Micro Flashcards
(269 cards)
1
Q
What is the basic economic problem?
A
The problem of how to allocate resources given unlimited wants
2
Q
What are the factors of production?
A
Land, labour, enterprise and capital
3
Q
What is opportunity cost?
A
The cost of the next best alternative forgone when a choice is made. This tells us if the choice made is good or bad.
4
Q
What is the equation for opportunity cost?
A
What you sacrifice / what you gain
5
Q
What is a positive statement?
A
Objective statements that can be tested by referring to evidence
6
Q
What is a normative statement?
A
Subjective statements which contain a value judgement - they are opinions
7
Q
What are capital goods?
A
Physical assets that the company uses in the production process to manufacture goods and services
8
Q
What are free goods?
A
Ideas and works that are reproducible at zero cost or almost zero cost
9
Q
What are consumer durables?
A
Goods that do not need to be purchased often and last at least 3 years
10
Q
What are non-durables?
A
Ability to exist only a short time before deteriorating
11
Q
What are consumer goods?
A
Goods bought and used by consumers, not manufacturers to produce goods
12
Q
What’s an economic good.
A
A product or service which can command a price when sold
13
Q
What is utility?
A
The state of being useful, profitable or beneficial
14
Q
What is marginal utility?
A
The additional utility (satisfaction) gained from each additional unit of consumption
15
Q
What is diminishing marginal returns?
A
The phenomenon that each additional unit of gain leads to an ever smaller increase in value.
16
Q
What is irrational behaviour?
A
When people make choices and decisions that go against the assumption of rational utility-maximising behaviour
17
Q
What is demand?
A
How much people are willing to buy of something at a given price
18
Q
What is effective demand?
A
Only if the demand is backed up by a willingness and ability to pay the market price makes the demand effective
19
Q
What is composite demand?
A
When a good is demanded for more than one use
20
Q
What is derived demand?
A
When the demand for one good is linked to the demand of another
21
Q
What is joint demand?
A
When goods are brought together e.g a camera and a memory card
22
Q
What factors cause a shift in the demand curve?
A
Population
Income
Related goods
Advertisement
Tax
Expectations
23
Q
What is supply?
A
The quantity of product that a producer is willing and able to supply onto the market at a given price
24
Q
What is the law of supply?
A
As the price of product increases, businesses expand supply to the market
25
What factors shift the supply curve?
Productivity
Income
Number of firms
Technology
Subsidies
= Exchange rates
Weather
Costs of production
26
What is joint supply?
When the production process can yield two or more outputs
27
What is equilibrium price?
Where supply and demand are equal
28
What is a shortage?
Price is below equilibrium so supply is less than demand, can be resolved by increasing price
29
What is a surplus?
Price is above equilibrium so supply is larger than demand, can be resolved by decreasing price
30
What is price elasticity of demand (PED)?
A measure of how the quantity demanded of a good to a change in its price.
31
What are the factors that influence price elasticity of demand?
1) substitutes
2) type of good/ service
3) percentage of income spent on goods
4) Time
32
What is income elasticity of demand (YED)?
Measures how much demand for a good changes with a change in real income
33
How does income elasticity show whether a good is normal or inferior?
Normal goods have positive YED and inferior goods have negative YED
34
What is cross elasticity of demand?
A measure of how the quantity demanded of one good responds to a change in the price of another good
35
What is market failure?
A situation defined by an insufficient distribution of goods and services in the free market
36
What is resource misallocation?
Denoted a situation in which capital and labour are poorly distributed so that ,was productive firms receive a larger share of capital and labour than they should according to their level of productivity
37
What is complete market failure?
When there’s complete market failure, no market exists. This called a ‘missing market’.
38
What is partial market failure?
When the market functions, but either the price price or quantity supplied of the good/ service is wrong, then there is partial failure
39
How do externalities cause market failure?
Market failure occurs because in a free market the price mechanism will only take into account the private costs and benefits, but not the external costs and benefits.
40
How do merit and demerit goods cause market failure?
Merit goods are underproduced and demerit goods are overproduced.
41
How do public goods cause market failure?
Public goods are under provided in the free market because the free rider problem and because firms are reluctant to supply them as they may gain very little to no profit.
42
How does imperfect information cause market failure?
It means that merit goods are under-consumed because people do not know the full benefits and demerit goods are over-consumed because they do not know how harmful it is.
43
How do immobile factors of production cause market failure?
Immobile factors of production mean there’s often inefficient use of resources which means there’s market failure.
44
How do monopolies cause market failure?
In order to maximise profits, monopolies will restrict supply from the market equilibrium to force the price up. Therefore underproducing the good and causing market failutre
45
What are public goods?
Goods provided by the government because businesses would not be able to charge people to use them. This is because public goods are both non-rival and non-excludable.
46
What are private goods?
Goods supplied and sold by sector businesses. Have both rivalry and excludability
47
What are quasi-public goods?
Goods that have elements of both private and public goods. Ie it’s either non-rival or non-excludable but not both.
48
What is the tragedy of the commons?
Situation where individuals with access to a public resource (also called a common) act in their own interest and ultimately depleting the resource.
49
What is a merit good?
A good for which the social benefits of consumption outweigh private benefits.
50
What is a demerit good?
A demerit good is a good for which the social costs of consumption outweigh private costs
51
What are externalities?
The effect that producing or consuming a good/service has on people who aren’t involved in production and consumption of the good/service. These people are often called ‘third parties’.
52
What is the law of diminishing returns?
An investment in a particular area increases, the rate of profit from that investment, after a certain point will start to decrease
53
What are the criticisms of MRP theory?
- it can be difficult to measure productivity
- teamwork makes it difficult to measure individual productivity
- the self-employed
- imperfect labour markets
54
What is the MRP theory?
The theory states that workers will be hired up to the point when the MRP is equal to the wage rate.
55
What causes in the labour demand curve?
- price of product
- demand for final product
- productivt
- price of capital
56
What determines the elasticity of demand for labour?
S-substitutability of capital for labour
E- Elasticity of demand for the product
C- Cost of labour as a percentage of total cost
T- Time period
57
What causes shifts in the labour supply curve?
- wage on offer in substitutes occupations
- barriers to entry
- non-monetary characteristics
- improvement in occupational mobility of labour
- overtime
- size of the working population
- value of leisure time
58
What factors determines the elasticity of the supply of labour?
- nature of skills required
- length of training period
- vocation
- time
59
What are the characteristics of a perfectly competitive labour market?
- there are many potential workers and employers
- labour is homogeneous
- there is a perfect information
- firms are wage takers
- there are no barriers to entry
60
What is a trade union?
An organisation of lots of workers that bargain for high wages and/or better working conditions
61
What market imperfections cause labour differentials?
- labour is not homogenous
- non-monetary considerations
- labour is not perfectly mobile
- trade union and supply restrictions
- monopsonies and wage setting ability
62
What is a monoposony?
The sole employer of labour in a given profession. Are wage makers, will maximise revenue from workers by hiring up to MRP=MC(for labour)
63
Advantages of minimum wage?
- poverty alleviation
- reduce wage differentials
- incentive to work
-benefit to government
-higher wages means there will be a moral boost causing an increase in the production of workers
-incentive for firms to boost human capital.
64
Disadvantages of a minimum wage?
- youth lose out the most
- those not on the national minimum wage rate may ask for increased wages to keep wage differential
- regional differences
- hit to government finances given state employment
65
What is asymmetric information?
When one party in a transaction is in possession of more information than the other
66
What is imperfect information?
When the buyers and/or sellers do not have all the information necessary to make an informed decision
67
What is bounded rationality?
Describes the way that humans make decisions that depart from perfect economic rationality since we are limited by our mental capacity, the information available to us, and time.
68
What is bounded self-control?
Assumes consumers are able to exercise self-control. However, consumers are unable to exercise self- control with some decisions.
69
What is bounded self-control?
Assumes consumers are able exercise self-control. However, consumers are unable to exercise self-control with some decisions.
70
What is anchoring?
A cognitive bias describing the human tendency to rely too heavily on the first piece of information when making descriptions
71
What are social norms?
The expected behaviour that an individual is expected to conform to in a group, community or culture. Although these are not laws they will have impacts on people’s behaviour, even though it may not be rational
72
What is availability bias?
The tendency to rely disproportionately upon the most readily available data
73
What is choice architecture?
Theory that consumer spending patterns can be heavily influenced by the way a good is perested
74
What is framing?
A form of choice architecture that influences choices by the way that information is presented
75
What are nudges?
A form of choice architecture that aims to influence behaviour through the use of gentle suggestions and/or positive externalities
76
What is restricted choice?
Occurs when people’s choices are restricted
77
What is mandated choice?
This is where people have to make a decision eg the policy on organ donors
78
What is utility maximisation?
The concept that individuals and organisations seek the highest level of satisfaction from their economic decisions
79
What is production?
An activity carried out under the control and responsibility of the institutional unit uses inputs of labour, capital, goods and services to produce output of goods and services
80
What is productivity?
Refers to how much output can be produced with a given set of inputs. Productivity increases when more output is produced with the same amounts of inputs or when the same amount of output is produced with less inputs
81
What is labour productivity?
The measure of how much output is produced per unit of labour input
82
How can a firm increase labour productivity?
Through better training or management
83
What are advantages of profit maximisation?
- firms may have more money to reinvest in the business
- firms will not have to borrow money
- higher prices = higher salaries for workers
- higher dividends for shareholders and entrepreneurs
- higher profits makes firms less vulnerable to takeover
84
What are disadvantages of profit maximisation?
- profit going up means costs have decreased and so there may be an impact on quality
- companies might achieve higher profits at the expense of social/ethical environmental aspects of business
- might be achieved through higher prices for consumers which reduces their real incomes/ purchasing power and means a lower level of consumer surplus
85
What reasons may firms not want to profit maximise?
-managerial objectives
-small business/ startup
- state owned business
86
What point is profit maximising?
MC=MR
87
What is specialisation?
The process where a company decides to focus their labour on a specific type of production
88
What are the advantages of specialisation?
- people can specialisation in the thing they’re best at
- specialisation can lead to better quantity and a higher quantity of products for the same amount of effort overall
- specialisation is one way in which firms can achieve economies of scale
- specialisation leads to more efficient production which helps to tackle scarcity because if resources are used more efficiently more output can be produced per unit of input
- training costs reduced if workers are only limited
89
What are disadvantages of specialisation?
- workers can end up doing repetitive tasks, which can lead to boredom
- countries can become less self-sufficient which can be a problem if trade is disrupted for whatever reason
- it can lead to a lack of flexibility
90
What are the functions of money?
- a measure of value
- a store of value
- a standard of deferred payments
91
What is income?
The amount of money they receive over a set period of time e.g wages, interest on savings, dividends from shares, rent from property
92
What is wealth?
The value in money of assets held e.g property, land, shares
93
What are the main causes of income inequality?
- number of people in the household
- the area of England they work (north and south divide)
- different skill sets and education levels
- wealth inequality
- unemployment
94
What are the main causes of wealth inequality?
- is not taxed in the UK and so cannot be easily redistributed
- wealth often earns income and so those who earn income from their wealth could invest that income again which in turn will generate more income, and so the wealthy become wealthier, whereas those with low wealth have little to invest and so their wealth will only grow by a small amount.
95
What is equality?
Everyone is treated completely equally
96
What is equity?
About fairness as people have different circumstances, so it’s more about people getting what they need
97
What is horizontal equity?
People with the same circumstances are treated fairly e.g people with the same level of income are taxed the same amount
98
What is vertical equity?
People with different circumstances getting treated fairly but differently e.g people with higher incomes are taxed more
99
What are the benefits of more equal distribution of income and wealth?
- decrease in poverty
- increases economic growth because the poorer people will have funds for education and to start businesses
- crime is likely to decrease because people will have what they need
100
What are the costs of more equal distribution of income and wealth?
- inequality provides incentives for people to work harder and earn more
- inequality encourages enterprise by people with the funds to start a business
- inequality encourages people to work instead of claiming benefits
- inequality may create a trickle-down effect because if the rich get richer they will spend more goods and services, providing more income poor the poor
101
What does the Lorenz curve show?
Represents the distribution of income graphically
102
What is absolute poverty?
When someone cannot afford the very basics e.g food and shelter.
103
What is the poverty line?
The minimum income needed for food the very basics
104
What is relative poverty?
when someone has a low income relative to other incomes in their country.
105
What is the official UK relative poverty line?
Household disposable income (adjusted for household size) of less than 60% of median income
106
What causes absolute poverty?
- debt
- world population increases
- natural disasters
- conflicts
- child labour
107
What is relative poverty cause by?
- unemployment
- poor health
- inequalities within the labour market
108
What are the effects of poverty?
- unemployment
- low income
- poor housing
- inadequate health care
- barriers to lifelong learning, culture and sport
109
What policies can governments use to alleviate poverty?
- national minimum wage
- economic growth
-benefits
- state provision
- progressive taxation
110
How does a national minimum wage reduce poverty?
Will reduce poverty among the lowest paid workers. Will provide incentive to work and will help those with low incomes afford a reasonable standard of living. A NMW can also counteract monopsony power therefore reducing both relative and absolute poverty
111
How do benefits decrease poverty?
Benefits are used to redistribute income
112
How does progressive taxation decrease poverty?
Means a bigger percentage of tax is taken from workers with high incomes than those with low incomes. Helps to reduce the difference between people’s disposable incomes.
113
What are returns to scale?
Describe the effect on output of increasing all factor inputs by the same proportion
114
What are increasing returns to scale?
There are increasing returns to scale when an increase in output.
E.g doubling all of the factor inputs results in a tripling of output
115
What are constant returns to scale?
There are constant returns to scale when an increase in all factor inputs leads to a proportional increase in output.
E.g doubling all the factors of production will result in a doubling of output
116
What are decreasing returns to scale?
There are decreasing returns to scale when an increase in all factor inputs leads to a less than proportional increase in output
E.g tripling all the factor inputs results in a doubling of output.
117
What is the short run?
A period where at least one factor of production are fixed. In the short run, the scale of production remains constant
118
What is the long run?
A period when all factors of production are variable.
119
What is the marginal returns?
Helps a firm analyse whether the earnings from producing an additional unit is increasing or decreasing over a period of time. Is the incremental gain produced by selling an additional unit.
120
What are total returns?
Total output produced by all the factor inputs
121
What are the main characteristics of monopolistic competition?
- some product differentiation
- there are little to no barriers to entry
122
When can supernormal profits be made in monopolistic competition?
Short run not long run
123
What are the main characteristics of a monopoly
- only one firm which has 100% market share (natural monopoly)
- high barriers to entry
- price makers
124
Is a monopoly productively efficient and why?
The firm does not operate at the lowest on the AC curve and so is not productively efficient.
125
Is a monopoly allocatively efficient?
The price charged by the firm is greater than MC. This means that a monopoly market is not allocatively efficient.
126
Drawbacks of monopolies?
- there is no need for a monopoly to innovate or to respond to a changing consumer preferences in order to make a profit, so they may become complacent
- there’s no need to increase efficiency, so x-inefficiency can remain high
- consumer choice is restricted since there is no alternative products
- monopoly power power may be used to exploit
127
What are the potential benefits of monopolies?
- large size allows it to gain an advantage from economies of scale.
- the security of a monopolist has in the market (as well as supernormal profits) means it can take a long-term view and invest in developing and improving products for the future - this can lead to dynamic efficiency
- increased financial security also means that a monopolist can provide stable employment for its worers
128
What is price discrimination?
When a seller charges different prices to different customers for exactly the same product.
129
What conditions need to be satisfied for a firm to make use of price discrimination?
- the seller must have some price making power
- the firm must be able to distinguish separate groups of consumers who have different price elasticities of demand (PED)
130
Benefits of price discrimination
- often the consumers paying more have higher incomes, so are more able to afford these higher prices. Therefore the greater profits are sometimes used to subsidise lower prices, acting as a form of income distribution
- extra revenue could be used to improve the quality of the product or increase workers wages
131
What are drawbacks of price discrimination?
- Some or all consumer surplus is converted into revenue for the seller
- the average revenue is greater than MC so price discrimination does not lead to allocative efficiency, because allocative efficiency occurs when P= MC
132
What is a real world example of price discrimination?
- theatres and cinemas offer lower prices to certain groups (students and pensioners)
133
What is productive efficiency?
Where a firm produces at the point where average costs are minimised.
134
When is productive efficiency achieved?
At the bottom of the AC curve
135
What is allocative efficiency?
Where resources are used to produce goods that people actually want. If production of a good is allocatively efficient there is optimal use of resources
136
At what point is a firm allocatively efficient?
When price (AR) = Marginal cost (MC)
137
What is dynamic efficiency?
When a firm becomes progressively becomes more efficient over time
138
What are the benefits of dynamic efficiency?
- improves labour force
- better technology
- increased supernormal profits can be reinvested
139
What is x-inefficiency?
Occurs when a firm lacks the incentive to keep costs low. This causes the average cost of production to be higher than necessary.
140
How can governments intervene in markets for merit and demerit goods?
- directly provide certain goods and services
- they can use taxes and subsidies
141
What are the characteristics of a perfectly contestable market?
- no barriers to entry or exit
- both existing firms and potential new firms have access to the same level of competition
- little to no brand loyalty
- existing firms always face the threat of new firms entering the market
142
What are sunk costs?
Costs that cannot be recovered if a firm leaves the market
143
What is hit and run entry?
When firms enter a market when supernormal profits can be made and then leaving the market once prices have been driven down to normal profit levels.
144
What is one way that firms can reduce their sunk costs?
Leasing equipment rather then buying it
145
When does normal profit occur?
Total revenue (TR) = total costs (TR)
146
When is profit maximised?
Marginal cost (MC) = marginal revenue (MR)
147
What are economies of scale?
The cost advantages of production on a large scale
148
List of internal economies of scale
- technical economies of scale
- purchasing economies of scale
- managerial
- risk bearing
- financial
- marketing
149
How are technical economies of scale achieved?
- Production lines can be used by large firms to reduce average cost per unit
- specialised equipment
- workers can specialise
150
How are purchasing economies of scale achieved?
- larger firms making lots of goods will need larger quantities of raw materials, and so can often negotiate discounts with suppliers
151
How are managerial economies achieved?
- large firms will be able to employ specialist managers to take care of different aspects of the business
152
How are financial economies of scale achieved?
Larger firms can often borrow money at a lower rate of interest
153
How are marketing economies of scale achieved?
- Advertising is usually fixed cost and so this is spread over more units for large firms, so the cost per unit is lower
- larger firms also benefit from brand awareness because this may mean that a larger firm may not need to advertise as much to get sales
154
What are external economies of scale?
Changes outside a firm
155
What are some examples of external economies of scale?
- local colleges may start to offer qualifications needed by big local employers, reducing the firm’s training costs
- large companies locating in an area may lead to improvements in road networks or local public transport
- if lots a firms doing similar or related things locate near each other, they may be able to share resources. Suppliers may also locate in the same area, reducing transport costs
156
What are diseconomies of scale?
As a firm’s output increases, the firm can encounter diseconomies of scale. Diseconomies of scale cause average cost to rise as outout rises.
157
What are example of internal diseconomies of scale?
- wastage and loss can increase because materials may seem in plentiful supply and bigger warehouses may lead to more things getting lost or mislaid
- communication may become more difficult as a firm grows affecting staff morale
- managers may be less able to control what goes on
- it becomes more difficult to coordinate activities between different divisions and departments
158
What are examples of external diseconomies of scale?
- as a whole industry becomes bigger, the price of raw materials may increase (since demand is greater)
- buying large amounts of materials may not make them less expensive per unit. If local suppliers aren’t sufficient, more expensive goods from further away may have to be bought.
159
What the minimum efficient scale of production (MES)?
The lowest level of output at which the minimum possible average cost can be achieved it’s the first point at which the LRAC curve reaches its minimum value.
160
What is a barrier to entry?
Any potential difficulty or expense a firm might face if it wants to enter a market
161
What reasons cause barriers to entry?
- the tendency of incumbent firms to create or build barriers
- the nature of the Indy leading to barriers over which incumbent firms and new entrants have little control
- the extent of government regulation and licensing
162
How do incumbent firms actions cause barriers to entry?
- an innovative new product or service can give a firm a head start over its competitors. Also if the new technology is patented then other firms cannot copy the design
- strong branding means that some producers are very well known to consumers
- aggressive pricing tactics by incumbent firms can drive new competition out of the market before it becomes established
- the threat of a price war be deter new firms from entering a market
163
How can barriers to entry caused by the nature of an industry?
- some industries require large amounts of capital expenditure before a firm receives any revenue
- if there is a large MES then any new firms entering the industry on a smaller scale will be operating at a higher point on the AC curve than established firms
164
How can barriers to entry be caused by government regulation?
- if an activity requires a license
- new factories may need planning permissions to be built
- there will be regulations regarding health and safety and working conditions
165
What are the characteristics of perfect competition?
- there’s an infinite number of suppliers and consumers
- consumers have perfect information
- producers have perfect information
- products are homogeneous
- there are no barriers to entry and no barriers to exit
- firms are price takers
166
Are productive and allocative efficiency achieved in perfect competition? And when?
Both are achieved in the long run but only allocative efficiency is achieved in the short run
167
What are the disadvantages of perfect competition?
- limited consumer choice
- lack of investment
- lack of incentive for innovation
- lack of economies of scale
168
What are the advantages of perfect competition?
- no barriers to entry, so existing firms cannot derive any monopoly power
- only normal profits made, so producers just cover their opportunity cost
- no need to spend money on advertising, because there is perfect knowledge and firms sell all they can produce
169
What are the characteristics of an oligopoly?
- dominated by just a few firms (60% of market share is dominated by the top 5 firms)
- high barriers to entry
- firms offer differentiated products
- firms are interdependent
- firms use competitive or collusive strategies to make this interdependence work to their advantage
170
What is the concentration ratio?
Measures the combined market share of the top few firms in a market.
171
What is competitive behaviour?
This is when the various firms don’t cooperate, but compete with each other
172
What is collusion?
Where a group of businesses agree to act together on price/market sharing
173
When is competitive behaviour more likely?
- one firm has lower cost than the others
- there’s a relatively large number of big firms in the market
- the firms products that are very similar
- barriers to entry are relatively low
174
When is collusive behaviour more likely?
- the firms all have similar costs
- there are relatively few firms in the market
- brand loyalty means customers are less likely to buy from a different firm, even their prices are lower
- barriers to entry are relatively high
175
What are the two assumptions of the kinked demand curve?
- if one firm raises its prices, then the other firms will not raise theirs
- if one firm lowers its prices, then the other firms will lower theirs
176
What is the kinked demand curve model?
If a firm increases their prices they will see a large drop in demand. This is because customers are likely to switch to buying their goods elsewhere. Therefore when price is increased, demand is price elastic. If a firm lowers its prices it will not gain any market share. Therefore when price is decreased, demand is price inelastic.
177
What are the problems with the kinked demand curve theory?
- how was the sticky price determined
- sellers may keep price stable but reduce quality or quantity
- it may be true in the short run, when reactions of rivals may be guessed, but may not hold true in the long run
- this model is based on the assumption that other firms will follow a price cut, they will not follow a price rise, however this is probably not true in an inflationary situation
178
What are methods of non-price competition?
- loyalty cards
- branding
- quality of service including after sales
- free upgrades
- promotion
- advertising
- delivery
- innovation
179
Methods in which firms in an oligopoly can cooperate legally
- improved industry standards
- information sharing designed to give better information to consumers
- research joint-ventures and know how agreements
180
What is a cartel?
A group of two or more producers that work together to protect their interests through agreeing to control prices, limit output or prevent the entrance of new firms into the market.
181
What is game theory?
The study of how people and businesses behave in strategic situations. Therefore it can be used to predict or explain how firms react to the actual or expected behaviour of other firms
182
What are advantages of oligopoly?
- low level of competition
- high potential to receive big profits
- a great demand for products and services controlled through oligopolies
- a limited number of companies makes it easier for customers to compare and choose products
- more competitive prices
- better quality of products and services since brands need to survive in the market
- better customer support
- price stability within the market
- more informative ads
183
What are disadvantages of oligopoly?
- high barriers to entry
- companies are not interested in innovations since the level of competitive is low
184
What are fixed costs?
Fixed costs don’t vary with output in the short run - they have to be paid whether or not anything is produced
185
What are variable costs?
Variable costs do vary with output - they increase as output increases
186
What are total costs?
All the costs involved in producing a particular level of output
187
What are average costs?
The cost per unit
188
What are marginal costs?
The extra cost incurred as a result of producing the final unit of outcome
189
How does technological change positively impact firms?
- improvements in efficiency and productivity which could lower costs of production for firms. The quality and quantity of goods and services produced might improve
190
How can technological change influence the structure of markets?
- innovation is disruptive when it improves existing goods or creates new goods with which the existing market goods can’t compete
191
What is divorce of ownership from control?
The owners and those who control the firm (managers) are different groups with different objectives
192
What are the negatives that divorce of ownership from control can cause?
- agency problems
- conflicts of interest
- information asymmetry
- moral hazard
193
What are the possible objectives of firms?
- profit maximisation
- sales maximisation
- surviving in the market
- revenue maximisation
194
What is profit satisficing principle?
When a company makes enough profit to satisfy its shareholders
195
Equation for concentration ratio
Sum of sales value for the largest firms / total market sales
196
What are price wars?
Occurs when rival firms continuously lower prices to undercut each other
197
What are price agreements?
An agreement between a firm, similar firms, suppliers or customers regarding the pricing of a good or service
198
What is price leadership?
The setting of prices in a market, usually by a dominant firm, which is then followed by other firms in the same market
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What factors influence price in an oligopoly?
Availability and publicity of information about demand conditions
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What is the significance of interdependence and uncertainty in oligopoly?
Although firms are interdependent because they must consider other firms’ strategies, they are independent when choosing their own strategy. This brings uncertainty to the market
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What are the benefits of competition in the short run?
- lower prices
- increased choice
- innovation
- efficiency improvements
- consumer benefits
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What are the long run benefits of competition?
- lower long-term prices
- enhanced product quality
- technological advancements
- market expansion
- eliminates less efficient firms from the market
- consumer sovereignty
- global competitiveness
- environmental benefits
- incentives for ethical behaviour
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What is creative destruction?
The process of innovation and technological ch age that leads to the replacement of old technologies and business models with new ones.
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Why is contestability important for the performance of an industry?
It can lead to lower prices and higher quality goods and services
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What is static efficiency?
Efficiency at a particular point in time
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How does consumer and producer surplus determine the economic efficiency of a market?
A market is economically efficient when it provides the most consumer surplus and the most producer surplus possible
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What is competition policy?
- aims to increase competition in a market
- used by the government is to protect the interests of conumsers by promoting competition and encouraging the market to function more efficiently
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What is the CMA?
The UK’s competition and markets authority (CMA) monitors both competition to look out for unfair monopolistic behaviour
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What does the CMA look out for?
- mergers
- agreements between firms (e.g cartels, collusive oligopolies)
- the opening of markets to competition
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What is a merger?
A business deal where two existing, independent companies to form a new, singular legal entity
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What are regulatory bodies?
Regulate prices, monitor safety and product standards and encourage competition
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What are benefits of competition policy?
- encourages enterprise and efficiency
- creates a wider choice for consumers
- helps reduce prices and improve quality
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What are costs of competition policy?
- small businesses may suffer from decreased market power
- businesses may incur greater costs
-excessive regulation may stifle business innovation and flexibility
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Arguments against public ownership?
- increase in government debt
- no competition
- less revenue
- less investment
- inefficiencies
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Arguments for privatisation?
- increased revenue for the government because it is sold
- reduction in government borrowing
- promotion of competition
- promotion of efficiency
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Arguments against privatisation
- natural monopoly
- public interest
- government losses out on potential dividends
- low share prices as encouragement and they increased prices so people sold them
- low future investment
- higher cost to consumers
- lots of small shareholders do not vote
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What is privatisation?
When a government owned business become owned by a private non-government party
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What is deregulation?
The removal of government control in a market
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What is regulatory capture?
For, of government failure when the government operates in favour of producers over consumers
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What is public ownership?
When the government owns industries, firms and other assets e.g NHS
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What is nationalisation?
Transfer of industry from private to state control
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What is strategic importance?
Industries where governments should not let others have a stake in it due to security
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What are reasons for nationalisation?
- economic performance
- a way to bring stability in a developing economy
- solving a struggling industry
- governments can guarantee the production of strategically important goods such as energy, water, transport and food
- natural monopoly
- achieve government objectives
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When does government failure occur?
When government intervention in the economy leads to a misallocation of resources
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What are possible sources of government failure?
- imperfect information
- conflicting objectives
Administrative costs
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What is supernormal profit?
Profit over and above normal profit
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What is behavioural economics?
Economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions
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What is cognitive bias?
A systemic error in thinking that affects the decisions and judgements that people make
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What is a complementary good?
When two goods are compliments, they experience joint demand
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What is a contestable market?
A market in which the potential exists for new firms to enter the market
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What is deadweight loss?
The name given to the loss of economic welfare when the maximum attainable level of total welfare fails to be achieved
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What is Default choice?
An option that is selected automatically unless an alternative is specified
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What is division of labour?
Different workers perform different tasks in the course of producing a good or service
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What is the free-rider problem?
Someone who benefits from a good or service without paying as a result of non-excludability
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What is geographical immobility of labour?
When workers are unwilling or unable to move from one area to another in search of work
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What is immobility of labour?
The inability of labour to move from one job to another
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What is an inferior good?
A good for which demand decreases as income rises and demand increases as income falls
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What is information failure?
Occurs when people make wrong decisions because they do not possess or they ignore relevant information
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What is innovation?
Improves on or makes a significant contribution to something that has already been invented
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What is invention?
Making something entirely new
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What is a normal good?
A good for which demand increases as income rises and demand decreases as income falls
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What is normal profit?
The minimum profit a firm must make to stay in the market however this amount of profit is insufficient to attract new firms into the market
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What is occupational immobility of labour?
When workers are unwilling or unable to move from one type of job to another
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What is a price ceiling?
A price above which it is illegal to trade.
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What is a price floor?
A price below which it is illegal to trade.
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What is rational behaviour?
Acting in pursuit of self-interest, which for a consumer means attempting to maximise the welfare, satisfaction or utility gained from the goods and services consumed
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What is scarcity?
Results from the fact that people have unlimited wants but resources to meet these wants are limited
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What is a Subsidy?
A payment made by the government to producers for each unit of the subsidised good that they produce
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What is technological change?
A term used to describe the overall effect of invention, innovation and the spread of technology in the economy
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How can firms reduce their sunk costs?
By leasing equipment rather than buying it
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PES =
%change in quantity supplied/%change in price
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YED =
%change in demand/ %change in income
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XED =
%change in demand for good A / %change in price of good B
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PES =
% change in quantity demanded / %change in price
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Factors influencing Price elasticity of supply
- time period
- spare capacity
- stock levels
- availability of producer substitutions
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Disadvantages of specialisation and division of labour
- workers may find repetitive tasks monotonous and unrewarding, leading to job dissatisfaction
- over reliance on one thing make units vulnerable to staff illness or economic shocks
- structural unemployment. Workers trained in fewer skills and machines can replace some labour tasks
- lack of variety. Mass produced goods can reduce consumer choice
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Advantages of producer subsidies?
- corrects market failures
- encourages consumption of merit goods
- encourages firms to invest and innovate
- helps protect producer incomes and jobs
- supports those on lower incomes
- can help tackle climate change
Can help make exports more competitive
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Disadvantages of a monopoly
- higher prices
- will hit consumers on lower incomes more
- x-inefficiencies
- lack of choice for consumers
- supernormal profits may not be reinvested
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Advantages of monopoly?
- supernormal profit could be reinvested leading to dynamic efficiency
- economies of scale
- enables price discrimination due to their price setting power which is a form of income redistribution
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What is predatory pricing?
Firm sets its price below average variable cost to force out a rival or prevent new entrants
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What are the three types of barriers to entry?
- natural barriers
- legal barriers
- strategic barriers
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Examples of natural barriers to entry
- high capital start up costs
- high sunk costs
- high economic of scale
- geographical barriers
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Examples of legal barriers to entry
- patents
- copyrights and trademarks
- import controls
- licensing
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Examples of strategic barriers to entry
- ownership or control of the factors of production needed
- control of the technology needed
- limit pricing
- predatory pricing
- marketing barriers
- advertising barriers that create brand loyalty
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Factors influencing trade union power
- public support
- union density
- trade union legislation
- financial consequences of industrial action
Globalisation ( MNCs can outsource to other parts of the world)
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Benefits of trade unions
- better wages and working conditions
-lower income inequality
- counterbalances monopsony power of employers
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Costs of trade unions
- reduces employment flexibility
- prevents efficient working of labour markets
- adds to business costs if wage is higher with no improvement in productivity
- reduces profits of companies
-can delay introduction of new technology
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What is a market economy?
A type of economic system where supply and demand regulate the economy, rather than government intervention.
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What is creative destruction?
Capitalism evolving and renewing itself over time through new technologies and innovations replacing older technologies and innovations
