Key Points Flashcards
Factors affecting profitability
degree market comp- if more cmop then tend towards normal profits, monopolu with barriers to entry can make supernormal profits
- rate of ggrowth of market demand- profitability squeezed in recessoin, decrease demand businesss less prices
- Ped potentila to use price discrim to increase profits- charge diff prices diff people
- Changes cost factors- variable/fixed, impact gov regulators, subsidies
How is conc ratio set out
No firm: conc hold
Causes disecon of scale
control and communications- problem monitor productiity and work quality- risk increasing wastage of resources, increase cost but not tooal output
Coop- workers in large firms may feel sense of alienation and loss of morale
Neg effcts internal piliitics, info overload, unrealistic expectations among managers, culture clash between senior people with inflated egos
More regulation and scritiny by gov as grow bigger- increases costs by regulation
Too much underutilised capital
Exampels econ of scale
technical-and containerisation
-managerial
-financial
Risk bearing
Network
Criteria for perfect comp
Half pppp
Homogenous products
All firms access factorproduction
Large no of buyers and sellers
Free costss entry into and exit rm market
Perfectly elastic demand curve- horizontal
Price takers- firms cannot dictate market price
Perfect knowelge
Prodit max key objective
example perfect comp
Foiregn exhcnage market
Agri goods
Monopolistic comp
large no firms in makret
No barriers to entry and exit
Differentiation
Industry conc low
Allocative efficiency monoplistic
No
Productively efficient monoploistic
No
Perfect comp allocative
Y sr and lrr
Perfect comp productive efficiney
Lr
Game theory
Study of strategic understanding by firms that operate in interdepdnent markets
Dominant strategy
Strategy that firm iwll undertake to max own interests regardless of other players
Explanation game theory
3/3 collude- pareto optemum
5/0 but risky
1/1 safest
Nash equlibrium
Equlibirum outcome of a game where no colusion
Critic of kinked diagram
Stigler
Who came up with kinked diagram
Sweezy
Reasons diff firms obejctives§
managerial obejctives
Returns to shareholders
Info constraints
Cost and pricing
Small businesses- lifestyle business
State owned corp- raneg diff econ social political objectives
Why sales max
if struggle to do as much as possible
Gain market share- ie aldi
Econ of scale ie netflix 2021 20%
Supermarkets may have loss leader
Principle agent problem
Conflict occurs from varying objectievs
Economic efficiency
Alloccative and productive efficiency
Productive efficiency
No additional output can be produced from the factory inputs available at the lowest position abailiabel
Av cost minimised
At lowest ac
Rev max more relatsic obective than profit max
Loa - depends on size and sturfture of firm- to a dregree
Trad econ firms seek to maimise make best possible from available options
Rev max profut max non profit max
Rev max more than profit max
seek max rev where mr=0
Eg divorce of wonership, principle agent problem
Manager bonus with rev sales- baumol
Profit max more than rev max
seek max profit- total rev- total cost
Trad econ most likely
Greater wages/dividens
Retained profit source cheap finances- iinvestment avoids interest rates
Market leaders such as apple can set price- innovation schumpter creative disruption iphne touchscreen thanr nokie, airdorp
Not profit max
Principle agent problem- shareholders not control- investment
Bounded rationality- alrge complex firms may be unable to access all finances, aware at margine- but more abel for small firms
Penalties cartels uk
10% worldwide profits
3-15y exec
Costs of collusive behavour
Damages consumer welfare- higher prices, loss consuemr surplus, loss allocative efficiency, hits lower income famileis/regressive impact
Absence of competition hits efficiency- x inefficieny leads to higher unit cots, less incentives to innovate/loss dynamic efficiencies, output quotas penalised firms who want to expand
Reinforce cartel- hard new businesses to enter
Potential benefits from collusion
General industry standards can bring social benefits- pharama, car sfaety research
Fairer prices for producer coop in lower and middle income developing companies- decrease rates with extra income generated
Profits have value- how used, capital investment, higher wages for employers, randd leading to dynamic efficiency
Roles cma
Monitor and investigate mergers- sainsburys and asda 2019
Protect consumers against unfair market practises
Fight against market cartels
Recommendations to gov and regulators to benefit consumer
Hold exec personally responsible
High fines
Investigate market when case of consumer or comp problem
Cancorelia and actavais acucsed of illegal agreement which enabled higher prices for a life saving drug to be prolonged
Roles cma hold exec personally responsible
Libor price fixing tomorrow hayes- 11 years
Trade for ubs and citi group
Roles cma high fines
2012 major tv producing companies philips and samsung 1.1bn pounds to several firms for coluding iin production of cathode ray tubes for increasing price tv sets
Pure monopoly
100%
Working monoplly
25%
Dominant firm
40%
Gov inteverntion for monopolies- price regulation
set price control to force monoplies to choose a price lbelow profit max price- rpi -x (x re[resentas expected efficieny of firm
Or rpi -x+k -k investment- used in water industry has allowed investmentof 130bn OFWAT regulator
Gives incentive for firms to be as effciient as possible
Gov inetrvention for monopolies- quality standards
can obeseve quality of gs
Gas and electircity markets regulators ensure elderly treates fairly- esp in colder months
Post office has deliveries on daily basis to all areas
Electricity generators forced to have enough capacity to prevent balckouts
Require political will to ensure upheld
Gov intervention for monopolies= performance targets
punctuality targets trains
-split service into regions to compare-e water industry
Targets on price quality, consuemr choice and costs of production, imrpoes service and gains for consumers
Firms will resist the introduction of targets- required political will and undertsnaidng, firms will attempt to find was to meet targets whe actually impsoses it- change train times so not techinally runnicg late
How to resolve divroec of ownership
Renumeration schemes- profit related pay
Use of boards owners and shareholder smake deciison of firms and in agm
Discuss hwo divroecce of wonership from control may affect both the conduct and performance of firms
Inrto- define divroce fo ownership, consuct firms, performance
Diff maximisers- trad profut but also rev and sales- show on diagram
How problem- impact conduct as principle agent problem
Impact performance- efficiency disecon of scale and financial performance
Solutions
-renumenrtaio package
Sharehohlder boards
Overall may be problem but avoidable
A consumer will be in a state of eqiliibrium with respect to the q of the goods purchased where
Relationship between marginal utility and price is the same for each product bought
Hypothesis of diminishing marginal utilisty- shap shape of curve
Downsward sloping demand curve
Why do we need nurgde
When we tend to forget something
When we see the benefits now and costs later- intertemporal choices- choices that hav econsequences over time
Zero price effect
The demand curve for a good changes shape dramatically once the price of the good is zero
Should gov intervene to encourage healthy diet
Y- market failure
Sugar tax- trad policy
Education cmapaigns- trad policu
Behavoural- choice archetecture framing
Conc- behavoural policies most but perhaps with education too
Tax on unhealthy food
Sugar tax imposed apr 2018 unit tax
Evidence of sugar tax in mexico supports success of this policy with sales of sugary foods decreasing by 12% in first year of tax
Tax revenue hypothecated to reduce consumption of unhealthy foods
Draw diagram- demand contracts
But unliekly to be effectiev- diff to put monetary value on cost of neg externality- demand unhelathy foods prcie inelastic, regressive
Education capmpaign. To increase healthy food cnsumption
gov enforce restaurants takeaways fast food outlets to provide calorie info
Policy helpds individ more effectively wight up benefist and costs of consuming diff food-s make choices that max utility
Reduce info failure
Yet ineffective as uk already. Has compulsory food labelling of ingreidients and campaigns such as change4life initiative
Consumer protection act 2007 already protects consumers against misleading ads suggesting that info provision cannot easily be improved
Gov increase consumption healthy foods- behavoural
Consumer shows isgns bounded rationality- inablity control aspectcs own behavour
Choice achreteectyure
Framing
How useful behavoural policies are in influencing peoples choices
Behavoural policies- lib paternalism approach to infleucneing poeples choices
Trad econ policies- tax regulation and info campaiagns
Behavoural policies incorporate psycholohu into tgheir creations and thus may be more useful at directly influecing peoples choices
Nudges smoking
Influence choices- choice architectur ehelathier eating
Making decision making easire- defailt options
Nudges smoking
-restrict choice- only smoke in smoking specific areas- outside or in non public places away choldren
Additional challengs imposed- consumption demerit goods may ne reduced closer to social optimum
Neg externalities- nhs treat smoking related helath conditions
But lowenstein and chater argue- nudges fail to adress root causes of problem
info failure and additiccve nature- bheavoural not enough
Info campiagns- health risks increased risk thraot cancer
Quit smoking cmapaings- nicotine replacemnet needed tackle addictiveness
Lt combination- reduce normality of smoking, behavoural econ stil play role
Econ a social science- 15 marker
Social science
Institutional econ
how humans make choice
Tools and methods other social sciences
Social science
study how humans behave nad interact- around consumer deiciosns
Social science- concerned how poeple institutions and societies make deciisons how to use scarce reosurce and max welfare
Institutional eocn
emphasise legal policitical and social framework in which econ actigvity occurs
Eocn outcomes not determined socley bu market forces
But also infleuences by rules regualtionas and norms that shape econ actors
Analyse issues property righst contracts and regulation of makrtes
Study humand and how make choices
how socilal psycholoical and political factors influence deciison making, how decisions affect society
Uses tools and methods other social sciences- sociology and psychology undeerstand how diff eocn systems free or miced econ operate- kjhaneman
Econ not social science
More closely related natural science
Statistical methods
Econ more closely related natural sciences
increasingly rleie son mathematical modelas and data analysis to study human behavour and econ systems
Econometrics
application of statistical methods to econ date in order to estimate and test hypthoesis about econ relationships
Branch of econ that aims to provide empirical evidence for ecno theories and t oforecast futrue eocn trends
N
Profit used for investment
Retained profits cheaper than loan
Improve dynamic efficiency
Can have product and prcess innovation
Schumpter creatiev destruction - apple- reinvesting market leader set high prices - face id- desirable and competitive
Explain how advances in modern tech are likely to elad to risiing wages in some industries
-boost labour productivity- mrpl demand for labour
Machines create derived demand for workers who can amintain machines
Lead to new products more workers
Lower osts and increase in profits which may lead to an increase in wages
Informatio asymmetry seen with cars
Disel thought to be ccleaner than petrol yet disel led to 40,000 premature deaths
consequences of wealth inequality
Unequal distribution of property- some live in low qality homes or having to frequently move house
Hindrance of social mobility via the wealthy affording better education, health, cultural goods
Intergenerational probelms property ineuqlaity, nature of uni funding
Impact on income ineuqlity- wealth creates income via interest rent and dividneds
Only wealthy can afford to take big risks as entreprneurs so have acess to highe risk high reard opp
Envy and jelously leading to social problems
Marginal rev product of labour assumes
A firm emp labour is operating in a perfect comp market
Profit max and so change in level of emp that max profit
Hire pepole where marginal revenue=marginal cost of lab
Elasticity of lab demand depends on
Lab costs as % total costs- lab expenses are a higyh % total cotss, lab demand more wage elastic
Ease and cost of factory substittution- lab demand, more elastic when a firm can easiily sub between capital and lab
Ped of final product- determines whther a firm can pass on higher laabour osts to consumers in the form of higher prices- if demand is inelastic, higher costs passed on
Time period- in lr easier for firms to sub factor inputs- bring more capital in perhaps replacing lab
Shiftfs in lab demand curve
increase final consumer demand- businesses need to take on more workers
Change in market price of output that lab is making
Increased productivity of lab which makes lab more cost efficient than capital- higher productivity marginal product of lab
Gov employemnt subsidies which alllows busness to employ more workers
Change cost capital equpiment
Causes outwards shift supply for labour
Net inward migration with qualified experience
Fall in relative pay in substitute occupations
Lower barriers to entry- min professional qualificatins
Demographics factor changes- increase child care provision
Inward shift supply for labour
Brain drain effect- econ lose skilled wrokers oversees- tax
Decline non monetised rewards assc with jobs- stress
Increase pay in sub occupations
Key factors affecting lab supply
Real wage and extra pay- oveertime
Wages on offer in sub occuptaions
Barrier to entry- artificial limits with min qualifications
Improvements in occupational mobility of labour and stock human capital
As a result expansion apprenticeships and other type of work experience
Non monetised characcteristic of specific jobs- job risks, anti social hours job secuirty
Net migration of labour
Demographic factors - working myms
Peoples preference- working ohours felxibility
Determinants in elasticity of supply
Skills//qual
Inelatsic of skilled workers, length and easeof trainnihg more inelatic, min skill needed makes sub workers more
Vocational nature- more so such as nursing less responsiev to changes in wages
Time epriod- needs longer time to respond to change in wages as people may need to be retrained
Causes of pay differentails
Reward antisocial hours, risky- oil rig
Mrpl
Skills and barriers to entry
Tu use collective bargaining power to achieve increase wages
Discrim- although equal pay act 2010 meant that firms with 250 plus. Employers must publish pay gap
Poliices to change income/wealth
Progressiev tax system
Wlefare reform
Wage floors and emp reform
Tackling structural barriers to emp
Eval likely impact of increase na tnin wage
Intro- min wage definition
Workers
Firmsc
Market structure
Workers benefit impact uk nat min wage
increae wage rate
Ucl and institute for fiscal studies 60% in relative poevrty in work
Unemp trap reduce, reduce replacement ratio- incentivise workers to work
Workers benefit no- impact of uk nat min wage
But not all workers- self employed and gig econ- on flexible st contracts paid for by task rather than hour
The gaurdian may 2023- 52% in gig econ make less than min wage- ie uber, deliveroo, just eat
But sc ruling uber guarenteed 70,000 driver min wage floor, holiday pay, pension- but only paid time trip allcoated to drop off not waiting time
Impact nat min wage increase0 firms
Pro- may incentivise train to increase productivuty
No- small business may struggle to make profits- risk of increase business cost, increase price, less comp internat members, decrease exports worse for firm
Instead gov should offer tax relief on apprentices, training (apprenticship levy) increase incentive buisnesses ratehr than via increase min wage
Pressure increase wages all workers
Impact imn wage market structure
Monopoly- likely to see increase in wage and employemnt
Perfect comp- may lead to real wage unemp
Characteristics- many firms, perfect info, homogenous skills, sma ejobs
Min wage efficiency depends on
how much by- 24% 2022 to 2024
Ped firms products- can pass on higher costs
State of econ- whether firms are sufficienly profitable to be able to absorb hugher min wage
Explain causes of wage diffentials in uk
diff in production and revenue creation
Compensating differentails
Barriers to entry
Wage differentials- diff in production and revenue creation
- footballer generate much more- ticket sales advertising
- Higher mrpl generally rewarded higehr pay (see diagram)
- Eg engineers making cars, lawyers, legal servcies
Compensating differentials
- oil rig- antisocial hours and risk
- But discrim 2010 equalities act enactied, firms over 250 employees publish data on gender pay gap bbc male presenter
- Gary linker match of the day most
- Min wage may be still underpaid- discrim against migrants, lack understnding of rights
Barriers to entry
- qualifications- sqe lawyer
- Higher skill in high demand ie lawyers
- Reduced no of them due to high entry reuqirpements
- Lower skilled workers more inelastci
Childcare barrier to women working
- fawcett society found that 250,000 women with children under 4 left workforce
- Childcare costs v high in uk compared to elsewhere- uk 25% take home pay, 14% oecd
- Yet as of 2024- eligable 15h per week hours 9 month to 3, 3-4 sept 2024
Impact of min wage depends upon
If above equlibrium point and its level
Elastciity supply- inelastic min wage emay not result in signif change in emp
If demand inelastci jobs lost relatievly small
Regulatory failures
Regulators may limit innovation in fast growth markets- change and expand, lack of competititive adv
Capp prices may prevent new firms entering a market- lack incentive from rent controls, energy price caps
Regulation becomes bureaucratic and costly- menu costs
Regulator may be ‘behind the curve’ with new tech
May lack powers to be truley effective in protecting consumers
Frequent rule changes can shift business investment- eu laws
Word for cant govern overseas
Territoriality of jurisdiction
Esp on pollution
Why may the market fails
There is a less than optimum allocation of scarce resources resulting in a welfare loss to society
Causes of gov failure
Inadequate info
Conflicting objectives
Admin cost
Unintended consequences
Self interest
Expertise- lack of
Sucess of cap and trade system
Acid rain program usa 1990s
81% done by 2015
Positive economic benefits of clean air zones
Increased competitiveness, since reducing air pollution can make affectied areas more attractive to investors
Imporves public helath and reduction in healthcare costs leading to increased econ productivity and healthier woorkforce
Efforts to reduce air pollution can crive innovation in clean technologies and energy production creating new econ opportunities and ,armets
Promote sustanable development and reduce risk future environ and health crisis and ensure lt econ stability
Nationalisation
Socio econ argumenets (structural unemp in failuring industryes)
Efficiency- against- public sector may. Be more allocatively but not productively or dynamically, managers may have no experience or incentives
Alternatives- subsidy or enabel to fall and tehn build up areas with fdi and levelling up
Loa- no
Nationalise trains
Loa no
Benefit consumer
-servcies reliabel, prices, efficiency, safety prioritiesed as not trying to cut costs, accountable gov
Macro econ
-mobility of labour, cost of living, merit good wnat to increase provisoin better enrion
Cost operations and efficiency
Privatisation would mean comp with each other0 monopoly price comp diragra cinio cino orice
Choice
Econ of scale less likeyl to be obtained- mes- as nay priioioise other things such as safetty rathe rthan cost
May be costly for gov if lossmaking infustry- coal 1946-1994
Objective agents
What we assume as economists- rationality
Productive efficiency for econ
When it is impossible to produce more of one good without producing less for another
Value judgement influence econ decision making and policy becayse value judgements
Are eval processes based on individ standards and priorities
Factors affecting demand
Pirates cs
Population
Income
Real interest rates
Advertising
Tastes/trends
Economic conditions
substitutes
Complementary goods (prices)
Substitute goods prices
Factors affecting supply
Pintswc
Productivity
Indirect taxes
Number of firms
Technology
Subsidies short term
Weather- favoruable conditions mean increase agri products
Cost of production
Factors affecting pes
Time period
Existance of spare capacity
Ease of storing supply
Length of production period
Market supply period
Situation facing firms following a switch in unexpected rightward shift of demand
Firms cannot immediately increase output
Supply increasingly inelastic- price increasingly eliminate excess demand
Inferior good
Negative yed
Tesco own brand coke, bus travel
Luxury goods
Yed over +1
Normal goods
Positive yes- as y increases so does demand
Everyday goods
+0-1 yed
Condition of demand
A determinant of demand other than price, that fixes the positiin of teh demand curve
Factors which affect demand
Veblen goods
Goods of exclusive or ostentatious consumption
Eg farrari
Reassuringly expensive
If ped above 1
Elastic
Ped =0
Demand perfectly inelastic
ped les than 1
Demand price inelastc
Ped above 1
Demand price elastci
Ped infinity
Perfectly priced elastic
Ped =1
Unitary elastic demand
Is ped normally positive or negative
Negative apart from veblen goods
Adv of rpi-x regulation
Regualtor can set price increases depending on the state of the industry and potential efficiency svaings
If a firm c ut costs by more than x, they can icnrease their proifts0 incentive cut costs
Heelps to increase comp and prveet abuse of monpoly power
Disadv of rpi-x regulation
Costly and difficult to decide what level x should be
Danger of regulatory capture
Firms may argue that regulators are too strict and dont allow them to make enough profits for investment
If a firm becomes very efficientm it may be penalised by having higher levels of x so it cant keep its efficiency saving
Positive ced
Subsitutes
Neg ced
Complementary goods
Explain how the imposition of a tax on a good or service affects both consumer surplus and prdocuer surpkus
definitions of tax, consumer surplus, producer surplus
• explanation of how tax raises the costs of production for producers, reducing their willingness to
supply at any given price level
• how firms will usually look to pass on at least some of this higher tax to consumers in the form of
higher prices
• alternatively, firms may respond to the higher tax by not raising prices much, instead paying the
tax out of their profits, if indeed they make any such profits. Other firms may be forced out of
business by the tax, thus limiting supply
• how the incidence of tax is determined by the price elasticity of demand for the good or service.
When PED is low, the consumer surplus is affected more than the producer surplus. When PED
is high, the opposite is true
• some of the lost consumer and producer surplus is likely to be transferred to the government via
tax revenue. However, there is also likely to be some degree of deadweight loss as a result of the
reduced economic activity brought about by the tax
Ced formula
Percentage change demand y/percentage change price x
Yed formula
Percentage change demand / percentage change income
