economics questions Flashcards
(99 cards)
open- AR>AC
closed- AR<AC
1) demand is low in January
2) P1- indifferent to shutting down and staying open because only cover AVC (staff) but loosing TFC which you would loose if you closed anyway
-Any price below this and you shut down because you are AR<AVC
3)In summer may have P2 but price is at P1 in jan because low demand so might as well close
cost tables and extra reading
When asked a question about why a firm is closed during a certain month, what graph do you use
open- AR>AC
closed- AR<AC (when price is at bottom of AVC or below it)
income effect and substitution effect
must have definition. All need is some examples and mitigations.
1. no claims discount if you comply and drive safely so could get money off insurance in future years
2. employer cannot monitor employee all the time/ piece rates is where you pay per piece of work; awards productivity
How is health insurance a moral hazard and suggest a way that problem could be mitigated
insured individuals take additional risks in because the terms of their health insurance coverage require the insurer to pay for all or some medical care.
solutions- co-pay schemes/ deductibles individuals to pay partially for the services they get. Also reflecting the price with accurate information. The decision to smoke cigarettes or go paragliding looks different when it means increased premiums.
How can big banks be a moral hazard
With the idea that a corporation is too big to fail; management of the company believes they will receive financial assistance to keep it going from the government- more willing to take risks to get profit. Governments cover their losses with bail outs
What is the 5 forces framework reference
Michael Porter’s (1978) 5 forces
to explore key factors that effect profitability, what work do you need to cite and write about
Michael Porter’s (1978) 5 forces (forces that effect profitability
5 forces
-threat new entry
-threat of substitutes
-power of buyers
-power of suppliers
-competition
How does threat of new entry explain why the industry is not profitable
relatively low barriers to entry. New companies can lease planes and airports and don’t even have to buy them/ new entrants are increasingly using regional airports at lower prices which steal customers. This has a downward effect on prices in the market- means all airlines now make less profit
5 forces
-threat new entry
-threat of substitutes
-power of buyers
-power of suppliers
-competition
How does threat of substitutes explain why the industry is not profitable
definition- functionally equivalent to what you’re offering
Cars/buses/ boats etc. Not much of a threat because they are not as good for long haul, so might not reduce profitability. However things like the Eurostar could steal customers and mean airlines have to compete with the train company or Channel ferries
5 forces
-threat new entry
-threat of substitutes
-power of buyers
-power of suppliers
-competition
How does threat of buyers explain why the industry is not profitable
climate conscious buyers/ Demand can be easily affected by events such as terrorism, political instabilities and natural disaster. Buyers will not want to travel to these places
-reputation for bad service- Long lines due to security cramped seating, poor service - the list of airline travelers’ complaints is a lengthy one. The perception that air travel is an ordeal makes it very difficult for airlines to charge the higher prices
5 forces
-threat new entry
-threat of substitutes
-power of buyers
-power of suppliers
-competition
How does power of suppliers explain why the industry is not profitable
very few suppliers of planes (Boeing and airbus) and oil. volatile to changes in oil prices and it means airlines cannot get cheaper planes from anywhere else
5 forces
-threat new entry
-threat of substitutes
-power of buyers
-power of suppliers
-competition
How does competition explain why the industry is not profitable
The competitive rivalry in the industry is Intense and increasing because of the presence of too many competitors in routes. low cost airlines drive profitability down to higher cost airlines because they price compete. Intensive price competition on particular routes, when LC airlines they take a lot of market share off more established airways. Profitability of these routes started to fall because the cheaper airlines overtook them
How would advertising increase buyers likeliness to buy the product
A rational consumer could say. ‘The more a company spends on advertising the more expensive it will be, therefore, heavily advertised goods must offer the worst value’
However, most consumers do not think like this. They think, if the firm can afford to spend a lot on advertising it must be good. Therefore, they trust the good to offer a minimum standard of service.
What are some advantages and disadvantages of advertising
disadvantages-
1.Cost of advertising doesn’t improve the product but leads to higher prices for consumers
2.needs regulating to prevent firms from making false claims
advantages-
1.High barriers to entry (cola and Pepsi) difficult for new entrants
2. Consumers like buying goods where they feel they can rely on a minimum standard
3.generate more sales and enhance brand loyalty
What are the advantages and disadvantages of price discrimination (charging different prices for different people)
advantages:
-firms increased revenue (train companies who offer different prices for peak and off peak
-Lower prices for some
-Manages demand airlines use cheaper early morning flights to avoid over-crowding and helps to spread out demand
disadvantages:
-Higher prices for some
-Potentially unfair For example, adults paying full price could be unemployed, senior citizens can be very well off
-Decline in consumer surplus Price discrimination enables a transfers money from consumers to firms – contributing to increased inequality
In markets where the marginal cost of an extra sale is very low, the firm has an incentive to use price discrimination to sell all the tickets. What is an example of this happening in practice
Airline tickets very low just before their date. Once the company is due to fly the MC of an extra passenger will be very low. Therefore this justifies selling the remaining tickets at a low price.
For goods and services, demand peaks at particular times. Why should prices be higher during peak times
MC=high during peak periods because of capacity constraints. Prices should be higher during peak periods.
(D1 is peak period) The firm sets MC = MR for each period.
-It is also efficient; the sum of producer and consumer’s surplus is greater because prices are closer to MC
Question on HQ good vs LQ good. Two firms, Post and Kellogg have got a new cereal, which it would sell for $3 a box. Assume the MC of making cereal is zero, so the $3 is all profit. Each company knows that if it spends $10 million on advertising, it will get 1 million consumers to try its new cereal. And each company knows that if consumers like the cereal, they will buy it not once but many times. Post is lower quality than Kelloggs. What should each company do in regards to advertising.
Post-advertising would sell one box to each of I million consumers, but customers would not buy again. It is not worth paying $10 million in advertising to get only $3 million in sales. It does not bother to advertise. It sends its cooks back to the drawing board to find another recipe
Kellogs- Advertising is profitable here because Kellogg has a good product that consumers will buy repeatedly.
-the content of the advertisement is irrelevant. Kellogg signals the quality of its product by its willingness to spend money on advertising
What is the limiting profitability factor in the photographic film industry such as Kodak and Fuji
threat of substitues- digital photography/ coping with the substitute product becomes the number 1 strategic focus
threat of entry- why are entrants who are diversifying from other markets more threatening
new entrants always put pressure on price, but existing companies can leverage existing capabilities and cash flows to shake up competition (apple into music distribution, Pepsi into bottled water market)
Advice for incumbent companies when the threat of entry is high/ low entry barriers
threat of entry puts a cap on industry profit potential.
-incumbents must hold down prices or boost investment (modernising) to deter entrants
