Imperfect competition

Question 1

Oligopolistic competition

Answer 1

A few suppliers in the market, creates strategic behaviour

Question 2

Principle agent problem

Answer 2

Conflict in interests between managers and owners

Question 3

What do people do instead of optimising?

Answer 3

Setting an attainable goal satisficing

Question 4

What did Schumpeter argue?

Answer 4

Development and equilibrium are mutually exclusive

Question 5

Where does Capitalism’s dynamism come from (2)

Answer 5

Classical economists believed it was coercive competition

Schumpeter believes it is the entrepreneur

Question 6

3 stages of market innovation

Answer 6

Invention
Innovation
Imitation

Question 7

Long waves of economic development

Answer 7

Periods where basic innovations led to rapid growth e.g. railway 1843-97

Question 8

Role of banks in innovation (3)

Answer 8

In dynamic economy innovation needs to funded from credit from another activity
Banks should lend to innovator based on judgement of innovation
When at full employment extra credit raises price of raw materials creating a tax on static firms diverting resources to the innovator

Question 9

Role of credit in innovation (4)

Answer 9

Credit is purchasing power
Development doesn’t require saving, saving will be created by increased income from innovation
Interest is a deduction from profit to pay for liquidity proviion

Question 10

Legacy of Schumpeter’s theories (3)

Answer 10

Evolutionary economics
New growth theory
Basic innovations

Question 11

Theory of financial market instability (4)

Answer 11

Investors initially practice hedge funds
As boom approaches investors us ‘speculative finance’
Ponzi finance means investors borrow expecting profitability
Bubble bursts creating capital crisis