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A-level Economics > Theme 3 > Flashcards

Theme 3 Flashcards

1
Q

What is the principal agent problem?

A

Its a form asymmetric information where the agent acts in his/her own interests

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2
Q

What does a Not-For-Profit organisation maximise?

A

Social welfare

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3
Q

What is organic growth?

A

Internal growth, done by increasing output and products , using more R&D and technological improvements.

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4
Q

Internal growth is…

A

A long term but low risk strategy, with no debt so more sustainable.

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5
Q

What is vertical integration?

A

Is where a firm merges or takes over a firm in the same industry but at a different stage of production

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6
Q

What are the impacts of vertical integration?

A
  • Can increase efficiency and so reduce average costs
  • Firms gain more control over the market
  • Gain more certainty of production
  • May face diseconomies of scale
  • Can create barriers to entry
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7
Q

What is horizontal integration?

A

Is the merger or takeover of a firm in the same industry at the same stage of production

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8
Q

What are the impacts of horizontal integration?

A
  • Allows firms to grow very quickly
  • Disagreements may form between merged firms
  • Increase output very quickly
  • Can spread costs such as advertising
  • Can gain more control over the market
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9
Q

What is conglomerate integration?

A

Its the combining of 2 firms with no common connection

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10
Q

What constraints are on business growth?

A
  • The size of the market
  • The access to finance
  • The owners objectives
  • Regulation
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11
Q

What are demergers?

A

When a large firm is is separated into smaller firms

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12
Q

What are the reasons for demergers?

A
  • Lack of synergy
  • Have diseconomies of scale
  • Grow faster on their own
  • Raise finance
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13
Q

Impacts of demergers?

A
  • May eliminate diseconomies of scale
  • Change in job roles and job cuts
  • Lead to lower prices for consumers
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14
Q

What is profit maximisation?

A

When a firm produces at MC=MR to get the most profit

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15
Q

What is revenue maximisation?

A

When a firm produces at MR=0 allowing a firm to gain the most revenue possible and so the largest market share possible

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16
Q

What is sales maximisation?

A

When a firm produces at AC=AR allowing a firm to achieve rapid growth

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17
Q

What is profit satisficing?

A

Where profit is not the main objective at a certain time

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18
Q

If demand is perfectly elastic…

A

D=AR=MR

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19
Q

What are total costs?

A

They are the fixed costs and variable costs combined

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20
Q

What is the law of diminishing marginal productivity?

A

Its when producing more actually leads to a reduction in productivity

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21
Q

Where does the MC curve always cut?

A

The lowest points in the ATC curve (also AVC curve)

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22
Q

What are internal economies of scale?

A

When a firm becomes larger and average costs fall

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23
Q

What types of economies of scale are there?

A
  • Risk bearing
  • Financial
  • Managerial
  • Technological
  • Marketing
  • Purchasing
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24
Q

What are external economies of scale?

A

They’re economies of scale which occur from factors outside of the firm

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25
Q

What are diseconomies of scale?

A

When output passes a certain point that AC’s begin to increase

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26
Q

Why do diseconomies of scale occur?

A
  • Less control
  • Worse coordination
  • Lack/harder communication
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27
Q

What are normal profits considered?

A

A cost

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28
Q

When would a profit maximising firm shut down?

A

When they can’t cover their average costs

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29
Q

What is allocative efficiency?

A

When resources are distributed to the goods and services customers want, maximising utility P=MC

30
Q

What is productive efficiency?

A

Where a firm produces at the lowest point of the AC curve

31
Q

What is dynamic efficiency?

A

Where resources are allocated efficiency over time and the rate of innovation is optimum

32
Q

What is X-inefficiency?

A

Is when a firm is producing within the AC boundary, costs are higher than they should be.

33
Q

What are the factors of perfect competition?

A
  • Many buyers and sellers
  • Sellers are price takers
  • Free entry and exit
  • Perfect knowledge exists
  • Homogenous products
  • Firms are short run profit maximisers
34
Q

When can firms make supernormal profits in a perfectly competitive market?

A

Only in the short run

35
Q

What are the advantages or perfect competition?

A
  • Lower prices in the long run
  • Firms produce at the bottom of the AC curve
  • Short run supernormal profits can be used for investment
36
Q

What are the disadvantages of perfect competition?

A
  • Lack of dynamic efficiency in the long run
  • Small firms don’t benefit from economies of scale
  • Model rarely applies in real world
37
Q

What are the characteristics of monopolistic competition?

A
  • Short run profit maximisers
  • Firms sell differentiated goods
  • No barriers to enter and exit
  • Firms have some ability to set prices
  • Buyers and sellers have imperfect knowledge
38
Q

Advantages of monopolistic competition?

A
  • Consumers get a wide range of choice

- Short run super normal profits increase dynamic efficiency

39
Q

Disadvantages of monopolistic competition?

A
  • In the long run lack of supernormal profits can cause dynamic inefficiency
  • Firms aren’t as efficient as in perfect competition
40
Q

What are the characteristics of an oligopoly?

A
  • High barriers to entry
  • High concentration ratio
  • Firms are interdependent
  • There is product differentiation
41
Q

What is overt collusion?

A

It’s a formal agreement between firms which is illegal in the US,UK and EU

42
Q

What is tacit collision?

A

Is not formal but collusion is implied

43
Q

What are the costs of collusion?

A
  • Loss of consumer welfare due to higher costs
  • Less efficiency
  • Makes barriers to entry larger
  • Lower quantity supplied leads to less allocative efficiency
44
Q

What are the benefits of collusion?

A
  • Firms can save costs on things such a research
  • Large profits can be used for re-investing
  • Firms can benefit from economies of scale
45
Q

What is a cartel?

A

A group of firms which set prices eg. OPEC

46
Q

Types of price competition…

A

Price wars, Predatory pricing, Limit pricing

47
Q

Types of non-price competition…

A

Improvements in service, Special offers, Advertising and marketing, Brand loyalty

48
Q

Monopolies can be characterised by…

A
  • Make supernormal profits in the short run and long run
  • Very high barriers to entry
  • Price setters
  • Can use price discrimination
49
Q

What is the definition of a monopoly in the UK?

A

When a firm has at least a 25% market share

50
Q

What is monopoly power influenced by?

A
  • The size of the barriers to enter and exit
  • The economies of scale being achieved
  • The ownership of important resources
  • Amount of brand loyalty
  • The amount of competition and product differentiation
51
Q

What is price discrimination?

A

It’s when different groups of people are charged different prices

52
Q

Why do natural monopolies arise?

A

When there are very high fixed costs and very high set-up costs

53
Q

What is a monopsony?

A

It’s a single buyer in a market

54
Q

What are the drawbacks of monopsony power?

A
  • Force prices down so suppliers can barely make normal profits
  • Employees are likely to get lower wages however trade unions off-set this
55
Q

What are the advantages of monopsony power?

A
  • NHS can negotiate lower prices for drugs

- Consumers should get a cheaper price if suppliers are paid less

56
Q

What are the characteristics of contestability?

A
  • Entrants has free access to technology and production techniques
  • Very low customer loyalty
  • Varying number of firms
  • Firms likely to be allocative efficient so firms can’t take supernormal profits and leave the market
57
Q

Why is labour derived demand?

A

The demand for labour is related to the demand of what is being produced

58
Q

What is demand for labour effected by?

A
  • The productivity of the labour
  • The substitutes available for the labour
  • The number of firms employing in the market
59
Q

What is the supply of labour?

A

The number of workers willing to work at a given wage rate

60
Q

What is the supply of labour effected by?

A
  • The demographics of the population
  • The amount of immigration
  • The wage rate compared to benefits
  • What skills are required
61
Q

What is geographical immobility?

A

Obstacles which prevent the factors labour moving between areas

62
Q

What is occupational immobility?

A

Obstacles which prevent the factors of production changing their use

63
Q

What did Keynes say about wages?

A

That they were sticky downwards

64
Q

What effects the wages received for a job?

A
  • Formal education
  • Skills/experience
  • Gender and discrimination
65
Q

Effects on the labour market due to migration?

A
  • More competition for jobs
  • More skilled workers may improve productivity
  • It may depress wages for low skilled jobs
  • Could lead to more domestic workers unemployed
66
Q

How can the government intervene in the market?

A

By setting a minimum or maximum wage rate

67
Q

What is the elasticity of demand for labour?

A

The responsiveness of the demand for labour to a change in wage rate

68
Q

What is the elasticity of supply for labour?

A

The responsiveness the quantity of labour supplied to a change in wage rate

69
Q

How can the government intervene in a market?

A
  • Price regulation (RPI-X)
  • Profit controls
  • Quality standards
  • Performance targets
70
Q

What is regulatory capture?

A

When regulators start working in the interests of the firm

A-level Economics (6 decks)

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