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Economics > Theme 3 > Flashcards

Theme 3 Flashcards

1
Q

Derived Demand

A

Demand that comes from the demand for something else

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2
Q

Marginal Product

A

The amount of output an additional worker produces

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3
Q

Where does profit maximise?

A

Where Marginal cost equals Marginal revenue (MC=MR)

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4
Q

Problems with working out MR

A

Often collaborative products, individual productivity difficult to measure. And many people set their own pay.

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5
Q

Factors influencing demand for labour

A

Wage rate (higher WR, lower demand), Demand for product (higher demand for product, higher demand), Productivity of labour,(higher productivity, higher demand(can be argued)), profitability of firms(higher profitability, higher demand), number of substitutes( cheaper machinery, lower demand), number of buyers of labour (less buyers, less demand)

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6
Q

Demand for labour

A

How many workers/employees an employer is willing and able to hire at a given wage rate in a give time period

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7
Q

Supply of labour

A

Number of workers able willing and able to work at a given wage rate

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8
Q

Factors effecting supply of labour

A

Wage rate, size of working population, migration levels, preferences for work, net advantages of work, relationship between work and leisure

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9
Q

Geographical mobility

A

The ability of workers within a specific economy to relocate to find a new or better employment

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10
Q

Occupational mobility

A

The ability to change individual occupational status

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11
Q

Occupational immobility

A

Lack of training/experience/skills to be able to transfer easily between occupations

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12
Q

Market clearing wage

A

The wage that brings the demand and the supply of labour into equilibrium

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13
Q

Elasticity of demand for labour in low skilled jobs

A

Very elastic as low skilled so many people able to do them. A change in wage will see a large change in demand

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14
Q

Elasticity of demand for labour in high skilled jobs

A

Higher paying jobs, labour supply inelastic as often require more skill meaning less people are able to do them. Therefore, a change in wage sees little change in demand

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15
Q

Benefits of a minimum wage

A

Reduces poverty, increases productivity, increases the incentive to accept a job, increases investment, counterbalance the effect of monopsony employers

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16
Q

Problems of increasing the minimum wage

A

Increases unemployment, cost-push inflation, black market, poorest don’t benefit( those on benefits), limited impact on relative poverty ( those just above the poverty line become relatively poorer), regional variations in wage, higher wages passed into consumers, increased number of workers on minimum wage

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17
Q

Monopsony

A

Market situation where there is only one buyer

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18
Q

Problems of a monopsony

A

Can lead to lower wages which increases inequality, worker pains less that MRP, have a degree of monopoly selling powers so can increase profits at the expense of consumers, care less about working conditions

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19
Q

How do trade unions help in a monopsony

A

Can cause higher wages, can be beneficial in a monopsony industry to help productivity by brining in new working practices

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20
Q

Concentration Ratio

A

The percentage of market share taken up by the largest firms

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21
Q

Normal Profit

A

The minimum profit required to keep factors of production in their current use in the long run

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22
Q

Abnormal Profit

A

Profit achieved in excess of normal profit (also known as supernormal profit)

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23
Q

Sub-normal profit

A

Profit which is less than normal (less than AC)

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24
Q

Characteristics of Perfect Competition

A

Large number of firms, homogenous products, freedom of entry/exit, firms are price takers, each producer supplies small proportion of industry output, consumers and producers have perfect knowledge of the market

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25
Q

Long-run supernormal profit in perfect markets

A

Firms have freedom of entry/exit into the market, increase of supply so a fall in price. Returns to normal profit

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26
Q

Perfect Market Short-run loss minimisation

A

In short run, if revenue is greater than variable cost you should continue to produce

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27
Q

Monopoly Characteristics

A

1 firm in the industry, only 1 product, high barriers to entry/exit, firms are price setters, producers supply fill proportion of the output, imperfect knowledge

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28
Q

Problems with Monopolies

A

High price, lack of choice, poor quality, inefficient

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29
Q

Origins of a Monopoly

A

Growth of firm, merger/takeover, legal means, acquiring patents

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30
Q

Monopolies are allocatively inefficient because…

A

The price is higher than marginal cost

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31
Q

Monopoly is productively inefficient because…

A

They don’t produce at the lowest point on the AC curve

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32
Q

Monopoly is X-inefficient because…

A

they have no incentive to cut costs.

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33
Q

Monopoly long-run supernormal profit

A

Continues to make supernormal profit, leads to unequal distribution of wealth

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34
Q

Advantages of a Monopoly

A

Benefit from economies of scale so may be more efficient, better research and development, if grown organically may be more efficient, natural monopoly (may be better to just have one firm in the industry)

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35
Q

Price Discrimination

A

Charging a different price to a different group of people for the same good

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36
Q

Conditions needed for Price Discrimination

A

Firms must operate in imperfect conditions, firms must be able to separate tickets and prevent resale, different consumer groups must have elasticities of demand

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37
Q

Advantages of price discrimination

A

Firms able to increase revenue, increased revenues can be used for R and D, some consumers benefit

38
Q

Disadvantages of Price Discrimination

A

Some consumers end up paying higher prices (allocatively ineffecient), decline in consumer surplus, increases inequality, administration costs, predatory pricing

39
Q

Oligopoly

A

Where a few large firms dominate the industry

40
Q

Feature of an oligopoly

A

Price may be stable, collusion potential, high concentration ratio, interdependence of firms, homogenous or highly differentiated goods, brand loyalty, non-price competition, high barriers to entry, game theory, Long run AC saucer shaped

41
Q

Advantages of an oligopoly for consumers

A

Price wars, high levels of R and D (improved dynamic efficiency), economics of scale, high supernormal profits can be taxes

42
Q

Disadvantages of an Oligopoly for consumers

A

Price fixing collusion, limits customer choice (high barriers to entry), persuasive advertising distorts the market, oligopolies can avoid paying tax

43
Q

Shadow Pricing

A

Companies claim higher profits in countries with less tax

44
Q

Conditions for contestable Markets

A

Access to all available technology, absence of sunk costs, low barriers to entry, low rate of customer loyalty

45
Q

Hit and run entry

A

When a business enters an industry to take advantage of temporarily high profits

46
Q

Sunk costs

A

Costs that can’t be recovered if a business decides to leave an industry - higher costs, less contestable markets

47
Q

Barriers to entry in contestable markets

A

Sunk costs, levels of advertising/loyalty, access to supply of goods, access to technology and skilled labour

48
Q

Methods to increase the contestability of markets

A

Removal of legal barriers to entry, force firms to allow competitors to use its network, ban predatory pricing, CMA investigate on the use of predatory power

49
Q

Characteristics of monopolistic competition

A

Large number of firms, firms have little control over price, few barriers to entry and exit, imperfect knowledge

50
Q

Organic growth

A

When a firm chooses to grow from within

51
Q

External growth

A

Growing the business by either merging or taking over another business

52
Q

Benefits of external growth

A

Allows consumer cheaper prices, allows companies to keep the best staff

53
Q

Problems of external growth

A

May cause principal-agent problem as workers aren’t interested in another company, may lose customers if other brand is poor

54
Q

Conglomerates

A

When a firm had a merger or a takeover with a firm who they have nothing in common with

55
Q

Fixed and Variable costs

A

Fixed costs don’t change with output, variable costs change with output

56
Q

Deserters

A

When two firms who had previously joined decide to split

57
Q

Economies of scale

A

The more you produce, the cheaper the product becomes

58
Q

Types of economies of scale

A

Production, Purchasing, Financial, Marketing, Managerial, Risk bearing

59
Q

Diseconomies of scale

A

When firms get too big, AC starts rising again

60
Q

economies of scale

A

The more the industry produces, the cheaper each product becomes

61
Q

Allocative Efficiency

A

Efficiency which markets are allocating resources - allocatively efficient for producing the right goods for the right people at the right price

62
Q

Productive efficiency

A

Where a firm produces at the lowest point on its AC curve

63
Q

X-inefficieny

A

When firms don’t have incentives to cut costs, so costs end up being higher than they should be

64
Q

Technical efficiency

A

When a firm is producing the maximum output from the minimum quality of inputs

65
Q

Dynamic efficiency

A

Measures the extent to which various forms of static efficiency improve over time

66
Q

Limit Pricing

A

Charge below the average cost of your rivals

67
Q

Predatory Pricing

A

Charge a price to force new rivals out

68
Q

Revenue Maximisation

A

Pricing in order to bring in considerable revenue

69
Q

Profit Maximisation

A

Pricing to satisfy the shareholders by making as much profit this accounting year

70
Q

Normal Pricing

A

Pricing to cover your ATC

71
Q

Price War

A

Constantly undercutting your equally powerful rival

72
Q

Sales Volume Pricing

A

Charging a price where AR=AC

73
Q

Non-price strategies

A

Competing against direct rivals, but on areas other than price

74
Q

Collusion

A

When two or more firms agree to manipulate the market for their own self interest

75
Q

Factors of collusion

A

Charge the exact same amount, agree not to compete against each other, agree not to compete on location

76
Q

Reasons to collude

A

Increase profits, protect market share, reduce costs such as advertising, avoid having to open new shops

77
Q

Price capping

A

When firms are only allowed to charge up to an agree maximum price

78
Q

Regulators

A

Government set up an independent body who regulate a natural monopoly

79
Q

Water Regulators

A

Ofwat - set targets that hold water companies to high standards

80
Q

Natural Monopoly

A

A natural monopoly exists because the cost of producing the product is lower if there’s just a single producer than if there

81
Q

Problems with a natural monopoly

A

Monopsony power - force producers out of business , same as monopoly problems

82
Q

Public Private Partnership

A

Contractors pay for the construction then rent the good back to the public sector

83
Q

Positives of a public private partnership

A

Government gets new infrastructure without paying taxes, expert building and running of the operation

84
Q

Negatives of Public Private Partnership

A

Profit focused firms so poorer quality, moral issues, government make a loss eventually (more taxes being paid)

85
Q

Profit capping

A

Capping the amount of supernormal profit a firm is allowed to earn

86
Q

Positives of profit capping

A

Incentive to keep quality high, reduces inequality, firms can’t exploit consumers, firms still make profits, firms forced to be x-inefficient

87
Q

Windfall tax

A

A one off additional tax on firms supernormal profits

88
Q

Deregulation

A

A reduction or elimination of government power in a particular industry

89
Q

Self regulation

A

When the industry sets up its own body to police itself

90
Q

Privatisation

A

When a state owned industry is floated on the stock exchange and sole to profit making investors

91
Q

Nationalisation

A

When private owned firms are taken into state ownership

92
Q

Breaking up a monopoly

A

When the government decides that a monopoly has become too big and forces it to sell off part of its business

Economics (8 decks)

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