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Economics - Chapter 8 > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Name a monopoly power?

A

Google

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2
Q

What is a pure monopoly?

A

When only one firm supplies the market

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3
Q

What can large profits enable firms to do?

A

R&D, that then leads them to gain more customers
Pay out higher returns to shareholders, which may encourage more people to buy shares in the company, or to help boost the share price

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4
Q

What is the profit-maximising rule?

A

MC = MR

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5
Q

What are the possible consequence of a divorce of ownership of control?

A

May lead to conflicting objectives between the manager and the shareholder

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6
Q

What are possible objectives of directors?

A

Growth maximisation
Sales revenue maximisation
Satisficing

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7
Q

What is satisficing?

A

Making do with a satisfactory, sub-optimal level of profit

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8
Q

What can help a firm benefit from economies of scale?

A

Sales maximisation

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9
Q

What might be alternative strategies of firms in a market, other than profit maximisation?

A

Survival
Growth
Sales Maximisation
Increasing market share
Stakeholder objectives

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10
Q

What is the growth focus of a firm?

A

Once a firm has survived its first few critical years, its owners are likely to pursue growth. The firm will increase its output and scale of operation = might be able to take advantage of various economies of scale. Will also help a business fend off takeover bids from rival companies

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11
Q

Explain the strategy of increasing market share

A

Linked to the aim of growth. Having the highest market share for a particular product = can give the firm benefits of monopoly power. Consequences are that the gov may notice, and fear abuse of power.

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12
Q

Explain the modern view of firms

A

That they may achieve financial and non-financial objectives at the same time i.e. looking after employee needs is at least as important as maximising profit

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13
Q

What is a price taker?

A

A firm which is unable to influence the ruling market price and thus has to accept it

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14
Q

What is a stakeholder?

A

Any individual or group with an interest in how a business is run

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15
Q

What are the advantages of perfect competition?

A

Static efficiency, which is made from productive and allocative efficiency

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16
Q

What is static efficiency?

A

Efficiency measured at a point in time. Productive + allocative

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17
Q

What are the features of monopolistic competition?

A

Large number of producers
Similar products differentiated from one another by i.e. branding, quality etc

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18
Q

Examples of monopolistic competition?

A

Hairdressers, fast-food takeaways

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19
Q

What are the features of an oligopoly?

A

Small number of relatively powerful firms compete for market share
Highly concentrated markets
Interdependent

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20
Q

What is concentration ratio?

A

A measurement of how concentrated a market is

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21
Q

What is a cartel?

A

A collusive agreement among a group of oligopoly firms to fi prices and/or output between themselves

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22
Q

What is tacit collusion?

A

A collusive relationship between firms without any formal agreement having been made

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23
Q

What is overt collusion?

A

A collusive relationship between firms involving an open agreement

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24
Q

What is interdependence?

A

How firms in competitive oligopolies are affected by rival firms’ pricing and output decisions

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25
Q

What is a famous example of a cartel?

A

OPEC - Organisation of the Petroleum Exporting Countries

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26
Q

What do collusive agreements allow?

A

Inefficient firms to survive

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27
Q

What are some examples of non-price competition?

A

Product differentiation
Customer service
Loyalty products

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28
Q

What happens if a firm increases its price and the rivals don’t follow suit?

A

It loses some, but not all, market share

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29
Q

What happens if a firm cuts its price?

A

Other firms have to follow suit. It then leads to a small expansion of market size, but no increase in market share for the individual firm. Hence, firms prefer non-price forms of competition in an oligopoly.

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30
Q

What is a pure monopoly?

A

A monopoly that has 100% market share. The firm is a price maker.

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31
Q

What are the 5 types of barriers to entry?

A

Natural barriers
Economies of scale
Legal Barriers
Product differentiation
Sunk costs

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32
Q

Explain natural barriers

A

Include naturally-occurring climatic, geographical or geographical factors that make the product difficult to replicate elsewhere. Wine-growing regions

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33
Q

Explain economies of scale as barriers to entry

A

When a firm’s average costs of production fall as output increases. Large firms can set their prices below those of any potential new entrant firms to the market, and still make a supernormal profit.

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34
Q

Explain legal barriers

A

Factors which give a single firm or individual the right to have a monopoly over a new product, process or other intellectual property, either forever or over a given time.

35
Q

Explain product differentiation

A

Existing firms in a market may have spent considerable sums of money over many years on advertising and branding in order to build up a significant consumer loyalty and marketing profile. i.e. the large advertising budgets of major soft drinks firms

36
Q

Explain sunk costs

A

Costs that cannot be easily recovered if a firm is unsuccessful in a market and has to exit, i.e. these financial commitments are essentially lost, or sunk. i.e. market research costs

37
Q

What are the advantages of a monopoly?

A

Economies of scale: financial, technical, marketing, managerial
Innovation

38
Q

What are the disadvantages of a monopoly?

A

Productive and allocative inefficiency
X-inefficiency
Diseconomies of scale

39
Q

What is X-inefficiency?

A

The lack of willingness of firms with monopoly power to control their costs of production

40
Q

Explain the features of a natural monopoly

A

Natural monopolies occur when it is uneconomic for more than one firm to supply a market because that firm enjoys continuous economies of scale i.e. utilities such as household gas
It is productively efficient for a single firm to supply the market, as several individual firms cannot achieve the low costs of the single firm
If the market were broken up, average costs would be higher than for a single firm, meaning prices may be higher

41
Q

What are the conditions necessary for price discrimination to occur?

A

Firms must have a degree of monopoly power
Different sub-markets of consumers with different elasticities of demand
No ‘seepage’ between markets - consumers being charged higher prices mustn’t be able to access cheaper prices

42
Q

What is price discrimination?

A

Where firms with monopoly power charge different groups of consumers different prices for the same product

43
Q

What is consumer surplus?

A

The difference between what a consumer would be prepared to pay and the price they actually pay for a good or service

44
Q

What is producer surplus?

A

The difference between what a producer would be prepared to accept a good for and what they actually receive

45
Q

What makes up economic welfare?

A

Consumer and producer surplus

46
Q

What are the advantages of price discrimination?

A

Supernormal profits may be reinvested, leading to better quality products
Extra profits can ‘subsidise’ those paying a lower price
Those on lower incomes can access services i.e. lower priced off-peak train fares

47
Q

What are the disadvantages of price discrimination?

A

Earning or increasing supernormal profit can be seen as inequitable
Increases producer surplus at the expense of consumer surplus
May be seen as exploiting those in greatest need who have no choice about using peak-time services

48
Q

How do firms in concentrated markets behave with price competition?

A

Firms may benefit from economies of scale, so they could reduce prices whilst still making supernormal profits.
Firms may use these profits to reinvest in R and D.
Dynamic efficiency would lead to a reduction in the firms’ costs at every given output level.
If a firm wishes to take market share from rivals, it might initiate a price war by undercutting others

49
Q

What is a price war?

A

Were firms in an industry repeatedly cut prices below those of competitors in order to win market share

50
Q

What is price competition?

A

Reducing price of a good/service in order to make it more attractive than those of it’s competitors

51
Q

Over time, what happens in competitive markets?

A

Creative destruction. Firms in monopolies use innovation to overcome existing barriers to entry.

52
Q

What is a contestable market?

A

A market with freedom of entry and exit.

53
Q

What would happen if a market was made more contestable?

A

Incumbent firms would behave in more economically desirable ways with regard to pricing and static efficiency.

54
Q

What are the features of a perfectly contestable market?

A

Freedom of entry/exist
No sunk costs
Perfect info
Firms produce where P = MC

55
Q

What is the impact of contestable markets?

A

Incumbent firms would behave in more economically desirable ways with regard to pricing and static efficiency, otherwise new entrants would be taking a share of any supernormal profits (hit and run competition)

56
Q

What is hit and run competition?

A

Where new entrants take a share of the supernormal profits and then exit the industry

57
Q

What is dynamic efficiency?

A

Improvements in productive efficiency over time. Can be R&D, investment in human and non-human capital, technological change

58
Q

What type of competition performs well in static efficiency, but not dynamic?

A

Perfect competition

59
Q

How does dynamic efficiency arise?

A

Through improvements in productive efficiency - i.e. technology.

60
Q

Why can’t perfectly competitive firms be dynamic efficient?

A

Because they don’t have access to supernormal profits, or high profits needed for R and D etc. They also don’t want to take risks in R and D or invest in new technology, as they earn only normal profit, and only do it for adequate reward.

61
Q

What is a duopoly?

A

Extreme case of oligopoly with only 2 dominant firms in the market

62
Q

Monopolies exercise what?

A

Producer sovereignty

63
Q

What is producer sovereignty?

A

When firms have the power and ability to influence consumer decisions

64
Q

When is monopoly power greatest?

A

When there are no substitutes in the market, as the monopoly is producing an essential good.

65
Q

What does allocative inefficiency lead to?

A

Resource misallocation

66
Q

What is market conduct?

A

The way that firms behave in a particular market structure i.e. whether they collude etc

67
Q

What is the deadweight loss?

A

The cost to society created by market inefficiency or the inefficient allocation of resources

68
Q

What happens to the degree of product differentiation as number of firms in a market increases?

A

There is more differentiation

69
Q

How can barriers to entry be created by the governent?

A

Through regulation and licencing.
If an activity requires a license, it restricted speed and number of new entrants
New factories may need planning permission before building
There’s also regs with health and safety for employees of firms

70
Q

In a perfect market, what are the 3 signals?

A

Rationing, Signalling and Incentive functions work perfectly together.

71
Q

If a firm in perfect competition makes AR that’s less than the firm’s AC, what is happening?

A

It’s making less than normal profit.

72
Q

A firm has to leave the market if it’s not making normal profit, but in the short run, what are the 2 possibilities?

A

If the market price (AR) is above the firm’s AVC, then they may continue trading temporarily
If the market price (AR) is below the firm’s AVC, then they leave the market immediately

73
Q

Productive efficiency only occurs if what is assumed?

A

That there’s no economies of scale

74
Q

What are the limitations of the kinked demand curve model?

A

It doesn’t explain how the price was arrived at in the first place.
Firms may engage in price competition. It also only describes one possible outcome.

75
Q

What is the kinked demand curve?

A

Shows why prices are quite stable, even in competitive oligopolies.
2 assumptions to the model:
- if one firm raises it’s prices, the other firms will not (due to substitutes being cheaper)
- if one firm drops it’s prices, all will do so ( but lowering price lowers market share)
The outcome is that firms have no incentive to change prices, and if they raise/lower their prices, they lose out.
= therefore, price stability for prolonged periods of time.

76
Q

How can sunk costs be reduced by hit and run tactics?

A

Leasing of equipment

77
Q

When are barriers to entry high in contestable markets?

A

Patents or production methods that stop other firms copying
Brand loyalty
Threat of predatory pricing
Trade restrictions - tariffs or quotas
Sunk costs are high

78
Q

What can technological change have an impact on?

A

Structure of market
Production methods
Consumption of goods/services

79
Q

What can innovation and invention lead to?

A

Improvements in capital equipment - leading to better quality products
Barriers to entry are reduced or increased
Monopoly power to firm who invented innovation
Larger economies of scale

80
Q

What can creative destruction lead to?

A

Job losses, but then new jobs will be made in new markets.

81
Q

Define the MES

A

The lowest level of output at which average total costs of production are minimised

82
Q

What are external economies of scale?

A

Reductions in long-run average total costs arising from the growth of the industry in which a firm operates

83
Q

What are diseconomies of scale?

A

Increases in average total costs that firms may experience by increasing output in the long run

84
Q

What are the 2 types of diseconomies of scale?

A

Co-ordination and control
Communication

Economics - Chapter 8 (10 decks)

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