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econ chains of analysis > micro year 2 > Flashcards

micro year 2 Flashcards

1
Q

marginal returns in the short run

A
  1. in SR at least one factor of production is fixed
  2. increases in other factors of production (e.g. Labour)
  3. diminishing marginal returns
  4. total output rises at a slowing rate
  5. marginal product falls
  6. marginal cost rises
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2
Q

returns to scale (long run)

A
  1. in LR all factors of production are variable
  2. if inputs double but output less than double
  3. decreasing returns to scale
  4. total output rises by less than total inputs
  5. unit costs rise
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3
Q

economies of scale (long run) and examples

A 
e.g. Bulk buying
managerial
financial
technical
marketing
risk-bearing
scope

bulk-buying, lowers unit input costs which reduces LRATC as output rises

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4
Q

profit maximisation

A
  1. Q of total output set where MC=MR
  2. maximum profit
  3. no incentive to change production level
  4. re-invest profit into R&D
  5. innovate and invent
  6. dynamic efficiency
  7. lower prices or increase future profit
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5
Q

how abnormal profit reduced, contestable market

A
  1. abnormal profit
  2. incentives other firms to enter the industry
  3. increases competition
  4. increases industry supply (if contestable)
  5. lowers market price
  6. lowers AR for firms
  7. reduces abnormal profits t
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6
Q

revenue maximisation

A
  1. managerial pay and rewards may be linked to revenu
  2. e.g. market share
  3. increase revenue
  4. increase monopoly power
  5. raise price in future
  6. increase future profit
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7
Q

sales maximisation or normal profit only (ATC=AR)

A
  1. for start up firm sales max may be necessary to ensure survival
  2. increase sales
  3. economies of scale
  4. lower unit costs
  5. increase brand loyalty
  6. increase market share
  7. increase monopoly power
  8. raise price in the future
  9. increase future profit
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8
Q

characteristics of perfect competition

A
  1. homogenous goods
  2. large number of buyers and sellers
  3. no barriers to entry or exit in LR
  4. perfect information
  5. perfect factor mobility
  6. all agents price takers
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9
Q

AR and MR curves in perfect competition

A
  1. in PC any good priced above equilibrium will not be sold since consumers can switch to an alternate supplier
  2. firms face perfectly elastic demand
  3. AR curve is horizontal
  4. AR for every good sold is equal to market price hence also equal to MR
  5. MR is constant and equal to TR
  6. gradient of TR is positive and constant
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10
Q

PC abnormal profits to normal profits in LR

A
  1. in SR firms in PC can make abnormal profit
  2. new firms are attracted to enter the industry
  3. firms can enter due to lack of entry barriers
  4. increases industry supple (S-S1)
  5. reduces industry price (P-P1)
  6. reduces AR for firms until AR= ATC
  7. normal profits only in long run
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11
Q

PC losses to normal profits in LR

A
  1. in SR firms in PC can incur a loss

2. firms producing where AR

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12
Q

characteristics of monopoly

A
  1. pure monopoly= single seller
  2. working monopoly = 25% or more market share
  3. monopoly power= P or Q setter
  4. high or impenetrable barriers to entry
  5. highly differentiated or unique products
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13
Q

AR and MR curves in monopoly

A
  1. market’s quantity demanded is inversely proportional to price
  2. pure monopoly is a single seller so demand curve is firm’s AR curve
  3. to increase Q sold monopoly must reduce P
  4. if AR is falling then MR must be falling at a faster rate
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14
Q

Monopoly power- economies of scale

A
  1. economies of scale
  2. lower unit costs of production for monopolist (falling LRATC as output rises)
  3. able to charge lower price than small firms
  4. forms a barrier to entry
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15
Q

Monopoly power- advertising and branding

A
  1. advertising and branding
  2. increase price inelasticity of demand for monopolist’s product
  3. difficult for new firms to gain a foothold in the market
  4. monopolist can then charge higher price to increase revenue
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16
Q

monopoly is market failure

A
  1. monopolist enjoys monopoly power
  2. restricts output to MC=MR
  3. raises prices above allocatively efficient level
  4. lowers output below productively efficient level
  5. captures consumer surplus
  6. increase producer surplus
  7. causes deadweight loss of overall welfare
17
Q

advantage of monopoly, econ of scale

A
  1. large firm enjoys economic software scale
  2. lowers production costs
  3. increases abnormal profit
  4. reinvest in R&D
  5. higher innovation and invention
  6. dynamic effcieincy gains
  7. increased choice and variety of products for consumers at lower costs
  8. increased social welfare
18
Q

Oligopoly, price rigidity, Sweezey’s kinked demand curve

A
  1. any price increase above X, other firms maintain at X
  2. consumers switch to other firms
  3. demand for firm’s output becomes relatively price elastic, revenue falls
  4. any price reduction below X, other firms match price reduction
  5. demand for firm’s output becomes relatively price inelastic, revenue falls
  6. no incentive to compete on price in oligopolistic markets
19
Q

oligopoly, uncertainty

A
  1. competitor firms could rake any number of responses to a price cut
  2. firms do not know how their competitors will behave
  3. a firm could match price reduction, engage in price war or do nothing
  4. uncertainty leads to inaction and focus on non-price competition
20
Q

oligopoly, price leadership

A
  1. dominant firms raises its price
  2. dominant firms loses price competitiveness
  3. PED more elastic
  4. lower barrier to entry
  5. loses market to competitive fringe
  6. loses monopoly power and becomes less dominant
  7. loses profit
21
Q

positive outcome of oligopolies

A
  1. large firms enjoy economies of scale
  2. lower production costs
  3. increases abnormal profit
  4. reinvest in R&D
    5, higher innovation and invention
  5. dynamic efficiency gains
  6. increases choice and variety of products for consumers at lower costs
  7. increased social welfare
22
Q

negative outcome of oligopolies

A
  1. interdependence
  2. collusion (join profit maximisation)
  3. agree quotas and restrict output to industry profit max (MC=MR) level of output
  4. raises prices for consumers
  5. decreases consumer welfare
23
Q

efficiency in competitive markets

A
  1. profit maximising firm operates where MC=MR
  2. enjoys abnormal prfits
  3. attracts new firms to enter the industry
  4. increase industry supply
  5. reduce industry price
  6. lower firm’s AR and increases output towards where AR=MC (allocatively efficient) and where MC=ATC (productively efficient)
24
Q

market contestability increases productive/allocative efficiencies

A
  1. reduced barreies to entry or exit
  2. increased threat of competition
  3. firm behaves as if there is competition
  4. increase output and lower price where AR=ATC to prevent incentive of new firms to enter
  5. increases productive and allocative efficiencies
25
Q

why is competition policy necessary

A
  1. natural monopoly
  2. high barriers to entry
  3. no need to pass on lower unit costs to consumers
  4. abuse of monopoly power
  5. reduced consumer welfare
26
Q

why isn’t competition policy necessary

A
  1. where abnormal profits exist
  2. attracts new firms to enter
  3. increases competition
  4. incumbent firms must compete on price
  5. abuse of monopoly power cannot persist
  6. no need for competition policy intervention
27
Q

3rd degree price discrimination increases abnormal profit

A
  1. firms identity different groups of buyers with different PEDs and keep them separate at low cost
  2. produce output where MC=MR overall
  3. sets MC=MR in sub-groups
  4. charge higher price to inelastic PED and lower price to elastic PED groups
  5. increase abnormal profit compared to single price
28
Q

positive outcome of unequal distribution of outcome

A
  1. increases incentive to work
  2. increase supply of labour
  3. wages rates fall
  4. lower costs of production for firms
  5. increase profit
  6. increase investment in R&D
  7. raises dynamic efficiency gains for all
29
Q

negative outcome of unequal distribution of outcome

A
  1. lower effective demand at any given price
  2. demand curves for products more elatic
  3. lower consumer suplus possible
  4. lower social welfare
30
Q

progressive taxation, more equal lorenz curve

A
  1. higher income earners pay a higher proportion of income in tax and PA increases
  2. high income earners keep less whilst low income earners keep more of their earned income
  3. gap reduces
  4. more equal lorenz curve
31
Q

progressive taxation, trickle down

A
  1. lower income tax for high income earners
  2. increased absolute income to spend on goods and services
  3. increase in derived demand for lower income labour
  4. increase wages
  5. reduced income gap
32
Q

minimum wage benefits workers

A
  1. in monopsony
  2. increase in wage (to W2) and increase in quantity of labour demanded
  3. kinked curve W2XSL becomes supply curve of labour
  4. employer must pay wage rate to ALL workers
  5. W2XYMCL becomes marginal cost of labour
  6. more workers employed at higher wage rates
33
Q

minimum wage doesn’t benefits workers

A
  1. in PC
  2. increase in wages (to W2)
  3. excess supply of labour relative to firm’ demand
  4. increase unemployment
34
Q

minimum wage negative impact on firm

A
  1. increase in wage
  2. increase in variable costs of production
  3. shifts MC and ATC upwards
  4. lowers abnormal profit
35
Q

wage differential

A
  1. different jobs (pilot and cleaners(
  2. each worker brings in different marginal reveneu
  3. each worker brings in different productivity
  4. different MRPLs justify different wage rates
36
Q

positive of wage differential

A
  1. incentives workers to upskill to increase productivity
  2. lowers costs of production
  3. ATC falls
  4. increases firm’s profit
  5. dynamic efficiency
  6. increase consumer choice and variety of goods
  7. increases social welfare
37
Q

negative of wage differential

A
  1. if based on discrimination (e.g. gender)
  2. fall in demand for female workers in one market raises supply of female workers in the other
  3. fall in wage rate in other market
  4. all females paid less
  5. widens gender pay gap

econ chains of analysis (4 decks)

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