econplusdal - Micro

Question 1

definition and conditions necessary for price discrimination

Answer 1

charging different prices to consumers for the exact same good/service with no difference in cost of production
price making ability, info/ability to separate the market , prevent re sale

Question 2

cons of price discrimination

Answer 2

allocative inefficiency - inelastic part of the 3rd degree price discrimination, p and Q are far from the allocatively efficient point P=MC, costumers are exploited are consumer surplus is decreased
inequality - widen income inequality as poorer people may be part of the inelastic group meaning they are charged high prices
anti competitive - low prices from the price elastic part of the price discrimination may drive out competition leaving the firm with pure monopoly power

Question 3

pros of price discrimination

Answer 3

dynamic efficiency
economies of scale
some consumers benefit
cross subsidisation - money raised from price discriminating allows other area of the frim to still produce (uber)

Question 4

objective of firms

profit maximising

Answer 4

re- investment (dynamic efficiency)
dividends for shareholder
allow for lower costs and pass them onto consumers ( long run)
reward for entrepreneurship

firms do not know their mc and mr
greater scrutiny by market authorities, investigation often does not end favourably
key stakeholders are harmed

Question 5

objective of firms

profit satisficing

Answer 5

sacrifice profits to satisfy as may stakeholders as possible
profit max harms key stakeholders
consumers - bad reputation as they are being exploited
workers - low wages
government - investigation
environmental groups - protests, social media attack

Question 6

objective of firms

revenue max

Answer 6

mr = 0 , meaning output level is greater
economies of scale
predatory pricing
principle agent problem, divorce of ownership and control

Question 7

objective of firms

sales maximisation

Answer 7

economies of scale
limit pricing
principle agent problem
flood the market - consumers become aware ad develop loyalty for your product

Question 8

objective of firms

others

Answer 8

survival
public sector organisation (p=mc), maximise social welfare
corporate social responsibility - acting ethically

Question 9

negative externality in production example and analysis

Answer 9

pollution - lung cancer
resource degradation - polluting rivers
deforestation - people who rely on the Forrest

firms are ignoring social cost due to self interest, end result is over production/consumption , price is too low and is only accounting for the private cost not the full social cost

Question 10

negative externality in consumption example and analysis

Answer 10

alcohol - crime, NHS cost

• consumer are ignoring the social benefit due to self interest as rational consumers are utility maximises
• consumers may not know the full social cost due to lack of information e.g cigarette market before the government intervention
• over consumption / production, price too high
  welfare loss to society

Question 11

Positive externality in consumption example and analysis

Answer 11

Health care, more healthy = more productive
Education, better educated = better job = higher wages = more tax

Consumers act in self interest and igorne any social benefits of their consumption as they are only interested in maximising their own utility.
As a result the market allocates resources at the private optimum meaning there is under consumption and under pricing resulting in a misallocation of resources
Society loses out on potential welfare

Question 12

Government failure

Answer 12

When the costs of the intervention outweigh the benefits. The end results is a worsening of the allocation of resources harming social welfare

Question 13

4 types of government failure

Answer 13

Information failure
Unintended consequences
Regulatory capture
Admin and enforcement costs

Question 14

Government failure

Information failure

Answer 14

Valuing externalities - must be set at the right level to be effective and has high costs
Lack of information
Asymmetric information

Question 15

Government failure

Admin and enforcement costs

Answer 15

In regulating, subsidy, state provision of info, price control

Question 16

Government failure

Unintended consequences

Answer 16

Black markets - reduce tax revenue, cost of trying to police the black market, reduces the effectiveness of policies
Impacts on poor - minimum prices effect those with lower disposable incomes more
Impact on firm over strict regulation - shut down, relocate , lay off workers ( diseconomies of scale).
Firms become dependant on subsidy

Question 17

Government failure

Regulatory capture

Answer 17

When ceos and mangers influence the regulator meaning the regulator works in the interest of the firm instead of society
The best regulators will be the ones that have previously worked in the industry but they will be bias

Question 18

Monopoly regulation

Price regulation

Answer 18

RPI
RPI - x
RPI +-k
This measure is introduced to stop monopolies exploiting costumers and aims to set maximum prices at the allocatively efficient point ( P = MC)
Minus x is the expected increase in efficiency
+ k is the additional profit needed to be made to finance investment into capital goods

Question 19

monopoly regulation

Evaluating price regulation

Answer 19

The level of x or k to be set is unknown , imperfect information
If x is too high firms will have to shut down
If x is too low the measure is ineffective, competitive target not met
opportunity cost of regulating ( tax payer burden )
By meeting the “-x” target it incentives the regulator to keep reducing x
Regulatory capture

Question 20

Monopoly regulation

Quality control / performance targets

Answer 20

Limit train delays, gas and electricity cannot increase price for over 65 year olds in winter, NHS number of GP visits per hour. Incentive to be more efficient

Unintended consequences
Rushing GP appointments
Cheating the system, train delays = lie about the expected length of a journey

Question 21

Monopoly regulation

Profit control

Answer 21

Profit control, adding a % onto the return from capital investment
Asymmetric info
Over report costs and over report capital employed
Also gives very little incentive to become efficient so costs rise out of control

Question 22

Monopoly regulation

Taxing monopoly profits

Answer 22

Raises government revenue

Promotes tax evasion, removes monopoly benefits, less innovation + dynamic Efficiency, may cause monopolies who were previously profit saticficying to move to mc=mr

Question 23

Cons of a firm having monopoly power

Answer 23

Allocative inefficiency - consumer surplus decreased , quality issues , DWL
Productive inefficiency - voluntarily forgoing economies of scale to restrict output keeping prices high and don’t minimise costs by operating at the lowest point on AC curve
X - inefficient - producing beyond their AC curve due to a lack of competition
Inequality - high prices on necessities have a greater effect on the poor as the higher prices is a greater % of their income

Question 24

Pros of monopoly power

Answer 24

Dynamic efficiency
Greater economies of scale as a profit maximising monopolist could be producing at a lower price + greater output than smaller competitors due to their mc curve being shifted to the right
Natural monopoly - ore efficient to only have 1 firm in the industry in order to not duplicate costs
Cross subsidisation, may be able to provide another product

Question 25

Characteristics of oligopoly

Answer 25

Few firms dominate the market , high firm concentration ratio
Different good
High barriers to entry : brand loyalty , sunk costs
Interdependence = rigid pricing shown through kinked demand curve
Lots of non price competition
Profit max not necessarily sole objective , fight for market share

Question 26

Competitive oligopoly market , factors promoting competition

Answer 26

Large number of firms
New market entry possible - firms enter and remove supernormal profits
One firm with significant cost advantages
Homogenous goods
Saturated market

Question 27

Competitive oligopoly market , factors promoting collusion

Answer 27

Small number of firms
Similar costs
High barriers to entry
Ineffective competition policy -likely to get away with actions
Consumer loyalty - as cheating on collusive agreement by undercutting prices will not increase your market share
Consumer inertia - not likely to switch

Question 28

Pros and cons of competition in oligopolies ( threat of entry)

Answer 28

Pros - Allocative / productive /x efficiency gains, job creation as firms need to employ more people to increase output

Cons - Dynamic inefficiency, creative destruction, anticompetitive strategies, cost cutting in dangerous areas

Question 29

Pros and cons of collusion in oligopolies

Answer 29

Cons
Absence of competition leads to productive and x inefficiency
Inequality due to higher prices burdening poor more
Damages consumer welfare with higher prices and a loss of allocative efficiency
Reinforces cartels monopoly power making it harder to firms to enter the industry

Pros
pharmaceuticals are allowed to join in research
Producer collusion getting a higher price for your product
Dynamic Efficiency - reinventing profits into R+D
higher pay for workers

Question 30

What does game theroy show

Answer 30

Interdependence
Temptation to collude
dominant strategy to reach Nash equilibrium

Question 31

What are the aims of government intervention to increase competition

Answer 31

Prevent excessive pricing 
Promote competition 
Ensure quality standards and choice 
Ensure effective privatisation of natural monopolies 
Promote technological innovation

Question 32

Reason for minimum price introduction

Answer 32

Occurs in markets for goods with negative externalities.
Contracts demand causing consumption to fall to the socially optimum level, internalising the externality and helping society maximise welfare by reaching the allocatively efficient point

Question 33

evaluation for minimum price introduction

Answer 33

Price inelastic demand reduces effectiveness
Regressive, burned the tax
Black market - dangerous ( safety of the goods will not be regulated e.g alcohol), loss in tax revenue, cost to try and destroy the black market
Level of minimum price - may cause firms to shut down, unless demand is inelastic, as this will instead raise revenue

Question 34

Reason for and against maximum price

Answer 34

Prevent exploitation and income inequality

Shortage , excess demand, problems on how to allocate supply
Black market - exploitation via quality or price
Enforcement cost, Germany really struggle with this
Max price set at correct level?
Producer surplus falls, for landlord less income = less maintenance of properties
Cost meeting the excess demand, producing own good, subsidy

Question 35

Arguments in favour of nationalisation

Answer 35

Greater economies of scale - lead to productive efficiency gains that lower AC and therefore prices
Government will focus on service provision - allocative efficiency at a low price, maximise consumer surplus ( socially optimum level) —> minimising over/under production problems that the private sector may of had
Less likely to be market failures as government will address any externalities
Public sector can be a vehicle for macro - economic control

Question 36

Arguments in against of nationalisation

Answer 36

Potential diseconomies of scale as they company could become huge —> coordination/communication/motivation issues
Lack of incentive to minimise costs of production —> wasteful production —> x/productive inefficiency
Lack of supernormal profit = dynamic inefficiency as there is no profits to finance the technology gains/innovation/ R + D
Highly expensive + burdens the taxpayer : wages , maintenance, buying the asset from the private sector in the first place
Opportunity cost
Higher prices due to a lack of competition —> monopoly outcomes
Risk of moral hazard
Political priorities override commercial issues
Lack of experts

Question 37

Evaluation points for nationalisation

Answer 37

Economies of scale available dependant on the industry
Regulation could be better
If the private sector was already competitive
Size and objectives of private sector firms - if they weren’t profit maximising
“ in a period of austerity, when national debt is high can the government afford to spend these large sums”

Question 38

Definition and effect of privatisation

Answer 38

When state run organisation are sold to the private sector —> increasing efficiency and competition due to the profit motive

Question 39

Advantages of privatisation

Answer 39

Privatisation causes an increase in competition due to privatisation pushing output out to the allocatively efficient point. Firms will produce goods that the consumers want
Reduction in x inefficiency as firms look to drive down costs to remain competitive + maximise profits
Dynamic efficiency gains due to the incentive to be efficient

Question 40

Disadvantages of privatisation

Answer 40

No guarantee that firms will rush to the industry —> limited competition due to barriers to entry = productive + allocative inefficiency ( short run )
Loss of natural monopoly and therefore loss of economies of scale —> productive inefficiency as smaller firms cannot exploit all economies of scale
Private sector will not want to produce loss making goods even if they are socially desirable

Question 41

Evaluating government regulation

Answer 41

If firms do not flood to the industry
Government regulation - increase competition where markets become oligopolies and local
monopolies, forcing firms to take externalities into account

Question 42

Evaluating monopoly power ( not just cons)

Answer 42

Will they actually be dynamically efficient
Could be too big ( diseconomies of scale)
May not have profit max objective
Markets may be regulated to counterbalance the cons
May use price discrimination
Competition or threat of entry ( Tesco with 26% market share)
Natural monopoly
Type of good ( luxury like apple )

Question 43

Evaluating threat of entry

Answer 43

Do you really lose dynamic efficiency
Long run or short run contestability, limit pricing or other anticompetitive strategies will kick out the threat of entry. Firms can also patent their ideas
The improvement in technology could actually allow firms to improve in acquiring consumer data allowing them to price discriminate
Regulation could minimise the effect of “cost cutting in dangerous areas” and “anti competitive strategies”