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Economics > Economics Theme 4 > Flashcards

Economics Theme 4 Flashcards

1
Q

What’s a monopoly

A

Where one company is the sole supplier to a market
e.g. Google with search engines

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2
Q

What’s a ‘Duopoly’?

A

Where two firms are the sole supplier to a market
e.g. Apple and Samsung with smartphones

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3
Q

What’s a ‘Oligopoly’?

A

where a handful of firms dominate and supply the market
e.g. Warner, Sony, Universal etc, with record labels

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4
Q

What is ‘Monopolistic competition’?

A

Many firms with differentiated products
e.g. house hold products

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5
Q

What’s a ‘perfect competition’?

A

An extreme where there are many firms with identical products
e.g. farmers

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6
Q

Name a limitation to perfect competition

A

Lack of economies of scale - this is due to the fact that there will be many small firms, therefore these small firms wont be able to produce in mass amounts and capitalize on lower average costs

Less governmental intervention - Perfect competition leads to high efficiency, this many they’ll be a lack of government intervention which some economists see as a bad thing

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7
Q

Name 2 ways of non-price competition

A
  • USP
  • Quality
  • Branding
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8
Q

What are ‘Contestable Markets’?

A

Contestable market is one which firms can enter and leave easily, with a feature being low sunk costs

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9
Q

What are ‘Sunk Costs’?

A

The costs that are irretrievable,

Machinery costs can be retrieved by just selling them, but marketing costs can’t be retrieved.

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10
Q

Name 2 contestable markets

A
  • Hairdressers
  • Restaurant
  • retail
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11
Q

Name 2 non contestable markets

A
  • Smartphone market
  • Taxi industry
  • Social Media
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12
Q

What are ‘Barriers to entry’?

A

Obstacles making it difficult for firms to enter market

this includes; Legal, Natural and Artificial

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13
Q

Distinguish the differences between Legal, Natural and Artificial barriers to entry

A

Legal; When a firm has patents for products or processes, and competitors can’t copy them or they risk being sued

Natural; When barriers are likely to occur due to high start up costs, or the uniqueness of the product

Artificial; When firms ploy practices, such as predatory pricing, to ensure barriers of entry are near impossible

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14
Q

Name and explain 3 barriers to entry

A

Product differentiation
- A firm can make a product so unique that it is hard to compete,
i.e. iPhone

Branding
- A firm making it hard for new competitors to attract customers from their brand, i.e. McDonalds

Start up costs
- A barrier as it is near impossible to start the business without some upfront funds

Intellectual property rights
- When a firm stops other firms from copying their product/service without permission. i.e. Copyright, Patents

RnD
- Basically the same as start up costs, it is virtually impossible to become successful in a market with RnD, which usually costs a lot

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15
Q

Explain the impact of economies of scale on barriers to entry,
and give an example

A

When it is virtually impossible to start up a successful business in a market, as production costs are too high and you need to reap the benefits of economies of scale

  • It would be virtually impossible for me to start a supermarket shop as I’d need the production facilities that Tesco or Asda has to compete, or i won’t be able to price products so low
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16
Q

What are ‘Natural Monopolies’?

A

When it is inefficient for multiple firms to operate in a market, thus naturally overtime a market becoming monopolized

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17
Q

What is ‘X-inefficiency’?

A

The waste of resources which occurs when a firm has little incentives to control costs; monopolistic firms have no reason to work efficiently.

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18
Q

What are ‘Concentration Ratios’?

A

The measure of market shares of large firms in an industry; limited number of firms having more than 50% indicate an oligopoly

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19
Q

Name 2 ways price wars benefit consumers

A
  • Lower prices
  • Varity of options
  • reaping the benefits of innovation
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20
Q

Name 2 ways price wars benefit firms

A
  • Encourages higher productivity
  • More employment
  • Innovation
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21
Q

What is ‘Interdependence’?

A

The way in which oligopolies will each take decisions in the light of actions or expected reactions of competing businesses.

  • Apple may increase their prices, if Samsung are
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22
Q

What is ‘Price Wars’?

A

A series of price cuts to push other firms out of the industry; Predatory pricing

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23
Q

What are ‘Market Structures’?

A

The way in which a number of firms in an industry behave

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24
Q

What is ‘Tacit Collusion’?

A

When firms in an industry refrain from competition without explicit agreements.

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25
Q

What is ‘Price Leadership’?

A

When a firm makes prices that other quickly follow.

  • Apple was the first to price a phone at $999, after all phone companies followed
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26
Q

What is ‘Price Discrimination’?

A

When firms charge different prices to different consumers for the same product/service.

  • Age discounts like UNIDAYS or veteran discounts
  • Airlines Charging different prices depending on if that person will have higher elastic demand
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27
Q

What is ‘Marginal Revenue’?

A

The change in total revenue when the firm sells one more unit

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28
Q

What is ‘Marginal cost’?

A

The change in total costs when the firm sells one more unit

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29
Q

Why is marginal revenue and marginal cost linked?

A

They measure the changes to determine what level a company is most efficiently producing and selling goods

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30
Q

Why is marginal revenue and marginal cost linked?

A

They measure the changes to determine what level a company is most efficiently producing and selling goods

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31
Q

What is ‘Productive efficiency’?

A

When an economy uses the minimum inputs to produce as much possible

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32
Q

What is ‘Allocative efficiency’?

A

Where consumer satisfaction is maximized in the production of goods and services

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33
Q

Name 3 ways efficiency is influenced

A
  • Technological advancements
  • Advancements in human capital
  • Improved quality management
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34
Q

What are the 2 ways GDP increases

A
  • More productivity
  • More workers
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35
Q

Name 2 ways of improving productivity

A
  • Training employees
  • Provide incentives
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36
Q

Name 2 ways governments can improve productivity

A
  • Increase pay
  • Incentives to upgrade technology
  • Regressive pay
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37
Q

What is ‘Market Orientation’?

A

Taking the interests of the consumers when creating a product

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38
Q

What is a ‘Cartel’?

A

A group that colludes; price fixing, creating barriers

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39
Q

What is ‘Collusion’?

A

Taking joint action to reduce competition

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40
Q

What are ‘Restrictive practices’?

A

Anti-competitive abuse of market power; artificial barriers to entry or price fixing

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41
Q

What is a ‘Monopsony’?

A

A market structure where there is only a single buyer

42
Q

Name 3 characteristics of a monopoly

A
  • Sole seller in a market
  • High barriers to entry
  • Price maker
  • Price discriminators
43
Q

What percentage market share does a firm (or two) have to have to be defined as a monopoly or duopoly

A

25%

44
Q

Name 2 characteristics of an oligopoly

A
  • High barriers to entry (price, branding)
  • High concentration ratio (only a few firms supply the majority of the market)
  • Interdependence of firms; actions of one firm affect another firm’s behaviour
45
Q

Name 2 characteristics of monopolistic competition

A
  • there are a lot of relatively close substitutes
  • products are differentiated by branding
  • Buyers and sellers in a monopolistically competitive market have imperfect information.
46
Q

Name 2 ways to determine the most appropriate pricing strategy

A

Number of Unique Selling Points
- if the product is unique, the firm may put a premium price on the product and vice versa
Price elasticity of demand

  • if customers have low ped, then higher prices a can be set, as demand wont change
  • Stage in the product life cycle, if its new, you’ll try skim prices
47
Q

Name 2 ways to determine the most appropriate pricing strategy

A

Number of Unique Selling Points
- if the product is unique, the firm may put a premium price on the product and vice versa
Price elasticity of demand

  • if customers have low ped, then higher prices a can be set, as demand wont change
  • Stage in the product life cycle, if its new, you’ll try skim prices
48
Q

Name 2 characteristics of contestable markets

A
  • Competition all around the market
  • There are no significant entry or exit barriers to the industry
  • There is low consumer loyalty
49
Q

Name 1 positive and 1 negative of contestable markets

A
  • firms are more likely to be allocatively efficient, as lots of competition leads to productive efficiency
  • Can lead to hit and run competition, because of ease of access into a market
  • There could be supernormal profits in the short run and only normal profits in the
    long run.
50
Q

Name all the ways of achieving economies of scale

Hint:
Really Fun Mums Try Making Pies

A
  • Risk bearing
  • Financial (bank loans)
  • Managerial (employing specialists)
  • Technological
  • Marketing
  • Purchasing (bulk buying)
51
Q

How do you calculate the concentration ratio of something

A

Add up the percent market share of all firms

If the 4 firm concentration ratio was calculated, the market share of the 4 largest firms would be added together:
28.4% + 17.1% + 16.4% + 10.9% = 72.8%.

52
Q

What is ‘Collusion Behaviour’?

A

Collusive behaviour occurs if firms agree to work together on something, which minimises the competitive pressure they face.

53
Q

Name 2 advantages of an oligopoly

A
  • Oligopolies can earn significant supernormal profits, so they might invest more in research and development, and innovate, benefitting society
  • Higher profits could be a source of
    government revenue.
  • Industry standards could improve, firms can collaborate on
    technology and improve it. It saves on duplicate research and development
  • Exploit economies of scale, so they have
    lower average costs
54
Q

Name 2 disadvantages of an oligopoly

A
  • inefficiency may result in a misallocation
    of resources
  • f firms collude, there is a loss of
    consumer welfare, since prices are raised
  • Collusion could reinforce the monopoly power of existing firms and makes it hard for new firms to enter
55
Q

Name a pro and con of price discrimination for consumers

A

Pros
- Consumers could benefit from a net welfare if they receive a lower price. Those who were previously excluded by high prices, might now be able to benefit from the good or service

Con
- loss of allocative efficiency
- strengthens the monopoly power of firms, which could result in higher prices in the long run for consumers

56
Q

Name a pro and con of price discrimination for producers

A

Pros
- The higher supernormal profits, which result from price discrimination, could help stimulate investment

Cons
- It might cost the firm to divide the market, which
limits the benefits they could gain
- If it is used as a predatory pricing method, the firm
could face investigation bythe CMA

57
Q

Name 2 reasons why a firm may want to profit maximise

A
  • It provides greater wages and dividends for entrepreneurs
  • Retained profits are a cheap source of finance, which saves paying high interest rates on loans
  • In the short run, the interests of the owners or shareholders are most important, since they aim to maximise their gain from the company.
58
Q

What are ‘‘Super normal profits?

A

Supernormal profit is the profit above normal profit

59
Q

What are ‘Normal Profits’?

A

It covers the opportunity cost of investing funds into the firm and not elsewhere

60
Q

What is ‘Sales Maximisation’?

A

Selling as much of their goods and services as possible
without making a loss.

61
Q

What is ‘Satisfying’?

A

Earning just enough profits to keep its shareholders happy

62
Q

What is ‘Survival’?

A

New firms entering competitive markets, might aim to
simply survive in the market

63
Q

What is ‘Market share objective’?

A

This helps increase the chance of surviving in the market, and it can be achieved by maximising sales.

64
Q

What is ‘Cost efficiency’?

A

The more cost efficient a firm is, the lower its average costs

65
Q

What is ‘ROI’?

A

Return on investment (profits)

66
Q

What is ‘Employee Welfare’?

A

Ensuring their employees are well looked-after. When
employees are happy, they are more likely to be productive

67
Q

What is ‘Customer Satisfaction’?

A

Improving their customer service or the quality of the good they produce to make consumers happy

68
Q

What are ‘Social Objectives’?

A

Acting in a morally correct way.

69
Q

Name 2 benefits of monopsony power

A
  • They are able to negotiate lower prices. This saves money which can be invested elsewhere, such as in R&D
  • By lowering the price paid to suppliers, consumers might receive lower prices
70
Q

Explain the main negative of monopsony power

A
  • For e.g. farmers can lose profits as they will have to agree negotiated prices, as they literally can’t sell to anywhere else
  • Workers (farmers for e.g.) might become unproductive if wages are low
71
Q

What is the ‘CMA’?

A

The main competition regulator in the UK, which aims to promote competition and ensure markets are efficient

72
Q

Name and explain 3 ways the government can promote competition

A
  • Government intervention
  • Price regulation
  • Profit regulation
  • Quality regulation
  • Performance targets
73
Q

Name 3 benefits of regulation

A
  • Increases consumer surplus, since goods and services are provided at lower prices
  • Encourages firms to meet minimum quality targets, and results in products which are generally safe
  • Helps to improve the quality of life for consumers and employees
  • If regulation is harmonised, there can be fair rules for all businesses
  • The flexibility of labour markets in the UK has resulted in lower levels of unemployment and more job creation
74
Q

Name 2 costs of regulation

A
  • Regulation could increase the costs of firms and mean that it is more difficult to do business
  • If firms cannot collude, then their ability to increase their market power is limited.
  • Time lags
75
Q

What are ‘Indirect Taxes’?

and what’s the purpose

A

Tax collected by an entity in the supply chain, that is then passed onto the consumer as part of the purchase price

(Decrease consumption of demerit)
They increase production costs for producers, so producers supply less or increase purchase price, which is then less consumed

76
Q

What are ‘subsides’?

and what’s the purpose

A

Government support, in the form of finance or laws.

(Increase consumption of merit good)
They reduce production costs for producers, so producers supply more or decrease purchase price, which is then more consumed

77
Q

What are ‘tradable permits’?

A

Rights to discharge pollution. This can be exchanged in a permit market

78
Q

Name 2 advantages of tradable permits

A
  • Benefit the environment in the long run, by encouraging firms to use greener methods
  • The government could raise revenue from the permits, because they can sell them to firms. they can reinvest this into green technology
  • Those who use greener methods gain more revenue, as they can sell their permits
79
Q

Name 2 disadvantages of tradable permits

A
  • Firms might pass the higher costs of production onto the consumer
  • It could be expensive for governments to monitor emissions
  • Competition could be restricted in the market, if the permits create a barrier to entry for potential firms
80
Q

Name 2 ways the government can deal with market failure

A
  • Provide information
  • Provision of public goods
  • Regulation
81
Q

What is ‘Aggregate Demand’?

whats the equation

A

Total amount of demand in an economy

C+I+G+(X-M)

82
Q

What is ‘Consumer Spending’? (in terms of a components of AD)

and name 2 things that influence it

A

How much consumers spend on goods and services
- Interest rates
- Confidence in the economy

83
Q

What is ‘investment’? (in terms of a components of AD)

and name 2 things that influence it

A

The expenditure of money to fund a company’s long-term growth

  • Rate of economic growth
  • Business confidence
  • Demand for exports
  • Interest rates
  • Influence government regulations
84
Q

What is ‘Government Spending’? (in terms of a components of AD)

and name 2 things that influence it

A

This is how much the government spends on state goods and services.

  • Economic growth
  • Fiscal policy
85
Q

What is ‘Exports minus imports’? (in terms of a components of AD)

and name 2 things that influence it

A

The value of the current account on the balance of payments

  • Real income
  • Exchange rates
  • State of the world economy
  • How much protectionism
86
Q

What causes a shift in the AD curve

A

Changes in the components in AD

C,I,G,X,M

87
Q

What is the ‘Short Run Aggregate Supply’?

why is it slopping upwards?

A

It represents the total quantity of goods and services that firms are willing and able to produce at different price levels in the short run.

Because if prices rise, firms are willing to increase their production to take advantage of the higher prices (and vice versa)

88
Q

What is the ‘Long Run Aggregate Supply’?

and why is it straight

A

It represents the total quantity of goods and services that firms are willing and able to produce at different price levels in the long run.

Because in the long run, changes in prices do not affect the quantity of output that can be produced, as the economy has had time to adjust to changes

89
Q

Name 3 things that cause a shift in the SRAS

A
  • The cost of employment
  • The cost of other inputs
  • Government regulation
  • fall in business capital spending,
90
Q

Name 3 factors influencing the long-run AS

A
  • Technological advances
  • Changes in relative productivity
  • Changes in education and skills
  • Changes in government regulations
  • Demographic changes and migration
  • Competition policy
91
Q

What is ‘Full capacity output’? (in regard to the AS)

A

When all resources are fully employed

92
Q

What is the ‘Multiplier effect’?

A

Chain reaction of increased spending and income throughout the economy.

this can work vice versa with withdrawals in the circular flow of income

(one person’s spending is another person’s income)

93
Q

What are ‘demand side policies’?

A

Policies designed to increase consumer demand, so that
total production in the economy increases

94
Q

What is ‘Monetary Policy’?

A

Methods used to control the money flow of the
economy. This is done with interest rates and quantitative easing, conducted by the BOE

95
Q

What is ‘Fiscal Policy’?

A

Fiscal policy uses government spending and revenues from taxation to influence AD. This is conducted by the government

96
Q

Summarize and explain how the MPC uses interest rates to control the economy

A
  • The MPC alters interest rates to control the supply of money
  • When interest rates are high, the reward for saving is high and the cost of borrowing is higher. This encourages consumers to save more and spend less (and vice versa)
  • Used during periods of high inflation
97
Q

difference between risk and uncertainty

A

Risk is the probability of loss occurring

Uncertainty is where an event is difficult to predict

98
Q

One way businesses reduce risk

A

Firms might include the price of an insurance premium in their costs, which will help protect them against huge losses.

99
Q

Name 3 things the financial market provides

A
  • Facilitates saving, rewarding savers with interest
  • provides loans
  • provides forward markets in currencies and commodities
  • Provides equity markets (stock market)
  • Facilitates the exchange of goods and services
100
Q

Name 3 contributing factors to the global financial crisis

A
  • Subprime mortgages; many risky loans
  • Moral hazard; the belief the system was too big to fall, results in taking many risky loans
  • Speculation and hype leads to the price of the product rising way more than tis real value
  • Role of the banking regualtion

Economics (7 decks)

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