying the law of diminishing marginal utility

Answer 27

1. applies after the origin- the law only applies after a certain minimum quantity of the item has been consumed eg a bowl of cereal equals the origin rather than a single coco pop 2.consumer tastes do not change- it is assumed that consumers tastes remain the same thus utility means the same thing for the commodity in question 3. consumer incomes do not change- it is assumed that consumers incomes do not change in the time period being examined, which would affect consumption patterns 4. no time lapse between the consumption of successive units which permits a change in taste - it is assumed that there is a relatively short time period between consumption points. if you consumed a pizza once a week you could continue to derive the same satisfaction from it, but if you consumed additional pizzas on the same day, the law would kick in

Question 28

the law of diminishing marginal utility

Answer 28

this law states that as a consumer consumes more units of a good the extra satisfaction or marginal utility derived from each additional unit consumed will eventually decline

Question 29

exceptions to the law of diminishing marginal utility

Answer 29

1. medicine- the second dose of medicine may as or more important that the first dose ( eg a course of antibiotics), therefore the utility doesn't decline for the consumer 2.addictive goods- if a consumer is addicted to a good/service, the consumption of additional units of the good may bring even or increased utility than the first good consumed eg alcohol, cigarettes 3. goods/services that require a taste to be developed- some goods may not be enjoyable initially, requiring the consumer to develop a taste for them before gaining increased utility from consuming them eg health food, wine , olives 4. goods that give increasing utility - a consumer may seek certain goods to compliment goods they own, increasing utility as they are consumed eg a consumer may receive additional utility from an extra stamp for his stamp collection, an extra sicker for their football sticker book

Question 30

price elasticity of demand

Answer 30

measures the responsiveness of the quantity demanded of a good following a change in the price of the goods itself the law of demand states that a rise in the price of a good lowers the quantity demanded and a fall in price of a good increases the quantity demanded. PED measures by how much the quantity demanded responds to a change in price change in Q p1+P2 ___________ x _________ change in P Q1+Q2

Question 31

factors that affect the PED of a good/service (make it more elastic/inelastic )

Answer 31

1. the availability of close substitutes- when a good has a close substitute and its price is increased the demand for the good will be elastic because people will switch to the cheaper substitute. Where a good has no substitutes and its price is increased there is no substitute to switch to and so will be inelastic. the closer substitutability between goods the more consumers will tend to switch their purchasing behaviour in response to a change in relative prices thus the grater will be PED. 2.complementary goods- if the good in question is the cheaper of two goods, which are in joint demand, then the demand for it is likely to relatively inelastic in response to changes in its own price. If the two goods in joint demand are cigarettes and matches, if matches prices increased by 10% we would expect that demand would fall for them by less than 10% 3. is the commodity a luxury or necessity?- it is not a vital that one should possess luxuries and therefore the PED for them will be relatively elastic. in contrast to this, necessities are vital and as such, usually PED inelastic even if prices increase, consumers will continue to buy them. 4. the proportion of income which is spent on the commodity- in general the greater the proportion of income which is spent on a good, the more elastic the demand for it is likely to be, in response to a change in its own price. A rise of 50% in its price of a box of matches is unlikely to have a significant effect on its demand. 5. the durability of the commodity- the more durable the commodity, the more elastic is the demand for it is likely to be in response to a change in its own price. if products such as motorcars increase in price, it is likely that the public will extend the life of their existing model and postpone the purchase of a replacement 6. expectations as to future changes in price - if, in the face of a price reduction, the public considers that prices are likely to fall further, they may wait for the further reduction in price, in which case demand may not be very elastic on the initial price reduction. 7. consumer habits/ brand loyalty - a consumer may become strongly attached to a particular product through habit or loyalty to that brand. an increase in price for that good will cause him/her to consume less of the product or to switch to cheaper substitutes. the demand for such goods will therefore be inelastic.

Question 32

what is a fixed cost

Answer 32

they are costs that remain the same irrespective of the level of output. eg rent, loan repayments, commercial rates ... whether i produce 10 units or 10000 units, my fixed costs remain constant at a price.

Question 33

what is a variable cost

Answer 33

they are the costs that change as output changes. they increase as output increases eg electricity costs, input costs (raw materials, labour) ar 0 output, variable costs are 0 but fixed costs would still be charged

Question 34

what is marginal cost

Answer 34

is the addition/increase in total cost from the production of an extra unit of output

Question 35

what is average cost

Answer 35

is total cost divided by the total number of units produced/ it is the cost per unit of output produced

Question 36

what are normal profits

Answer 36

where AR = AC it is the minimum amount of profit which the entrepreneur needs to earn to keep resources in their present use in the long run. normal profit is a fixed cost making up part of the total cost of production. it is covered when the average revenue received from selling goods is equal to the average cost of production

Question 37

what are supernormal profits

Answer 37

where AR>AC it is the profit earned in excess of normal profit/ is the profit over and above the minimum required to keep factors of production in their current use. it occurs whenever the average revenue received from selling goods is greater than the average costs associated with production

Question 38

what is the law of diminishing marginal returns

Answer 38

as more of a variable factor of production are added to other (constant) fixed factors of production, the returns to the variable factor will eventually fall.