Chapter 11 Flashcards
response to new regulations:
entrenchment
mere compliance
full compliance
innovation
entrenchment = non-response
mere = passing on the cost of compliance to the customer
full = behaviour is changed; P+P adjusted to comply w/ regulations
innovation = behaviour exceeds regulations
= the Porter hypothesis - strict environmental regulations trigger the discovery + innovation of cleaner products/tech + environmental improvements
Ferndale plc is a multinational company. It has been charged with collusive behaviour in its UK
operations. If found guilty, the company could, amongst other sanctions, receive a fine of:
A up to 10% of annual worldwide revenues
B up to 10% of annual UK revenues
C up to 20% of annual worldwide revenues
D up to 20% of annual UK revenues
A
The government has intervened to impose a limit on businesses’ carbon emissions. This is an
example of regulation designed to address market failure caused by:
A asymmetric information
B equity
C market imperfection
D externalities
D - externality = an adverse social consequence which the private producer has no incentive to minimise - the external costs and benefits
regulation can also address:
-asymmetric info
-equity = improve social justice
-market imperfection = where monopoly power is leading to inefficiency - gov can intervene through controls on pricing + profits tf reducing effects of a monopoly
what is demand pull inflation?
price rises resulting from a persistent excess of D > S in the economy as a whole
supply cannot grow any further once ‘full employment’ of factors of production is reached
causes of demand pull inflation x2
- fiscal - an increase in gov spending/reduction in taxes = more £ in the economy
- credit - if levels of credit extended to consumers increases (decrease in IR) - expenditure rises
what is cost push inflation?
price rises resulting from an increase in the cost of production of G + S ie increased £ imported raw materials, wage increases
normal goods vs inferior goods = as income rises
as income rises:
normal goods - demand increases ie B+J ice cream
inferior goods - demand decreases ie Tesco value ice cream
Potatoes are a Giffen good. An increase in the price of potatoes will cause:
A an increase in demand for potatoes
B a decrease in demand for substitutes for potatoes
C a decrease in demand for potatoes
D an increase in demand for substitutes for potatoes
A
giffen goods = rare! ie potatoes, rice
A brand of cheese is an inferior good. A consultant has made two statements about the cheese.
Statement (1): Demand for the cheese will rise as incomes rise.
Statement (2): Demand for the cheese only exists because of the effects of advertising.
Requirement
Identify whether each statement is true or false.
A Statement (1) true; Statement (2) false
B Statement (1) false; Statement (2) false
C Statement (1) true; Statement (2) true
D Statement (1) false; Statement (2) true
1 - false: inferior goods, as income rises, demand decreases (normal goods, as income rises, demand increases)
2 - not just because of advertising - could also exist due to price and the level of incomes
which of these would cause a rightward shift in the supply of apple cider?
- a rise in the price of cider in the supermarkets
- a rise in the price of pear cider
- a fall in the price of apples
- good weather leading to a high harvest of apples
- a successful advertising campaign
- a rise in the price of cider in the supermarkets = expansion of supply (up the slope) NOT a shift
- pear cider now more attractive - suppliers want to produce pear cider tf apple supply decreases + shifts left
- cheaper to make tf rightward shift + supply increases
- more apples tf increased supply of product = rightward shift
- increases demand but not supply!
A brand of cheese is an inferior good. A consultant has made two statements about the cheese.
Statement (1): Demand for the cheese will rise as incomes rise.
Statement (2): Demand for the cheese only exists because of the effects of advertising.
Requirement
Identify whether each statement is true or false.
A Statement (1) true; Statement (2) false
B Statement (1) false; Statement (2) false
C Statement (1) true; Statement (2) true
D Statement (1) false; Statement (2) true
D
types of market structure: natural competition
- lots of B + S - small tf individually cannot influence the market price
- no barriers to entry or exit
- perfect info (no asymmetric info)
- homogenous
- no collusion
- suppliers earn NORMAL PROFITS
- there is a single selling price
types of market structure: monopolistic competition
- many B + S
- some differentiation between products w/ branding to achieve this differentiation!
- some customer loyalty
- few barriers to entry
- significant advertising
types of market structure: oligopoly
- a few large sellers but many small buyers
- product differentiation
- a high degree of mutual interdependency ie big 4 supermarkets; decisions of one influences the others
- price cuts copied but price increases not always copied
types of market structure: monopoly
- 1 S + lots of B
- barriers to entry
- suppliers can set the selling price OR determine the quantity supplied (make product scarce : make demand increase)
- suppliers can earn SUPERNORMAL PROFITS
what are the barriers to entry with monopolies?
- high set up costs
- low marginal costs
- economies of scale
- patent protection
- access to unique resources ie oil
- unique talent
- public sector monopoly
- size domination of the market
pure monopoly vs actual monopoly
pure = 1 supplier in the market
actual = 1 dominant supplier in the market
The cross elasticity of demand between the Terra product and the Nova product is zero. The two
products are:
A complements
B substitutes
C veblen goods
D unrelated
D
The UK government has recently imposed a maximum price on Pratex which is set at a lower level
than its equilibrium price. In future, therefore, it can be expected that there will be:
A excess supply of the product
B excess demand for the product
C no effect on supply but an increase in demand
D no effect on demand but a decrease in supply
B
9 There has been a significant rise in factor costs for the Tempo product during recent months. It can
be expected that there will be:
A a contraction in demand and supply
B an expansion in demand and supply
C a contraction in demand and an expansion in supply
D an expansion in demand and a contraction in supply
A