Micro Year 2 Flashcards

Question

What are economies of scale?

Answer 1

A reduction in long run average cost as output increases - firms face increasing return to scale, as cost is spread over a wider range of output

Answer 2

An increase in Long run average cost as output increases

Answer 3

internal and external

Answer 4

* **R**isk bearing - as a buisness grows, it can spread its opportunity cost over a much greater range of output * **F**inancial - as a firm gets larger, they can aquire finance at a lower interest rate, as they are reputable so the loan is much less risky for the bank * **M**anagerial - As firms grow, the managment team does not need to grow as the much as the size of thr firm gorws, as specalist managers can be hired * **T**echnology - Both in storage (volume rises faster than surface area) and in production, where capital equipment which is a high fixed cost but very efficient can be brought in * **M**arketing - can buy advertising in bulk * **P**urchasing - as a firm grows, they cn purchase raw materials in bulk** Really fluffy monsters try mince pies**

Answer 5

cost advantages that occur when multiple companies in an industry benefit from external factors * Increased transport in the area due to the growth in your industry * increasing pool of skilled labour

Answer 6

The level of output where long run average costs stop falling as output increases.

Answer 7

Profit that covers opportunity cost as well as explicit costs

Answer 8

abnormal is made by firms in perfect competition as it is not sustainable Supernormal can be sustained in the long run

Answer 9

The marginal revenue from seling an additional unit of output is higher than the marginal cost of producing it, therefore the firm can increase profits by selling that unit of output.

Answer 10

In the short run, a firm may choose to remain in a market even if its not covering their opportunity costs, as long as their revenue is covering their variable costs. As the firm as already inccured its fixed costs, . If the revenue the firm is receiving is greater than its variable cost (R > VC) then the firm is covering all variable cost plus there is additional revenue which partially or entirely offsets fixed costs. A firm should immediately leave an industry when revenue does not even cover variable costs, as it is generating larger losses by producing than if it simply shut down

Answer 11

Where resources are being allocated perfectly to match consumer and producer surplus - where marginal benefit to consumers = the marginal cost of production. At this level of output, societal welare is maximised. It occures when price = MC, or AR=MC

Answer 12

Productive efficency occures when firms maximise output at the lowest possible average cost, aka they are fully utilising economies of scale. MC=AC

Answer 13

Where firms reinvest supernormal profits into research and development, or new technology. This occures when firms are making supernormal profit (no gurantee this will translate to real life as they may use this money to pay the dividends of shareholders)

Answer 14

The difference between the actual and minimum cost of production for a given output produces X-inefficiency. Companies will incur X-Inefficiency as a result of lack of motivation to control its costs, which brings the average cost of production exceeds costs actually required for production. For example, the company have a potential potential cost curve. However, due to the lack incentive to motivate on control costs, the company's actual cost curve is at a higher position compared to the potential cost curve.

Answer 15

A sunk cost are costs that have already been incurred and cannot be recovered, therefore should make no influence over peoples actions

Answer 16

According to classical economics and standard microeconomic theory, only prospective (future) costs are relevant to a rational decision. At any moment in time, the best thing to do depends only on current alternatives. hus, if a new factory was originally projected to cost $100 million, and yield $120 million in value, and after $30 million is spent on it the value projection falls to $65 million, the company should abandon the project rather than spending an additional $70 million to complete it. Conversely, if the value projection falls to $75 million, the company, as a rational actor, should continue the project

Answer 17

* Firms are selling homognous products, which are perfectly substitutable * All firms have access to factors of production * Many buyers and sellers, none of which are small * No barriers to entry or exit into the market * Price takers, soo have a perfectly elastic demand curve * perfect knowledge of market conditions * firms are profit maximisers.

Answer 18

In perfect competitoin, firms ahve no price setting power, so the price remains the same no matter how many units are sold. Therefore, changing the quantity sold does not change price, meaing MR and AR are constant (Price does not change, so each additional unit of output adds the same amount to total revenue)

Answer 19

AC will shift out, but not MC, as MC is the increase in cost incurred from prodjucing an extra unit output, and fixed costs do not vary with output, thus MC stays the same.

Answer 20

Both MC and AC will shift out.

Answer 21

For one, each firm holds a relatively small share of the market. This means they lack market control to be ablle to influence prices. Secondly, a firm cannot raise prices, as goods are homognous and are perfectly substitutable, so consumers (with perfect knowledge) will buy goods from a different firm). Firms cannot lower prices, as they are assumed to be operating at normal profit, meaning to lower prices would mean incurring a loss).

Answer 22

If firms are making a loss, whereby AC is higher than AR even at the profit maximising level of output at Q profit max, this acts as a signal for firms to leave the industry, as they are perfectly aware of market conditions and can do so as there are no barriers to exit. Thus, market supply will shift in, reducing quantity supplied, which increases price in the market as scarcity has increased, this increases average revenue, causing AR to shift outwards. This will continue to happen until AR=AC, in which all firms are making normal profit, meaning the market is in long run equilibrium.

Answer 23

Allocative - always Productive - not in the short run but in the long run X - always Dynamic - no

Answer 24

Allocative and productive efficency - consumers pay what it costs to produce, meaning consumer surplus is maximised and resources are being allocated to match consumer demand. Jobs should be created

Answer 25

Lack of dyanmic efficiency - firms fail to earn supernormal profits in the long run, meaning they have no ability to reinvest it into R&D, meaning quality and innnovation in the market will be minimal. Lack of economies of scale - whilst productively efficient, an assumption of perfect competition is that there are no relatively large firms. This limits the baility of firms to expand their production in the long run to fully utilise economies of scale, as they may be unable to shift SRAC to a lower point on LRAC. Thus, prices may be higher than desireable

Answer 26

Significant barriers to entry and exit A single, dominant firm (a pure monopoly has 100%) firms are price makers monopolies have access to economies of scale imperfect knowledge products are differentiated Limited access to factors of production

Answer 27

utilities google (90%)

Answer 28

As the only supplier of a good or a service, a monoplies demand curve is the industries demand curve, therefore to sell more products they must lower price, as governed by the law of demand

Answer 29

Whenn a firm charges different prices to different consumers for a different product.

Answer 30

* The firm must have price setting power * the firm must be able to seperate the market by identifying the consumers with different elactisities of demand * Prevent market seepage

Answer 31

This occures when firms can seperate their customers into two groups, one with more price inelastic demand and the other with more price elastic demand (eg for rail companies, people who use it for commuting to work vs leisure). The marginal cost to the firm is the same for each sub market, however, the MR and AR curves (due to the differing elacisities) are different, so by charging different profit maximising prices for each sub market, the monopoly generates the greatest level of super normall profit.

Answer 32

* Allocative inefficiency - by charging a price way above MC, the firm drastically reduces consumer surplus * inequalities * anti competitive nature - if third degree price discrimination leads to lower prices being charged for consumers with price elastic demand, then this reduces the ability of other firms to enter the market

Answer 33

* higher supernomal profits could be used to be dynamically efficient * higher output allows firms to benfit from economies of scale * some consumers can purchase goods at lower prices, which they may not have been able to at the original price

Answer 34

* A large number of buyers and sellers * low barriers to entry or exit * some product differentiation * some price setting power * good knowledge of market conditions

Answer 35

Night clubs Food outlets Barbers

Answer 36

* Higher sales allow the monopoly to fully utilise economies of scale, which will reduce long run average costs, which may translate to a reduction in costs for the consumer, however there is no gurantee these lower costs will translate to the consumer * Monopolies can be dynamically efficient by reinvesting supernormal profits into R&D, which can increase the quality and variety of goods available to society * Patents and the success of monopolies encourage enterprise and innovation * For natural monopolies, such as utilities (water), it would not make sense for there to be several firms supplying the same good, as the extremely high fixed costs in the form of infrastructure creates a natural monopoly.

Answer 37

* Monopolies are not allocatively efficient, as price is set significantly higher than MC=P. This means consumers suffer from higher prices as well as reduced quantity, meaning societal surplus is not maximised - consumer surplus is partly absorbed by the monopoly in the form of super normal profit * With a lack of competition in the market, the monoply has less incentive to innovate and cut costs, leading to x inefficiency * The monoply is likely to be a monopsony in that industry, meaning they have the power to surpress wages below equilibrium * Consumers have less choice.

Answer 38

* Firms are neither allocatively nor productively efficient in the long run. This means costs are higher, quantitiy is lower and societal surplus is reduced when compared to perfect competition * normal profits in the long run create limited opportunity for firms to reinvest into R&D and thus become dynamically efficient. * Firms cannoot fully exploit economies of scale * The competition that occures on non price factors can lead to excessive spending on advertising, which could be seen as wasteful and cause AC to rise excessively high. However, the need to compete in this way may provide an incentive to firms to reduce x - inefficencies.

Answer 39

Although the firm is not perfectly efficient in any regard, the increased competition could be seen as a happy alternative to complete monopolistic power. In addition, consumers may be willing to pay slighlty higher prices in return for the variety that slightly differentiated products bring. Consumers want to have sovreignty.

Answer 40

* A few dominant firms * high concentration ratios * high barriers to entry / exit * product differention, so firms compete using non price factors * Profit maximisation is not the sole objective of firms. * firms are interdependent, so prices are rigid * firms are price makers

Answer 41

You add up the market shares of the largest firms in the oligpoly, you write it like this "The n-firm concentration ratio is ...% (Firm 1 ...% + firm 2 ...% + firm 3 ...% + firm 4...%)

Answer 42

The firm percieves that it faces a kinked demand curve around the current price P* Q*. It knows the degree of sensititivity to price chanages depends on the actions of the other firms in the market, and thus there is an inelastic (if firms copy the firms move) and elastic (if firms ignore the move) demand curve. If the firm increases price, this increase will fall on the elastic demand curve, as other firms will continue to sell the products at the original price, and consumers will switch consumption away from the firm which has increased prices, so they will lose market share as the increase in price is significantly smaller than the reduction in quantity - they have no incentive to increase price. On the other hand, if a price reduction will force other firms in the market to also lower prices, as they do not want to be undercut and lose their price competitiveness, so the decrease in price will occure on the inelastic demand curve, meaning all firms are worse off as the decrease in price will be significantly larger than the increase in quantity. This shows the interdependence of firms, and, that in the long run, prices will remain fairly stable (unless their is collusion)

Answer 43

In a kinked demand curve model (as always) D=AR, which also means there are two MR curves. They do not meet, so there is a vertical gap between them, which is connected by another MR curve

Answer 44

3m, 3m 0.5m, 4m 0.5m, 4m 1m, 1m

Answer 45

Firm A and B both charge £1, making 3m each with a communical outcome of 6m. Firm A, with firm B charging £1, ccan either charge the same and earn 3m, or undercut B and charge 90p, earning 4m. Therefore, it is logical for firm A to charge 90p. This increases A's revenue by 33%, however the value of the search market has fallen by 25%. Firm B has now two choices, whether to carry on charging £1 or to match A's 90p. It is logical for firm B to lower its prices, as it doubles their revenue. Therefore, we have made it to nash equilibrium. This has created a price war, and has resulted in a significant reduction of both of the firms revenue, as well as the communal market share.

Answer 46

The outcome in a game theory matrix which is acheived when both players choose the option in which their outcome is maximised regardless of what the other firm is doing. This only occures in a non co-operative game.

Answer 47

* There is likely to be price rigidity in a market. * Both plays have an incentive to collude to fix prices high and maximise communal outcome * however, there is a constant temptation to cheat on the agreement

Answer 48

A game where there are no external rules or agreements which enforce the players to co-operate.

Answer 49

Overt collusion occures when firms formally agree to fix prices to maximise communal outcome. Tacit collusion occures when there is no formal agreement between firms, but they collude via non direct manners such as price leadership.

Answer 50

An example of overt collusion - an agreement between firms in which prices and output is fixed, with the intention of maximising their joint profits.

Answer 51

Opec - organisation of petroleum exporting countries - is a cartel of 12 states which overtly collude to maximise profit from oil. They agree to artificially raise prices - although they cannot do this directly as oil is a homognous good, the member countries have production quotas to limit supply and drive up global oil prices. Iraq, Kazakhstan, and Russia are consistently mentioned by OPEC as the countries most out of compliance, with average overproduction totaling 621 million barrels per day.

Answer 52

The big four supermarkets in the UK were fined £116 million for overtly colluding to raise the price of milk (2007)

Answer 53

Whoever snitches on the collusion gets no punishment (cant trust the other partner) Fines of 10% of turnover

Answer 54

Where a dominant firm in an oligopoly sets the price and other firms follow, as they are fearful of engaging in a price war.

Answer 55

* Devlop brand loyality through advertising the quality of their product - Apple and Samsung * Celebrity endorsements encourage brand loyality - Nike basketball shoes (Lebron James and Kevin Durant) * Loyality card systems - nectar cards and tesco club cards * Packaging - laundry detergants

Answer 56

* If there are a large number of firms, as it would be difficult to reach a formal agreement * If there are low barriers to entry and the market is contestable, the artifical supernormal profits would provide too great an incentive for new entrants into the market * if one firm has significant cost advantages it makes agreeing on a set price harder * If a wide range of substitutes exist for the good

Answer 57

* Small number of dominant firms (high concentration ratio) * Similar costs * high barriers to entry, making the market less contestable * Ineffective competition policy * High degree of consumer loyality and intertia, as this reduces the effectiveness of cheating on the agreement and thus makes it less incentivising.

Answer 58

* Profit maximisation - MC = MR * Revenue maximisation - MR=0 * Sales maximisation - AC = AR * Other objectives (profit satisficing, social objectives)

Answer 59

When firms lower prices in a bid to snatch market share away from competitors. This stratergy is rare as according to the kinked demand curve model, all it does is lower profits for all firms involved whilst making limited impact on market share as firms are interdepndent

Answer 60

When a firm sets a price below average variable cost as a means to drive competition out the market. If the competitor dosnt lower price, it will lose market share, but if it does, the smaller competitor will constantly lose money and go bankrupt. This allows the remaining firm to gain monopoly power and set prices back up again. To do this, the firm must be large enough to sustain losses in the short run

Answer 61

The legal definition of predatory pricing - if price is set below AVC, the firm would conventionally shut down due to the Shut down point principle. Therefore, if the firm is setting prices below AVC, the only motive to do so would be to drive competition out of the market.

Answer 62

The highest price that an exisiting firm can set, but at which makes new entry into the market non profitable

Answer 63

A firm has some price setting power, and is maximising profit by charging P* Q*, and is making healthy supernormal profits. If barriers to entry into the market are weak, this supernormal profit would attract a new entrant into the market. If this new firm joins the market, and is producing at a small scale, market price would fall as quantity in the market rises. The new firm is making normal profits. However, if the original firm charged the new price to begin with, any new entrant into the market would surpress prices even further which would make entry not profitable, as the new firm does not benefit from economies of scale to the extent the original firm does. Thus, although the firm does not experience supernormal profits to the extent it did before, it benefits from reduced competition in the market.

Answer 64

Consumers - resources are fully allocated to consumer demand, which maximises consumer surplus. Prices are low and quantity is at optimal levels producers - by producing exactly what consumers want, they will experience high demand for their products. Only perfect competition is allocatively efficient in the long run.

Answer 65

consumer - if the low costs are passed on to consumers, consumers may benefit from lower prices. this will increase consumer surplus. Producer - greater output at a lower average cost means economies of scale are being fully exploited. this can translate into greater levels of profit. In addition, if lower cuts are passed down to consumers, this means that prices are lower so demand should be higher, meaning market share can be maximised. Only perfect competion is productively efficient in the long run

Answer 66

consumers - recieve a greater variety of products which are of higher quality, and in the long run ac may be lower meaning lower prices producers - profits are maximised in the long run, and because innovation increased demand the firm can stay ahead of rivals and cement its market share. Monopolies and oligopolies are dynamically efficient in the long run.

Answer 67

consumer - lower prices as firms are not wasting resources producer - costs are lower so profit is higher, and lower prices can increase market share only perfect competition is x efficient in the long run

Answer 68

Contestability is the threat of new firms entering the market

Answer 69

Where a firm enters a market to make short run supernormal profit before leaving with no sunk costs.

Answer 70

low barriers to entry or exit good informartion surrounding market conditions no sunk costs

Answer 71

Fidget spinners - hit and run entrants Ai - deepseek

Answer 72

In a highly contestable market, exisitng firms always face the threat of new entrants into the market. This threat is sufficient to keep prices at or very near AC=AR, so there are no supernormal profits which act as an incentive for neew firms to join the market. If firms are operating at sales max rather than profit max, there is a high degree of contestability.

Answer 73

Pros: * Allocative efficiency * Jobs will be created * closer to MES Cons: * Loss of dynamic effiency * May translate to monopoly behaviour in the long run if contestability is not sustainable * jobs will be low skill (a requirement for low barriers to entry

Answer 74

* High start up costs * high sunk costs * economies of scale * Natural cost advantage * legal barriers to entry such as copyright or food saftey legislation * marketing barriers - high brand loyality * limit pricing * product differentiation * asymetric information.

Micro Year 2 Flashcards

(100 cards)