Theme 3 Econ Flashcards
(139 cards)
1
Q
Revenue equation
A
Price x quantity
2
Q
Average revenue
A
Total revenue / quantity
3
Q
Marginal revenue
A
Change in total revenue / change in quantity
4
Q
What is a price taker
A
Accept market price and sell all units at the same price AR=MR
5
Q
What is a price maker
A
.Have some pricing power
.Downward sloping AR curve
6
Q
What is marginal revenue
A
The additional revenue a company earns from selling one more unit
7
Q
What is the revenue maximisation point
A
MR=0
8
Q
What is price elasticity of demand
A
% change quantity demanded / %change price
9
Q
Elasticity numbers for revenue
A
Elastic MR >0
Inelastic MR = NEGATIVE
10
Q
What is economics cost
A
Oppertunity cost of production
11
Q
What are a buisnesses cost
A
Cost = payment firms must make to use factors of production
12
Q
What is accounting cost
A
Actual expenses + depreciation of capital goods
13
Q
What is economic cost
A
Cost of using economics resources + oppertunity cost
14
Q
What is a fixed cost
A
.do not vary as level of output changes (short run)
.has to be paid wether the company hits sales target or not
.the higher the fixed costs the higher output must be to break even
15
Q
What is a variable cost
A
.cost directly related to production
.an increase in short run output will increase total variable cost
16
Q
What is variable cost determined by
A
The marginal cost of producing an extra unit
17
Q
Average variable cost equation
A
Total variable cost/ output
18
Q
Average fixed cost equation
A
Total fixed cost/output
19
Q
How do Factors of production in the short run work for buisnesses
A
.short run at least one factor of production is fixed
.fixed factors leads to businesses constraints
20
Q
Factors of production in the long run for buisnesses
A
All factors and variable can change
.firms can benefit from economies of scale
21
Q
What is short run diminishing returns
A
As more units of variable input are added to fixed land and capital the total output first rises then decreases
22
Q
What is marginal cost
A
Total expense of producing an additional good
23
Q
Marginal cost equation
A
Change in total cost / quantity produced
24
Q
A
25
What are economies of scale
.When long run average costs decrease
.aim to reduce cost over range of output
26
Fixed cost long run relationship to diminishing returns
No fixed costs in long run so diminishing returns cannot exist
27
What is the minimum effieicent scale
Is the scale of output where internal economies of scale have been fully exploited
28
What are constant returns to scale
When an increase in scale of factors of production lead to a proportionate increase in output
29
What are increasing returns to scale
Increase scale of factors of production lead to more than proportionate increase in output.
30
What are the factors that effect economies of scale
Managerial,financial,commercial,technical and marketing
31
What is a diseconomies of scale
Where there is decreasing returns to scale
.when LRAC increases this leads to diseconomies of scale
.increased unit cost of supply
32
factors that effect diseconomies of scale
Organisational factors or operational factors and external factors
33
Examples of organisational factor D.O.S
Communication breakdown, loss of control or reduced motivation
34
Example of operational factors that increase DOS
Allocative inefficiency, quakity control or coordination issues.
35
External factor complexity example
Increased regulation, market saturation, supply chain issues
36
What does D.O.S mean for buisnesses
Past optimum size
Reduced total profits
inefficiency
Loss of competitivensss as need to charge more
37
What is an external economy of scale
When individual firms benefit from an industry as a wholes growth.
38
Example of external economies of scale (London buisnesses)
Buisnesses may benefit from better transport,promotion from government and connection which lowers unit cost for that buisnesses
39
What is profit
Reward for risk taking
40
Profit equation
Revenue - cost
41
What is the break even point
Where total revenue = cost
42
What is Profit maximisation
Difference between total revenue and total cost
43
What is the profit maximising point
MC=MR
44
What is normal profit
The minimum level of profit required to keep factors of production in use
45
Total cost equation
Cost + normal profit
46
What is supernormal profit
Profit above 0 or above normal profit
47
When do firms earn profit
When TR=TC
48
When should firms stay open when operating at a loss
When price > variable cost
.as long as firms cover variable cost it should continue production
49
What is effiecieny
Efficiency is concerned with the relationship between scarce inputs + outputs
50
Dynamic effiecieny
How resources are allocated over a period of time
51
Productive efficiency
Lowest point on the AC curve. Unit cost is minimised
52
X-in effiecieny
When a firm doesn’t operate at lowest cost per output
53
What is allocative effiecieny
Maximising welfare and consumer preference as opposed to producing at maximum output
54
What point on a graph is allocativley effieicent
P=MC
55
Assumptions of perfect competition
.homogoneous products
.large numbers of buyers and sellers
.no info gaps
.all firms have access to factors of production
.free entry and exit into the market
.ealstic demand curve
56
Assumptions of monopolistic competition
.product differentiation
.some price setting power
.low market concentration ratio
.High elasticity
,low barriers to entry and exit
57
Oligopoly charectorisits
.market dominated by a few large firms
.high market concentration ratio
.firms supply branded products
.strategic behaviour is key
.barriers to entry + exit
58
What is strategic interdependence
It is that firms output and price determinism decisions are influenced by behaviour of competitors
59
Why are oligopolies at high likley hood of collusion
High rates of strategic interpdendance
60
What is concentration ratio
Measures proportion of market dominated by largest firms
61
When does a oligopoly exist in terms of market concentration
When top 5 firms account for 50% of the market sales
62
What is a duopoly
Edge of a oligopoly towards monopoly
.when 2 firms dominate the market
63
What is a cartel
Businesses who recognise interdependence and act together to profit maximise
64
Benefits of collusion
.lowers cost of competition
.decreases uncertainty
.increases profit
.increases producer surplus
65
Factors that allow for collusion
Weak regulation
Strong brands so low elasticity
Trust between colluders
Colluding firms have a argue market share
66
Example of collsuiin(opec cartel)
Petrol exporting cartel
Generates 45% of oil
Form of overt collusion as they fall under no jurisdiction so can’t be stopped
67
What is overt/explicit collusion
A form of explicit collusion between firms who openly agree to coordinate their actions (illegal)
68
What is tacit collusion
When firms have no formal agreement but act on others behaviour through monitoring
69
Examples of tacit collusion
Price leadership and price followers when one powerful firm sets the price and others follow to maximise profit for all
70
Cons of collusion
Efficiency is decreased
Consumer welfare falls as price increases
71
Types of price competition
Price war
Predatory pricing
72
What is a price war
Occours in markets where non price competition is weak. Price cutting leads to retaliation
73
What is predatory pricing
When an established firms lowers there prices below average cost to force other new entrants into the market to operate at a loss and force them out of the market.
74
Factors of contestable market and what is it
Low barriers to entry and exist
However there are a few dominant firms
75
Assumptions of a contestable market
.firms are short run profit maximisers
.perf knowledge of industry
.branded and homogoneous goods
.only long run normal profits
76
What is a hit and run entry and when is it possible
When barriers to entry and exit are low
.when existing firms price above cost
.firms quickly enter a market for profit then exit
77
What is a sunk cost
A cost that cannot be recovered when a firm leaves an industry
.sunk costs act as a barrier to entry
78
Eval points for contestable markets
.disruptive company entry can change market dynamic
.threat of new competition leads to interdependence
.highly contestable markets resemble perfect competition
79
Assumptions of monopoly markets
One firm in the industry
Barriers to entry prevent new entrants
Short run profit maximisers
80
Monopoly numbers (power percentage)
If a firm has 25% or more market share it’s a monopoly
If a firm has 40% or more it’s a dominant firm
81
Sources of monopoly power
High product differentiation equals higher monopoly power
High barriers to entry
82
What is price discrimination
Buisnesses charging different prices for different consumers for the same product
83
What is 1st degree price discrimination
Charging different prices for individuals unit purchase
84
What is 2nd degree price discrimination
Price varying by quantity sold e,g bulk discount or peak or off peak timing
85
What is 3rd degree price discrimination
Prices changes to groups based on their willingness to pay e.g student discount
86
Conditions to market power (3 reasons )
Sufficient market power
Ability to seperate groups
Sufficient market information
87
What is dynamic pricing
Changing prices varying at different times
88
Evaluation point for 3rd and 2nd degree price discrimination
Business benefit and consumers benefit as charging high price allows buisnesses to cover fixed costs allowing buisnesses to to function
89
Company example of using dynamic-surge pricing
Uber - when demand is more than supply raise prices
90
What is a natural monopoly
Exists in a market if a single firm can serve the market at a lower cost than multiple firms
.very high fixed costs
91
Does a natural monopoly make profit
If run privately for profit there is supernormal profit P>C
If run publicly as a provision of goods no profit so government covers debt as C>P
92
Cons of monopolies
Increased prices at decreased output
.x-inefficient in a sense of competition
93
What is a monopsony
Exists when there is only one buyer of the market
94
What is demand for labour
Demand for labour shows how many workers an employer is willing and able to hire in a given wage rate at any point
95
Factors effecting labour demand
.productivity of labour demand
.wage cost
.demand for product
.susbsititues for labour
96
What is real wage
Wage adjusted for inflation
97
What is income effect
As wages increase spending increases
98
Oppertunity cost of labour
As wages increases cost of not working increases
99
Substitution effect of labour
Increased wage increases opportunity volt of leisure
100
What is negative income effect
As wages increase working hours decrease
101
Eval for supply of labour
Hours in most jobs aren’t as flexible to your own desire
102
Factors effecting supply of labour
.barriers to entry of a occupations
.career progression
.job security and social factors
.mobility of labour social and geographical
103
What is elasticity of labour
Extent to which labour supply responds to change in wage rateb
104
What are determinants of labour supply
Nature of the job
Skill requirement
Qualifications
Vocational nature of work
105
What does excess supply of labour cause
Unemployment
106
What does excess demand for labour cause
Labour shortage and higher wages
107
Why do wage rates differ
Compensation differences
Different skil levels
.different levels of labour productivity
.trade union membership
108
What do trade unions try and achieve
Use collective bargaining power to protect members
109
Key roles of unions
Protecting and improving living standards of members
Promoting improved working conditions
Better workplace training and education
110
When are trade unions effective
When there is inelastic demand for labour
When union has high power and lots of members
When the market is profitable
111
Union effects in typical markets
Wage rates increase but employment of jobs decreases as there’s excess supply
112
Union effects in monopsony markets
To remain efficient AC
113
What is labour market discrimination
When employers use metrics other than productivity to judge attractiveness for a role for example gender or race
114
Geographical mobility
Ability of workers to move between different locations for employment oppertunities
115
Occupational mobility
The ease at which people can move jobs
Is key as it allows workers to adapt to changing labour markets
116
Policy solutions to help geographical mobility
Invest in affordable housing
Increase transport infrastructure
Increase regional development
117
Policy solutions to help occupational obility
Invest in all age learning
Career counselling
Strengthen anti discrimination
118
Government aims of intervention
Protect consumers and increase efficiency in markets
119
What is price intervention
When prices are set by non free market forces
120
What do regulators do
Monitor and regulate price to stop exploitation
Fine or take licenses away from buisnesses operating below standard
Open up markets - remove barriers to entry
121
What is price capping (RPI-X)
Price capping stops firms from disproportionately raising price above PRI-X
122
Components of RPI-X
RPI = inflation
X = efficiency saving
123
Points for price capping
.cut in real price level stops exploitation and helps real income
.helps firms strive for efficiency
.stops monopoly’s making excess profit
124
Cons for price capping
Large number of job losses
Distorts price mechanism
Regulator may not have perfect info
Capped profit = less investment
125
Who investigates mergers and investigations
THE competition market authority
126
Why do cmo intervene
Increase price hurts consumer surplus
Mergers are likely to decrease competition
Mergers can lead to increased price and decreased innovation
127
Types of supply side reforms
Privatisation
Deregulation
Toughening competition policy
128
What is privatisation
When ownership of a buisnesses is transferred from state to private sector
129
Why would a country privatise
Increased effieicent through increased incentive for cost reduction
RPI-X balance between protecting efficiency and consumers
130
Arguments for privatisation
Raise gov revenue from taxing business
Increased economic efficiency
Less government burden supporting operation through subsidies
Investment into business may lead to increased quality
131
Arguments against privatisation
Profit motive = higher cost for consumer
Monopoly control can lead to exploitation of power
132
What is competitive tendering
When a firm bids for the right to run a service
Allows private companies to run public sector buisnesses for some years
133
What is the private finance initiative
Private firms fund infrastructure development and cost is recouped by government to use private expertise
134
Who makes decisions in businesses
Businesses owners,shareholders,managers,directors and some workers have a say
135
Business objectives
Market power
Growth
Profit revenue and share price
Social aims
.profit maximisation
.revenue maximisation
136
Divorce of ownership and control
Shareholders want most profit whereas managers may not support this so can create business conflicts
137
Productive efficiency point
MC=AC
138
Allocative efficiency
P=MC
139
Sales maximisation
Ac=Ar
