Economics Flashcards
Perfect competition
e.g. Farmers Market
Many small firms
Homogeneous products
Firms are price takers
Set by forces of demand and supply
Free entry and exit
Perfect information
Monopolistic competition
Many firms
Limited market power
Differentiated products
Relatively free entry and exit
Imperfect knowledge -> good for advertising
Oligopoly
Few large firms
Interdependent decision-making
Quite high market power
Significant barriers to entry
Monopoly
One single firm
Unique product
Nearly impossible to enter market
Not beneficial for consumers
Most common market structure
Monopolistic competition
e.g. clothing, restaurants
Combines competition & differentiation
Maintains a certain amount of market power
Best market structure for consumers
Perfect competition
->low prices
->firms need to be efficient
-> consumer sovereignty
More realistic: Monopolistic competition
Best market structure for long-term profitability
Oligopoly
->market power
->barriers to entry
->economies of scale as a large firm
->potential to collude
Formal collusion
Open negotiation & agreement
Illegal in most countries
Price fixing cartels
Anti-competitive behaviour
Tacit collusion
Indirect observation & mimicking
Avoiding direct communication
More difficult to prove, regulate and spot
Often follow price-leader in an Oligopoly
Collusions
Explicit agreements to coordinate setting prices, limit production and divide markets
Product differentiation definition
A marketing strategy that businesses use to distinguish their products from those of competitors in the eyes of consumers (often present in Oligopolies)
Differentiation strategies
Brand names
Packaging
Innovation
Point of sale
Publicity through sponsorship with celebrities
Sales promotion through discounts, samples, buy one get one free & coupons
Special features
Free delivery and after sales service
Loyalty programs (Emirates)
->goal is to make demand less elastic
Price leadership
Largest seller sets prices, others follow
Concentration strategy definition
A business approach where a company focuses its efforts on a single or limited number of markets or a geographic area.
Concentration strategy goals
Achieving a strong market position - expertise
Competitive advantage by having better understanding
Customer loyalty by providing superior products
Increase own market share, take market share from competitors
3 types of concentration strategies
Market penetration: gain additional share
Market development: sell existing product in new markets
Product development: create new product in existing markets
What does the circular flow demonstrate?
Consists of consumption, production and income
How money moves through society:
From producers to workers as wages
Back to producers as payment for products
An economy is an endless circular flow of money
What does GDP consist of?
GDP = C + I + G + (X-M)
C = personal consumption expenditure
I = gross investment expenditure
G = government purchases
Net Exports (X-M)
X = Exports
M = Imports
Injection
Money coming into the flow e.g.
- aid from another country
- exports
Leakage
Money leaving the circular flow e.g.
- imports
- money put in a bank account/savings
- taxation
Multiplier effect definition
The amount of increase in GDP that results from an injection
Multiplier calculation
Multiplier = 1/1-MPC
If:
injections rise by 1 mil & GDP by 2 mil
Then:
Multiplier = 2
Marginal propensity definition
Likelihood to spend money a certain way when getting extra money
“to consume “to save
What is the marginal propensity influenced by?
Income
Economic stability
Interest rates
Social security/welfare systems (pensions, unemployment benefits etc.)
Demographics - age (save for retirement / spend for housing or education)
