Essays Flashcards
1
Q
Factors suggesting lower contestability
A
- increased barriers to entry/exit e.g. high start-up costs - can equipment be rented or must it be bought?
- economies of scale
- an increase in concentration ratio
- price fixing or collusion increasing
- lack of dynamic efficiency
- highly concentrated market - consider 3/4 firm concentration ratio
2
Q
Evaluation of factors lowering contestability
A
- collusion is illegal and regulators can stop this
- lack of profitability can suggest an industry is contestable
- budget, cost-efficient firms may be emerging
- diseconomies of scale may be occuring
3
Q
Points for how regulation can increase economic efficiency
A
- price capping e.g. RPI-X can incentivise productive efficiency as they may need to cut costs
- likely to improve allocative efficiency as prices become lower
- economies of scale
4
Q
Regulation improving monopoly evaluation
A
- regulatory capture e.g. bribery, revolving door, familiarity
- imperfect information
- DoS
- firms may lose best managers if pay is capped
- costs v benefits e.g. legal & admin costs
- benefits of monopoly
5
Q
Points for why some firms engage in collusion (essay points + K)
A
- interdependence likely to exist in an oligopolistic market structure for price setting power
- reduces level of comp & cost of direct comp e.g. marketing or price wars
- can use game theory pay off matrix
- enable costs of regulation and taxation to more easily be passed on to the consumer
6
Q
Evaluation of firms colluding essay
A
- illegal nature of collusion - risks of fines & criminal prosecution due to regulation
- impact on brand image
- complacency after collusion -> x-inefficiency
- elasticity of good - elastic goods may incentivise cheating on collusive agreements
- debate of whether it is collusion or just the nature of business behaviour in oligopoly markets
- competitiveness of new entrants may mean no profits despite collusion
7
Q
Chain of analysis for ‘lower interest rates increase profits for firms’
A
- lower interest rates mean MPC increases as lower cost of borrowing
- consumption increases meaning AR and MR increase
- profits increase leading to more dynamic efficiency
- demand increases due to better quality
- AR and MR further increase, increasing profits
8
Q
Methods of government intervention to control utility bills in the UK
A
- forms of price regulation (RPI-X, RPI+K)
- subsidies and maximum prices (can use diagrams)
- deregulation to reduce costs
- breaking up large suppliers and CMA investigating collusive behaviour e.g. 2014/16 £1.4bn
9
Q
Evaluate methods of government intervention for controlling utility bills in the UK
A
- time lags
- regulatory capture
- asymmetric information affects value of X, K, and subsidies/max prices
- short run v long run
- unintended consequences e.g. energy retailers leave the market
- size of price change
10
Q
Essay use of monopoly diagram
A
- Pm and Qm (prof max level of output) represents monopoly conditions outcomes
- Pc and Qc (at AR=MC) represents competitive outcomes
- in monopoly conditions, quantity is lower and price is higher
- good to use when talking about mergers, deregulation, privatisation etc
11
Q
Essay use of shifting cost curves
A
- fixed costs change -> AC shift only
- variable costs change -> AC and MC shift
- increases price, reduces quantity, reduces supernormal profit
12
Q
Essay use of perfectly competitive labour market
A
- producing where MRP is equal to the marginal cost of labour (W1)
- no other wage rate will give employment as high as Q1, so great for individuals trying to get into the labour market
- efficient allocation of labour (D=S)
13
Q
Market failure - why the government should intervene
A
- if market failure exists, go into the failure and how resources are misallocated
- explain appropriate policies e.g. bans, taxes, regulations, direct provision, subsidies
- may be barriers preventing an appropriate equilibrium e.g. inelastic demand for cigarettes
14
Q
Market failure - why governments should not intervene
A
- markets are working well - functions for price working well for producers and consumers
- markets could work well in the future e.g. tech may advance, innovation may occur, competition may rise
- risk of government failure - policies may be risky
15
Q
Market failure - why markets should be left to allocate resources
A
- functions of price working well
- tech/innovation advancements
- good competition and markets are contestable
16
Q
Market failure - why markets should not be left to allocate resources
A
- market failure
- explain appropriate policies
- barriers preventing an appropriate equilibrium e.g. inelastic demand for cigarettes
17
Q
Market failure - why government failure is likely + example
A
- apply to policy - can occur if policy is expensive, if unintended consequences occur, or if there is imperfect information
- strength of market failure e.g. climate change, addiction
- e.g. EU emissions trading scheme failure after 2008
18
Q
Market failure - why government failure is not likely
A
- if benefits outweigh costs
- SR/LR - if policies can be adjusted over time and are flexible
19
Q
Market structures - why intervention/regulation is necessary/should occur
A
- public interests are harmed - allocative inefficiency or risk of it, concentrated markets (like monopolies) can exploit consumers or suppliers
- good policy options exists e.g. regulation
- excessive cost cutting/predatory pricing exists - may lead to quality degradation and externalities
20
Q
Market structures - why government intervention/regulation is not necessary/should not occur
A
- market is working well - relative allocative efficiency, prices low and CS high, dynamic efficiency occurring
- market is contestable - therefore will be better in the future, threat of competition exists
- problems of intervention e.g. asymmetric info, reg capture, unintended consequences
- better options e.g. privatisation or deregulation (forms of government withdrawal from economic activity)
21
Q
Labour market - why government should intervene
A
- to regulate flexible labour markets - lack of job security due to easy hiring/firing - could ban zero-hours contracts - may be poor working conditions
- excessive profiteering - workers underpaid
- wage differentials/discrimination - differences in pay between workers
- monopsony/trade unions - strong trade unions may lead to CP inflation or unproductivity, monopsony power may mean workers exploited
22
Q
Labour market - why governments should not intervene
A
- market is working well - competitive labour market where wages = MRP, employment is maximised, insignificant cross firm differentials
- benefits of inequality e.g. higher wages may encourage skills acquisition
- problems of intervention e.g. asymmetric info, time lags, admin costs
