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Economics > micro > Flashcards

micro Flashcards

1
Q

What are the conditions of perfect competition?

A
  • infinite buyers and sellers
  • homogenous product (firms are price takers)
  • no barriers to entry/exit
  • homogenous FoPs
  • no externalities
  • perfect information
  • firms are profit maximisers
  • LR is when normal profit is made
  • SR is when abnormal profit is made
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2
Q

What are the conditions for monopoly?

A
  • 1 seller dominating market, large number of buyers
  • very good info
  • 1 product
  • very high barriers to entry
  • similar fops
  • few if any externalities
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3
Q

What are the conditions of a monopolistic competition?

A
  • large numbers of buyers and sellers
  • very good information
  • differentiated products
  • very low barriers to entry and exit
  • similar FoPs
  • very few externalities
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4
Q

What are examples of monopolistic competition?

A

Fast food shops, hairdressers, coffee shops

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5
Q

What are the characteristics of competitive oligopolies?

A

Innovation, normal profits, creative destruction and no collusion

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6
Q

What are characteristics of collusive oligopolies?

A

Products remain unaltered, high abnormal profits, collusion, x-efficiency

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7
Q

What are examples of non-price competition?

A

Branding, quality, location, loyalty schemes, and a range of products

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8
Q

What is a cartel?

A

A formal agreement between firms to limit competition in the market e.g. limiting output to raise prices- cheating and competition must be prevented

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9
Q

What is a CE of a cartel?

A

Quebec has 7,500, mostly family run farms who produce 70% of the world supply

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10
Q

What is game theory?

A

Interdependence depends on what other firms do and the dominant strategy for both firms to charge the same- price rigidity might not last in the LR due to the incentive to cheat on collusive agreement from 1 firm wanting to make more profits

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11
Q

What is first degree discrimination?

A

Every customer is charged at a different price

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12
Q

What is second degree discrimination?

A

Different prices charged on the basis of volume

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13
Q

What is third degree discrimination?

A

Different prices based on groups

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14
Q

What is a positive statement?

A

One that can be proven to be true or false

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15
Q

What is a normative statement?

A

Opinions or value judgements

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16
Q

What is meant by ‘constant prices’?

A

Real prices taking into account inflation

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17
Q

What is the formula to work out an index number for year M?

A

number for year M/ number for base year x 100

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18
Q

What is an economic good?

A

Supply of a good has an opportunity cost e.g. cars and TVs

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19
Q

What is a free good?

A

No opportunity cost in the supply of a good e.g. water and air

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20
Q

What is meant by an opportunity cost?

A

The benefit forgone for not choosing the next best alternative

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21
Q

Is PED always a negative number of positive?

A

Negative

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22
Q

What does it mean if a good’s PED is over -1?

A

It is elastic

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23
Q

What does it mean if a good’s PED is between 0 and -1?

A

It is inelastic

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24
Q

What is the PED equation?

A

percentage change in quantity demanded/ percentage change in price

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25
Q

What does a YED of 1 or less mean?

A

A good is a necessity meaning it’s a basic requirement

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26
Q

What does a YED of 1 or more mean?

A

A good is a luxury good (not a basic requirement)

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27
Q

What does a positive YED mean?

A

A normal good- More is demanded as income increases

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28
Q

What does a negative YED mean?

A

An inferior good- Less is demanded as income increases (own brand coffee)

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29
Q

What is the YED equation?

A

% change in demand/ % change in income

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30
Q

What does negative XED mean?

A

Goods are complements

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31
Q

What does positive XED mean?

A

Goods are substitutes

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32
Q

What is the XED equation?

A

% change in Q demanded of good A/ % change in P of good B

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33
Q

What is PES?

A

Responsiveness of supply to a change in price

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34
Q

What does SR mean?

A

At least one factor of production is fixed

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35
Q

What does LR mean?

A

All factors of production are variable

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36
Q

What is a shortage?

A

Excess demand

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37
Q

What is a glut?

A

Excess supply

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38
Q

What is the PES equation?

A

% change in Q supplied/ % change in P

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39
Q

What is joint demand?

A

Complements e.g. petrol and cars

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40
Q

What is competitive demand?

A

Substitutes e.g. Ford and Vauxhall

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41
Q

What is derived demand?

A

Demand for 1 product occurs as it’s used for another e.g. cars and steel

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42
Q

What is composite demand?

A

When a good has 2 or more uses like milk for drinking or for butter

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43
Q

What is joint supply?

A

The existence of one good means the supply of another like beef and leather

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44
Q

What is indirect tax?

A

Increases the supply cost faced by producers like VAT

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45
Q

What is VAT?

A

Value added tax- a percentage tax (20% of the unit price) generating £110bn annual tax

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46
Q

What is direct tax?

A

Tax that is paid straight on to the consumers like income tax

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47
Q

What is signalling (price mechanism)?

A

Prices adjust to signal to producers and consumers that they should allocate resources differently

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48
Q

What is incentivising (price mechanism)?

A

When demand for a good rises, supply increases as businesses respond to increased profit incentives

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49
Q

What is rationing (price mechanism)?

A

Price rises to ration scarce resources when market supply decreases causing demand to outstrip supply

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50
Q

What is complete market failure?

A

Markets failing to supply any of a good which is demanded creating a missing market

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51
Q

What is partial market failure?

A

The market for a good exists but they are under/over produced

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52
Q

What are negative externalities in production?

A

When the product made by a firm is causing problems to a third party e.g. factories emitting toxins contributing to air pollution or farmers creating fertiliser pollution

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53
Q

What are negative externalities in consumption?

A

When the consumption of a product is having negative effects on those consuming it e.g. smoking, alcohol

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54
Q

What are positive externalities in production?

A

When the production of a good has positive effects e.g. flood defence, honey production

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55
Q

What are positive externailities in consumption?

A

When the consumption of a product had positive effects on the consumer e.g. vaccines, education, healthcare

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56
Q

What is asymmetric information?

A

When the seller has perfect information and the buyer does not e.g. banks and financial firms sold useless products to unsuspecting buyers before GFC

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57
Q

What is the principal-agent problem?

A

When the agent (who makes the decision for the principal), makes the decision for their own benefit and not the principal e.g. shareholders or managers

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58
Q

What is moral hazard?

A

The seller of a product can never lose e.g. Heads I win, tails you lose

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59
Q

What is adverse selection?

A

Buyers and sellers have asymmetric information so that a participant will engage selectively which benefit them most e.g. seller with a second hand car or buyers with life insurance

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60
Q

What is a public good?

A

Non-rival (utility not reduced by others consuming the good) and non-excludable (not possible to stop someone else consuming the good)

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61
Q

What is a Quasi-public good?

A

Goods which have an element of non-rival and non-excludable but are not perfectly so like hospitals and schools (can be private or state)

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62
Q

What is the free rider problem?

A

People are receiving the benefit of a public good but are not prepared to pay for it

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63
Q

What is a merit good?

A

They are underprovided if left to the market and have positive consumption externalities

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64
Q

What is a demerit good?

A

Overproduced if left to the market and have negative consumption externalities e.g. the UK has 450,000 problem gamblers

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65
Q

What are examples of market based policies?

A
  • indirect taxes
  • subsidies
  • max/min prices
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66
Q

What are examples of interventionist based policies?

A
  • regulation
  • state provision of merit and demerit goods
  • provision of information
  • use of behavioural economics
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67
Q

What are diminishing returns to the variable factor?

A

When MP begins to fall when you keep adding variable factors to fixed factor in the SR

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68
Q

What are returns to scale?

A

LR concept, measures the % change in output to the % change in inputs

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69
Q

What are increasing returns to scale?

A

% increase in inputs results on a higher % increase in outputs

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70
Q

What are decreasing returns to scale?

A

% increase in inputs results in lower % increase in outputs

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71
Q

What are economic costs?

A

Opportunity cost of an input to the production process

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72
Q

What is an imputed cost?

A

Economic cost which a firm does not pay for with money to another firm but is the opportunity cost of the FoP which the firm itself owns

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73
Q

What are fixed costs?

A

Indirect costs or overheads are costs that do not vary as output changes e.g. rent and salaries

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74
Q

What are variable costs?

A

Direct costs that do not vary as output changes e.g. raw materials

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75
Q

What are economies of scale?

A

LRAC is falling as output increases

76
Q

What are diseconomies of scale?

A

LRAC is increasing as output increases

77
Q

What are internal economies of scale?

A

Occur within a business
- Technical
- Managerial
- Purchasing
- Marketing
- Financial

78
Q

What are external economies of scale?

A

Occur outside the business but still within the industry e.g. better transport infrastructure, component suppliers move closer, R&D firms move closer

79
Q

What are risk baring economies of scale?

A

As a business expands, you can spread risk over a larger output range- less damage

80
Q

What are financial economies of scale?

A

As a business gets larger, it can negotiate lower rates of interests from banks- reputable

81
Q

What are managerial economies of scale?

A

As a firm expands, it can employ specialist managers to boost productivity as they have specialist skills

82
Q

What are technical economies of scale?

A

Use of specialist machinery (boosts productivity), employing more workers and making them specialise

83
Q

What are purchasing economies of scale?

A

Buying raw materials in bulk- can negotiate a discount

84
Q

What is happening in all external economies of scale?

A

Total costs are rising but productivity and output is rising faster (decrease in average costs)

85
Q

What are control diseconomies of scale?

A

Big business- lots of workers- too many for managers to thoroughly oversee- workers slack off more

86
Q

What are communication diseconomies of scale?

A

Harder to spread messages (CEOs to workers of vice versa)

87
Q

What are coordination diseconomies of scale?

A

Difficult for departments to work together

88
Q

What are motivation diseconomies of scale?

A

Too many workers- individual workers feel less valued- easily replaced- low motivation/productivity

89
Q

What happens in all diseconomies of scale?

A

Total costs increase quicker than they increase quantity

90
Q

What are normal profits?

A

When total revenue= total costs, the level of profits required for an entrepreneur to maintain their current use

91
Q

What is profit maximising?

A

MC=MR

92
Q

What is allocative efficiency?

A

When MC cuts the bottom of the AC curve

93
Q

What are abnormal profits?

A

When total revenue is greater than total costs (above normal profits)

94
Q

What is the structure conduct performance model?

A

Determinants of type of market structure, conduct (behaviour) of the firm and the performance (profits) of the firm

95
Q

What are sunk costs?

A

Costs of production which are not recoverable if the firm leaves the industry

96
Q

What is a monopsony?

A

The market only has one buyer

97
Q

What is a contestable market?

A

A market where there’s freedom of entry to the industry and where the costs are low- normal profits in LR because of potential competitors with perfect knowledge and no sunk costs

98
Q

What are the key conditions for a contestable market?

A
  • a pool of businesses who are willing and ready to enter the market
  • no significant entry or exit barriers
  • equal access to tech
98
Q

Why do governments encourage contestability?

A
  • deregulation of an industry
  • open up networks of monopolies
  • tough rules on predatory pricing
99
Q

What is limit pricing?

A

Reducing price to a level where it’s below minimum point of LRAC of a potential competitor

100
Q

What is the divorce of ownership and control?

A

Causes the principal agent problem in larger businesses which may result in non-maximising behaviour e.g. manager is in direct contact with workers (control) but owners own the actual company

101
Q

What is x-inefficiency?

A

At any given output a firm’s cost is higher than it’s LRAC curve

102
Q

What is pareto efficiency?

A

Producing any combination of goods other than on the PPF will necessarily result in someone worse off

103
Q

What is static efficiency?

A

Is at one point in time

104
Q

What is dynamic efficiency?

A

Is over a period of time and can be seen with a lower LRAC curve

105
Q

What is creative destruction?

A

Created by Joseph Schumpeter refers to the process of innovation leading to a product before no longer being in use

106
Q

What are examples natural monopolies?

A

Severn Trent water and British gas

107
Q

What is invention?

A

Creating something entirely new

108
Q

What is innovation?

A

Improving something that already exists

109
Q

What is horizontal integration?

A

Company grows it’s operations at the same level of industry

110
Q

What is forward vertical integration?

A

Acquiring a business further up the supply chain e.g. a vehicle manufacturer buys a car retail business

111
Q

What is backward vertical integration?

A

A company buys a company further down the supply chain which supplies to that company e.g. a car company buys the manufacturing of the raw materials

112
Q

What is a conglomerate?

A

Joining together of firms which produce unrelated products

113
Q

What is income?

A

The flow of financial assets

114
Q

What is wealth?

A

The store of assets which can be liquidated

115
Q

What are forms of wealth?

A

Property, other financial assets, financial wealth and private pensions

116
Q

What are sources of wealth?

A

Excessive income, saving, inheritance

117
Q

What are the main causes of wealth inequality?

A

Income levels, wealth levels and inheritance (40% over £345k), chance (lottery)

118
Q

What is the Lorenz curve?

A

It shows the degree of inequality of income in a society, the further the curve form the 90 degree line the greater the inequality

119
Q

What do the numbers mean on the Gini coefficient?

A

0 means complete equality and 1 means one person has all the money in an economy (complete inequality)

120
Q

What is the UK Gini?

A

0.35

121
Q

What is absolute poverty?

A

People cannot access the sufficient necessities to maintain life

122
Q

What is relative poverty?

A

Households who earn less than 60% of the median household income

123
Q

What are causes of relative poverty?

A

Unemployment, health problems, lack of human capital, inheritance, dependency

124
Q

What are causes of absolute poverty?

A

Population growing faster than GDP, absence of public services, economic corruption and natural disasters

125
Q

What is horizontal equity?

A

Identical treatment of identical individuals in identical situations e.g. race relations act, equal pay act

126
Q

What is vertical equity?

A

Different treatment of people with different characteristics e.g. positive discrimination

127
Q

What are examples of government policies to reduce inequality?

A
  • welfare state transfers
  • public pensions
  • state provided services (education, healthcare, social housing)
128
Q

What are policies to help with the redistribution of income and wealth?

A
  • UBI
  • UBS
  • NMW
  • Equal pay
129
Q

What are the issues with taxation?

A
  • who should be taxed
  • how much tax should be levied
  • how much tax should redistributed
130
Q

What is crowding out?

A

Finite amount of money available, high government spending means there is reduced finance available for private sector investment

131
Q

What is crowding in?

A

There is an infinite amount of money available so when government spending is high, then AD will be high which will create more opportunities for profitable private sector investment

132
Q

What is bounded rationality?

A

Refers to our limited mental processing- limited brain power when it comes to decision making

133
Q

What is bounded self control?

A

Our limited ability to control ourselves e.g. eating chocolate and messing up a diet because of sugar cravings

134
Q

What is altruism?

A

Don’t maximise own utility as caring for others too e.g. donating to charity (motivated by fairness)

135
Q

What are social norms?

A

The behaviour of people around us e.g. herd behaviour- drinking excessively at Uni because everyone around you is

136
Q

What is anchoring?

A

A cognitive bias when consumers are influenced too much by the 1st piece of info we see e.g. in a sale “was £100 now only £75” when the product is actually worth £50 - but they buy because they are lead to believe they are saving as they think it was £100

137
Q

What is the availability bias?

A

When consumers are influenced too much by the most recent piece of information they have seen e.g. if there is a plane crash the demand for plane tickets decreases or more people buying lottery tickets due to seeing a winner on the news

138
Q

What are rules of thumb?

A

When consumers use mental shortcuts to make decisions quickly e.g. buying something with the highest reviews instead of researching- may not like it- waste

139
Q

What is choice architecture?

A

The layout of available choices- unhealthy food far away from tills- tackles bounded self control

140
Q

What are nudges?

A

Changes in choice architecture that influences people’s behaviour without restricting them

141
Q

What is framing?

A

How a choice is presented to you e.g. saying a gym membership us “just £2 a day” instead of £720 a year

142
Q

What is a default choice?

A

When someone is automatically enrolled into a choice e.g. Austria’s default is organ donation- you can opt out if unwilling

142
Q

What are restricted choices?

A

When consumers are still able to choose between options, but the difficulty of choosing some options is higher than others e.g. junk food in a supermarket being on the 8th floor

143
Q

What is a mandated choice?

A

When people are legally required to make a choice e.g. voting Australia is a legal requirement

144
Q

What is priming?

A

Cues that work subconsciously and prime us to behave in a certain way e.g. labelling a product premium, students signing honour code at Uni

145
Q

What is the demand for labour equation?

A

D=MRP=MPPxP

146
Q

What is MRP?

A

Change in revenue from the output produced by an extra worker employed

147
Q

What are the factors that determine the elasticity of demand for labour?

A

Labour costs as a % of total costs, ease and cost of factors production, time period, PED of final product

148
Q

What is a positive income effect?

A

When higher wages cause people to want to work more hours to reach targeted income

149
Q

What is a negative income effect?

A

When target income has been reached and people prefer to spend more time on leisure rather then earning more income

150
Q

What is the substitution effect?

A

A rise in the real wage increases the opportunity cost of leisure meaning higher wages will always

151
Q

What causes the supply of labour to shift outwards?

A

Net inward immigration of experienced workers, fall in relative pay in substitute occupations, lower entry barriers, demographic factors

152
Q

What are causes of supply of labour shifting inwards?

A

Brain drain effects, decline in non-monetary awards, fall in relative pay in this occupation

153
Q

What is geographical immobility?

A

Search costs, housing costs and social ties

154
Q

What is occupational immobility?

A

Time and cost of restraining, inability of labour to do a job

155
Q

What is the % of employees in TUs?

A

It fell from 32% in 1995 to 25% in 2013

156
Q

What is labour market failure?

A

Higher wages being paid higher than they should be and higher levels of unemployment then should be

156
Q

What are the factors behind trade union decline?

A

Legislation reduced many powers, rise in flexible labour markets, de-industrialisation, impact of globalisation

157
Q

What are policies to reduce labour market failure?

A
  • targeted employment subsidies
  • reforms in housing market
  • benefit reforms
  • laws on unfair dismissal
158
Q

What is the total reward equation?

A

Total reward= transfer earnings + economic rent

159
Q

What are transfer earnings?

A

Minimum reward which a factor of production must receive to maintain it’s current use

160
Q

What is economic rent?

A

Any reward to factor of production over and above transfer earnings

161
Q

What are issues surrounding the labour market?

A
  • skill shortages
  • young workers
  • time in education
  • retirement
  • temporary work
  • migration
  • wage inequality
162
Q

What is NMW?

A

An hourly wage rate which is illegal to pay an employee less than

163
Q

What is NLW?

A

Wage required to produce when they consider to be a decent standard of living

164
Q

How much did the pay gap between CEOs and average employees?

A

It tripled over that past 15 years

165
Q

What are arguments for high levels of executive pay?

A

Business relocating overseas, rewarding executives in other ways, higher marginal tax rates

166
Q

What are arguments for levels of executive pay?

A

Equity and fairness, damages social cohesion and pay and performance is hard to discern

167
Q

What are the factors affecting the gender pay gap?

A

Breaks from labour market (maternity), access to education, patterns of employment and employer discrimination

168
Q

What is the gender pay gap in the USA?

A

17.9%

169
Q

What is the gender pay gap in South Korea?

A

36.6%

170
Q

What is the gender pay gap in New Zealand?

A

5.6%

171
Q

What is the equation for total costs?

A

Total costs= total fixed costs + total variable costs

172
Q

What is the equation for average costs?

A

Average costs= Total costs/ Q
OR
Average costs= average fixed costs + average variable costs

173
Q

What is the marginal costs equation?

A

Change in TC/ Change in Q

174
Q

What is the TR equation?

A

P x Q

175
Q

What is average revenue equal to?

A

Price

176
Q

What is the equation for marginal revenue?

A

Change in TR/ Change in Q

177
Q

What is the total product equation?

A

Average product x QL

178
Q

What is the equation for average product?

A

Total product/ QL

179
Q

What is the equation for marginal product?

A

Change in total product/ change in QL

180
Q

What are the equations for profit?

A

TR-TC
OR
AR-AC

181
Q

Where is revenue maximised?

A

Where MR=0

182
Q

What is the minimum efficient scale?

A

The minimum output where all of the EoS are exploited

183
Q

What is the concentration ratio?

A

Number of firms: their market share

Economics (6 decks)

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