Paper 1 - Economics Flashcards
(15 cards)
=What is specialisation?
The concentration on firms, individuals in producing a limited range of goods or services
What is division of labour?
It is a form of specialisation aimed at breaking down the stages of production. - aims to increase productive efficiency and quality of output.
Adam Smith + Free Market?
No government intervention - incentivises competition to drive innovation. Cons: Inequality, exploitation to smaller firms.
Adam Smith - the invisible hand theory - I a free market everyone does everything for their own self interest through prices of supply and demand which helps to allocate resources efficiently. - Shift out on PPF. - benefits society as a whole.
Fredrich Hayek + Karl Marx - Command Economy?
Regulated by the government - Improves equality, prevents exploitation. Cons: lacks innovation, reduced competition.
Fredrich Hayek - Command economy results in poor decisions based on limited knowledge whereas a free market has better decisions, uses knowledge from millions of people through prices, supply and demand.
Market failures:
1.Lack of information?
- Unintended consequences?
- Administrative costs?
- Distortion of price signals?
- Political pressure?
- Government might not know enough about the market to make the right decision.
- Policies may lead to effects that were not expected - and can be harmful.
- Government action can be expensive to run or enforce.
- Interfering with the market can stop it from working efficiently.
- Decisions may be made for political reasons, not economical ones.
- What is a public good?
- What is non-excludable?
- What is non-rivalrous
- A public good is non-excludable and non-rivalrous
- You cannot stop other people from using it
- One persons use does not reduce the amount available for others
What is Economies of scale and the different types?
Economies of scale is the cost-advantage for when a business/firm grows in size and produces more, as output increases, the average cost per unit falls.
Purchasing economies of scale - Buying in bulk at discounted prices
Managerial economies of scale - Larger firms may benefit from having specialized management teams, better coordination, and more efficient decision-making processes. This can result in cost savings and increased efficiency. - productive efficiency
Technical economies of scale - These occur when a firm can produce goods or services more efficiently as it increases its scale of production. Factors such as specialization of labour, better utilization of machinery, and improved production processes can lead to technical economies of scale.
Marketing economies scale - As firms grow larger, they often have more resources to allocate to marketing and advertising efforts. This can lead to lower advertising costs per unit sold and increased market presence.
Financial economies of scale - Larger firms benefiting from cheaper loans and better credit terms.
What are the different types of diseconomies of scale?
Managerial diseconomies of scale - firms too large, management structure can be complex, communication breakdowns and leads to bureaucracy increasing and higher costs.
Coordination + Control problems - difficult to maintain effective control and coordination among various departments.
Worker alienation - workers may feel disconnected from the companies goals and values = lower productivity + higher turnover rates
What is monopsony?
List characteristics too:->
Where there is one dominant buyer within the market.
- single buyer, limited substitute buyers, price maker, down-ward sloping curve, high barriers to entry.
This can apply for labour (labour monopsony), this is where the dominant buyer e.g (NHS) there is no competition due to public sector so they can obtain labour at a lower wage rate.
This can also apply for goods (product monopsony), e.g Retail supermarkets and farmer suppliers, Since farmers have few alternative buyers, the large processor can offer a low price, and the farmer has to accept or lose the sale.
This leads to supplier exploitation: farmers get squeezed, and their profit margins shrink.
What is a natural monopoly?
List characteristics of a natural monopoly too.
Draw out diagram with LRAC, LRMC, AR, MR.
Where one single firm can supply the entire market demand more efficiently than any other competing firms.
- Most efficient
- High upstart costs (refer to LRAC diagram relative to output)
- Very high barriers to entry
- low marginal costs of supply
- Nation interest e.g London underground
- Utilises transport (High inelasticity PED)
What is contestability?
List characteristics of a contestable market.
- High degree of potential competition within a market
- Low barriers to entry
- Perfect information
- No sunk costs
- No collusion
Evaluation points:->
Firms have patents and consumers may stick to brand loyalty.
What is perfect competition?
List characteristics of perfect competition:
Perfect competition is where no individual firm has market power, and all participants are price takers.
- large number of sellers, homogenous products, perfect information, free entry and exit, price takers, zero long run economic profit, perfect mobility of resources, non-collusive behaviour.
All firms take the same price at the market supply and demand equilibrium due to perfect information (this is referred as price takers) as a result in the short run with AR > AC supernormal profit would be made allowing these firms to profit in he short run. However, in the long-run, potential entrants may arise with this low-barriers to entry. This would cause the market supply and demand to shift out to S1 with new entrants taking a price taker. This as a result of making supernormal profit would result in zero economic profit where AC = MC = AR/MR. This is where firms make enough to be able to pay back running costs.
What is Allocative efficiency and Productive efficiency?
- Allocative efficiency is where supply equals demand, maximising society surplus.
- Achieved where P = MC
- Consumers - As a result, resources resources are allocated based on consumer preferences, which allows for lower prices for consumers, maximising consumer surplus’s by providing greater choice and greater quality, utility can be maximised.
- Producers - As a result, firms are able to retain or increase their market share which allows them to stay ahead of competition and increase supernormal profits.
- Productive efficiency is where there is a full exploitation of economies of scale (producing at the lowest possible cost)
- Achieved where MC = AC
- Consumers - By full exploitation of economies of scale, firms may be able to provide lower prices to consumers which may result in lower prices and an increase in consumer surplus.
- Producers - A firm is able to produce more at a lower average cost (AC) which has a result in selling at lower prices which means greater demand for their goods and services allowing a potential increase in supernormal profits and a grater gain of market share.
What is Dynamic efficiency and X efficiency?
- Dynamic efficiency is where there is re-investment of supernormal profits into innovation and research development to reduce LRAC.
- Achieved due to supernormal profit in the long-run.
- Consumers - Through investing for innovation and research and development this would allow new innovative products, consumers would be given more choice and may be presented with greater quality new products. As a result, this allows lower prices over time due to LRAC falling over time allowing a high consumer surplus and maintaining low prices to consumers allowing supernormal profits to be maintained and market share to be maintained.
- Producers - Firms are able to profit maximise in the long-run which over time would allow lower costs, lower costs would mean greater demand for consumers, and increased consumer surplus which allows high sales contributing to a gain in market share or retaining market share giving an advantage to stay ahead of rivals.
- X efficiency is where there is production with no waste.
- Achieved when there is production on the AC curve
- Consumers - This allows lower prices for consumers, resulting in a greater market share, consumer utility increased.
- Producers - Allows producers to sell at lower costs, this would allow an expansion in demand for their products creating an increase in their supernormal profits and increase in market share to compete better against other firms.
Why can monopolies and externalities not achieve productive and allocative efficiency?
Allocative Efficiency:
occurs when resources are allocated in such a way that they maximize total societal welfare, meaning that the price (P) reflects the marginal cost (MC) of producing a good. In a competitive market, firms produce where P = MC, so consumers get the maximum benefit.
However, monopolies set their prices higher than marginal cost (P > MC). A monopoly does this because they are the sole supplier in the market and can dictate prices. This leads to:
Underproduction: The monopoly produces less than the socially optimal quantity because higher prices discourage demand.
Consumer Surplus Loss: Consumers pay higher prices than they would in a competitive market, leading to a loss in consumer surplus (the benefit consumers get from paying less than what they’re willing to pay).
Deadweight Loss: The total societal surplus is not maximized, as some potential trades (where consumers are willing to pay more than the marginal cost of production) don’t happen. This creates deadweight loss.
Productive efficiency:
In a monopoly, while the firm might achieve some economies of scale (as it controls the entire market), it is often not motivated to minimize costs. Since it faces no competition, there’s less incentive to produce at the lowest possible cost.
The monopolist may not invest in innovations or cost-reducing technologies because there’s no pressure from competitors to improve efficiency. As a result, monopolies may not operate at the lowest average cost (AC
