Theme 4 - Making Markets Work Flashcards
(121 cards)
1
Q
What are the 4 types of market structures?
A
Monopoly
Oligopoly
Monopolistic Competition
Perfect Competition
2
Q
What is the main goal of a monopoly?
A
Profit Maximisation
3
Q
Do monopolies face high or low barriers to entry?
A
High barriers to entry
4
Q
How much market share correlates to monopolistic power?
A
25%
5
Q
How do economies of scale help monopolies maintain their market share?
A
It gives incumbents a cost advantage, so they can offer customers lower prices, thus deterring new entrants
6
Q
How does limit pricing work?
A
Firms will offer their goods below the production price, so new entrants cannot enter the market and gain profit
7
Q
How does an oligopoly differ from a monopoly based on the number of firms?
A
A monopoly usually has 1 firm whereas an oligopoly has more than 1
8
Q
What does it mean if firms are interdependent?
A
The actions of one firm affect the others
9
Q
How high are the barriers of entry into a monopolistic competition market?
A
Low barriers to entry
10
Q
Do firms have market power in monopolistic competition markets?
A
Firms have relatively low market power in these markets
11
Q
Are firms price makers or price takers in a market of perfect competition?
A
Price takers
12
Q
Is there a degree of product differentiation in a market of perfect competition?
A
No, all products are homogenous
13
Q
What is the main objective of perfectly competitive firms?
A
Short-run profit maximisation
14
Q
What happens to market saturation as firms make more profit in perfectly competitive markets?
A
New firms start entering the market due to the profit incentive meaning market saturation increases
15
Q
Why is supernormal profit only in the short-run?
A
New entrants will join the market, attracted by the extra profit, thus shifting supply outwards and reducing that supernormal profits
16
Q
Are there any economies of scale in perfectly competitive markets?
A
No
17
Q
Describe price skimming
A
This is when a new, unique product enters the market, so the price of it is set high before any new entrants create their own versions of the product
18
Q
Describe price penetration
A
This is when goods are initially offered at a low price to attract customers and build customer and brand loyalty
19
Q
What is a good with a high PED more likely to have?
A
A low price, because quantity demanded is more sensitive to price changes
20
Q
What is a contestable market?
A
These are markets that experience actual and potential competition
21
Q
What is productive efficiency?
A
This is where firms operate at the lowest point on their average cost curve
22
Q
What is hit-and-run competition?
A
This occurs when firms enter a market, take all the supernormal profits and then exit the market
23
Q
Why are firms in contestable markets constantly innovating?
A
This is so they don’t lose profits or market share with the entrance of new firms into the market
24
Q
How do low barriers to entry affect contestability?
A
Low barriers to entry increase contestability as more firms can enter the market and compete for profits and customers
25
Give an example of legal barriers to entry
Patents and Intellectual Property Rights (IPR's)
26
How does consumer loyalty affect PED?
Makes goods more PED inelastic
27
How do you calculate the concentration ratio of the 5 largest firms in a market?
Add together the market share of the top 5 firms
28
How does collusion affect price and consumer surplus?
It usually results in an increase in price and a decrease in consumer surplus
29
Why is there less likely to be collusion when there are many firms in a market?
It is easier for firms to get caught by regulatory bodies
30
How does tacit collusion differ from overt collusion?
Tacit collusion occurs when there are no formal agreements
Overt collusion involves formal agreements
31
What is the most famous example of a cartel?
The Organisation of Petroleum Exporting Countries
32
How does price leadership increase market stability?
If the dominant firm changes their price, all other firms will most likely follow otherwise they risk losing market share
33
Which UK industry are always in price wars?
The UK supermarket industry
34
What are sunk costs?
Unrecoverable costs
35
What is game theory used to predict in oligopolies?
The outcome of a decision of one firm when they have imperfect information about their competitor
36
What is the Nash equilibrium?
The optimal strategy for all firms in an oligopoly
37
How could supernormal profits yield positives externalities?
By investing these supernormal profits into R&D to increase productivity
38
How do supernormal profits benefit the government?
Through increased tax revenue
39
Define price discrimination?
This is a firm charges prices to different consumer groups for the same good/service
40
How does price discrimination benefit monopolies?
It maximises their profit potential
41
How does first degree discrimination differ from third degree?
First degree involves charging individual consumers different prices, whereas third degree involves charging consumer groups different prices
42
How could price discrimination be dangerous for firms?
They could face regulatory scrutiny from the Competition and Markets Authority (CMA)
43
What is allocative efficiency?
This occurs when resources are allocated to the best interests of society
44
What is marginal utility?
This is the extra satisfaction derived from consuming one extra unit of output
45
What is the law used to describe the demand curve of marginal utility?
The law of diminishing marginal utility
46
What is a monopsony?
The sole buyer in the market
47
What is likely to happen to wages when a firm has monopsony power?
A decrease in wages will most likely result, because the firm has bargaining power over employees
48
What is a natural monopoly?
This occurs when it is more efficient for only one firm to be in the market, as duplicating the infrastructure would be wasteful
48
Who is the main competition regulator in the UK?
The Competition and Markets Authority (CMA)
49
When is a merger likely to be prevented?
If the resulting firm creates a monopoly with too much market power
50
Define privatisation
This refers to the transfer of assets from the public sector to the private sector
50
Describe regulatory capture?
Occurs when the regulatory body is likely to work in favour of the firm
51
What is the main purpose of performance targets?
To improve social welfare
51
What is the red tape challenge?
This aims to simplify regulation for businesses
52
Describe the theory of creative destruction
This explains how firms must constantly innovate and improve productivity, else they risk being forced out of the market by more modern firms
53
How does regulation affect average costs of production?
It increases costs for firms
53
How does regulation affect consumer surplus?
It increases consumer surplus
54
When does market failure occur?
When the free market fails to allocate resources to the socially optimal level of output
55
What is the equation for total social costs?
Social costs = Private costs + External costs
56
How would you measure external costs from a graph?
Measure the vertical distance from the marginal social cost (MSC) and marginal private cost (MPC) line
57
Do the MPC and MSC lines move parallel to each other?
No, both lines diverge from each other as external costs increase disproportionately to output.
58
Define externality
A cost or benefit to a third party who is outside the market transaction
59
Where on a graph is the socially optimal point in a market?
Where MSC=MSB
60
How do prices cause movements or shifts in the demand/supply graphs?
Changes in price cause movements, not shifts
61
List the components of aggregate demand?
Consumer spending
Investment
Government spending
Exports - Imports
62
Which is the largest component of aggregate demand?
Consumer Spending
63
Define disposable income
Income left over for consumers to spend after taxes have been deducted
64
How do low interest rates encourage consumer spending?
Low interest rates encourage spending and investment whilst discourages saving
They also decrease payments on variable mortgages which increases disposable income
65
What are the only 2 things consumers can do with income?
Save it
Spend it
66
How is business confidence and capital investment related?
As confidence increases, so does capital investment
67
Is fiscal policy demand or supply side?
Demand side
68
When would the government initiate contractionary fiscal policy?
During economic booms, in order to ease inflationary pressure and prevent any periods of economic instability
69
How would the exchange rate affect the current account deficit?
A depreciation of the pound makes imports expensive and exports cheap, thus narrowing the deficit and boosting economic growth
70
How could the government intervene to reduce current account deficit?
By adopting protectionist measures, whereby tariffs against imports increase and British firms are subsidised to improve competitiveness
71
List 4 factors affecting aggregate supply
Cost of employment
Cost of raw materials
Government regulation
Migration
72
Which way would the SRAS curve shift given an increase in taxes?
Shift to the left
73
Which way would the SRAS curve shift given a decrease in the cost of raw materials?
Shift to the right
74
What type of fiscal policies does the government implement when inflation is high?
Deflationary fiscal policies
Contractionary fiscal policies
75
Give 2 examples of expansionary fiscal policies?
Increase in expenditures
Reduction in taxes
76
Describe crowding out
Occurs when an increase in government spending reduces the resources available for the private sector to use
77
Will fiscal policies have an immediate impact on the economy?
No, there is a time lag
78
What 3 things does monetary policy involve?
Interest rates
Money supply
Exchange rates
79
How often do the Monetary Policy Committee meet?
8 times a year
80
What is the base rate?
The interest rate set by the central bank to loan money to commercial banks
81
Do low interest rates encourage borrowing or spending?
Borrowing
82
What is the positive wealth effect?
When people spend more because they feel richer
83
Briefly describe how quantitively easing works
The central bank digitally creates more money, which it then uses to buy corporate and bank bonds, so that banks are more willing to lend money to consumers to stimulate more demand in the economy
84
Why might changing the base rate have no effect on the economy?
Banks may not choose to pass the base rate on to consumers in the form of higher interest rates
85
Why does inflation rise as unemployment falls?
As the economy grows, workers have more bargaining power as firms need more of them, so workers demand higher wages which increases the prices of goods and thus the overall inflation rate
86
What is a positive output gap?
Occurs when the actual level of output exceeds the potential level of output
87
Why does economic growth lead to a current account deficit?
British consumers will have a high tendency to import, which will surpass exports in a time of economic prosperity
88
What is the aim of supply-side policies?
To improve the long-run productive potential of an economy
89
How are training and education beneficial for firms?
They improve the productivity of the workforce
90
Give 1 benefit of privatisation
Firms now have a profit motive, so will find ways to cut costs and improve productivity which will increase output
91
Are supply-side policies better at reducing structural or cyclical unemployment?
Structural unemployment
92
Give 2 examples of interventionalist supply-side policies
Reforming the labour market
Improving infrastructure
93
What does a Keynesian shift of LRAS look like?
A curved LRAS line shifts to the right with a normal AD line
94
What does a classical shift of LRAS look like?
A vertical LRAS line shifts to the right with a normal AD line
95
Describe the difference between risk and uncertainty
Risk is the probability of damage, whereas uncertainty refers to a situation which may or may not happen
96
When do banks face risks?
When they loan money to consumers as they may not get that money back
97
Define economic shocks
Unforeseen events that may have a devastating shock on the economy
98
What was the biggest economic shock in the 2000's
The 2008 Global Financial Crisis
99
What is a futures contract?
Where a price of an asset is agreed today but delivery is at a later date
100
What is insurance designed for?
To decrease the risk of decisions
101
What is the role of financial markets?
To provide a place for investors and consumers to store their funds
102
How can financial markets benefit firms?
These markets can provide firms with funds to invest and expand production
103
What are equity markets?
Where the transfer of shares takes place
104
What are dividends?
This is a share of company profits that investors receive
105
What is the base rate?
An interest rate set by central banks to loan money out to commercial banks
106
What is a lender of last resort?
This is when the central bank has the ability to lend to banks in times of major crises or when a bank is about to go into insolvency
107
What is a 'run on the bank'?
This is when consumers all withdraw their money from the bank at the same time, out of fear
108
Which 2 regulators watch over the UK banking sector?
Financial Conduct Authority (FCA)
Prudential Regulation Authority (PRA)
109
What is the role of the FCA?
To ensure banks are protecting consumer interests
110
What is the role of the PRA?
Promotes the stability of banks
111
How was the 2008 recession caused?
By inflated asset-prices and too much risk by banks, as they gave loans to consumers with poor credit histories, who then therefore defaulted on their loans
112
Who went bankrupt in 2008?
The Lehman Brothers
113
How low did interest rates reach?
0.5%
114
How have banks changed since the crisis?
They have become more risk averse, imposing more checks on people trying to acquire loans
115
Define a moral hazard?
This is when banks purposely give out risky loans, because they know they are 'too big to fall' and the government will bail them out
116
Define systematic risk?
This is risk to the economy or the financial market as a whole
117
When does a market bubble occur?
When the price of an asset is expected to rise significantly
