micro Flashcards
(186 cards)
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
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
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
4
Q
What are examples of monopolistic competition?
A
Fast food shops, hairdressers, coffee shops
5
Q
What are the characteristics of competitive oligopolies?
A
Innovation, normal profits, creative destruction and no collusion
6
Q
What are characteristics of collusive oligopolies?
A
Products remain unaltered, high abnormal profits, collusion, x-efficiency
7
Q
What are examples of non-price competition?
A
Branding, quality, location, loyalty schemes, and a range of products
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
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
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
11
Q
What is first degree discrimination?
A
Every customer is charged at a different price
12
Q
What is second degree discrimination?
A
Different prices charged on the basis of volume
13
Q
What is third degree discrimination?
A
Different prices based on groups
14
Q
What is a positive statement?
A
One that can be proven to be true or false
15
Q
What is a normative statement?
A
Opinions or value judgements
16
Q
What is meant by ‘constant prices’?
A
Real prices taking into account inflation
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
18
Q
What is an economic good?
A
Supply of a good has an opportunity cost e.g. cars and TVs
19
Q
What is a free good?
A
No opportunity cost in the supply of a good e.g. water and air
20
Q
What is meant by an opportunity cost?
A
The benefit forgone for not choosing the next best alternative
21
Q
Is PED always a negative number of positive?
A
Negative
22
Q
What does it mean if a good’s PED is over -1?
A
It is elastic
23
Q
What does it mean if a good’s PED is between 0 and -1?
A
It is inelastic
24
Q
What is the PED equation?
A
percentage change in quantity demanded/ percentage change in price
25
What does a YED of 1 or less mean?
A good is a necessity meaning it's a basic requirement
26
What does a YED of 1 or more mean?
A good is a luxury good (not a basic requirement)
27
What does a positive YED mean?
A normal good- More is demanded as income increases
28
What does a negative YED mean?
An inferior good- Less is demanded as income increases (own brand coffee)
29
What is the YED equation?
% change in demand/ % change in income
30
What does negative XED mean?
Goods are complements
31
What does positive XED mean?
Goods are substitutes
32
What is the XED equation?
% change in Q demanded of good A/ % change in P of good B
33
What is PES?
Responsiveness of supply to a change in price
34
What does SR mean?
At least one factor of production is fixed
35
What does LR mean?
All factors of production are variable
36
What is a shortage?
Excess demand
37
What is a glut?
Excess supply
38
What is the PES equation?
% change in Q supplied/ % change in P
39
What is joint demand?
Complements e.g. petrol and cars
40
What is competitive demand?
Substitutes e.g. Ford and Vauxhall
41
What is derived demand?
Demand for 1 product occurs as it's used for another e.g. cars and steel
42
What is composite demand?
When a good has 2 or more uses like milk for drinking or for butter
43
What is joint supply?
The existence of one good means the supply of another like beef and leather
44
What is indirect tax?
Increases the supply cost faced by producers like VAT
45
What is VAT?
Value added tax- a percentage tax (20% of the unit price) generating £110bn annual tax
46
What is direct tax?
Tax that is paid straight on to the consumers like income tax
47
What is signalling (price mechanism)?
Prices adjust to signal to producers and consumers that they should allocate resources differently
48
What is incentivising (price mechanism)?
When demand for a good rises, supply increases as businesses respond to increased profit incentives
49
What is rationing (price mechanism)?
Price rises to ration scarce resources when market supply decreases causing demand to outstrip supply
50
What is complete market failure?
Markets failing to supply any of a good which is demanded creating a missing market
51
What is partial market failure?
The market for a good exists but they are under/over produced
52
What are negative externalities in production?
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
53
What are negative externalities in consumption?
When the consumption of a product is having negative effects on those consuming it e.g. smoking, alcohol
54
What are positive externalities in production?
When the production of a good has positive effects e.g. flood defence, honey production
55
What are positive externailities in consumption?
When the consumption of a product had positive effects on the consumer e.g. vaccines, education, healthcare
56
What is asymmetric information?
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
57
What is the principal-agent problem?
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
58
What is moral hazard?
The seller of a product can never lose e.g. Heads I win, tails you lose
59
What is adverse selection?
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
60
What is a public good?
Non-rival (utility not reduced by others consuming the good) and non-excludable (not possible to stop someone else consuming the good)
61
What is a Quasi-public good?
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)
62
What is the free rider problem?
People are receiving the benefit of a public good but are not prepared to pay for it
63
What is a merit good?
They are underprovided if left to the market and have positive consumption externalities
64
What is a demerit good?
Overproduced if left to the market and have negative consumption externalities e.g. the UK has 450,000 problem gamblers
65
What are examples of market based policies?
- indirect taxes
- subsidies
- max/min prices
66
What are examples of interventionist based policies?
- regulation
- state provision of merit and demerit goods
- provision of information
- use of behavioural economics
67
What are diminishing returns to the variable factor?
When MP begins to fall when you keep adding variable factors to fixed factor in the SR
68
What are returns to scale?
LR concept, measures the % change in output to the % change in inputs
69
What are increasing returns to scale?
% increase in inputs results on a higher % increase in outputs
70
What are decreasing returns to scale?
% increase in inputs results in lower % increase in outputs
71
What are economic costs?
Opportunity cost of an input to the production process
72
What is an imputed cost?
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
73
What are fixed costs?
Indirect costs or overheads are costs that do not vary as output changes e.g. rent and salaries
74
What are variable costs?
Direct costs that do not vary as output changes e.g. raw materials
75
What are economies of scale?
LRAC is falling as output increases
76
What are diseconomies of scale?
LRAC is increasing as output increases
77
What are internal economies of scale?
Occur within a business
- Technical
- Managerial
- Purchasing
- Marketing
- Financial
78
What are external economies of scale?
Occur outside the business but still within the industry e.g. better transport infrastructure, component suppliers move closer, R&D firms move closer
79
What are risk baring economies of scale?
As a business expands, you can spread risk over a larger output range- less damage
80
What are financial economies of scale?
As a business gets larger, it can negotiate lower rates of interests from banks- reputable
81
What are managerial economies of scale?
As a firm expands, it can employ specialist managers to boost productivity as they have specialist skills
82
What are technical economies of scale?
Use of specialist machinery (boosts productivity), employing more workers and making them specialise
83
What are purchasing economies of scale?
Buying raw materials in bulk- can negotiate a discount
84
What is happening in all external economies of scale?
Total costs are rising but productivity and output is rising faster (decrease in average costs)
85
What are control diseconomies of scale?
Big business- lots of workers- too many for managers to thoroughly oversee- workers slack off more
86
What are communication diseconomies of scale?
Harder to spread messages (CEOs to workers of vice versa)
87
What are coordination diseconomies of scale?
Difficult for departments to work together
88
What are motivation diseconomies of scale?
Too many workers- individual workers feel less valued- easily replaced- low motivation/productivity
89
What happens in all diseconomies of scale?
Total costs increase quicker than they increase quantity
90
What are normal profits?
When total revenue= total costs, the level of profits required for an entrepreneur to maintain their current use
91
What is profit maximising?
MC=MR
92
What is allocative efficiency?
When MC cuts the bottom of the AC curve
93
What are abnormal profits?
When total revenue is greater than total costs (above normal profits)
94
What is the structure conduct performance model?
Determinants of type of market structure, conduct (behaviour) of the firm and the performance (profits) of the firm
95
What are sunk costs?
Costs of production which are not recoverable if the firm leaves the industry
96
What is a monopsony?
The market only has one buyer
97
What is a contestable market?
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
What are the key conditions for a contestable market?
- a pool of businesses who are willing and ready to enter the market
- no significant entry or exit barriers
- equal access to tech
98
Why do governments encourage contestability?
- deregulation of an industry
- open up networks of monopolies
- tough rules on predatory pricing
99
What is limit pricing?
Reducing price to a level where it's below minimum point of LRAC of a potential competitor
100
What is the divorce of ownership and control?
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
What is x-inefficiency?
At any given output a firm's cost is higher than it's LRAC curve
102
What is pareto efficiency?
Producing any combination of goods other than on the PPF will necessarily result in someone worse off
103
What is static efficiency?
Is at one point in time
104
What is dynamic efficiency?
Is over a period of time and can be seen with a lower LRAC curve
105
What is creative destruction?
Created by Joseph Schumpeter refers to the process of innovation leading to a product before no longer being in use
106
What are examples natural monopolies?
Severn Trent water and British gas
107
What is invention?
Creating something entirely new
108
What is innovation?
Improving something that already exists
109
What is horizontal integration?
Company grows it's operations at the same level of industry
110
What is forward vertical integration?
Acquiring a business further up the supply chain e.g. a vehicle manufacturer buys a car retail business
111
What is backward vertical integration?
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
What is a conglomerate?
Joining together of firms which produce unrelated products
113
What is income?
The flow of financial assets
114
What is wealth?
The store of assets which can be liquidated
115
What are forms of wealth?
Property, other financial assets, financial wealth and private pensions
116
What are sources of wealth?
Excessive income, saving, inheritance
117
What are the main causes of wealth inequality?
Income levels, wealth levels and inheritance (40% over £345k), chance (lottery)
118
What is the Lorenz curve?
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
What do the numbers mean on the Gini coefficient?
0 means complete equality and 1 means one person has all the money in an economy (complete inequality)
120
What is the UK Gini?
0.35
121
What is absolute poverty?
People cannot access the sufficient necessities to maintain life
122
What is relative poverty?
Households who earn less than 60% of the median household income
123
What are causes of relative poverty?
Unemployment, health problems, lack of human capital, inheritance, dependency
124
What are causes of absolute poverty?
Population growing faster than GDP, absence of public services, economic corruption and natural disasters
125
What is horizontal equity?
Identical treatment of identical individuals in identical situations e.g. race relations act, equal pay act
126
What is vertical equity?
Different treatment of people with different characteristics e.g. positive discrimination
127
What are examples of government policies to reduce inequality?
- welfare state transfers
- public pensions
- state provided services (education, healthcare, social housing)
128
What are policies to help with the redistribution of income and wealth?
- UBI
- UBS
- NMW
- Equal pay
129
What are the issues with taxation?
- who should be taxed
- how much tax should be levied
- how much tax should redistributed
130
What is crowding out?
Finite amount of money available, high government spending means there is reduced finance available for private sector investment
131
What is crowding in?
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
What is bounded rationality?
Refers to our limited mental processing- limited brain power when it comes to decision making
133
What is bounded self control?
Our limited ability to control ourselves e.g. eating chocolate and messing up a diet because of sugar cravings
134
What is altruism?
Don't maximise own utility as caring for others too e.g. donating to charity (motivated by fairness)
135
What are social norms?
The behaviour of people around us e.g. herd behaviour- drinking excessively at Uni because everyone around you is
136
What is anchoring?
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
What is the availability bias?
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
What are rules of thumb?
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
What is choice architecture?
The layout of available choices- unhealthy food far away from tills- tackles bounded self control
140
What are nudges?
Changes in choice architecture that influences people's behaviour without restricting them
141
What is framing?
How a choice is presented to you e.g. saying a gym membership us "just £2 a day" instead of £720 a year
142
What is a default choice?
When someone is automatically enrolled into a choice e.g. Austria's default is organ donation- you can opt out if unwilling
142
What are restricted choices?
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
What is a mandated choice?
When people are legally required to make a choice e.g. voting Australia is a legal requirement
144
What is priming?
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
What is the demand for labour equation?
D=MRP=MPPxP
146
What is MRP?
Change in revenue from the output produced by an extra worker employed
147
What are the factors that determine the elasticity of demand for labour?
Labour costs as a % of total costs, ease and cost of factors production, time period, PED of final product
148
What is a positive income effect?
When higher wages cause people to want to work more hours to reach targeted income
149
What is a negative income effect?
When target income has been reached and people prefer to spend more time on leisure rather then earning more income
150
What is the substitution effect?
A rise in the real wage increases the opportunity cost of leisure meaning higher wages will always
151
What causes the supply of labour to shift outwards?
Net inward immigration of experienced workers, fall in relative pay in substitute occupations, lower entry barriers, demographic factors
152
What are causes of supply of labour shifting inwards?
Brain drain effects, decline in non-monetary awards, fall in relative pay in this occupation
153
What is geographical immobility?
Search costs, housing costs and social ties
154
What is occupational immobility?
Time and cost of restraining, inability of labour to do a job
155
What is the % of employees in TUs?
It fell from 32% in 1995 to 25% in 2013
156
What is labour market failure?
Higher wages being paid higher than they should be and higher levels of unemployment then should be
156
What are the factors behind trade union decline?
Legislation reduced many powers, rise in flexible labour markets, de-industrialisation, impact of globalisation
157
What are policies to reduce labour market failure?
- targeted employment subsidies
- reforms in housing market
- benefit reforms
- laws on unfair dismissal
158
What is the total reward equation?
Total reward= transfer earnings + economic rent
159
What are transfer earnings?
Minimum reward which a factor of production must receive to maintain it's current use
160
What is economic rent?
Any reward to factor of production over and above transfer earnings
161
What are issues surrounding the labour market?
- skill shortages
- young workers
- time in education
- retirement
- temporary work
- migration
- wage inequality
162
What is NMW?
An hourly wage rate which is illegal to pay an employee less than
163
What is NLW?
Wage required to produce when they consider to be a decent standard of living
164
How much did the pay gap between CEOs and average employees?
It tripled over that past 15 years
165
What are arguments for high levels of executive pay?
Business relocating overseas, rewarding executives in other ways, higher marginal tax rates
166
What are arguments for levels of executive pay?
Equity and fairness, damages social cohesion and pay and performance is hard to discern
167
What are the factors affecting the gender pay gap?
Breaks from labour market (maternity), access to education, patterns of employment and employer discrimination
168
What is the gender pay gap in the USA?
17.9%
169
What is the gender pay gap in South Korea?
36.6%
170
What is the gender pay gap in New Zealand?
5.6%
171
What is the equation for total costs?
Total costs= total fixed costs + total variable costs
172
What is the equation for average costs?
Average costs= Total costs/ Q
OR
Average costs= average fixed costs + average variable costs
173
What is the marginal costs equation?
Change in TC/ Change in Q
174
What is the TR equation?
P x Q
175
What is average revenue equal to?
Price
176
What is the equation for marginal revenue?
Change in TR/ Change in Q
177
What is the total product equation?
Average product x QL
178
What is the equation for average product?
Total product/ QL
179
What is the equation for marginal product?
Change in total product/ change in QL
180
What are the equations for profit?
TR-TC
OR
AR-AC
181
Where is revenue maximised?
Where MR=0
182
What is the minimum efficient scale?
The minimum output where all of the EoS are exploited
183
What is the concentration ratio?
Number of firms: their market share
