Micro Flashcards
1
Q
What is choice architecture
A
Refers to the way choices are presented to individuals which can influence their decision eg tobacco
2
Q
What is framing
A
Refers to how the presentation was or wording of information can influence people’s decisions and perceptions
3
Q
What is a nudge
A
Subtle changes in the environment or the way choices are presented to influence people’s behaviour without restricting options eg piano stairs
4
Q
What is anchoring
A
The first bit of information received by a consumer has more weight in their decision even if it is not relevant
5
Q
What is mandated choice
A
Legally forced to make a decision-opt in or opt out
6
Q
What is restricted choice
A
Stripping back number of choices-simplify decisions
7
Q
Default choice
A
Assume people want the optimal choice unless they opt otherwise
8
Q
What is bounded self control
A
States that individuals have limited ability to make decisions that are in their long term best interests due to physiological limitations or impulses eg smoking or eating unhealthy
9
Q
What is social norms
A
Refers to the shared expectation and rules within a society or group that influence how individuals behave eg tipping culture
10
Q
What is market failure
A
Where the free market, when left to operate on its own fails to allocate resources efficiently, resulting in a loss of economic and social welfare
11
Q
What is derived demand
A
Firms demand labour to fulfil their need to supply
Firms demand labour for the revenue that is created
12
Q
What factor of production is fixed in the SR in labour markets
A
Labour is variable in supply but capital is fixed
13
Q
What is the marginal revenue product
A
MRP=marginal physical product of labour(MPP) x selling price
14
Q
What is the marginal physical product of labour(MPP)
A
The increased physical product by employing one extra worker
15
Q
Where will a firm employ workers up to
A
Up to the point where MC=MRP
16
Q
What are the assumptions in a perfectly competitive labour market
A
Large number of small buyers and sellers
No barriers to entry
Perfect information on wages and working conditions
Labour is homogeneous
17
Q
When does the MRP curve shift
A
Any changes in selling price
Any changes in productivity
18
Q
Factors determining WED
A
Time period(contracts)
Ability to sub capital with labour
Share of labour cost in relation to business cost
19
Q
What is the substitution effect of labour
A
As wage rates increase the opportunity cost of not working increases- thus the substitutes of leisure for work
20
Q
What is the income effect of labour
A
As wage increases so does one’s ability to enjoy leisure time thus workers may supply less labour at higher wage rates to enjoy more leisure time
21
Q
What shifts the supply of labour
A
Population-age, gender
Changing retirement age
Net migration
Social trends-attitudes
Trade union power
Gov taxation and welfare policy
Labour mobility-occupational and geographical
22
Q
What will the supply of labour to an industry depend on
A
Availability of suitable labour in other industries
Level of skill required
Time taken to acquire skills
Rate of employment(unemployment)
23
Q
What is a monopsony employer
A
Sole or dominant purchaser has the ability to affect the market price or wage rate eg gov in education
24
Q
Where will a monopsony employer employ workers up to
A
A monopsony employer is a wage maker and will maximise profit from labour by employing up to the point where MC=MRP
25
What are trade unions
Organisations of workers that seek through collective bargaining with employers to:
Bargain for higher wages
Improve job security
Better working conditions
A trade union is a monopoly seller of labour
26
In a monopsony market what is the influence of trade unions
The increase in wage rates from trade unions pushed wages and employment levels closer to competitive equilibrium
27
What is the impact of trade unions in a perfectly competitive labour market
Increase in wage rates
However firms will now employ less therefore increasing unemployment
28
Factors influencing trade union power
Membership-more influence
Militarist level-likelihood of industrial action
PED if demand for labour is inelastic power increases
Profitability levels- more profit=more power
29
What do trade unions control
Supply at a given wage rate
30
What does the influence of trade unions depend on
TU in monopsony labour market increases wages and employment
Strength oh TU power
Success determined by increase in wage
31
Why do TU have limited power in real world
Strict legislation-closed shop illegal, reduce strike power
Union membership decreasing
Restructuring of UK economy-less manufacturing, part time work
Competitive pressures-firms have more power
32
What are wage differentials
Difference in wages paid for certain reasons
In a perfectly competitive market wage differentials would not exist directly to work not being homogenous and imperfect information
33
Causes of wage differentials
Labour is not homogenous
Discrimination
Labour is not perfectly mobile
Imperfect information
Trade unions
Monopsony employers
34
Effect of elasticity on NLW
More unemployment when elastic(when capital can take place of a worker)
35
Arguments for NLW
Equity justification
Poverty reduction
Training
Incentives to work
Anti-discrimination
36
Arguments against NLW
Increases unemployment
Small business struggle
Reduced global competitiveness
Cost push inflation- increase in business costs
37
What is wage discrimination
A form of price discrimination
Different wage for same job
Market failure is a cause
More likely to occur when asymmetric information exists
38
Consequences of wage discrimination
Inequality of income and poverty
Lower motivation and productivity
Lower tax revenue for gov
Social unrest
39
Government policies to tackle labour immobility
Train potential employees
Fast+efficient transport network
Efficient communication
Regional policy-grants
40
Government policies to tackle disincentives to find work
Cutting income tax
Cut benefits
Increase min wage
41
Government policies to tackle discrimination
Tougher laws on equality
Laws on unfair dismissal
Min wage
Encourage trade unions
42
Government policies to tackle monopsony of employers
Encourage business start ups
Encourage trade union membership
43
What is the concentration ratio
Refers the to the % market share enjoyed by the largest firms in the industry
Highly concentrated markets tend to have low levels of competition vice versa
44
Alternative measures of market concentration(HHI)
Calculated by squaring the % market share of each firm and summing them
The lower the number the more competitive
A value above 2000 would be considered highly concentrated
45
What is price discrimination
The action of selling the same product at different prices to different buyers in order to max sales or profit
46
Conditions necessary for price discrimination
Different markets have different PEDs
The firm must have price making power
The markets must be separated by time place etc and be kept separate so that no cross selling can occur
The cost of separation must be less than potential gain
47
What is first degree price discrimination
This is where a firm with price making power charges each individual consumer the maximum price they are willing to pay, turning all producer surplus into producer surplus
48
What is third degree price discrimination
Where the market is split in two according to their differing elasticities of demand
Different markets will then face different prices in order to max profits from two markets
This will be larger than the profit if markets were combined
Eg train tickets
49
Advantages of price discrimination
Consumer: more accessible to people who might be priced out of market
Loss making service may be able to run-cross subsidise
Dynamic efficiency
Producer:increase SNP
50
Disadvantages of price discrimination
Consumer: higher price paid, inequality
Reduced consumer surplus
Producer:negative publicity
Max price regulation to combat exploitation
51
Where is productive efficiency
Where MC=AC
Lowest point on AC curve
52
Where is allocative efficiency
Where MC=AR
(MC=mu)
Maximising consumer satisfaction by ensuring that the MC of producing one more good is less than or equal to the price a consumer is willing to pay
53
What is dynamic efficiency
Occurs over time
Linked to the pace of innovation and investment
Leads to improvements in product and efficiency
Supernormal profits needed
54
What is x inefficiency
Happens when a lack of effective real competition in a market or industry means that average costs are higher than they would be with competition
55
Perfect competition characteristics
Infinite number of buyers and sellers
Homogenous goods
Perfect information
No barriers to entry or exit
Price takers
56
Outcome of perfect competition
Produce where MC=MR (no supernormal profit available)
Dynamic efficiency ❌
Allocative efficiency ✅
Productive efficiency ✅
57
58
How does a perfect competition diagram go from SR to LR
Supernormal profit is made
This sends a signal to firms who join the market as there are no BTE
Supply will increase until all SNP is gone
This happens due to AR and MR curve fall until they hit bottom of AC curve and there is no incentive to join market
59
Why is the AR and MR curve flat in perfect competition
Firms are price takers-price is set by industry, no reason to increase or decrease price
Homogenous goods means no USP
60
Monopoly characteristics
25% market share
Profit max
High barriers to entry
SNP in LR
Price makers
Unique product(pure monopoly)
61
What does monopoly power depend on
No. of competitors
Strength and durability of barriers to entry
Brand loyalty and marketing
62
Why are monopolies dynamically efficient
So they can stay ahead of potential competition
Allows them to maintain market share
63
Why are monopolies not allocatively efficient
Underproduction, misallocation of resources and market failure
64
Why are monopolies not productively efficient
Would result in less profit
Could argue they are due to benefits of EOS
65
Monopolistic competition characteristics
Large number of buyers and sellers none dominant
No/few BTE
Perfect knowledge and info
Goods are differentiated
Can only make SNP in SR
66
Are monopolistic competition markets efficient in SR and LR
SR: DE✅ PE❌ AE❌
LR: DE❌ PE❌ AE❌
However businesses are closer to PE and AE due to competition in the market compared to a monopoly
67
How does a monopolistic competition market transition from SR to LR
SNP is made
Firms join the market from signal due to low BTE
Increases no. of sub goods
Demand curve shifts in and flatter(more elastic)
Occurs until all SNP has gone
68
Evaluation of monpolistic competition
Prices are kept closer to MC leading to improved AE- however saturation of products and firms not exploiting EOS- loss of PE
Negative externality of production of increased waste due to excessive product differentiation
People have bounded rationality and may not benefit from greater choice of product
69
Oligopoly characteristics
Small no. of very large firms- dominate MS
BTE are significant
Similar but slightly differentiated products-branding
Firms are interdependent-match price reductions but not price rises
Prices tend to be sticky/rigid
Firms compete using non price competition in order to avoid price wars
70
Where do oligopolies produce
MC=MR
71
Are oligopolies efficient
AE❌
DE✅-due to high competition
72
Why are oligopoly prices sticky/rigid
Prices in market are sticky/rigid as firms don’t want to enter price wars and also because small changes in the MC curve do not change where the firm produces
73
Why would an oligopoly collude
Fix prices or supply in order to max joint profits- increase producer surplus
If they do collude they would in effect be operating as one single monopoly
This would cost the consumer higher prices and lost CS
HOWEVER this would break EU competition law
74
What is price leadership
Price is established by the most dominant firm
75
How does a collusive oligopoly work
The largest firm set a price and other firms follow suit
In a non collusive oligopoly firms act independently when setting prices
76
What is oligopoly cooperation
Where firms cooperate to maximise joint benefit
May not involve price or supply fixing but may involve an agreement to avoid price wars
77
What is game theory
Illustrates the interdependence of oligopolies
Shows that if they operate independently it leads to a sub optimal outcome
They need to cooperate to gain optimal outcome-incentive to collude
78
What are the characteristics of contestable markets
No BTE and no sunk costs
Perfect info and knowledge
No. of firms in market is irrelevant due to threat of new competition joining market
79
What are sunk costs
Costs that cannot be recovered when a firm leaves an industry eg marketing costs
80
Where do firms produce in contestable markets
Where AC=AR
Only normal profit is made as any SNP in a market with no BTE would attract new competition
81
Why would the government attempt to remove BTE in a market
To make them more contestable
Done through deregulation and will result in a better outcome for consumers( more supply and lower price)
More CW and CS
Market based solution to market failure of monopolies
82
Key barriers to market contestability
Internal EOS
Brand loyalty
Expertise and market reputation
83
How to evaluate contestable markets
Hard to remove BTE- high set up costs
How realistic are zero BTE and sunk costs
Can a firm hide SNP
Dynamic inefficiency
Deregulation could negatively impact consumers
84
What is another way for the government to stop market failure of monopolies instead of deregulation
Setting a max price at MC=AR
(AE)
85
86
What is the concentration ratio
Refers to the % market share enjoyed by the largest firms in the industry
Higher concentrated markets tend to have lower levels of competition and vice versa
87
88
What is an alternative measure of market concentration
Herfindall-horschman index (HHI)
Calculated my squaring the % market share of each firm in the mayhem and summing these numbers
Max 10k low of close to 0( more competitive closer to 0)
Measure exceeding 2000 can be characterised as highly concentrated
89
What is nationalisation
The action of turning a privately owned industry into a publicly owned industry
This is often done through the purchase of these private assets
90
What is privatisation
The process of turning a state owned industry into a privately owned industry
This is done through a process of breaking the industry up, deregulating to remove BTE and selling the assets on the stock exchange
91
What is a natural monopoly
Occurs when the most efficient number of firms in the industry ie one and any competition is wasteful
Typically have very high fixed costs, meaning it is impractical having more than one firm producing the good
92
Advantages of privatisation
Leads to increased competition- increased productive and allocative efficiency, low prices and increased CS
Lower taxes-gov don’t need to maintain infrastructure
Gov benefit from tax revenue of selling assets on stock exchange
93
Disadvantages of privatisation
May lead to a private monopoly-
Productively and allocatively inefficient
Gov needs to deregulate market to reduce BTE to stop this
Private firm produces at MC=MR
Increase in negative externalities due to deregulation
Loss of EOS due to competition- loss of PE
94
95
Advantages of nationalisation
Can set price at MC=AR(AE✅)
Easier to regulate and minimise externalities
Public sector workers receive fair wages
Benefit from EOS PE✅- lower costs
96
97
Disadvantages of nationalisation
Lack of or threat of competition-AE❌ PE❌ and x inefficient
Moral hazard-losses picked up by tax payer
Opportunity cost of gov revenue
98
Evaluation of privatisation vs nationalisation
Depends on industry and whether profit or welfare is main goal eg healthcare
Depends on quality of regulation
Is the market contestable and competitive- don’t want private monopolies
Need for national security and long term investment planning eg water
Nationalisation can create monopsony labour market
99
100
What are the types of price regulation
RPI-allow prices to increase in line with inflation
RPI-X-encouraged productive efficiency and low costs
RPI+_k-allows enough profit to make capital investment
101
Problems with price regulation
Hard to generate perfect level of x or k-shutdown or lack of competition
High cost of imposing reg-opp cost
Incentive is to keep reducing x-unfair
Risk of regulatory capture
102
Monopoly regulation-quality control/performance targets
Eg trains,NHS
Unintended consequences eg shortcuts(misdiagnosis)
Game the system(state trains take longer than they actually do)
103
Monopoly regulation- profit control
Covering costs and adding %
Granting a return on capital employed
However-asymmetrical info
Incentive to increase costs and to over employ capital
104
Monopoly regulation-windfall taxes on profits
Worsens monopoly outcomes-higher profit,lower output
Tax evasion and avoidance
Less innovation
105
What are the ways a monopoly can be regulated
Price reg
Quality control and performance targets
Profit control
Windfall taxes on profits
Merger policy-CMA
Privatisation
Deregulation
Reduce trade barriers
106
Evaluation of monopoly regulation
Depends on level of info regulatory bodies have to make right decisions
Costs vs benefits(opp cost)
Regulatory capture
Benefits of monopoly-eg natural monopolies,EOS
107
Benefits of monopolistic competition
AE-not much price exploitation compared to monopoly
-better than perfect comp as people will pay more for differentiated goods
PE-better than in monopoly
-More EOS taken advantage of compared to perfect comp-lower prices
DE-still might occur as needed to invest in order to compete
-SNP in SR
108
Pros of contestable markets
Move closer to AE, PE, X efficiency
Firms have to prepare for competition
Job creation
109
Cons of contestable markets
Lack of DE-chance for new firms to join market and innovate?
Cost cutting in dangerous areas-eg wages or health and safety
Anti competitive strategies-predatory pricing
110
Evaluation of contestable markets
Length of contestability-patents, anti competitive strategies(not contestable long term)
Role of tech-patents,copyright
Regulation-minimise anti competitive strategies and cost cutting in dangerous areas
111
Consumer benefits of AC
Resources follow consumer demand
Low prices
Max CS
High choice
High quality
112
Producer benefits of AE
Retain or increase MS
Stay ahead of rivals
113
Consumer benefits of PE
Low prices
High CS
Full exploitation of EOS
114
Producer benefits of PE
More production at lower AC
Low prices and high MS
115
Consumer benefits of DE
New innovative products
Lower prices over time
High CS
116
Producer benefits of DE
LR profit max
Lower costs over time
Retain MS
Stay ahead of rivals
117
What is x efficiency
Production with no waste
Production on AC curve(not above)
118
Consumer benefits of XE
Low prices
High CS
119
Producer benefits of XE
Lower costs
Low price and high MS
120
