Micro: Contextual Analysis Flashcards
What is the focus of this set?
This set provides a contextual analysis of microeconomics topics for A-level Economics, covering price determination, market structures, the labour market, income distribution, and government intervention.
What are some factors that can shift the demand curve?
Decrease: Technological advances in the food industry (e.g., UberEats, Just Eat) reduce demand for restaurant dining.
Decrease: Print journalism declines due to online articles and e-commerce.
Decrease: The coronavirus pandemic reduces demand for air travel.
Increase: National lockdowns boost e-commerce sales (e.g., Amazon).
Increase: Peloton sees increased demand for home exercise equipment during lockdowns.
What is price elasticity of demand, and what are some examples?
Price elastic: Furniture stores and motor vehicle providers (many substitutes).
Price inelastic: Electricity and water (necessities, few substitutes).
Perfectly elastic: Book stores (theoretical, demand falls to zero if prices rise).
Perfectly inelastic: Lifesaving drugs (demand remains constant regardless of price).
Unitary price elastic: Clothing (quantity changes proportionally with price).
What factors can shift the supply curve?
Decrease: Tariffs on UK imports/exports reduce supply of goods (e.g., fruits and vegetables).
Decrease: Natural disasters reduce housing supply.
Increase: Innovation (e.g., digital revolution) increases supply chain efficiency.
What is price elasticity of supply, and what are some examples?
**(Perfectly) elastic: Firms with spare capacity can increase supply without reaching PPF.
**
-Major producers (e.g., OPEC+) maintain spare capacity to stabilize global oil markets during supply disruptions.
-Example: Saudi Aramco’s CEO warned about extremely low spare capacity, stressing the need for reserves to cushion potential shocks.
(Perfectly) inelastic: Housing in prime locations (e.g., London Green Belt policy restricts new housing).
What are the objectives of firms?
Profit maximisation: Moderna sold vaccines at high prices.
Ethical objectives: Pfizer distributed vaccines for free.
Survival: Firms reduced costs during COVID-19 lockdowns (e.g., furlough schemes).
Brand reputation: Lush avoids animal testing to strengthen brand image.
What are examples of market structures?
Perfect competition: Agricultural industry (e.g., India).
Monopolistic competition: Fashion industry (e.g., Boohoo, ASOS).
Oligopoly: UK supermarket industry (e.g., Tesco, Morrisons).
Duopoly: Boeing and Airbus in aerospace.
Monopoly: Google in search engines.
What are some barriers to entry in markets?
Government legislation: Long-winded approval processes (e.g., FSA).
Market power: Amazon and Apple promote their own products over competitors.
Intellectual Property Rights (IPRs): Pharmaceutical patents.
High startup costs: Electric car industry (e.g., Tesla).
What is contestability, and how does it affect markets?
Technological advancements: Lower barriers to entry (e.g., Stadia in gaming).
**Predatory pricing: **Incumbents like Xbox and Playstation use pricing strategies to deter new entrants.
What are some key points about the labour market?
UK unemployment rose to 4.9% in August 2020 due to COVID-19.
US unemployment hit 14.7% during the pandemic, affecting the gig economy.
Trade unions can lead to real-wage unemployment and cost-push inflation.
Strikes and work-to-rule actions can reduce GDP.
What is monopsony power, and what are some examples?
Product market: NHS negotiates lower drug prices.
Labour market: NHS and Walmart can reduce wages due to lack of alternative employers.
Exploitation: Pretty Little Thing paid low wages to workers in sweatshops.
How has COVID-19 affected income and wealth distribution?
Wiped out decades of poverty alleviation due to halted tourism and border closures.
Exacerbated the North-South divide in the UK, with structural unemployment in the North.
What is market failure, and how does government intervene?
Regulation: CMA oversees industries (e.g., OFGEM for electricity).
Deregulation: Airline Deregulation Act increased contestability.
Privatisation: Water industry saw improved quality but probation industry failed.
Government failure: EU Emissions Trading Scheme faced price drops post-GFC.
What is regulatory capture?
Regulatory agencies may act in the interest of the industry rather than the public (e.g., OFGEM siding with energy companies).
What is the Digital Markets Unit (DMU)?
A UK regulatory body for firms with ‘strategic market status’ (e.g., Facebook, Google). It uses ‘ex ante’ regulation to prevent market power abuse.
What is the Emissions Trading Scheme (ETS)?
An EU ‘cap and trade’ system for pollution permits. Prices fell post-2008 GFC, undermining its purpose, leading to the Market Stability Reversal mechanism.
What is the McCarran-Ferguson Act, and why is it an example of government failure?
Passed in 1945, it allowed states to regulate insurance firms individually, leading to inefficiency. The National Association of Insurance Commissioners (NAIC) was later formed to standardize rules.
What is the role of the Competition and Markets Authority (CMA)?
The CMA oversees regulatory bodies for specific industries (e.g., OFGEM for electricity, OFCOM for telecommunications). It promotes competition and prevents monopolies.
What is the European Competition Commission (ECC)?
The ECC regulates firms in the European Union to ensure fair competition and prevent monopolistic practices.
What is the impact of privatisation on industries?
Positive: Water industry saw £160 billion in investments to improve quality.
Negative: Probation industry failed under privatisation, leading to re-nationalisation.
What is the Airline Deregulation Act, and what was its impact?
Passed in the 1970s, it allowed new entrants into the airline market, leading to the rise of budget airlines and lower ticket prices.
What is the Royal Mail, and how has deregulation affected it?
The Royal Mail was the sole postal service provider in the UK. Deregulation allowed new entrants (e.g., Hermés, Whistl), leading to lower costs and prices.
What is the Green Belt policy, and how does it affect housing supply?
A policy in London that restricts new housing construction in certain areas to preserve the environment, leading to perfectly inelastic housing supply.
What is the Equal Pay Act, and when was it introduced?
Introduced in 1970 in the UK, it prohibits discrimination in salaries between men and women performing the same job.
What is the role of trade unions, and what are their potential downsides?
Trade unions use collective bargaining to push for higher wages, which can lead to real-wage unemployment, cost-push inflation, and strikes that reduce GDP.
What is the impact of technological advancements on market structures?
Lower barriers to entry (e.g., online fashion stores like Boohoo).
Increased competition (e.g., budget airlines like Ryanair).
Creative destruction (e.g., electric cars replacing petrol cars).
What is the role of corporate social responsibility (CSR) in oligopolies?
Firms like Tesco and Morrisons use CSR (e.g., paying higher wages, building leisure centres) to boost their market share and reputation.
What is the impact of COVID-19 on e-commerce?
E-commerce saw a significant boost during lockdowns, with Amazon reporting a 200% increase in profits and Peloton’s revenues rising by 172%.
What is the impact of COVID-19 on the aviation industry?
Demand for air travel dropped significantly, leading to lower ticket prices, furlough schemes, and redundancies in the aviation industry.
What is the impact of COVID-19 on education and income inequality?
Students learning from home with fewer skills and qualifications may struggle to secure high-paying jobs, widening the income gap between high and low-income families.
