Macro Theme 3 Flashcards
(47 cards)
What are barriers to entry that stop a market from being contestable?
- patents: prevent firms from copying technology and products without patent holder’s permission. Negotiate a licence fee which would increase costs. Patents encourage innovation by ensuring the first firm to develop a product wil receive financial rewards. Patents can encourage monopolies
- vertical integration: large firms use integration to discourage new entrants. If a firm acquires a large proportion of suppliers/ controls the supply they can discourage new entrants from finding suppliers
- sunk costs. New firms will struggle to raise the funds required to pay the sunk costs which reduces their ability to enter the market. Harder for firms to achieve normal profit
- limit pricing: established firms in the market will set their prices so low as to discourage new firms from entering the market.
- marketing: firms with strong brand precence have established brand loyalty and will spend a significant amount on advertising to keep their brand popular. New firms would have to spend money on advertising to attract people to their business. This is a sunk cost.
Why is contestability in a market beneficial?
- incumbent firms are encouraged to continue innovating due to the threat of new entrants
- hit and run entry, when firms enter a market when they see another firm making profit forces incumbent firms to innovate in order to maintain market share. Will strive for productive and allocative efficiency in the long run
- high investment in r&d: technology can create EoS, lower barriers to entry, efficiency and create monopoly power
What are the characteristics of perfect competition?
- homogenous goods
- many buyers and many sellers
- no barriers to entry and exit
- sellers and buyers have perfect and relevant information to make rational decisions
- firms aim to maximise profits.
- firms are price takers because there are so many other firms in the market
- allocatively efficient
- productively efficient
- dynamically inefficient
What are the characteristics of monopolistic competition?
- product differentiation between small to medium sized firms, non-price competition
- the larger the differences in product the more ineleastic demand will be.
- barriers to entry are low to medium
- firms have some price setting power and there can be brand loyalty
What are the characteristics of monopolistic competition in the SR?
- each firm has some price making power
- firms will try maximise profits where marginal cost = marginal revenue. At a higher price than what is allocatively efficient
- snp in sr
What are the long run characteristics of monopolistic competition?
- snp signals that other firms should enter the market
- low barriers to entry so they can join and compete away snp
- Normal profit in long run
What are the characteristics of an oligopoly?
- a few firms with a high concentration ratio, dominate the market and have significant price setting power
- supernormal profit in the short run and long run
- barriers to entry are relatively high
- product differentiation
- interdependence between firms. Make decisions based on actions of rival firms. Price rigidity
- non- price competition
- profit max is not the sole objective
What is the positive income effect for the individual supply of labour?
+ as wages go up, hours worked increase and incomes rise
What is the negative income effect for individual supply of labour?
As wages go up, there is a decrease in hours worked because people may surpass their targeted income.
What is the substitution effect?
As wages increase, the opportunity cost of not working increases.
What are the disadvantages of a Monopsony ?
- distorts efficient market outcomes
- wages and employment are reduced under a monopsony
- workers are paid at QMWM which is lower than their wage in a competitive market. Nurses and teachers have to accept this because of a lack of alternative employers.
What are the characteristics of a monopsony?
- wage maker
- maximise revenue by hiring where MRP=MCL this maximises the revenue from each individual worker
- however, monopsonist can afford to pay lower than the worker’s mrp and decrease level of employment
What is the elasticity of labour demand? (SECT)
- measures the responsiveness of labour demanded given a change in the wage rate
S: substitute ability of capital for labour
E: elasticity of demand for the product
C: Cost of labour as a % of profit
T: time period
What factors can impact an individuals labour supply in the long run?
- pecuniary and non pecuniary benefits
- non-pecuinary: flexibility, security, promotion opportunities etc
- high job satisfcation means people are willing to accept a lower wage
What is the supply of labour in skilled and unskilled careers?
Low skilled jobs: supply of labour is elastic. Small rise in wage rate leads to a proportionately larger rise in quantity of labour supplied. Low skilled jobs have lower barriers to entry and have similar wage rates. Increase in rates for one will increase supply of labour.
Highly skilled jobs: inelastic esp in short run: shortage of doctors could not be fixed by an increase in the wage rate because it takes years of training to qualify
- mobility of labour: occupational and geographical.
Net migration can increase supply of labour 7
How does the government increase the flexibility of its labour force?
+ flexible labour force is important because occupational labour immobility may led to structural unemployment
Governments increase flexibility by:
+ promote or subside training and education schemes
+ increased apprenticeships, vocational education therefore allowing people to develop skill s
+ reduced power of trade unions which can cause inflexibility of the market by pushing for longing working contracts
- zero hour contracts reduce unemployment figures and means that employers can reduce costs such as not paying them sick pay, but those on the contracts dont have a fixed income
What are the advantages and disadvantages of the national minimum wage?
+ National minimum wage is in place to prevent the exploitation of workers and prevent payment of unfairly low wages
+ leads to a more equitable distribution of income and reduces poverty
+ governments tax revenue is likely to increase
+ encourages people to work
- creates unemployment. However hasn’t in the UK. Eval
- increases wage costs
- decreases international competitiveness of uk firms. May have to pass on costs to consumers by increasing prices, contributing to inflation
What are the advantages and disadvantages of a maximum wage?
Maximum wage limits a workers wage rate.
+ max wage an prevent wage spiral and inflation
+ limits inequality in a country
+ reduce a firms labour costs and increases willingness to hire more workers
+ could be used in performance targets
- deincentives hard work. Could lead to brain drain
What is productive efficiency?
- operating at lowest point of AC curve. MES point. Fully tapped into economies of scale
MC= AC
What is allocative efficiency
MC= AR
Allocative efficiency is rising when consumer surplus rises, any benefits to the consumers e.g. increase in happiness of eggs and therefore higher quality of eggs
What is price discrimination?
When a firm charges different consumers different prices for exactly the same product
What conditions would be needed to satisfy price discrimination?
+ have to have a degree of monopoly power. Have the ability to set prices
+ need to be able to segment the market int sectors with different PEDs
+ have arbitrage seepage
Through pd the firm will generate more profit than if they had set one universal price
How can the oligopoly benefit consumers?
+ price wars which means lower prices for consumers
+ collusive oligopolies can achieve dynamic efficiency through non- price competition and product development
+ competitive oligopolies can be efficient
- high prices in collusive oligopolies
+ however this may not be the case if one firm in the cartel defects
What is coase theorem?
If well defined property rights are issued, it increases bargaining power and conflicting parties can come to a solution
For example if Nando’s were given property rights over the river wye, where they have been accused of polluting the river because of manure being put in the river, they could come to an agreement with the local residents that used the river for leisure purposes.
Local residents could pay Nando’s compensation to make up for a loss in output or revenue
This would internalise the negative externality
