Economics Micro weak points

Question 1

Economics growth: what is internal growth

Answer 1

As a firm increases in size, it may use internal expansion / organic growth to expand the scale of their operations and gain market share by issuing shares, borrowing from banks or using retained profits to:

Invest in the factors of production e.g. employing specialist managers or purchasing new machinery.

Move into foreign markets (become a multinational).

Question 2

Advantages of internal growth

Answer 2

Less risky than external growth
Maintain complete control of the firm (diseconomies of scale)

Question 3

Disadvantages of internal growth

Answer 3

Slower than merging
Does not provide access to new expertise or assets
Market may become saturated leaving only external growth as a means of growing

Question 4

Why is external preferable to internal growth?

Answer 4

Faster than internal growth
Reduces competition
Can access a loyal customer base
To gain knowledge of foreign markets or different products/processes (for non-horizontal mergers/takeovers)
To achieve managerial aims - ie profit maximisaiton via econ of scale

Question 5

Horizontal advantages

Answer 5

Economies of Scale
Access to unique assets and knowledge
Reduced Competition
Lower prices?
National Champion

Question 6

Horizontal disadvantages

Answer 6

Diseconomies of Scale
Lack of diversification
Investigation by CMA
Unemployment
Less Choice
Higher Prices?
Too big to fail- require bailout

Question 7

Backwards Vertical advantages

Answer 7

Cheaper Supplies
Guaranteed Supply
Lower prices?

Question 8

Backwards Vertical disadvantages

Answer 8

Lack of diversification
May lack technical knowledge
Market exploitation

Question 9

Forwards Vertical advantages

Answer 9

Eliminate competing suppliers
More control over marketing of the product
Lower prices?

Question 10

Forwards Vertical disadvanges

Answer 10

May lack market knowledge
Lack of diversification
Market exploitation

Question 11

Conglomerate advantages

Answer 11

Diversify Risk
Widen Brand Awareness
Cross-subsidise R&D

Question 12

Conglomorate disadvantages

Answer 12

Dilution of core brand
May lack market knowledge

Question 13

Functions of money

Answer 13

Medium of exchange - a common exhcnage for goods and services that is accepted
Store of value - money can be saved and can be used later on
method of deferred payement - loans etc

Question 14

Demand effects that make the curve

Answer 14

Substitution effect - price more expenesive, people buy cheaper substitutes
Incoem effect - prices get cheaper, more peoplem buy it
Diminishing marginal utility - each additional good purchased means less happiness

Question 15

Market effects

Answer 15

Incentive effect - short run effect where changes in price incentivises producers to enter the market
Rationing effect - insufficient supply to meet demand will change price to ration resources setting it at a higher price, exploiting whoever has the highest consumer surplus
Long term effects:
Signalling - changes in price inform economic agents where resources are needed and encoirage entry or exit into the market eg. if prices are high then new producers will enter the market to attemot to benefit from this (eg perfect competition)

Question 16

Factors of elasticity (demand) that i am weaker on

Answer 16

Percentage of income spent on goods, cheap products have high elasticity of demand but expensive ones don’t.
Quality; better quality = more price inelastic
Substitutes
NASTIQB

Question 17

Why does elasticity of produciton change

Answer 17

In the short run, it is inelastic due to not being able to easily change more than one factor of production but over time they can.

Question 18

Factors effecting supply elsaticity

Answer 18

Barriers to entry
Factor immobility - produciton cant change dependant on labour markets etc
Spare capacity, if there is none then you have to wait till there ie if property is super high in demand then you have to wait
BFRITZ

Question 19

What is an Engel curve?

Answer 19

Curve related to income elasticity

Question 20

Cross elasticity?

Answer 20

Compliments are always negative and subsitututes are positive

Question 21

Types of indirect taxes

Answer 21

AD Valorem - Percentage charged on the price
Specific is incurred on the good per unit ie 3 pounds per pack of ciggies

Question 22

Can direct tax be passed on as indicidence

Answer 22

NO

Question 23

DWL

Answer 23

Markets need to allocate resources affectively and the free market maximisies economic welfare for consumers and producers but not allocatively , so the market intervene which reduces economic welfare but this can decrease the DWL.

Question 24

When does tax incidence go entirely on the consumers?

Answer 24

When suplly is elastic and demand is inelastic because they can incrase prices without much struggle ie imagine if Vodaphone decided they want to give more phone contracts, this costs them nothing

Inelastic demand means most of the incidence goes on them.

Question 25

When does tax incidence go on the producer

Answer 25

When supply is very inelastic but also when demand is perfectly elastic.

Question 26

Types of market failure

Answer 26

Externalities
Imperfect info
Public goods
Irrational behaviour

Market power like monopolies

Question 27

Government intervention on market failure?

Answer 27

Regulate
Subsidise
Provision of goods
Provide information
Tradeable permits (externalities)
Maximimum and minimum prices
Nudges
Property rights
Prohiibition
Restrictioin

Question 28

What is adverse selection

Answer 28

When participation in the market is affected by asymmetric information such as health insurers don’t know if you are a smoker or non smoker and therefore cannot price insurance appropriately since you can just lie - which pushes up the prices for non smokers

Question 29

State internvention to solve market failure via information provision pros and cons;

Answer 29

Advantages:

Discourages or encourages activity
Less asymetric info
Low consumption of products

Disadvantages:

COnsumers may not understand the information
COnsumers may behave irrationally
Risk of regulatory capture - regulation company works with the externaltiy via sympathy
Opportunity cost - of spending

Question 30

State intervention to solve market failure via nudges pros and cons

Answer 30

Pros:
Encourages behavour without being restrictive

Bad:
People are irrational and it might be weak
Might not work
Doesn’t encourage consumers independance of thought

Question 31

What does non excludable and non rivalrous mean

Answer 31

Non- excludable: you cannot stop other people using it
Non-rivalrous: your consumption doesnt affect other peoples ability to consume it
Some goods as quasi-public goods like:
Lectures, more people means lower quality of service BUT it doesn’t mean you can stop them consuming the good.

Question 32

What is a private cost or benefit?

Answer 32

A cost internal to an exchange and is paid by an individual economic agent like producers and consumers

Question 33

Indirect taxes policy Advantages and disadvantages on externalities:

Answer 33

Advantages:
Tax revenue to reinvest and recycle
More choice for consumers

Disadvantages:
Elasticity
Lack of perfect info
Regressive taxation

Question 34

Mimumum pricing for externalities advantages and disadvantages:

Answer 34

Adv:
Reduces consumption of goods
Targetted at groups who are in a lower income band like young people
Cost to government is much smaller
Disadvantage:
No effect if set below equilibirum
LEss effective on inelastic goods as the surplus is smaller

Question 35

Regulating and limiting how much can be bought externalities pros and cons:

Answer 35

Advamntages:
Reduces consumption
Nearer to social optimjm
Inelastic demand means it is a good alternative

Disadvantages:
Limits set too low due to government failure and regulatory caputre
House limit = costs to buisnesses rise and price and unemployment may rise

Question 36

Property rights

Answer 36

Resources with no owners are able to be exploited by people which causes market failure since they are allocated effectively, which can also cuase exploitation of the resource for rational self interest which hinders everyone else ability to use it.
If the government gives ownership rights, it will be protected such as National Trust.

Advantages:
Ensures externalities are internalised
Reduces burden on the government

Bad:
Difficult to calculte the size of the exploitation of the good
Externaltiies are hard to trace
Legal costs

Question 37

Tradeable permits

Answer 37

Good since it limits the amount of externality in the market while creating a new market that can allocate externalities well
But it can be exploited since it wont be regulated well
Regulatory capture
May break the rules
Provides an incentive for efficiency
Might not providen incentive since you can just buy more permits
How many permits to give?

Question 38

Max prices on products pro and con

Answer 38

ADv:
reduces consumption or incentive to enter the market due to the signalling effect
Chdeaper
Low cost stategy
Encourages efficiency to drop costs and somehow make SNP

Disadvantages:
Excess demand - less consumers can access.
Long queues and waiting lists and shortages
Less producer revenue

Question 39

Guaranteed minimum prices pros and cons

Answer 39

Government ensures producers get sufficient income regardless of how much they sell which is an issue in normal minimum price market
The government nuy up remaining stock to help them out

Adv:
Good for prodiucers
More innovative profits

Bad:
Wasted goods bought up
Storage? Lack of allocative efficiency
No effect if set above equilibum which is hard to measure due to asymetric information
Negative externlaities

Question 40

How does government failure happen:

Answer 40

information gaps, excessive admin costs, unintended costs.

Question 41

Blurt everything you know about capitalism , keynesiansm, free market and communism

Answer 41

Adam Smith - free market but believed that monopolies are bad and compeitition should be a think.
Hayek; entirely free because complexity of economic production means that free market should provide all but public goods
Keynes: government needs to control free market economies

Command economies failed because of poor producition and less choice.

Mixed economies contain government intervention and in recent years, more market based through government privatising state run monpolies which is pretty free market
They have the state take over public sector and private sector is often regulated but allowed to run on its own

Command economy - socialism advantages:
Great income equality
Externalities will normally be low since they work at social optimum.
Efficiency through economies of scale

Disadvantages:
No profit incentive = less need for government to create.
High level of bureaucracy.
Government may not have info
Low price means shortages and queues.

Free market economy advantages:
Pros;
Profit motive and competition leads to lower prices and creation of new producers.
Consumers have the freedom to work for who they want
Incentive to work hard for more money

Cons:
CPnsumers may not have infromation to be rational
Income inequality
Negative externalties
No public good provision