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Economics A Level > Theme 3 > Flashcards

Theme 3 Flashcards

(73 cards)

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1
Q

Derived demand

A

The demand that comes from the demand for something else

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2
Q

When does the profit maximisation occur

A

When MC=MR

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3
Q

Evaluation points for marginal revenue product

A
  • MRPL is taken as the basis for the labour demand curve
  • measuring labour efficiency
  • relatively easy to measure productivity in construction industry and in-call-centres
  • much harder to measure productivity in consultancy
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4
Q

Factors influencing marginal revenue

A
  • the wage rate (the lower the demand)
  • the demand of products
    -productivity of labour
  • profitability of firms
  • substitutes
  • number of ‘buyers’ of labour
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5
Q

Labour of supply

A

Defined as the number of workers willing and able to work, multiplied by the hour they are willing and able to work

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6
Q

Factors influencing the supply of labour

A
  • wage rate
  • size of the working population
  • migration
  • people’s preferences for work
  • net advantages of work
  • work and leisure
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7
Q

Income effect ?

A

The ride in income as wages rise but with the potential of individuals reaching a target income

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8
Q

Substitution effect?

A

As wage rises the opportunity cost of leisure time increase providing an initiative to work

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9
Q

What’s the type of demand in labour market

A

Derived demand for a product or service

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10
Q

Monopsony

A

One buyer, multiple sellers
Has buying or bargaining power in one or more markets
Maximise profit by negotiating lower prices from suppliers

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11
Q

What might monopsony power be used to do

A

Bring down the average and marginal costs for a firm
Results in a lower equilibrium price
Increases supernormal profit

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12
Q

Strategies to counter monopsony power

A

New regulators - grocery adjudicator
Competition policy - block mergers and takeovers
Producer co-operatives as a counter balance to monopsony buyers
Tougher laws on standards

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13
Q

What are big businesses told to do (payments)

A

Speed up their payments to smaller firms as they are more dependant on this income

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14
Q

How to calculate the concentration ratio

A

Top 3 / Total Number x 100

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15
Q

What can trade unions do?

A

They can bargain wages above the competitive equilibrium

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16
Q

Reasons not to move ( geographic immobility)

A

Transport
Family and social ties
Financial costs
Cultural and language barriers

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17
Q

What has the government done to increase geographic mobility?

A

Housing subsidies- the government offers subsidies to key workers
Increase transport e.g. trains
Move jobs outside of London
Work from home

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18
Q

What are some barriers to geographic mobility

A

Skills
Training
Qualification
Education

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19
Q

General factors of labour mobility

A

Minimum wage
Labour market regulation
Trade unions
Zero-hour contact

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20
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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21
Q

Subnormal profit

A

The profit which is less than normal

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22
Q

Supernormal profit

A

Profit achieved in excess of normal profit

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23
Q

Characteristics of perfect competition

A

Large number of firms
Products are homogeneous (identical) - consumer has no reason to express a preference for any firm
Freedom of entry and exit into and out of the industry
Firms are price takers
Consumers and producers have perfect knowledge about the market

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24
Q

Examples of near perfect competition

A

Food markets
Agriculture
Betting (horse racing)

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25
Monopoly -pure
Where only one producer exits the industry
26
Origins of monopoly
Through growth of firms Through merger or takeover Through acquiring patent or license Through legal means
27
Critisms of monopoly
Higher prices Quality gets worse Lower output supernormal profit - long run Productive inefficiency is always at the lowest point of the AC curve. Lowest average curve X-inefficiency Allocative efficiency - where price = marginal cost Dynamic efficiency
28
Evaluation for monopoly
Some companies produce high quality e.g. apple Economies of scale
29
Benefits of a monopoly
Economies of scale Research and development- investment A firm may gain monopoly power if more efficient
30
Price discrimination
Involved charging a different price to different groups of people for the same thing
31
First degree price discrimination
Involves charging consumers the maximum price they are willing to pay
32
Second degree price discrimination
Involves charging different prices presenting of the quality used
33
Third degree price discrimination
Involves charging different prices to different groups of people
34
Benefits of inequality
Creates incentives for people Encourages risk and investment
35
What are the conditions necessary for price discrimination
A firm must operate in imperfect competition, must be a price maker with downwardly sloping demand curve The firm must be able to separate markets and prevent resale Must have different elasticities
36
Costs of inequality
Underconsumption of merit goods, overconsumption of de-merit goods Decreased quality of life Increased rates of crime
37
Disadvantages of price discrimination
Some consumers will pay higher prices - might be the poorest Define in consumer surplus
38
How to reduce inequality
Progressive tax system Benefit system Greater investment in education
39
Disadvantages of price discrimination
Some consumers will pay higher prices - might be the poorest Define in consumer surplus
40
Advantages of price discrimination
Firms will be able to increase revenue -> can be used for research and development
41
Oligopoly
Competition between few -> may be a large number of firms in the industry but is dominated by a small number of very large firms -> concentration ratios - the proportion of total market sales held by the top 3,4,5 firms
42
Features of an oligopoly
Prices may be relatively stable across the industry -kinked demand curve Potential for collusion Behaviour of firms affected by what they believe their rivals might do - interdependence of firms Good could be homogenous or highly differentiated Branding and brand loyalty may be potential source of competitive advantage Non price competition may be prevalent Game theory can be used to explain same behaviour AC curve may be saucer shaped - minimum efficient scale could occur over large range output High barriers to entry
43
Concentration ratio for an oligopoly
As a rule of thumb an oligopoly exists when the 5 firm concentration ratio
44
Barriers to entry in a oligopoly
Economies of scale Vertical integration Brand loyalty Set up costs Control of important platforms Expertise, good will and reputation Patent protection
45
Problems with economic sustainability
Subsidies will run out Opportunity costs Time lags More unknown costs
46
An example of external growth
Merger or takeover
47
Advantages of becoming a bigger firm
More money to reinvest Opportunities for more innovation Increased demand for products or services Can influence market price Attract investors
48
The types of mergers
Backward vertical Forward vertical Horizontal Conglomerate
49
What’s backwards vertical integration
When a company buys another company that supplies the products or services needed for production
50
Forward vertical integration
Involves acquiring a business further up the supply chain, guaranteeing a place to sell your products
51
Characteristics of monopolistic competition
Large number of the firms in the industry May have some element of control over price due to the fact that they are able to differentiate their product in some way from their rivals - products are therefore close but not perfect substitutes Entry and exit from the industry is relatively easy - few barriers to entry and exit Consumer and producer knowledge is imperfect
52
Demergers
The separation of a large company into two or more smaller firms, often the result of an earlier merger
53
Reasons to merge
Less money spent on paying employees Invest more money into other things Greater market share (clients) Increasing revenue
54
Characteristics of oligopoly
Few dominant firms Interdependence Barriers to entry Non price competition
55
Why would you choose to de merge
So you don’t have to share profit Discourages a takeover Doesn’t work culturally Better off returning to organic growth
56
Monopolistic competition
Products are differentiated Imperfect competition Branding
57
Conglomerates
When a firm has a merger or takeover with another firm whom they have nothing in common with
58
Economies of scale
When your average costs start to fall
59
What are differentiated products
Product quality Product performance Branding Functioning/reliability Provenance of product Quality of after sales service
60
Internal economies of scale
The more you produce the cheaper the product becomes Production/ technological Purchasing Financial Marketing Managerial Risk bearing
61
What the different scales on the economies of scale graph mean
Return to scale - AC is falling Minimum efficient scale - lowest point on ac curve Diseconomies of scale - when average costs rise again
62
Contestable markets
Firms behaviour influenced by the threat of new entrants to the industry
63
What can cause average costs to go up in large firms
Too many employees Machines breaking down Poor quality staff / managers Availability and raw materials cost Poor co-ordination and communication Office politics
64
What can cause average costs to go up in large firms
Too many employees Machines breaking down Poor quality staff / managers Availability and raw materials cost Poor co-ordination and communication Office politics
65
Characteristics of contestable markets
No barriers to entry or exit No sunk costs Firms may deliberately limit profits made to discourage new entrants - entry limit pricing Firms may attempt to erect artificial barriers to entry Over capacity Aggressive marketing and branding strategies to tighten up the markets Potential for predatory pricing
66
Solutions for average costs increasing in large firms
Better communication- more meetings Smaller groups - easy to manage Levels of output - have better supervisors New machinery
67
Characteristics of monopsony
Multiple sellers and one buyer Has buying or bargaining power in one or more markets Means they can exploit bargaining power with suppliers to negotiate lower price The reduces costs of purchasing power reduces costs and maximises profits
68
Characteristics of monopsony
Multiple sellers and one buyer Has buying or bargaining power in one or more markets Means they can exploit bargaining power with suppliers to negotiate lower price The reduces costs of purchasing power reduces costs and maximises profits
69
Benefits to firms (monopsony’s)
Allows firms to achieve purchasing economies of scale leading to lower long run average cost Lower purchasing costs bring about height per supernormal profits and increased returns for shareholders Extra profit (producer surplus)
70
How might monopsony damage consumer welfare?
Businesses may use their buying power to squeeze lower prices out of supplies Example was battle of milk farmers - covers the average cost of milk Not paying a ‘fair price’ Consumers may have less choice or higher prices in long run Monopsony employers
71
Strategies to counter monopsony power
Creating new regulator such as the grocery adjudicator Competition policy might block some mergers and takeovers Establishing producer co operatives as a counter balance to monopsony buyers Tougher laws Using technology for suppliers
72
Natural monopoly
It is more efficient for one firm to be the sole provider of a specific good or service due to economies of scale
73
Natural monopoly
It is more efficient for one firm to be the sole provider of a specific good or service due to economies of scale

Economics A Level (9 decks)

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