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Micro Flashcards

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1
Q

What is market failure

A

Where the free market, when left to operate on its own fails to allocate resources efficiently, resulting in a loss of economic and social welfare

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2
Q

What is the concentration ratio

A

Refers the to the % market share enjoyed by the largest firms in the industry
Highly concentrated markets tend to have low levels of competition vice versa

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3
Q

Alternative measures of market concentration(HHI)

A

Calculated by squaring the % market share of each firm and summing them
The lower the number the more competitive
A value above 2000 would be considered highly concentrated and therefore not very competitive

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4
Q

What is price discrimination

A

The action of selling the same product at different prices to different buyers in order to max sales or profit

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5
Q

Conditions necessary for third degree price discrimination

A

Different markets have different PEDs
The firm must have price making power
The markets must be separated by time place etc and be kept separate so that no cross selling can occur
The cost of separation must be less than potential gain

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6
Q

What is first degree price discrimination

A

This is where a firm with price making power charges each individual consumer the maximum price they are willing to pay, turning all consumer surplus into producer surplus

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7
Q

What is third degree price discrimination

A

Where the market is split in two according to their differing elasticities of demand
Different markets will then face different prices in order to max profits from two markets
This will be larger than the profit if markets were combined
Eg train tickets

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8
Q

Advantages of price discrimination

A

Consumer: more accessible to people who might be priced out of market
Loss making service may be able to run-cross subsidise
Dynamic efficiency

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9
Q

Disadvantages of price discrimination

A

Consumer: higher price paid, inequality
Reduced consumer surplus
Producer:negative publicity
Max price regulation to combat exploitation

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10
Q

Where is productive efficiency

A

Where MC=AC
Lowest point on AC curve

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11
Q

Where is allocative efficiency and what is it

A

Where MC=AR
(MC=mu)
Maximising consumer satisfaction by ensuring that the MC of producing one more good is more than or equal to the price a consumer is willing to pay

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12
Q

What is dynamic efficiency

A

Supernormal profits are reinvested into the business to increase productivity, innovate, or reduce costs

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13
Q

What is x inefficiency

A

Happens when a lack of effective real competition in a market or industry means that average costs are higher than they would be with competition

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14
Q

Perfect competition characteristics

A

Infinite number of buyers and sellers
Homogenous goods
Perfect information
No barriers to entry or exit
Price takers

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15
Q

Outcome of perfect competition

A

Produce where MC=MR (no supernormal profit available)
Dynamic efficiency ❌
Allocative efficiency ✅
Productive efficiency ✅

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16
Q

How does a perfect competition diagram go from SR to LR

A

Supernormal profit is made
This sends a signal to firms who join the market as there are no BTE
Supply will increase until all SNP is gone
This happens due to AR and MR curve fall until they hit bottom of AC curve and there is no incentive to join market

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17
Q

Why is the AR and MR curve flat in perfect competition

A

Firms are price takers-price is set by industry, no reason to increase or decrease price
Homogenous goods means no USP

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18
Q

Monopoly characteristics

A

25% market share
Profit max
High barriers to entry
SNP in LR
Price makers
No close substitutes
Imperfect info

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19
Q

What does monopoly power depend on

A

No. of competitors
Strength and durability of barriers to entry
Brand loyalty and marketing
Elasticity of demand
Availability of substitutes

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20
Q

Why are monopolies dynamically efficient

A

So they can stay ahead of potential competition
Allows them to maintain market share and continue to make SNP

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21
Q

Why are monopolies not allocatively efficient

A

Underproduction, misallocation of resources and market failure

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22
Q

Why are monopolies not productively efficient

A

Would result in less profit
Could argue they are due to benefits of EOS

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23
Q

Monopolistic competition characteristics

A

Large number of buyers and sellers none dominant
No/few BTE
Perfect knowledge and info
Goods are differentiated
Can only make SNP in SR

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24
Q

Are monopolistic competition markets efficient in SR and LR

A

SR: DE✅ PE❌ AE❌
LR: DE❌ PE❌ AE❌
However businesses are closer to PE and AE due to competition in the market compared to a monopoly

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25
How does a monopolistic competition market transition from SR to LR
SNP is made Firms join the market from signal due to low BTE Increases no. of sub goods Demand curve shifts in and flatter(more elastic) Occurs until all SNP has gone
26
Evaluation of monpolistic competition
Prices are kept closer to MC leading to improved AE- however saturation of products and firms not exploiting EOS- loss of PE Negative externality of production of increased waste due to excessive product differentiation People have bounded rationality and may not benefit from greater choice of product
27
Oligopoly characteristics
Small no. of very large firms- dominate MS BTE are significant Similar but slightly differentiated products-branding Firms are interdependent-match price reductions but not price rises Prices tend to be sticky/rigid Firms compete using non price competition in order to avoid price wars
28
Where do oligopolies produce
MC=MR
29
Are oligopolies efficient
AE❌ DE✅-due to high competition
30
Why are oligopoly prices sticky/rigid
Prices in market are sticky/rigid as firms don’t want to enter price wars and also because small changes in the MC curve do not change where the firm produces due to high competition and elastic demand
31
Why would an oligopoly collude
Fix prices or supply in order to max joint profits- increase producer surplus If they do collude they would in effect be operating as one single monopoly This would cost the consumer higher prices and lost CS HOWEVER this would break EU competition law
32
What is price leadership
Price is established by the most dominant firm
33
How does an informal collusive oligopoly work
The largest firm set a price and other firms follow suit In a non collusive oligopoly firms act independently when setting prices
34
What is game theory
Illustrates the interdependence of oligopolies Shows that if they operate independently it leads to a sub optimal outcome They need to cooperate to gain optimal outcome-incentive to collude
35
What are the characteristics of contestable markets
No BTE and no sunk costs Perfect info and knowledge No. of firms in market is irrelevant due to threat of new competition joining market
36
What are sunk costs
Costs that cannot be recovered when a firm leaves an industry eg marketing costs
37
Where do firms produce in contestable markets
Where AC=AR Only normal profit is made as any SNP in a market with no BTE would attract new competition
38
Why and how would the government attempt to remove BTE in a market
To make them more contestable Done through deregulation and will result in a better outcome for consumers( more supply and lower price) Market based policy to reduce market failure of monopolies
39
Key barriers to market contestability
Internal EOS Brand loyalty Expertise and market reputation
40
How to evaluate contestable markets
Hard to remove BTE- high set up costs How realistic are zero BTE and sunk costs Can a firm hide SNP Dynamic inefficiency Deregulation could negatively impact consumers
41
What is another way for the government to stop market failure of monopolies instead of deregulation
Setting a max price at MC=AR (AE)
42
43
What is the concentration ratio
Refers to the % market share enjoyed by the largest firms in the industry Higher concentrated markets tend to have lower levels of competition and vice versa
44
45
What is an alternative measure of market concentration
Herfindall-horschman index (HHI) Calculated my squaring the % market share of each firm in the mayhem and summing these numbers Max 10k low of close to 0( more competitive closer to 0) Measure exceeding 2000 can be characterised as highly concentrated
46
What is nationalisation
The action of turning a privately owned industry into a publicly owned industry This is often done through the purchase of these private assets
47
What is privatisation
The process of turning a state owned industry into a privately owned industry This is done through a process of breaking the industry up, deregulating to remove BTE and selling the assets on the stock exchange
48
What is a natural monopoly
Occurs when the most efficient number of firms in the industry ie one and any competition is wasteful Typically have very high fixed costs, meaning it is impractical having more than one firm producing the good
49
Advantages of privatisation
Leads to increased competition- increased productive and allocative efficiency, low prices and increased CS Lower taxes-gov don’t need to maintain infrastructure Gov benefit from tax revenue of selling assets on stock exchange
50
Disadvantages of privatisation
May lead to a private monopoly- Productively and allocatively inefficient Gov needs to deregulate market to reduce BTE to stop this Private firm produces at MC=MR Increase in negative externalities due to deregulation Loss of EOS due to competition- loss of PE
51
Advantages of nationalisation
Can set price at MC=AR(AE✅) Easier to regulate and minimise externalities Public sector workers receive fair wages Benefit from EOS PE✅- lower costs Long term view-not short term profit incentives
52
Disadvantages of nationalisation
Lack of or threat of competition-AE❌ PE❌ and x inefficient Moral hazard-losses picked up by tax payer Opportunity cost of gov revenue
53
Evaluation of privatisation vs nationalisation
Depends on industry and whether profit or welfare is main goal eg healthcare Depends on quality of regulation Is the market contestable and competitive- don’t want private monopolies Need for national security and long term investment planning eg water Are there large benefits of EOS
54
What are the types of price regulation
RPI-allow prices to increase in line with inflation RPI-X-encouraged productive efficiency and low costs RPI+_k-allows enough profit to make capital investment
55
Problems with price regulation
Hard to generate perfect level of x or k-shutdown or lack of competition High cost of imposing reg-opp cost Incentive is to keep reducing x-unfair Risk of regulatory capture
56
What are the problems with monopolies being regulated with performance targets/quality control Eg trains, NHS
Unintended consequences eg shortcuts(misdiagnosis) Game the system(state trains take longer than they actually do)
57
How do profit controls work as a way of regulating monopolies
Covering costs and adding % return on capital employed However-asymmetrical info Incentive to increase costs and to over employ capital
58
How does windfall taxes as a way of regulating monopolies work and what are the problems with them
Tax profits which are not made from investment or reduced costs Increased gov revenue and ability to redistribute However: Tax evasion and avoidance Less innovation Taxes are subjective
59
What are the ways a monopoly can be regulated
Price reg-max price Quality control and performance targets Profit control Windfall taxes on profits Merger policy-CMA Privatisation Deregulation Reduce trade barriers
60
Evaluation of monopoly regulation
Depends on level of info regulatory bodies have to make right decisions Costs vs benefits(opp cost) Regulatory capture Benefits of monopoly-eg natural monopolies,EOS
61
Benefits of monopolistic competition
AE-not much price exploitation compared to monopoly -better than perfect comp as people will pay more for differentiated goods PE-better than in monopoly -More EOS taken advantage of compared to perfect comp-lower prices DE-still might occur as needed to invest in order to compete -SNP in SR
62
Pros of contestable markets
Move closer to AE, PE, X efficiency Firms have to prepare for competition Job creation
63
Cons of contestable markets
Lack of DE-chance for new firms to join market and innovate? Cost cutting in dangerous areas-eg wages or health and safety Anti competitive strategies-predatory pricing
64
Evaluation of contestable markets
Length of contestability-patents, anti competitive strategies(not contestable long term) Role of tech-patents,copyright Regulation-minimise anti competitive strategies and cost cutting in dangerous areas
65
Consumer benefits of AE
Resources follow consumer demand Low prices Max CS High choice High quality
66
Producer benefits of AE
Retain or increase MS Stay ahead of rivals
67
Consumer benefits of PE
Low prices High CS Full exploitation of EOS
68
Producer benefits of PE
More production at lower AC Low prices and high MS
69
Consumer benefits of DE
New innovative products Lower prices over time High CS
70
Producer benefits of DE
LR profit max Lower costs over time Retain MS Stay ahead of rivals
71
What is x efficiency
Production on AC curve(not above) X-efficiency refers to a firm’s effectiveness in minimizing costs and fully utilising resources and using them efficiently. X-inefficiency happens when there’s waste—often due to lack of competition, poor management, or organizational slack.
72
Consumer benefits of XE
Low prices High CS
73
Producer benefits of XE
Lower costs Low price and high MS
74
What is a closed shop trade union
A closed shop is a situation where an employer agrees to hire only workers who are members of a specific trade union. It means that union membership is a condition of employment.
75
What is a joint demand(complementary goods)
When consumers use two products together, also known as complementary goods The change in price of one good impacts the demand for the other good Eg.Cereal and milk
76
What is competitive demand(substitute goods)
Two goods are used for the same purpose, also known as substitute goods The change in price of one good impacts the demand for the other good Eg tea and coffee
77
What is composite demand
When a good is demanded for multiple different uses If supply of one goes up supply for the others will fall Eg milk is needed to make cheese and yogurt
78
What is a derived demand
Demand for a good or service arises from the demand for another good or service The demand for inputs is derived from the demand for the final product Eg aluminium and cars
79
What is a joint supply
The supply of two different goods stems from the same source The increase in production of one good will increase the production of another good. The second good may be a by-product of the first Eg beef and cow
80
What is first degree price discrimination
occurs when a seller charges each consumer the maximum price they are willing to pay for a good or service.
81
Benefits of monopoly regulation
Prevents exploitation of consumers Encourages efficiency Improve quality of service Controls excessive profits Encourages long term investment Promotes fairness and equity
82
Why does MC curve have its shape
Initially labour productivity increases due to things like specialisation and division of labour This occurs until law of diminishing returns kicks in and labour productivity starts to decrease as fixed factors of production become a constraint on production
83
What are increasing returns to scale
%change in output>%change in input
84
What is the MES
Lowest level of output to exploit full econ of scale

Economics (9 decks)

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