Bulleted Chains of Analysis Flashcards
Advantages of Specialisation / Division of Labour
-Tasks separated in production process.
-Workers gain more practice in specific tasks.
-Skills improve + productivity rises.
-Lower unit costs.
-Firms can set lower prices - consumer welfare improves/surplus analysis.
-Or just make more profit - potential for dynamic efficiency.
Disadvantages of Specialisation / Division of Labour
-Tasks separated in production process.
-Workers repeat the same task the whole time.
-Workers get bored + feel alienation (don’t feel part of the final product).
-Increased levels of absenteeism and inactivity / high turnover rates.
-Higher unit costs.
Change in Conditions of Demand
Increase Yd >
Rise in effective demand
D1 to D2
Excess demand
Extension of supply
(firms raise prices to P2 > contraction of demand > new equilibrium P2
Conditions of Supply
Example: Increase in production costs lowers supply at any given price.
Price Mechanism (Rise in Price)
Signals scarcity to producers, incentivizing them to reallocate factors of production to goods, which lowers consumers’ effective demand.
Externalities
Third-party effects of production/consumption not included in private decisions, leading to misallocation of resources and reduced allocative efficiency.
Public Goods (Market Failure)
Characterized by non-excludability and rivalry, leading to a missing market and misallocation of resources.
Information Failure (Goods with Positive Externalities)
Consumers may not possess or ignore relevant information, leading to under-consumption of goods with positive externalities.
Example: Healthcare.
Utility Maximisation
Consumers aim to maximize welfare by acquiring the bundle of goods/services that provide maximum utility, constrained by limited income, prices, time, and information.
Marginal Returns (Short Run)
In the short run, at least one factor of production is fixed, leading to diminishing marginal returns and rising marginal costs.
Returns to Scale (Long Run)
In the long run, all factors of production are variable. If inputs double but output less than doubles, it results in decreasing returns to scale.
Economies of Scale (Long Run)
Sources include bulk buying, managerial, financial, technical, marketing, and risk-bearing.
Example: Bulk buying lowers per unit input costs.
Profit Maximisation (MC=MR)
Occurs at the quantity of output where marginal cost equals marginal revenue, allowing for reinvestment into R&D and dynamic efficiency.
Revenue Maximisation (MR=0)
Firms may focus on increasing revenue linked to managerial pay, which can lead to increased monopoly power.
Sales Maximisation (AC=AR)
Necessary for start-up firms to survive, aiming to increase sales and market share while lowering unit costs.
Perfect Competition (AR/MR Curves)
Characterized by perfect information, perfectly elastic demand, and horizontal AR curve.
Perfect Competition (SR Supernormal Profits)
In the short run, firms can make supernormal profits, incentivizing new firms to enter the industry.
Perfect Competition (SR Losses)
In the short run, firms can incur losses, leading to a reduction in industry supply and an increase in prices.
Monopoly (AR/MR Curves)
In a pure monopoly, market quantity demanded is inversely proportional to price, with the monopolist needing to reduce price to increase quantity sold.
Sources of Monopoly Power
Include economies of scale, advertising, and barriers to entry, allowing monopolists to charge higher prices.
Monopoly Market Failure
Monopoly power restricts output and raises prices above allocatively efficient levels, leading to deadweight loss.
Monopoly (Advantage)
Can lead to economies of scale, lower production costs, and increased supernormal profits, which may be reinvested in R&D.
Oligopoly: Price Rigidity (Kinked Demand Theory)
In oligopolies, firms may not have an incentive to compete on price due to the elastic and inelastic nature of demand.
Oligopoly (Uncertainty)
Firms face uncertainty regarding competitor responses to price changes, leading to a focus on non-price competition.
Maximum Price (Price Ceiling)
Leads to reduced prices, contraction of supply, and extension of demand, but can result in collusion among firms.
Efficiency in Competitive Markets
Profit-maximizing firms produce where MC=MR, leading to supernormal profits and increased industry supply.
Market Contestability
Reducing barriers to entry increases competition, prompting firms to behave as if there is competition.
Competition Policy for Natural Monopolies
Addresses high barriers to entry and the potential abuse of monopoly power, which can reduce consumer welfare.
Third Degree Price Discrimination
Firms charge different prices to different groups based on price elasticity of demand, increasing supernormal profit.
Determinants of Consumption
Factors include disposable income, taxation, consumer confidence, interest rates, and inflation expectations.
Increase in Consumption
Increasing personal allowance leads to higher disposable income and increased consumption.
Example: 2019 personal allowance of £12,500.
Government Spending
Expansionary fiscal stance can be caused by recessionary pressure, war, or natural disasters, leading to increased demand.
Investment
Causes of rise in investment include lower interest rates and improved business expectations.
Example: Fall in interest rates increases investment.
Net Exports (X-M)
Rise in export revenue can be caused by a fall in exchange rates or improved economic performance of trading partners.
Example: Reduction in base rate leads to depreciation of sterling.
Positive Multiplier Effect
Any increase in injection into the circular flow of income leads to increased demand and derived-demand for labor.
Negative Multiplier Effect
Any decrease in injection from the circular flow leads to reduced demand and derived-demand for labor.
Example: Rise in exchange rate reduces demand for UK exports.
Accelerator Effect
Expansionary demand-side policy leads to increased capital expenditure in anticipation of future demand increases.
Causes of Productivity Gap in G7
Factors include low investment, lower R&D, and worse education/skills of the labor force.
Example: Low levels of investment lead to reduced labor productivity.
Supply Side Policies
Include education, infrastructure improvements, and tax incentives to encourage investment and increase potential output.
Fiscal Policies
Expansionary policies include reducing direct and indirect taxation and increasing government spending.
Example: Reduction in direct taxation increases household disposable income.
Financial Crowding Out
Government budget deficits can lead to increased interest rates, crowding out private sector borrowing and spending.
Expansionary Monetary Policy
Lowering the base rate increases demand for mortgage credit and consumer spending, leading to higher AD.
Example: Increase in house prices due to demand for mortgages.
Contractionary Monetary Policy
Raising the base rate increases the reward for saving, leading to a fall in AD and real GDP.
Example: Appreciation of sterling leads to reduced export demand.
Quantitative Easing (QE)
The Bank of England creates digital money to purchase gilts, increasing liquidity and lowering borrowing costs for firms.
