Micro- 1 Flashcards
What is the production possibility frontiers
The Production Possibility Curve (PPC) is an economic model that considers the maximum possible production (output) that a country can generate if it uses all of its factors of production to produce only two goods/services
Many PPC diagrams show capital goods and consumer goods on the axes
Capital goods are assets that help a firm or nation to produce output (manufacturing). For example, a robotic arm in a car manufacturing company is a capital good
Consumer goods are end products and have no future productive use. For example, a watch
How is the environment a scarce resource
It’s only limited amount of resource on planet made up of renewable and non renewable resources
With non renewable resources- stock level decreases over time so cannot be renews
This can be fossil fuel such as coal , natural gas
Finding substitute such as wing farms can reduce rate of decline of resources
Determinants of demand
-PIRATES
Population- demographic- greater population = more people in the UK to demand……= demand will shift to the right
Recently UK is experiencing increase in aging population = living longer= more in the economy so = increase in demand for wheelchair
Incomes- we need to make distinction between normal and inferior goods=
Interior goods-if income goes up= demand go down as there’s more disposable income= able to afford high quality goods
Related goods
- substitute- can be replace with another food such as brand of TV.= if price of substitute fall= quantity demand of original food falls as consumer will switch to the cheapest option
- complement good- if price for one good increases = demand for the other good decease
Advertising
Good advertising affects our willingness to buy something / good advertising shift the demand curve from___ increasing demand from Q___ to Q___ regardless of price
Can also increase consumer loyalty
Taste and fashion
The demand curve also shift if consumer taste change such as demand for physical book might fall if consumers start preferring to read e -books
Expectation
- this is of future price change. If speculators expect price of shares in a company to increase in the future demand likely to be present
Seasons
- summer= demand for ice cream, lotion, winter
Factors influencing PED
Necessity good- will negative demand even if price increases consumer still demand= liekly to be unresponsive to change in price
Substitute - such as android and I phone 1 demand more price elasticity
Peak and off peak demand- during peak times for train demand more price inelastic
Addictions or habitual consumption - demand for cigs is not sensitive to Chang run price as consumers addicted
This can be coffee , junk, video games
Time
In the short run products Kiley to be price inelastic as consumers find it difficult to change shopping habits
Or don’t have enough options to change
In long run products likely to be priced elastic as consumer adjust to changing market conditions
Or find substitute
If firm sells good with inelastic demand, if they are likely put most of the tax burn on
Consumers as they know price increase will not cause demand to fall significantly
Increase in tax will decrease supply from s1 to s2 which increase price form. P1 to p2 therefor demand contracts
Most effective for raining government revenue
What is supply
Is the quantity of good or service s producer is able and willing to supply are given price during a given period of time
Upward sloping as price increase = its more profitable for firms to supply .
Also with larger output = firms cost increase so they need to charge higher price to cover the cost
Factors affecting shift of supply
Productivity - higher productivity = outward shot as average cost falls= shift supply to right
Indirect tax
Number of firms= more supply
Technology
Subsidies
Weather
Cost of production
Factors influencing PES
Time scale - in short run supply more inelastic so producer cannot quickly increase supply
Spare capacity if firm operating at full capacity = there’s no space left to increase supply
If there’s spare resource = supply can be increase quickly
Barriers to entry
Means supply more price inelastic as it’s difficult for new firms to enter and supply the market
Definition of derived demand , composite demand, joint demand, joint supply and composite supply
- derived demand is when the demand for one good is linked to the demand for a related good
For example for brick is devised from demand of building new house
Composite demand - when demand for a good which has more than one use such as milk. Means increase in demand for one use of good reduce supply of the good for an alternative use
Joint demand are complements - are product bought alongside another
- product that are consumers together
Increase in demand for one good will increase demand for a complementary good
Joint supply when production of a product creates a by product that can also be supplied
Composite supply - when provision of a g/ s come from variety of source, such as heat comes from gas or electricity
Formula for productivity and labour productivity
Productivity = the total output per period of time/ number of inits of FOP
Labour productivity = total output per period of time/ number of units of labour
Importance of labour productivity
Advance in technology = leading worker dot being equipped , lead to increase in labour productivity
Can arise from more better education and training
Is an important determinant of how competitive firms and countries are
What is specialization and division of labour
Specialization involves an individual worker , firm , region or country producing a specific g/s.
Occurs when each worker completes a specific task in the production process
Division of labour refers to specialization at the level of individual learner. Breaking down the production process into seperste task upon specialization
Advantages
There’s more competition= gives incentive for firms to lower their cost , helps keeps price down
Reduce the time spent moving between task and workstation = increase productivity as they are more efficient= drives up wage
Higher output due to machinery,, potentially higher quality , since production focus on what people and business best at
Hep solve the problem of scarcity as there will be a greater supply of goods/services to meet unlimited wants = allocative efficiency
Disadvantage
Work becomes repetitive = could lower motivation of workers, potentially affecting quality and productivity
Workers could become dissatisfied= higher turnover rates
Could be more structural unemployment
Since skills might not be transferable = cause worker to have focus on the task for long = bad longing standards= put a drag on government finance
Change in fashion and taste = don’t diversify
Importance of trade and exchange
Countries can specialize in production of a certain goods such as Norway is one of the largest oil exporters
Country trade to get the good and service they unable to produce
Specialization and division of labour only viable if there’s an efficient system of exchange
Contrite can exploit their comparative advantage = produce good at a lower opportunity cost to another
Absolute advantage occurs when country produce more of a good with the same factor input
Advantages
There’s and outward shift in the ppf = greater world output so there’s gain in economic welfare
There’s increase in supply of food to choose from
Lower average cost- since market becomes more competitive
Disadvantage
Less developed countries might use up their non renewable resources too quickly
Countries could become over dependent on export of one commodity such as wheat
If there poor weather condition or price fall = economy will suffer
Function of money
A system of exchange involving money as a medium of exchange
Avoid the need of bartering ( when goods and services supply are traded with other goods/services but people not always get what they needed and want
Exchange could only take place if there’s coincidences of wants. Using money eliminates the problem
- money provided a means to measure the relative values of different g/s such as a piece jewelry might be considered more valuable than a table as the relative price measured by money
Also money had to hold its value to be used for payment . It can be kept for a long time without expiring
However the quantity of g/s that can be bought with money fluctuate slightly with forces of supply and demand
Money allows debt to be able to be created
People can therefore pay for things without having money present and pay for it later.
This relies on money storing its value
Economies of scale
Internal
When long run average for falls as output increase
Internal economies of scale occurs within business :
Risk bearing - when firms become large , they can expand their production range
= can spread the cost of uncertainty = if not successful they have other products to rely on
Financial - banks willing to lend loans more cheaply to larger firms as they are demand less risky = larger firms take advantage of cheaper credit
Can negotiate lower interest rates rate
Managerial - larger firms are more able to specialize and divide their labour = managers can monitor productivity of the workforce and boost the productivity of worker , also bring skills= therefore quantity rising than total cost
Technological- larger firms can afford to invest in more advanced, productive machinery= lower their average cost= boost productivity as firms using factory efficiently. Quantity rising faster
Marketing - larger firms can divide their marketing budgets across larger outputs so the AC of advertising per unit is less than that of smaller firms
Purchasing - larger firms can bulk buy = each unit will cost them less such as supermarket have more buying power from farmers than corner shops, sho they can negotiate better deals
Cost rising but at a slower rate
There’s also network EOS
There are gained from an expansion of e commerce
Larger online shops such as eBay can add extra good and service at very low cost but the revenue gained from it will be significantly higher
What is external economies of scale
Occur within the industry such as local road much improve so transport cost for local industries will fall
Also might be more training facilities., more r and d, also Lower AC for firms in local area
- new airport , new railway lines= reduce cost= cheaper to sell good , cheaper to access raw materials
R and d firm may move closer = see your a key business = improve tech = reduce cost= AC then fall
HOWEVER
If business gets too big = suffer economies of scale= increase in LRAC as output increases
This is due to
Control- becomes harder to monitor how productive workforce is as firms become larger. If worker know manager isn’t monitoring strictly= may slack off = mean quantity suffer, TC rise faster than quantity = bring up AC rise
Coordination- coordinating different part of business gets difficult.
To make sure all business departing working in same way , it’s diffuse ( hr , IT, marketing) productivity is gong to suffer therefore cost rise faster than quantity
Communication- worker may got great ideas to improve efficiency of the business but can spread their message quickly to those higher = takes time , effort to send message . Or won’t be clear
Impact productivity = therefore cost rise faster than quantity
Motivation- as business gets larger= means more workers= each individual worker feel less valued = feel easily replaced( dispensable).= hit your motivation = lower productivity = fall of worker in company = cost rising much faster than quantity going to be rising
What is the difference between normal and supernormal profit
Normal profit -is the minimum reward required to keep entrepreneurs supplying their enterprise
It covers the opportunity cost of investing funds into firm and not elsewhere
This is when AC= AR
Normal profit considered a cost so it’s included in the cost of production
Supernormal profit is profit above normal profit
It exceed the value of opportunity cost of investing funds into the firm
This is when TR> TC
The role of profit in a market economy
In a free market economy , profit is the reward that entrepreneurs yield when they take risk and make investment
An entrepreneur want to avoid loss, gain profit= makes them want to innovate, so they can reduce their production cost, improve quality of their products
Entrepreneur seek to maximise their profits
Profits can be returned = kept within firm and not given to shareholders as dividends = this can be a source of finance for firms if they choose to make an investment
Helps avoid cost of interest payment if they borrow money
Profit also act as a signal to firms and consumers such as in market where firm make supernormal profits= likely to be new firms entering the market since market seems profitable
- this increase maker supply =lower market price.
This assumes market is contestable , there are no barriers to entry
Technological change spec
-. The difference between invention and innovation
- technological change can affect methods of production
Technological change can lead to development of new products, the development of new market and may destroy existing markets
Technological change can influence the strictest of market
What is technological change and the difference between between invention and innovation
Technological change describes the overall effect of innovation, invention and the spread of technology in the economy
The difference between invention and innovation
Invention- the process of creating a new product or a new way to make a product
Innovation- the act of improving or contributing to existing products
Such as apple innovation in smartphones with iPhone transformed the mobile phone market by integrating multiple functions into a single device
How technological change can affect productivity and efficiency and firms cost of production
Technological change can result improvement in efficiency and productivity which lowers cost of production for fimrs.
The quality and quantity of g/s produced might improve
Such as mobile phones have become cheaper to produced , which is why their price has fallen .
More importantly their quality improves significantly due to improvement in technology
Technological change improve productive efficiency- producing at a level where it’s average production cost care minimized= lower cost= shift curve down= EOS
Also dynamically efficient = able to innovate and improve productive efficiency in a sustained manner
Another example introduction of computer aided design software has significantly increased the productivity of architects and engineers
- with specialization and division of labour in human workforce brought about labour productivity = done with specialized machinery
Technological change affecting method of production
- new tech= workplace has become increasing mechanized and automated
Mechanization involves more machinery , more capital intensive methods of production
Automation -. Implementation of tech that reduce the needs for labour
Tc has lead to more capital intensive production such as car production - use of robot to replace workers = led to more capital intensive production in that industry
-. But tc can also lead to more labour intensive production such as as medial service - lots of new technology advancement so may require use of labour to operate them
So it depends on industry- may have increase jobs
Technological change can lead to
-. New development of new products , development of new market and many destroy existing markets
Such as development of DVD, then blue rays , now rise of download films, has essentially destroyed the market for DVD
So the process of creative destruction is linked to technological change
What is creative destruction
Schumpeter an economist proposed the idea of creative destruction
Idea that new entrepreneurs are innovative, chock challenge existing firms
The more productive= firms then grow whilst the least productive are forced to leave the market ,. This results in an expansion oft the economy productive potential
However loss of jobs= unemployment
Real world examples
Taxi market. , rise of Uber destroying traditional taxi services , listening to music online
How can technological change influence structure of market
- distribution of traditional market
Monopolies do not have an incentive to innovate, since they they have no competition
= this means they are often inefficient and their cost are higher then they could be
Oligopolies tend to have more incentive to innovate since they are earning supernormal profit and trying to get ahead of their competitors
= this means that technological change quite fast in oligopolies
Therefore certain technologies may lead to dominance of few large firms = increase barriers to entry due to tech EOS
Such as smartphone market is dominated by small number of market players
In some industries tech change has made market entry much easier= due to internet= low barriers to entry = less need of physicals premises= start up cost low , sunk cost low, causing a shift in market structure away from monopolistic/ oligopolistic structure
Such as buying tickets online
Also adverting make it easier to do with greater role of the internet= reduce brand loyalty aspect on barriers to entry
However other industries = opposite = such advance tech may be expensive , or difficult to enter market
Globalisation - tech enable companies to operate on a global scale= impacting market dynamics = e commerce platforms = connected buyers and seller globally = re shaping traditional retail markets
Why has technological change been moving in rapid pace in recent period of time
- knowledge has been improving
R and d
Greater source of funding for such investment to taken place
Technological change evaluation
- tech desirable as more firms will be in the market. = more competition if barriers are low
Less firms = more monopoly outcome
So TC offering market structure by becominng more competitive or more concentrated depends on industry
= so apply it to the characteristics of the industry
So existing market can be disrupted by technical progress = makes g/s outdated
Conclusion
Business seeking long term success in the real world that is always changing must embrace technical innovation
- (. Beneficial for labour/. Worker in long run?????
