exam Flashcards
Opportunity Cost
Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another.
Because opportunity costs are unseen by definition, they can be easily overlooked.
Public Good
A good or service that, once purchased by anyone, can of necessity be enjoyed by many.
Marginal cost.
The cost of producing an extra unit.
Ceteris Paribus
(cet. par.)
When analysing one variable, the convention that all other variables are held constant.
Inferior Good
An inferior good is one for which the quantity purchased decreases when real income increases.
Normal goods
Good which when income increases the quantity also increases.
Complementary Good
A good whose demand curve shifts along with that of another good.
Substitute Good
A good whose demand curve shifts inversely with that of another good.
What is the difference between marginal cost and opportunity cost?
Marginal cost is how much extra it costs to make one more thing, while opportunity cost is what you give up by choosing to do that thing instead of something else.
So, marginal cost is about the extra money spent, and opportunity cost is about the value of the best thing you didn’t do.
Law of demand
When Price rises → the quantity demanded falls
Two reasons explain this: Income effect and substitution effect
Income effect
The income effect is how changes in your income affect how much of something you buy.
1 If you have more money, you might buy more of most things (normal goods), and if you have less, you buy less.
2 But for some cheaper things (inferior goods), you might buy less of them if you have more money because you can afford better stuff.
substitution effect
The substitution effect is what happens when you choose something different because its price has changed compared to other things.
If something gets more expensive, you might switch to a cheaper alternative, even if your income stays the same.
2 For example, if the price of coffee goes up a lot, you might start drinking more tea instead.
Determinants of Demand
Demand is affected by the following:
Tastes
- The number and price of substitute goods.
- The number and price of complementary goods.
- Income
- Expectation of future price changes.
What are the most important determinants of the supply curve? How they possibly could cause a rise in supply?
Costs of production;
profitability of alternative products (substitutes in supply);
profitability of goods in joint supply;
nature and other random shocks;
aims of producers;
expectations of producers.
Short run
The period of time over which at least one factor is fixed.
The actual length of the short run will differ from firm to firm and industry to industry. It is not a fixed period of time.
Long run
The period of time long enough for all factors to be varied.
The law of diminishing returns
When one or more factors are held fixed, there will come a point beyond which the extra output from additional units of the variable factor will diminish.
explicit costs
Factors not owned by the firm
The payments to outside suppliers of inputs. They involve direct payment of money by firms.
implicit costs
Factors already owned by the firm:
costs that do not involve a direct payment of money to a third party, but which nevertheless involve a sacrifice of some alternative.
Sunk costs
Costs that cannot be recouped.
Examples include specialised machinery or the costs of an advertising campaign.
Remember that the cost of a machine was not always a sunk cost. Before its purchase, the opportunity cost of buying the machine was the money paid for it.
You should not base your decision on sunk costs.
Historic costs
the original amount the firm paid for factors it now owns.
economies of scale
When increasing the scale of production leads to a lower cost per unit of output.
Reasons why firms are likely to experience economies of scale
Specialisation and division of labour.
Indivisibilities
The ‘container principle’
Greater efficiency
By-products
Multi-stage production
Specialisation and division of labour.
Because of this, less training is needed, workers can become highly efficient, less time is lost in workers switching from one operation to another, and supervision is easier.
Indivisibilities
The impossibility of dividing a factor into smaller units. The problem of indivisibilities is made worse when different machines, each of which is part of the production process, are of a different size.
The ‘container principle’
Any capital equipment that contains things tends to cost less per unit of output the larger its size. the reason has to do with the relationship between a container’s volume and its surface area. A container’s cost depends largely on the materials used to build it and hence roughly on its surface area. Its output depends largely on its volume.
Greater efficiency
Greater efficiency of large machines.
Larger machines might be more efficient because they can have more output even when the input is not much.(one person opparate a large machine whether large/small)
By-products
There may be sufficient waste products to enable some by-product(s) to be made
Multi-stage production
A large factory may be able to take a product through several stages in its manufacture. This saves time and cost in moving semi-manufactures products from one firm to another.
These are plant economies of scale = economies of scale that arise because of the large size of a factory.
It is usual to divide markets into four categories. In ascending order of competitiveness these are
Monopoly,
Oligopoly,
Monopolistic competition
Perfect competition
Perfect competition
- there are many firms, none of which is large;
- there is freedom of entry into the industry; - all firms produce identical products;
- all firms are price takers. (Horizontal)
- Undifferentiated products (Homogeneous)
EX.
Food market
Netflix
Mcdonalds
Monopoly
-There is only one firm in the industry.
- Restricted
- Unique products
- Downward sloping /more elastic the Oligopoly
- Firm controls price
EX.
NS Railway
Luxotica
Google
Monopolistic competition
- There are many firms and freedom of entry into the industry,
- each firm produces a differentiated product thus has some control over its price.
- Downward sloping
EX.
Hairdressers
Restaurants
Shoe stores
Oligopoly
- There are few enough firms to enable barriers to be erected against the entry of new firms.
- Downward sloping
EX.
Car shops
Electric appliance shops
Collusive oligopoly
where oligopolists agree to limit competition between themselves. They may set up quotas, fix prices, limit product promotion or development, or agree not to poach each other’s markets.
Cartel
a formal collusive agreement.
Cartel’s MC curve is horizontal sum of the MC curves of members.
Maximum profit is at MC=MR.
Cartel members may somehow agree to divide the market between them > quota = the output that a given member of a cartel is allowed to produce or sell.
Tacit collusion
where oligopolists take care not to engage in price cutting, excessive advertising or other forms of competition. There may be unwritten rules of collusive behavior such as price leadership.
Nash equilibrium
This is the position that results from everyone making their optimal decision based on their assumptions about their rivals’ decisions.
If a firm’s behavior was different from its expected behavior, then the decisions of its rivals do not represent a Nash equilibrium.
The difference between a single-move game and a repeated move gave is that each firm can now see what its rivals did in previous periods.
Dominant strategy
where the firm’s optimal strategy remains the same, irrespective of what it assumes its rivals are going to do. One of the best ways of illustrating this idea is to represent the strategic environment facing the firms as a normal-form game = where the possible payoffs from different strategies or decisions are presented as a matrix.
Trigger strategy
once a firm observes that its rival has broken some agreed behavior it will never co-operate with them again.
Sequential move game
one firm makes and implements a decision. Rival firms can observe the actions taken by the first mover before making their own decisions.
First-mover advantage
when a firm gain from being the first one to take action.
Price discrimination
where a firm sells the same product at different prices.
Three different types of price discrimination
First-degree price discrimination
Second-degree price discrimination
Third-degree price discrimination
First-degree price
This is where the seller of the product charges each consumer the maximum price her or she is prepared to pay for each unit. It is sometimes called perfect price discrimination or personalized pricing.
Second-degree price discrimination
This where a firm offers consumers a range of different pricing options for the same or similar product. Customers are then free to choose whichever option they wish, but the price is often dependent on some factor such as:
The quantity of the product purchased.
The use of coupons/vouchers.
When the product is purchased.
The version of the product purchased.
Third-degree price discrimination
This is where a firm divides consumers into different groups based on some characteristics that is:
Relatively easy to observe
Informative about consumers’ willingness to pay
Legal
Acceptable to the consumer
i.e. age, gender, nationality, location, occupation, business/individual, past buying behavior.
Peak-load pricing
price discrimination (2nd, 3rd) where a higher price is charged in peak periods and a lower price in off-peak periods.
Principal-agent problem
Where people (principals) as a result of lack of knowledge, cannot ensure that their best interests are served by their agent
PA Problem
Two elements to tackle the problem
The principals must have some way of monitoring the performance of their agents.
There must be incentives for agents to behave in the principals’ interests.
Growth through strategic alliances
Strategic alliance
where two firms work together, formally or informally, to achieve a mutually desirable goal. There are many types of strategic alliance between businesses, covering a wide range of alternative collaborative arrangements
Joint ventures
Consortia. Consortium
Franchise
Subcontracting
Network
Joint ventures
This where two or more firms set up and jointly own a new independent firm.
Consortia. Consortium
This is where two or more firms work together on a specific and create a separate company to run the project.
Franchise
This is a formal agreement whereby a company uses another company to produce or sell some or all of its product.
Subcontracting
This is where a firm employs another firm to produce part of its output or some if its inputs.
Growth by merger
There are three types of merger:
A merger may be the result of the mutual agreement of two firms to come together.
A horizontal merger
A vertical merger
A conglomerate merger
A horizontal merger
This where two firms in the same industry at the same stage in the production process merge.
A vertical merger
This where two firms in the same industry at different stages in the production process merge.
A conglomerate merger
This where two firms in different industries merge.
Motives for merger
Merger for growth
Merger for economies of scale
Merger for monopoly power
Merger for increased market valuation
Merger to reduce uncertainty (behavior of rivals/economic environment)
Merge due to opportunity
We benefit from the environment in three ways
As an amenity to be enjoyed.
As a source of primary products.
As a place where we can dump waste.
There are various factors that are helping to reduce environmental degradation
Technological developments.
Increased price of non-renewable resources.
Public opinion.
We can identify four different approaches to the environment and sustainability
The free-market approach.
The social efficiency approach.
The conservationist approach
The Gaia approach
The conservationist approach
maintenance of the environment is seen as an ethical constraint on human activity.
The Gaia approach
the respect for the rights of the environment to remain unharmed by human activity. Humans should live in harmony with the planet and other species. We have a duty to be stewards of the natural environment so that it can continue to be a self-maintaining and self-regulating system
Grandfathering
where the number of emission permits allocated to a firm is based on its current levels of emission. A major crititsm on this method is that it seems unfair on those firms that have already invested in cleaner technology.
Green tax
a tax on output designed to charge for the adverse effects of production on the environment. The socially efficient level of green tax is equal to the marginal environmental cost of production.
The main purpose of money is for buying and selling goods, services and assets. Four other important functions:
Medium of exchange = something that is acceptable in exchange for goods and service.
A means of storing wealth.
A means of evaluation.
A means of establishing the value of future claims and payments.
Two types of banks:
Retail banking
Wholesale banking
Retail banking
branch, telephone, postal and internet banking for individuals and businesses at published rates of interest and charges. Retail banking involves the operation of extensive branch networks.
Wholesale banking
where banks deal in large-scale deposits and loans, mainly with companies and other banks and financial institutions. Interest rates and charges may be negotiable: wholesale deposits and loans = large-scale deposits and loans made by and to firms at negotiated interest rates.
In the past there were many wholesale banks that were known as investment banks.
The main purpose of money is for buying and selling goods, services and assets. Four other important functions:
Medium of exchange = something that is acceptable in exchange for goods and service.
A means of storing wealth.
A means of evaluation.
A means of establishing the value of future claims and payments.
Financial intermediaries
the general name for financial institutions which act as a means of channeling funds from depositors to borrowers.
