Economics Theme 4 Flashcards
1
Q
What’s a monopoly
A
Where one company is the sole supplier to a market
e.g. Google with search engines
2
Q
What’s a ‘Duopoly’?
A
Where two firms are the sole supplier to a market
e.g. Apple and Samsung with smartphones
3
Q
What’s a ‘Oligopoly’?
A
where a handful of firms dominate and supply the market
e.g. Warner, Sony, Universal etc, with record labels
4
Q
What is ‘Monopolistic competition’?
A
Many firms with differentiated products
e.g. house hold products
5
Q
What’s a ‘perfect competition’?
A
An extreme where there are many firms with identical products
e.g. farmers
6
Q
Name a limitation to perfect competition
A
Lack of economies of scale - this is due to the fact that there will be many small firms, therefore these small firms wont be able to produce in mass amounts and capitalize on lower average costs
Less governmental intervention - Perfect competition leads to high efficiency, this many they’ll be a lack of government intervention which some economists see as a bad thing
7
Q
Name 2 ways of non-price competition
A
- USP
- Quality
- Branding
8
Q
What are ‘Contestable Markets’?
A
Contestable market is one which firms can enter and leave easily, with a feature being low sunk costs
9
Q
What are ‘Sunk Costs’?
A
The costs that are irretrievable,
Machinery costs can be retrieved by just selling them, but marketing costs can’t be retrieved.
10
Q
Name 2 contestable markets
A
- Hairdressers
- Restaurant
- retail
11
Q
Name 2 non contestable markets
A
- Smartphone market
- Taxi industry
- Social Media
12
Q
What are ‘Barriers to entry’?
A
Obstacles making it difficult for firms to enter market
this includes; Legal, Natural and Artificial
13
Q
Distinguish the differences between Legal, Natural and Artificial barriers to entry
A
Legal; When a firm has patents for products or processes, and competitors can’t copy them or they risk being sued
Natural; When barriers are likely to occur due to high start up costs, or the uniqueness of the product
Artificial; When firms ploy practices, such as predatory pricing, to ensure barriers of entry are near impossible
14
Q
Name and explain 3 barriers to entry
A
Product differentiation
- A firm can make a product so unique that it is hard to compete,
i.e. iPhone
Branding
- A firm making it hard for new competitors to attract customers from their brand, i.e. McDonalds
Start up costs
- A barrier as it is near impossible to start the business without some upfront funds
Intellectual property rights
- When a firm stops other firms from copying their product/service without permission. i.e. Copyright, Patents
RnD
- Basically the same as start up costs, it is virtually impossible to become successful in a market with RnD, which usually costs a lot
15
Q
Explain the impact of economies of scale on barriers to entry,
and give an example
A
When it is virtually impossible to start up a successful business in a market, as production costs are too high and you need to reap the benefits of economies of scale
- It would be virtually impossible for me to start a supermarket shop as I’d need the production facilities that Tesco or Asda has to compete, or i won’t be able to price products so low
16
Q
What are ‘Natural Monopolies’?
A
When it is inefficient for multiple firms to operate in a market, thus naturally overtime a market becoming monopolized
17
Q
What is ‘X-inefficiency’?
A
The waste of resources which occurs when a firm has little incentives to control costs; monopolistic firms have no reason to work efficiently.
18
Q
What are ‘Concentration Ratios’?
A
The measure of market shares of large firms in an industry; limited number of firms having more than 50% indicate an oligopoly
19
Q
Name 2 ways price wars benefit consumers
A
- Lower prices
- Varity of options
- reaping the benefits of innovation
20
Q
Name 2 ways price wars benefit firms
A
- Encourages higher productivity
- More employment
- Innovation
21
Q
What is ‘Interdependence’?
A
The way in which oligopolies will each take decisions in the light of actions or expected reactions of competing businesses.
- Apple may increase their prices, if Samsung are
22
Q
What is ‘Price Wars’?
A
A series of price cuts to push other firms out of the industry; Predatory pricing
23
Q
What are ‘Market Structures’?
A
The way in which a number of firms in an industry behave
24
Q
What is ‘Tacit Collusion’?
A
When firms in an industry refrain from competition without explicit agreements.
25
What is 'Price Leadership'?
When a firm makes prices that other quickly follow.
- Apple was the first to price a phone at $999, after all phone companies followed
26
What is 'Price Discrimination'?
When firms charge different prices to different consumers for the same product/service.
- Age discounts like UNIDAYS or veteran discounts
- Airlines Charging different prices depending on if that person will have higher elastic demand
27
What is 'Marginal Revenue'?
The change in total revenue when the firm sells one more unit
28
What is 'Marginal cost'?
The change in total costs when the firm sells one more unit
29
Why is marginal revenue and marginal cost linked?
They measure the changes to determine what level a company is most efficiently producing and selling goods
30
Why is marginal revenue and marginal cost linked?
They measure the changes to determine what level a company is most efficiently producing and selling goods
31
What is 'Productive efficiency'?
When an economy uses the minimum inputs to produce as much possible
32
What is 'Allocative efficiency'?
Where consumer satisfaction is maximized in the production of goods and services
33
Name 3 ways efficiency is influenced
- Technological advancements
- Advancements in human capital
- Improved quality management
34
What are the 2 ways GDP increases
- More productivity
- More workers
35
Name 2 ways of improving productivity
- Training employees
- Provide incentives
36
Name 2 ways governments can improve productivity
- Increase pay
- Incentives to upgrade technology
- Regressive pay
37
What is 'Market Orientation'?
Taking the interests of the consumers when creating a product
38
What is a 'Cartel'?
A group that colludes; price fixing, creating barriers
39
What is 'Collusion'?
Taking joint action to reduce competition
40
What are 'Restrictive practices'?
Anti-competitive abuse of market power; artificial barriers to entry or price fixing
41
What is a 'Monopsony'?
A market structure where there is only a single buyer
42
Name 3 characteristics of a monopoly
- Sole seller in a market
- High barriers to entry
- Price maker
- Price discriminators
43
What percentage market share does a firm (or two) have to have to be defined as a monopoly or duopoly
25%
44
Name 2 characteristics of an oligopoly
- High barriers to entry (price, branding)
- High concentration ratio (only a few firms supply the majority of the market)
- Interdependence of firms; actions of one firm affect another firm’s behaviour
45
Name 2 characteristics of monopolistic competition
- there are a lot of relatively close substitutes
- products are differentiated by branding
- Buyers and sellers in a monopolistically competitive market have imperfect information.
46
Name 2 ways to determine the most appropriate pricing strategy
Number of Unique Selling Points
- if the product is unique, the firm may put a premium price on the product and vice versa
Price elasticity of demand
- if customers have low ped, then higher prices a can be set, as demand wont change
- Stage in the product life cycle, if its new, you'll try skim prices
47
Name 2 ways to determine the most appropriate pricing strategy
Number of Unique Selling Points
- if the product is unique, the firm may put a premium price on the product and vice versa
Price elasticity of demand
- if customers have low ped, then higher prices a can be set, as demand wont change
- Stage in the product life cycle, if its new, you'll try skim prices
48
Name 2 characteristics of contestable markets
- Competition all around the market
- There are no significant entry or exit barriers to the industry
- There is low consumer loyalty
49
Name 1 positive and 1 negative of contestable markets
- firms are more likely to be allocatively efficient, as lots of competition leads to productive efficiency
- Can lead to hit and run competition, because of ease of access into a market
- There could be supernormal profits in the short run and only normal profits in the
long run.
50
Name all the ways of achieving economies of scale
Hint:
Really Fun Mums Try Making Pies
- Risk bearing
- Financial (bank loans)
- Managerial (employing specialists)
- Technological
- Marketing
- Purchasing (bulk buying)
51
How do you calculate the concentration ratio of something
Add up the percent market share of all firms
If the 4 firm concentration ratio was calculated, the market share of the 4 largest firms would be added together:
28.4% + 17.1% + 16.4% + 10.9% = 72.8%.
52
What is 'Collusion Behaviour'?
Collusive behaviour occurs if firms agree to work together on something, which minimises the competitive pressure they face.
53
Name 2 advantages of an oligopoly
- Oligopolies can earn significant supernormal profits, so they might invest more in research and development, and innovate, benefitting society
- Higher profits could be a source of
government revenue.
- Industry standards could improve, firms can collaborate on
technology and improve it. It saves on duplicate research and development
- Exploit economies of scale, so they have
lower average costs
54
Name 2 disadvantages of an oligopoly
- inefficiency may result in a misallocation
of resources
- f firms collude, there is a loss of
consumer welfare, since prices are raised
- Collusion could reinforce the monopoly power of existing firms and makes it hard for new firms to enter
55
Name a pro and con of price discrimination for consumers
Pros
- Consumers could benefit from a net welfare if they receive a lower price. Those who were previously excluded by high prices, might now be able to benefit from the good or service
Con
- loss of allocative efficiency
- strengthens the monopoly power of firms, which could result in higher prices in the long run for consumers
56
Name a pro and con of price discrimination for producers
Pros
- The higher supernormal profits, which result from price discrimination, could help stimulate investment
Cons
- It might cost the firm to divide the market, which
limits the benefits they could gain
- If it is used as a predatory pricing method, the firm
could face investigation bythe CMA
57
Name 2 reasons why a firm may want to profit maximise
- It provides greater wages and dividends for entrepreneurs
- Retained profits are a cheap source of finance, which saves paying high interest rates on loans
- In the short run, the interests of the owners or shareholders are most important, since they aim to maximise their gain from the company.
58
What are ''Super normal profits?
Supernormal profit is the profit above normal profit
59
What are 'Normal Profits'?
It covers the opportunity cost of investing funds into the firm and not elsewhere
60
What is 'Sales Maximisation'?
Selling as much of their goods and services as possible
without making a loss.
61
What is 'Satisfying'?
Earning just enough profits to keep its shareholders happy
62
What is 'Survival'?
New firms entering competitive markets, might aim to
simply survive in the market
63
What is 'Market share objective'?
This helps increase the chance of surviving in the market, and it can be achieved by maximising sales.
64
What is 'Cost efficiency'?
The more cost efficient a firm is, the lower its average costs
65
What is 'ROI'?
Return on investment (profits)
66
What is 'Employee Welfare'?
Ensuring their employees are well looked-after. When
employees are happy, they are more likely to be productive
67
What is 'Customer Satisfaction'?
Improving their customer service or the quality of the good they produce to make consumers happy
68
What are 'Social Objectives'?
Acting in a morally correct way.
69
Name 2 benefits of monopsony power
- They are able to negotiate lower prices. This saves money which can be invested elsewhere, such as in R&D
- By lowering the price paid to suppliers, consumers might receive lower prices
70
Explain the main negative of monopsony power
- For e.g. farmers can lose profits as they will have to agree negotiated prices, as they literally can't sell to anywhere else
- Workers (farmers for e.g.) might become unproductive if wages are low
71
What is the 'CMA'?
The main competition regulator in the UK, which aims to promote competition and ensure markets are efficient
72
Name and explain 3 ways the government can promote competition
- Government intervention
- Price regulation
- Profit regulation
- Quality regulation
- Performance targets
73
Name 3 benefits of regulation
- Increases consumer surplus, since goods and services are provided at lower prices
- Encourages firms to meet minimum quality targets, and results in products which are generally safe
- Helps to improve the quality of life for consumers and employees
- If regulation is harmonised, there can be fair rules for all businesses
- The flexibility of labour markets in the UK has resulted in lower levels of unemployment and more job creation
74
Name 2 costs of regulation
- Regulation could increase the costs of firms and mean that it is more difficult to do business
- If firms cannot collude, then their ability to increase their market power is limited.
- Time lags
75
What are 'Indirect Taxes'?
and what's the purpose
Tax collected by an entity in the supply chain, that is then passed onto the consumer as part of the purchase price
(Decrease consumption of demerit)
They increase production costs for producers, so producers supply less or increase purchase price, which is then less consumed
76
What are 'subsides'?
and what's the purpose
Government support, in the form of finance or laws.
(Increase consumption of merit good)
They reduce production costs for producers, so producers supply more or decrease purchase price, which is then more consumed
77
What are 'tradable permits'?
Rights to discharge pollution. This can be exchanged in a permit market
78
Name 2 advantages of tradable permits
- Benefit the environment in the long run, by encouraging firms to use greener methods
- The government could raise revenue from the permits, because they can sell them to firms. they can reinvest this into green technology
- Those who use greener methods gain more revenue, as they can sell their permits
79
Name 2 disadvantages of tradable permits
- Firms might pass the higher costs of production onto the consumer
- It could be expensive for governments to monitor emissions
- Competition could be restricted in the market, if the permits create a barrier to entry for potential firms
80
Name 2 ways the government can deal with market failure
- Provide information
- Provision of public goods
- Regulation
81
What is 'Aggregate Demand'?
whats the equation
Total amount of demand in an economy
C+I+G+(X-M)
82
What is 'Consumer Spending'? (in terms of a components of AD)
and name 2 things that influence it
How much consumers spend on goods and services
- Interest rates
- Confidence in the economy
83
What is 'investment'? (in terms of a components of AD)
and name 2 things that influence it
The expenditure of money to fund a company's long-term growth
- Rate of economic growth
- Business confidence
- Demand for exports
- Interest rates
- Influence government regulations
84
What is 'Government Spending'? (in terms of a components of AD)
and name 2 things that influence it
This is how much the government spends on state goods and services.
- Economic growth
- Fiscal policy
85
What is 'Exports minus imports'? (in terms of a components of AD)
and name 2 things that influence it
The value of the current account on the balance of payments
- Real income
- Exchange rates
- State of the world economy
- How much protectionism
86
What causes a shift in the AD curve
Changes in the components in AD
C,I,G,X,M
87
What is the 'Short Run Aggregate Supply'?
why is it slopping upwards?
It represents the total quantity of goods and services that firms are willing and able to produce at different price levels in the short run.
Because if prices rise, firms are willing to increase their production to take advantage of the higher prices (and vice versa)
88
What is the 'Long Run Aggregate Supply'?
and why is it straight
It represents the total quantity of goods and services that firms are willing and able to produce at different price levels in the long run.
Because in the long run, changes in prices do not affect the quantity of output that can be produced, as the economy has had time to adjust to changes
89
Name 3 things that cause a shift in the SRAS
- The cost of employment
- The cost of other inputs
- Government regulation
- fall in business capital spending,
90
Name 3 factors influencing the long-run AS
- Technological advances
- Changes in relative productivity
- Changes in education and skills
- Changes in government regulations
- Demographic changes and migration
- Competition policy
91
What is 'Full capacity output'? (in regard to the AS)
When all resources are fully employed
92
What is the 'Multiplier effect'?
Chain reaction of increased spending and income throughout the economy.
this can work vice versa with withdrawals in the circular flow of income
(one person’s spending is another person’s income)
93
What are 'demand side policies'?
Policies designed to increase consumer demand, so that
total production in the economy increases
94
What is 'Monetary Policy'?
Methods used to control the money flow of the
economy. This is done with interest rates and quantitative easing, conducted by the BOE
95
What is 'Fiscal Policy'?
Fiscal policy uses government spending and revenues from taxation to influence AD. This is conducted by the government
96
Summarize and explain how the MPC uses interest rates to control the economy
- The MPC alters interest rates to control the supply of money
- When interest rates are high, the reward for saving is high and the cost of borrowing is higher. This encourages consumers to save more and spend less (and vice versa)
- Used during periods of high inflation
97
difference between risk and uncertainty
Risk is the probability of loss occurring
Uncertainty is where an event is difficult to predict
98
One way businesses reduce risk
Firms might include the price of an insurance premium in their costs, which will help protect them against huge losses.
99
Name 3 things the financial market provides
- Facilitates saving, rewarding savers with interest
- provides loans
- provides forward markets in currencies and commodities
- Provides equity markets (stock market)
- Facilitates the exchange of goods and services
100
Name 3 contributing factors to the global financial crisis
- Subprime mortgages; many risky loans
- Moral hazard; the belief the system was too big to fall, results in taking many risky loans
- Speculation and hype leads to the price of the product rising way more than tis real value
- Role of the banking regualtion
