Theme 3 Flashcards
(101 cards)
1
Q
What is the law of diminishing returns?
A
In the SR, when variable factors of production (labour) are added to a stock of fixed factors of production (land and capital), marginal product will initially rise, then fall
2
Q
Marginal product equation
A
change in total product divided by change in quantity
3
Q
Average product equation
A
total product divided by quantity
4
Q
Why is there an initial increase in product (LoDR)?
A
There’s an increase in labour productivity as specialisation occurs and new workers are learning. There’s an underutilisation of fixed FoPs so we employ more workers and they begin to be used.
5
Q
Why does product end up falling? (LoDR)
A
Marginal product and labour productivity begins to fall as there aren’t enough fixed FoPs for the increasing labour to marginal product falls
6
Q
What are the two types of costs?
A
Explicit and implicit
7
Q
What’s the difference between implicit and explicit costs?
A
Implicit is the opportunity cost and explicit is the things that require payment
8
Q
What are the fixed explicit costs?
A
rent, salaries, interest on loads, advertising, business taxes
9
Q
What are the variable explicit costs?
A
wages, utility bills, raw material costs and transport costs
10
Q
What is the average variable cost curve shaped like on the average cost curve diagram?
A
smiley
11
Q
What is the TFC shaped like?
A
straight horizontal line
12
Q
What is the AFC shaped like?
A
a line that descends slowly like the LAC for natural monopoly
13
Q
What are increasing returns to scale?
A
when percentage change of output is greater than the percent change in input
14
Q
What are constant returns to change?
A
When percentage change in output is equal to the percentage change in input
15
Q
What are decreasing returns to scale?
A
When percentage change in output is less than the percentage change in inputs
16
Q
What is the minimum efficient scale?
A
the lowest level of output required to exploit full EoS
17
Q
What are economies of scale?
A
As quantity of output goes up, cost per unit goes down
18
Q
What are internal EOS?
A
They occur within a business
19
Q
What are external EOS?
A
Occur outside a business but in the industry
20
Q
What is the acronym for external economies of scale?
A
Really Fun Mums Try Making Pies (risk-bearing, financial, managerial, technical, marketing and purchasing)
21
Q
What is risk-bearing eos?
A
As a firm grows, they spread their risk/opportunity cost over a larger range of output
22
Q
What are financial eos?
A
Firms can acquire lower rates of interest as they are seen as less risky
23
Q
What are technical EOS?
A
Specialist machinery. can be bought so productivity goes up
24
Q
What are managerial EOS?
A
Specialist managers are hired to quantity goes up
25
What are marketing EOS?
bulk buying advertising
26
What are purchasing EOS?
Buying in bulk at a discounted rate
27
What are the examples of external EOS?
- better transport, infrastructure, as businesses grow imports, roads and rail links do too which reduces cost
- suppliers are closer as it’s in their best interest to supply to firms so cost of transport goes down
- R+D firms move closer again reducing transport costs
28
What are diseconomies of scale?
When a business goes so large so their cost per unit increases
29
What are the reasons of diseconomies of scale?
- control (harder for managers to control larger workforce, productivity decreases, quantity decreases)
- communication and coordination - harder for. higher ups to communicate, takes time and productivity decreases
- motivation decreases if workers think they don’t have much value in a large firm to productivity decreases, decreasing output
30
What is economic profit?
considers both implicit(opp cost) and explicit costs(all other costs)
31
What is accounting profit?
Only considers explicit costs
32
What are the objectives of firms?
Profit maximisation, satisficing, revenue max, sales max, survival
33
What is profit maximisation?
Where MC=MR
34
Why do firms profit maximise?
for re-investment, dividends for shareholders, lower costs and lower prices for consumers
35
Why don’t firms profit maximise?
- they don’t know their MC/MR
- to avoid investigations from regulators which usually leads to increasing of costs through fines
- stakeholders could be harmed
- other objectives
36
What is profit satisficing?
sacrificing profit to satisfy as many stakeholders as possible
37
What is a stakeholder?
Someone interest in how a business is performing
38
What is the effect on shareholders, managers, consumers, workers, government, and environmental groups when it comes to satisficing?
- happy as they receive larger dividends
- happy as they receive more income
- unhappy as higher prices
- unhappy as cost cutting leads to lower wages
- unhappy due to effect on consumers and workers
- cost cutting usually leads to environmental neglection
39
What is revenue maximisation?
Where MR=0
40
Why does revenue maximisation occur?
- economies of scale (diagram)
- predatory pricing to drive out competitors
- principle agent problem
41
Why does sales maximisation occur and when?
At AC=AR as firm becomes as large as possible without making a loss
- could do it for EOS
- limit pricing at AC=AR which is lowest price point, limits competition as less firms join due to lack of incentive
- principle agent problem
- for future switching of objective
42
What is the objective of survival?
In the SR, when a firm newly joins a market, their goal may just be to survive a period of time and their goal may switch after that
43
What is the goal of the public sector?
This occurs at P=MC so they act on public interest
44
What are some legal barriers to entry?
Patents(firms having sole ownership over something)
licences and work permits
paperwork
excessive standards(costly)
45
What are some technical barriers to entry?
Start-up costs
sunk costs
Natural monopoly
46
What are some strategic barriers to entry?
Predatory pricing
limit pricing
heavy advertising
47
What is the last barrier to entry?
Brand loyalty
48
What are some barriers to exit?
- high redundancy costs
- penalties for leaving contracts early
- sunk costs
49
What are the types of efficiencies?
X-efficiency, productive, allocative, X-inefficiency, dynamic and static
50
What is X-efficiency vs inefficiency?
- minimising waste and it takes place on the AC curve
- there is waste and it is hard to reduce as it may mean reducing wages
51
What is productive efficiency?
- production on the lowest point of the AC curve
- full exploitation of EOS
52
What is dynamic efficiency?
Re-investment of LR supernormal profit into things like capital, tech and R+D, but it needs LR supernormal profit
53
What is allocative efficiency?
Society surplus is maximised, net social benefit is maximised, D=S, P=MC
54
What is static efficiency?
Allocative, productive and X occur at one production point whereas dynamic occurs over time
55
What is the benefits to consumers with allocative efficiency?
- resources follow consumer demand
- low prices
- max of consumer surplus
- high choice
- high quality of production as firms stay ahead of rivals
56
What is the producer benefits for allocative efficiency?
- retain/increase market share
- stay ahead of rivals
- increase profits
57
What is the consumer benefits for productive efficiency?
- lower prices
- high consumer surplus
- full exploitation of EOS
58
What are the producer benefits for productive efficiency?
- more production at a lower cost
- higher profit
- lower prices and greater market share
59
What is the consumer benefits for dynamic efficiency?
- new and innovative products
- lower prices over time
- high consumer surplus
60
What is the producer benefit for dynamic efficiency?
- LR profit max
- lower costs over time
- retain/increase market share
- stay ahead of rivals
61
What is the consumer benefits for X efficiency?
- lower prices
- high consumer surplus
62
What is the producer benefit for X efficiency?
- lower costs
- higher profit
- lower prices
- market share increases
63
What is a monopoly?
Where there is one seller dominating the market
64
What’s the difference between a pure monopoly and monopoly power?
Monopoly power is where a firm has 25% or more of the market share and a pure monopoly is where there is one seller
65
What are the characteristics of a monopoly?
- differentiated products
- firm is a price maker
- high barriers
- imperfect info
- firms profit maximise
66
What is price discrimination?
Where a firm charges different prices to different consumers for an identical good/service with no differences in cost of production
67
What are the three conditions for price discrimination?
- price making ability
- information to separate the market
- prevent re-sale
68
What is first degree price discrimination?
- CS is turned into monopoly profit as consumers are charged the exact price they are willing and able to pay
69
What is 2nd degree price discrimination?
When a firm has fixed costs and spare capacity that needs to be filled so they charge last minute low prices to pay those fixed costs, eg airports, rail companies
70
What is 3rd degree price discrimination?
Selling based on inelastic and elastic demand
71
What are the pros of price discrimination?
- more profit, dynamic efficiency
- some consumers benefit in 2nd degree and 3rd degree
72
What are the cons of price discrimination?
- alllocative inefficiency as it exploits consumers
- inequalities increase due to exploitation of low income consumers
- anti-competitive pricing
73
What are the characteristics of a natural monopoly?
- huge fixed costs
- ration for 1 firm to supply the market
- competition is undesirable and lead to a wasteful duplication of resources
74
What is an example of a natural monopoly monopoly?
Underground railways
75
What is the natural monopoly diagram shaped like?
costs on y axis and quantity on x axis
MR AND AR and lrac above lrmc
76
What are the cons of a natural monopoly?
- allocative inefficiency, consumers often pay more due to costs of production
- productive inefficiency
- x inefficiency
- inequality in necessity markets
77
What are the pros of a natural monopoly?
- dynamic efficiency which could lower costs in the LR
- greater EOS
- natural monopoly
78
What is the problem with the pro of a natural monopoly having dynamic efficiency?
LR profits may not go into business but instead into paying off debts.
79
What are the ways government intervention is used to control mergers or monopolies?
- price regulation
- profit regulation
- quality standards
- performance targets
80
What are some ways government intervention is used to promote competition and contestability?
- promotion of small businesses
- deregulation
- competitive tendering for government contracts
- privatisation
81
What are some government interventions used to protect suppliers and employees
- restrictions on monopsony power of firms
- nationalisation
82
How can government intervention be used to control mergers?
CMA investigation, if a merger creates a monopoly, CMA can block it or impose conditions such as selling parts of it
83
Explain how price regulation can be used to control monopolies.
Price caps, RPI-X which is inflation minus efficiency factor means that firms can only increase prices by that percentage
84
Explain how government intervention can be used to promote competition and contestability
- grants and subsidies, advice or tax relief for small businesses
- deregulation allows for lower barriers, in transport or finance
- competitive tendering - gov outsources services and firms compete to offer best deal, lowest cost firm wins
- privatisation - private firms are more efficient and profit driven
85
What does demand for labour depend on?
-wage rate
-productivity of workers
-demand for final good
-price of substitutes like capital
-non-wage costs, including NI,pensions etc
86
What are the factors affecting supply of labour?
Wage rate, working conditions, qualifications needed, barriers to entry like training, geographical location, working hours, non-wage benefits
87
What is a gig economy?
a labour market that has short-term contracts or freelance work as opposed to permanent jobs
88
What are the labour market issues?
Gig economy, minimum wage, wage inequality, skills shortages, automation and AI replacing jobs, post-brexit changes
89
What is wage elasticity of demand for labour?
How responsive demand is to changes in wages
90
Labour is more elastic if...
labour can be easily replaced by capital
labour is a large cost to the firm
91
What is a contestable market?
low barriers to entry and exit
no sunk costs
access to same tech
hit and run entry
short-term competition pressure on incumbent firms
92
What are the behavioural effects of a contestable market?
lower prices, improved efficiency to stay competitive, less profit maxing, increased innovation and customer service
93
What are the types of barriers to entry for contestable markets?
EOS, brand loyalty, high startup costs, legal barriers such as patents or licenses, predatory pricing
94
What are the barriers to exit?
Long term contracts, high redundancy costs, specialist equipment that cant be reused
95
What are some sunk costs?
Advertising, specialist equipment, research and development
96
Marginal cost equation
change in total cost/ change in quantity
97
Average variable cost
total variable cost/quantity
98
Average fixed cost
total fixed cost/quantity
99
average total cost
total cost/quantity
100
Total cost
total fixed cost plus total variable costs
101
What is income inequality
uneven allocation of income from employment, investment etc
