tricky topics Flashcards
(12 cards)
profit satisficing
Firms don’t always maximize profit—they aim for an acceptable threshold.
Common in large firms with separated ownership and control (e.g., shareholders versus managers).
Contrasts with traditional neoclassical economics, which assumes profit maximisation
reasons businesses may choose satisfying over profit max
- divorce ownership and control
- managerial objectives
- prevent entry of firms- limit pricing
- satisfy shareholders- attract investors raise finance
-Bounded rationality: In complex markets, firms often don’t have complete data to calculate the true profit-maximizing strategy. Under bounded rationality, they settle for a “good enough” outcome that reduces risk.
Separation of Ownership and Control: In large corporations, shareholders own the firm, but managers run it. They might have slightly different goals to equity holders in a business
satisfying diagram
price at MC= AR
- still making profit
depends on the firm
possible effects of satisfying on economics efficiency and consumer welfare
closer to P=MC - max allocative efficiency and consumer welfare
loss ofDE due to loss SNP
Allocative efficiency: Satisficing involves setting a lower price. In theory this leads to an expansion of demand, price is closer to marginal cost – leading to an improvement in allocative efficiency. Consumer surplus increases.
Dynamic efficiency: Supernormal profits are lower which reduces the funds available to finance research and development. This might limit gains in dynamic efficiency.
collusions in oligopoly
Key aims of price collusion in an oligopoly
Maximise Joint Profits: By agreeing to fix prices (at a level above competitive equilibrium), firms act like a pure monopoly, reducing output and increasing prices to maximize collective profits.
Reduce Price Competition: Collusion helps avoid destructive price wars that reduce supernormal profits for members.
Create Barriers to Entry: Incumbent firms can deter new competitors by maintaining high prices, while threatening lower prices if a new entrant appears (known as limit pricing
LEADS TO A WELFARE LOSS
consequences of price collusion for eco efficiency
- higher prices - loss allocate efficiency, consumer surplus falls affordability reduces
-Allocative efficiency: Colluding firms set prices above marginal cost to maximize joint profits, leading to underproduction relative a competitive market. Causes a deadweight welfare loss –hits lower income families hardest- REGRESSIVE
X-inefficiency: Firms in collusive arrangements often lack the competitive pressure to minimize costs or innovate. Without the threat of being undercut, they might maintain higher-than-necessary costs and pass them on to consumers.
price discrimination
Price discrimination happens when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs of supply.
Examples include social tariffs - discounted prices offered to vulnerable or low-income groups to ensure access to essential goods or services.
They represent a form of third-degree price discrimination aimed at promoting affordability and social equity.
Price discrimination normally works in the interests of firms with market power – but it is important to evaluate possible benefits for consumers too.
benefits of price discrimination for consumer welfare
- higher consumer surplus, higher profits reinvested into improving quality of product, increase in equality if price based on price consumers can pay - smaller% income for Lower income -social tariffs or students increasing welfare
Effective demand and market access: Allows people with lower income to enjoy goods and services they might otherwise forgo, reducing fuel poverty and the digital divide without harming others. (a pareto improvement in welfare)
Progressive impact on consumer welfare: For example, life-saving drugs / vaccines priced lower in developing countries - expands access to healthcare where affordability is a barrier.- gilead
helps keep businesses afloat- avoiding job losses- social benefits
monopsony power in labour market
Monopsony power in the labour market refers to a situation where a single employer (or a few dominant employers) has significant control over the wages and employment conditions of workers, due to limited competition for labour.
There is an asymmetry of bargaining power between employer and employees
A monopsonist can pay less than the competitive wage because workers have few alternatives.
The gap between profits and worker earnings often increases.
Low wages increase the risk of working poverty. - in work but don’t have enough to move above poverty line
diagram
amazon= monopsony
MRP- revenue of selling output for next worker employed
AC- labour supply, cost per labour employed
MC> AC- To employ more workers must bid wage up therefore everyone receives higher wages , thereforeThe gap between profits and worker earnings often increases?
employ up to Mrp=MCl
wage is off the AC curve
leading to wage gap, exploitation employed workers
ways in which monopsony power employers may be addressed
Raising the minimum wage: Legally enforced wage floor, preventing monopsonistic employers from paying below a certain level. Reduces wage suppression and improves earnings without major job losses when set appropriately.
Strengthening Trade Unions: Unions give workers a collective voice, helping them negotiate better wages and working conditions. Might be accompanied by skills training, better childcare to reduce barriers that trap people in low-paid work.
less than 25%
deregulation- increased competition / privatisation
more childcare, education more choice of employment
SAT, min wage
16% of jobs (approximately 4.5 million people) were compensated below the Real Living Wage in April 2024.
As of April 2025, the NMW for workers aged 21 rose by 6.7% to £12.21 per hour.
