Economics revision Flashcards
What are constant returns to scale ?
Long run average cost as output rises
What are diseconomies of scale ?
Business may expand beyond its maximum size , they will see an increase in long run average cost
What are economies of scope ?
When it becomes cheaper to produce a range of products - cost saving from diversification
What are external economies of scale ?
When an expansion of industry leads to growth of ancillary services causing a downwards industry supply curve
What are Increasing returns to scale ?
When output is rising faster than inputs when all inputs can be varied in the long run
What is minimum efficient scale
When internal economies of scale have been maximised - corresponds to the firms lowest point on the long run average cost curve
What are some examples of internal economies of scale ?
Technical economies - containerisation of products + tourism
Financial economies - Lower interest on loans for larger firms
Marketing economies - Spreading the cost of marketing easily
Managerial economies - Employing specialised staff to raise efficiency
What is marginal profit ?
The increase in profit when one more unit is sold
What is normal profit ?
The minimum reward for an entrepreneur to keep them running the business / stay in the industry
Reflects the opportunity cost of using funds to finance a business
If the price of a product covers the AC then the firm is making normal profits
What is profit maximisation ?
Marginal cost = marginal revenue
What is profit per unit ?
Average revenue - average total cost
What are subnormal and supernormal profits ?
Subnormal - Profits are less than normal
Supernormal - Profit exceeded of normal profit - there is an incentive for other producers to enter the market
What is the importance of profit ?
Finance for capital investment / R and D - for example retained profit to fund acquisition + capital investment
Market entry - sends signals to other producers in a market
Demand for and flow of factor resources
Signals about the health of the economy - if profits are high then the economy is doing good
What is the difference between accounting profit and economic profit ?
Accounting profit is total revenue - total cost
Economic profit -
Total Rev - Total Cost - Opportunity cost - Income lost out on
What is the equation for average revenue ?
AR = Total revenue / output
What is the equation for marginal revenue ?
MR = Change in total rev / Change in total output
What are some motives for a firm ?
Profit motive - profit maximisation
Cost motive - economies of scale
Market power - monopoly / oligopoly
Risk motives - reducing risks
Revenue maximisation
What is the equation for average costs ?
AC = Fixed costs + total variable cost + normal profit / quantity
What is Average and marginal revenue on a diagram
AR is the demand curve ( downward facing )
MR is half the gradient of the AR curve
What are fixed costs ?
Costs that have to be paid even if there is a change in output
What are sunk costs ?
Costs that cannot be recovered . E.g. set up costs
What are unit variable costs ?
Costs that vary with output . E.g. raw materials and packaging
What are Marginal costs ?
Costs of producing one more additional unit
What is dynamic efficiency ?
Production innovation : Small scale , frequent changes to a characteristic and performance of a good or service
Process innovation : Changes in the way in which production takes place or is organised / changes in business model and pricing strategies
What is social efficiency ?
When the socially efficient level of output or consumption occurs
( when marginal social benefit = the marginal social cost )
+ and - externalities mean that the private level of consumption differs from social optimum
The free market does not always take into account the social cost and benefits
What is allocative efficiency ?
When no one can be made better off without making someone worse off
The value that a consumer places on a good or service = the cost of the factor resources used up in production
Output which maximised consumer welfare , at the equilibrium point producer surplus is maximised and economic welfare is maximised
What is minimum pricing ?
Is a price floor for a market - suppliers cannot sell the product legally at a lower price
A form of Govt intervention
What needs to be done to make a minimum pricing policy to become efficient ?
A minimum price must be set above the normal free market equilibrium
If a minimum price is set below the market equilibrium then it will have 0 impact
What are maximum prices ?
When the Govt or an industry regulator sets a maximum price to prevent a price from rising above a certain level
What are some examples of maximum price policies in real life ?
Housing rent controls
Energy price cap
Cap on interest rates charged by lenders
Price capping water companies
What must be done in order to make a maximum price policy effective ?
Maximum price must be set below the normal free market equilibrium price to have any affect on output and price
What are buffer stock schemes ?
Schemes which seek to stabilise the market price of agricultural products by :
Buying suppliers stock when supply is high
selling supply onto the market when supply is low
How does a buffer stock scheme use price standards to carry out its function ?
Some buffer stocks use a minimum and maximum price to sell goods
Anything above the maximum price protects customers from paying vast amounts
Anything below the minimum price protects producers from getting little for their products
What are some alternatives for buffer stock schemes ?
Long term - Investment in capital goods like irrigation and wider access to insurance
Reducing dependency on a specific type of crop
What are some arguments FOR buffer stock schemes ?
Lower chance of extreme food poverty for poor farmers
Helps more economic stability
More stable incomes for farmers
What are some arguments AGAINST buffer stock schemes ?
High cost of storage of the product may decrease quality
Better long term solutions
Buffer may not be large enough to change the price
What are subsidies ?
Any form of government financial support given to consumers or producers to help the economy
What are some examples of government subsides ?
Eat out to help out
Solar and wind farm investment
Subsidies for the rail industry
What are some justifications for subsidies for Producers ?
Encourage output / investment in loss making industries
reduces cost of training employees
Helps poorer families / Makes health care more accessible
How do government subsidies affect the demand curve ?
They cause an outward shift in the supply curve as it becomes cheaper to produce the goods
Suppliers can produce more with the money they have
What are indirect taxes ?
A tax imposed by the Govt that increases the supply costs faced by producers
What is a valorem tax ?
Percentage tax on a unit price
What is a specific tax ?
A set tax per unit
What are some examples of indirect taxes ?
VAT
Landfill tax
Fuel duties / alcohol duties
Air passenger duties
What do indirect taxes do to the supply curve ?
Indirect taxes cause the supply curve to move inwards
This is because Producers have more costs due to the tax , they have less money to produce , decreasing the supply
How do government failures occur ?
When an intervention leads to deeper market failure - creates inefficiencies , a misallocation of resources + loss of welfare
What is the law of unintended consequences ?
Actions of customers , producers and government - they have effects that are unanticipated or unitended
What are some failures of Govt regulators ?
Regulators may limit innovation
Frequent rule changes can stifle business investment
May lack the powers to be truly effective
How do negative externalities occur ?
When production / consumption impose external cost on third parties outside of the market .
What are some negative externalities caused by production ?
Air pollution from factories
Pesticides in farming
Noise pollution from planes
Damage caused by overfishing
What are some negative externalities caused by consumption ?
Vehicle pollution
Effects of smoking
Family problems from gambling
Traffic congestion on health
What are some disadvantages of adding extra regulation
High cost of enforcement
Regulations could cause unwelcomed consequences
Cost of meeting regulation could put off small business + lower competition in markets
What are some advantages of adding regulation
Acts as an incentive for businesses to innovate
Regulation that gradually changes , help stimulate capital investment
Regulations can be effective when demand is irresponsive to change
What are private costs ?
Costs faced by the producer / consumer directly involved in the transaction
What are private benefits ?
Benefits for the producer / consumer who are directly involved in the transaction
What is social cost
The cost incurred by society as a whole
What is social benefit ?
The benefits to society caused by a product or service
