Micro econ Flashcards
Positive statement
-Objective
- This must be either right or wrong
-
Normative statement
- Subjective
- It is allow to disagree this statement
- This might be True or False
Positive and Normative statements
Intertwined each other
Economists’s job
- How to allocate scare resources effectively and fairly.
“Likely”
Raises many more Questions.
{eg: Likely in the past? or now [or] through history ]
Economic problem. [ in other word]
Scarcity
What causes “ Scarcity”
Unlimited wants and limited resources
Opportunity cost
The next best alternative forgone
What causes opportunity cost?
Scarcity lead to “choices” . This makes O C.
Which goods have an opportunity cost? Free goods or economics goods?
Econ goods
opportunity cost { in other words]
True cost
OC in financial term **
Need to be consider the total cost NOT JUST the OBVIOUS one.
The concept of OC help us???
- value the diff: choices
- know the true cost of decision making
OC at 3 levels
At the Individual level
- company
- gov
Econ goods
- Scare
- water, food, shelter. [ They USED TO BE “ free goods’. ]
- tangible [ touchable] [ Factories, offices]
Free goods
- Abundant
- Air
Services
Intangible { dental care, banking, legal advice]
How many factors of production ? What are they?
4
- Land
- Labour
- Capital
- Enterprise
What is Land?
below the ground
- on the ground
- int the atm
- in the sea
What Land can be?
Renewable or non renewable
Which can be either sustainable or non- sustainable ? Renewable or non ?
Renewable
What dose sustainable mean?
Can make much more and the same quality in a long run.
What is Labour?
Work done by people
Can Work be paid or unpaid or both?
Both
Nursery is paid work
Taking care of your own child is unpaid work.
What is human capital?
The value of a worker
How to increase human capital?
By giving more training and education
Capital
Goods that are used to produce other goods
- Tools and machine
Working capital
Raw materials and semi-finished goods which are waiting to be sold
Fixed capital
Use this to transport working capital into finished products.
Entrepreneur
1- Organise 3 factors of production
2- Take risk using their own money j and others’ money
3 key Econ Q
1- What should we produce?? Oranges or apples?
2- How ?? Least in\ most out. { efficiency]
3- Who [ poor or rich] Consumers
How many types of Econ System?? And what are they?
3 types
- Command\ planned\ communist
- Mixed
- Free market\ Capitalist
North Korea, Cuba, China
Planned econ
,UK, France Sweden
Mixed Econ
Free Econ
Hong Kong, USA
Sweden VS UK Which is more free??
UK
Sweden tends to be more planned
Command Econ
Control by gov and allocate via a planning process
How does Fee Econ allocate resources
The price mechanism allocates scare resources
Economic agent. How many? what?
3 types
- gov
- firms
- consumers
Free Market [ Pros] and main motivation for the produces
1- Freedom of enterprises [ What to produce, what to sell?]
2** goods and services can be produced as much as they want* “ Main incentive for the owners.’
3- No involvement of the Gov [ Consumers’s freedom of choices]
Main concept in free market is, there’s no???
Decentralised control
Cons or Market Failure of Free Econ
- Gov are not addressing many social probs [ obesity, mis- advertising]
- Inequality of income
Econ Agents. How many? who?
- Individual, firms, gov
In planned econ, who owns the resources such as Land, Capital and workers
Land and capital are by Gov
Workers by Factortries
In Planned econ, what kind of products are under-produced??
Essential goods or popular goods
In which econ, rationally is likely to be happened
Planned econ
In which econ, Gov allocates more resources to key industries like Military and IT
Planned Econ
In which econ uses “labour intensive”
Planned ecoN
WHAT IS “ LABOUR INTENSIVE”
For eg: in a farm in NK, they use people insted of tractors and tools.
In Planned econ, essential goods are sold at…??
Lower prices
Pros of Planned Econ
1- A welfare is good
2- very little unemployment
3- Equality of income
Cons of planned econ
1- Inefficiency
2- shortages
3- less freedom of choices
In free Econ, prices are determined by ….??
Price mechanism or “supply and demand”
Cons of Free Econ
1- Inequality
2- Market failure
3- Monopoly
In MIXED Econ, we use 2 Theory to Satisfy people
1- Demand and supply
2- Equality
Give the eg of theory used in MIXED Econ to Satisfy people
1- Goods are services are produced by private sectors to those who can afford to buy them.[ Supply and Demand]
2- If they can’t afford to buy them, public sectors provide them. [NHS] [ Equality]
Pros of Mixed Econ
1- Economy can grow faster cuz this is balanced.
Sweden or UK?? Which is more free
UK
In Planned econ, which is higher than Mixed econ and Why??
Tax rates cuz, they are providigf wealfare to people for free
PPF. In other words??
Production possibility frontier or PPD or PPC
PPF shows??
The max potential output of an economy.
Diff between Consumer goods and Capital goods
- for their own enjoyment [ phones, cereals, cars]
- Goods which are used to make another goods and services[ buses, bricks]
IS physical capital and money capital the same??
NO
What makes Econ Probs
Scarcity and Choices
Econ Agents have to make choices. True or False. For eg??
True
- more workers or more machine
- hospitals or buildings
People have to face “trade-off”. What does it mean??
Like an Opportunity Cost
Rational=???
Sensible.
What are the basic 3 Econ probs???
- What to produce
- How to…
- For whom….
3 basic Econ Probs are diff: upon???
Different market.
In Command econ, what is an incentive??
Common goods or essential goods.
Consumers decide, Demand or Supply??
Demand
Demand??
Behaviours of buyers: how much they can afford, how much they’re willing to buy
What is the demand curve??
The RS between “Price” and “ Quantity Demanded”
What determines the “ QUANTITY DEMANDED???”
The Price
Price and Quantity Demanded are inversely proportional. T or F
True
How many condition of Demand are there?? What are they??
2.
- Extension of demand
- Contraction of demand.
Shift in demand curve can be either inwards or outwards. T or F ??
True
In PPF, if the line is straight, OC is??
Constant
In PPF if the is curve, OC is??
Is increasing
Empirical
Scientific
PPF can illustrates???
1- Scarcity and choices 2- Trade-off 3-OC 4-Benefits of trade and specialisation 5-Econ Growth and Recession
The eg of Value Judgement
The gov was wrong to introduce tuition fees
Which 2 things can increase” efficiency”
1- Specialisation
2-Division of labour
Eg of Micro??
Cars market in the UK
Eg of Macro
The total output of the UK economy[ GDP]
What is GDP???
UK’s economy
What 6 factors Shift the Demand curve???
1- Price
2- Income ( depends on the type of goods) ( Normal goods or Inferior goods)
3- Prices of related goods ( 1- Substitute, 2- Complement or non-related goods)
4- Taste or fashion
5- Expectations ( Future income or prices)
6- Numbers of Buyers
Income, Normal goods and Demand. RS??
“NG” INCREASES “ Income”. Therefore, Demand INCREASED.
Income, Inferior goods and Demand. RS???
“IG” Increases “ Income”. But, Decreases “ Demand”
Eg of Normal Goods??
Travel, cars, Rice
Demand and substitute goods??
PPrice of S rises, the demand of the other goods rises
Complementary and Demand??
Price of C rises, the demand of the other goods decreases.
What influances the tastes, fashion and the attitudes of consumers??
Marketing, media, peer pressures
Price changes makes what to Demand curve??
Movement along
Why Cetris paribus assumption is Vital??
If things are changing stimutaneously, it’s very difficult to understand the different influences on demand and supply curve.
A change in price of a product is shown by movement along the curve.. In this case, what assumption is used??
Cetris Paribus.
How can we use resources effectively??
!- Specialisation and 2- Division of labour
Why Specialisation is the Pro??
If people specialise, people are better off cuz they’re enjoying what they’re doing. Consequently, the output will gain.
Law of Supply shows??
Price = QD
Law of Supply shows??
Price = - QD
What is Marginal Utility??
extra satisfaction received from consuming one more unit of goods.
Diminish is equal to??
Fall
The 1st unit has always more marginal utility. Foe eg??
Cold drink after exercising
How can we calculate Marginal Utility?
TU of 1st unit - TU of 2nd unit.
Utility??
Satisfaction.
Effective Demand VS Latent Demand.
Which we can afford and willing to pay right now
Which we cannot ……… eg. Farrari
Demographic??
Population
Why does Supply curve always slope Upward??
Since Marginal cost increases because production rises. So, firms need to command a higher price for increased production.
As you increase supply ( production ) Marginal Cost rises. Why??
1- Labour has to be paid overtime
2- Less productive labour need to be trained more
3- Raw materials from further away must be used
4- Law of Diminishing returns
Marginal cost??
Additional cost of producing 1 more unit.
Factors shifting Supply Curve
1- Quantity of factors of production. (the amount of wheat available to make bread)
2- Change in Cost 9 labour, raw materials..)
3- No of firms willing to invest. ( more investmeny= More Supply)
4- Advancement in Tech
5- Cartels between firms. ( Shift inward)
6- Government intervention ( Sale tax, Subsidies, Regulatory level)
7- Weather
8- Expectations of future events
Why producers are always in the position of fortune???
If they think the price will go down, they can withhold or stockpile the goods.
How many types of Markets?? Eg??
1- Organised (oil market)
2- Less organised ( virtual, E-bay)
One Big Supplier
Monopoly
One Big Buyer
Monopsony
What is the equilibrium price?/
at which the QD and QS are equal
When the Surplus exist??
excess supply or the price is higher than EP
Why the price is higher than EP??
Since QS is higher than QD
How can we eliminate the Surplus??
Suppliers will lower the price
When Shortage exists??
excess demand or price is lower than EP
Why the price is lower than EP??
Since QD is higher than QS
How to calculate Consumer Surplus??
What consumers are willing to pay- market price
Consumer surplus position on Graph.
Above the market price but below the Demand
Consumer Surplus exist example??
A promotion
biding
offering price
How to calculate Producer Surplus??
what producers are willing to accept- market price
Producer Surplus on Graph
Below the market price but above the Supply
In which condition, a market is efficient??
In Equilibrium
In equilibrium which are the same??
1- QD= QS
2- Consumer Surplus= Producer Surplus
What are 2 main functions of a Market??
1- Determines Price via Supply and Demand
2- where buyers and sellers interact each other to Trade
What elements do Demand and Supply determine??
Price and Quantity
What is the function of Price Mechanism??
Moves a market to equilibrium
What are the three detailed functions of Price Mechanism??
SIR
1- Signalling
2- Incentive
3- Rationing
The concept of elasticity allows us to Do what???
analyse supply and demand with greater precision.
Elasticity??
how much one variable changes, as the result of the change in another variable
Elasticity?
how much one variable changes, as the result of the change in another variable
What is PED??
measures how much the quantity demanded of a good , responds to a change in the price of that good.
Why PED is always -ve??
Due to relationship between Price and QD. That means due to Law of Demand.
PED<1
Inelastic
PED> 1
Elastic
PED=0
Perfectly inelastic
PED = infinity
perfectly elastic
PED=1
unitary elastic. 5:5
Factors influence PED
1•Availability of Close Substitutes 2•Necessities versus Luxuries 3•Definition (and size) of the Market 4•Time Horizon 5•Addictive nature of a good 6•Proportion of income spent on good
When does Demand tend to be more elastic??
1. larger number of close substitute 2- If the good is a luxury 3- the longer period of time 4- if the good is not addictive 5- if the market is narrowly defined 6-if the good takes up a large proportion of a person’s income
Why firms are interested in knowing the PED of their products?
1- PED measures the extent to which demand will change
2- PED and changes in TR are linked
3- Useful when deciding to Raise or DROP the price of the product. i.e. Pricing strategies.
deciding to Raise or DROP the price of the product.
Pricing Strategies
What is TR??
the amount paid by buyers and received by sellers of a good.. TR= PxQ
If the demand curve is Elastic, what happen to TR and why?/
TR Decreases cuz Price leads to Decrease in QD
Why we Can say that elasticity use the Cetrius Peribus??
Cuz just one variable at a time changes
What does YED measure?
the response of demand to changes in incom
YED< 1
inelastic
YED can be both or just one? - or +
can be Both
If YED is -, what type of good it is?
Inferior goods
If YED is +, what type of goods it is??
Normal goods
necessities tend to be income inelastic or elastic??
Inelastic
XED in other words??
Price or Cross ED
XED can be both or just one? - or +
Can be both.
What does XED measure??
he degree of responsiveness of quantity demanded of one good to a change in price of another.
XED formula??
%∆Qd of B
%∆P of A
If XED is +, what type of good it is??
Substitute goods
If XED is +, what type of good it is??
Substitute goods
If XED is -, what type of good it is??
Complementary
The effect of XED on Substitutes and eg??
Price og A rises, QD of B also rises. Coke and Pepsi
The effect of XED on Complementary good and eg??
Price of A rises, QD of B decreases. Milk and cereal or textbooks and university fees.
Application of XED??
- help business to make marketing decisions in relation to Complementary goods and Substitutes goods.
- Trying products together ( mobile phones and phone services)
- In relation to Competitors and Substitutes ( whether or not rise or lower the price)
What does PES show??
the responsiveness of quantity supplied to a change in price.
Why PES is always positive (+)??
Law of supply. Price= QS
Determinants of Elasticity of Supply 5
1-Availability of substitutes 2-Time 3- Spare Capacity 4- Spare stocks 5- Factor Mobility
What is the most desirable PES for a firm? Why?
PES > 1 or Elastic supply. Elastic supply makes firm to be more competitive than its rivals so that it allows the firm to yield more revenue and profit.
What does Market perform?
-allocates scare resource efficiently
In this Market Failure, what type of Efficiency do we concern only?
Social efficiency
How can we know, a market is Socially efficient?
If there’s no external costs and benefits(Externalities). They all are internalised.
When do externalities happen?
No private cost but getting benefits, externalities happen
When do -ve externalities happen??
When a production or consumption of a product results in a Cost to Third Party (Bystander)
How many types of Costs and Benefits are there?
1- Private Costs and Benefits ( Internal costs and benefits)
2- External Costs and Benefits ( - and + externalities)
3-Social Cost and Benefits
Private costs (or internal costs) ??
The Cost of an economic decision or action (production or consumption) to an economic agent who is directly involved
Eg of Private costs (or internal costs)?
Smokers having a serious illness
What is Private benefits (internal benefits)?
The benefits of an Econ decision to an Econ agent who is directly involving in it.
Eg of Private benefits (internal benefits)?
The profits made from selling a factory’s output
The enjoyment of smokers get from smoking a cigarette
what is External costs (negative externalities/ negative spillover)
The costs of an economi decision to an economic agent who is not directly involved (i.e. a third party or bystander
Eg: External costs (negative externalities/ negative spillover)
Waste from a factory which is disposed of into a river (pollution)
Passive-smoking, congestion, anti-social behaviour
Eg of External Benefits (positive externalities or positive spillover)
- Taxation paid by the factory to thegovernment who will then spend it to help the population as a whole.
- The jobs created by the tobacco industry,
- investment in housing maintenance
- law and order.
What is Scoial Cost? and its formula
- All the Cost to Society
- Private costs + external costs
What is Social Benefits and its formula?
- All the Benefits to Society
- Private benefits + external benefits
What makes Market to Fail??
—where the market mechanism fails to allocate resources efficiently
—This will arise where Social Cost is higher than Private Cost (i.e. Negative Externalities exist. SC>PC
Eg of Market Failure in terms of SC> PC. 5 sentences
- If a firm is **not paying all the costs of its production **( SC>PC)
- Consequently,that firm will be able to produce, and sell, cheaper than if it had to pay.
- Therefore, it will be able to sell at a lower price, increasing demand for the goods
- This means that too much of that product will be produced using more scarce resources than it really should do.
- ** So, the market is Failing **
For -ve externalities, which is larger? SC or PC
SC>PC
In econ, Decisions are made at what??
MARGIN.
In econ, Decisions are made at MARGIN, what does that mean?
That means consumers and producers decide whether to consume or produce one more unit, depending on** its marginal benefit or cost**
What is Demand curve also called ??
marginal utility curve
What does Demand curve show?
marginal private **benefit **
Why Demand curve always Sloping Upward all the time ??
Because It shows that the benefit, satisfaction or utility gained from consuming and an additional unit of a product tends to decline (diminishing marginal utility)
The marginal (private) benefits include consumers and producers both?
Consumer only
The marginal (private) benefits include consumers only. So, what is the consequence of it?
Consequently, there are no (positive or negative) externalities
What is Marginal Social Benefit (MSB)? and its Formula?
- The total of all **benefits **obtained from the **consumption **of a good
- marginal private benefits + marginal external benefits.
Where (positive or negative) externalities exist, the MPB does not show WHAT?? And what does it Show ??
- the true level of economic benefit to society
- the true level of economic benefit to the individual consumers directly involved in the activity. (SHOWS)
Where (positive or negative) externalities exist, the MPB does not show the true level of economic benefit to society, as a whole - only that of the individual consumers directly involved in the activity.
In this case, we need to draw a sperate Demand graph which include What and Label it as What?
- Demand cureve which includes ALL the BENEFITS (private and external)
- Label it as MSB not MPB
How is Supply Curve also called?
Marginal private cost curve
Why Supply Curve always Sloping Upward?
- Producers will provide one more unit always because they can cover their marginal cost (MC).
- The cost of making each additional unit tends to increase due to the law of diminishing returns
- The producer will not be willing to supply the product below the marginal cost of producing it.
The marginal (private) cost involve both consumers or producers?
Producers only. Consequently, there’s no externalities
What is Marginal Social Cost (MSC) and its formual??
the total of all costs arising in the production of a good. MSC= private costs + external costs.
If (positive or negative) externalities exist, the MPC does not show What? and Shows What?
- show the true level of economic cost to society
- show the true level of economic cost to the individual concusmers who is directly invoulved in this activity
Where (positive or negative) externalities exist, the MPC does not show the true level of economic cost to society, as a whole - only that of the individual consumers directly involved in the activity.
If this is the case, then we need to draw a separate Supply curve which INCLUDES WHAT? And LABEL it as??
- INCLUDES all costs (private and external
- lable it as MSC not MPC
Economic Welfare can be happend in what market? Free or centralised?
Free
Adam Smith believes that what would occur in FREE market?
Economic Welfare
If there is a Economic Welfare, what things are equal.
Costs and Benefits
MPB = MSB = MPC = MSC
economic welfare exist when …..are equal?
Consumer Surplus is equal to the producer surplus.
When Consumer Surplus is equal to the producer surplus, there is economic welafare and ?
Equilibrium
When welfare loss or deadweight loss can be happened?
If the free market does not work correctly, then at this equilibrium price and private costs and benefits would not be the same as social costs and benefits.
Market Failure may be 2 types?
Complete failure and Partial failure.
When does Partial market failure happen?
When
“externalities
info failure
under or over production of merit and demerit goods “ EXIST
When does complete Market failure happen?
If there is no function market for public goods
How can we call information failure in another way?
Asymmetric Info(biased info)
How can we know that there is an information failure or Asymmetric info? And eg??
- If people don’t have the same information i.e someone knows better than the others.
- In used car market. (A seller knows better than the buyers).
Asymmetric info or info failure can lead to ??And eg?
- Only bad goods are left in the market which can Destory the particular market(eg used car market)
- The buyers Only wanted to offer low prices for all cars in case of they were a lemon. Therefore, the bad things are left in the market due to Asymmetric info( adverse selection).
What does Gov do for used car market to overcome problems caused by Asymmetric info??
- Used cars sellers are required to have a Warranty for their used cars.
What types of INFOS are Asymmetric ?? in terms of example
- Expert advice
- Pensions
* (people have no idea about how long they will live which is info failure ) they don’t have the complete informations. - Insurance
When can you tell that there is adverse selection?
when sellers have information that buyers do not have, or vice versa, about some aspect of product quality.
There are 2 types of Asymmetric infos. What are they??
- Adverse selection
- Moral Hazard
Advers selection with product…??
Product quality
In insurance market, Which Information is common and why?
Asymmetric infos
Since buyers know a lot better about their situation than sellers ( helath insurance)
When does Moral Hazard happen?
when an economic agent takes risks, but does not face the full costs of these risks
In insurance market, there is sth can exist apart from Adverse selection. And Why?
Moral Hazard exists
Because the buyer of insurance changes their behaviour after obtaining insuranc
In insurance market, there is sth can exist apart from Adverse selection. And Why?
Moral Hazard exists
Because the buyer of insurance changes their behaviour after obtaining insuranc
Example of Moral Hazard?
1- bank Loans (customers take out bank loans and engage in risky investments/business activities – especially if they have very little of their own capital at risk)
2- Government bail-outs (“rescues”) of the banking system
(Gov Bailed out after the Financial Crisis of 2008, had “created possibly the biggestmoral hazardin history”. Banks’ attitudes had changed, as they realised they could now** take risks without facing the full consequences of their actions**.)
incur?
sth unwelcomming happen
In Principal-agent problem, who has more information? What is the Consequence of that?
The agent usually has more information than the principal.
This difference in knowledge is known as asymmetric information.
The consequence is that the principal does not know how the **agent will act. **
Also, the principal cannot always ensure that the agent acts in the principal’s best interests
When does the principal-agent problem occur?
- when one person (the agent) is allowed to make decisions on behalf of another person (the principal)
What kind of issues does the principal-agent problem has?
- issues of moral hazard and conflicts of interest.
Real word example of The principal-agent problem?
In many real-world examples, the agent will not prioritize the best interest of the principal, but will instead pursue his own goals
* Politicians (the agents) and voters (the principals)
* shareholders and managers in public companies.
Can Market instability cause Market Failure?
Yes.
Unstable markets provide what kind of information to economic agents, mainly through price.
Unstable information
Unstable markets provide unstable information to economic agents, principally through price. Consequently, what happens to resources.
resources become misallocated.
a misallocation of resources due to market INSTABILITY example??
WHEAT due to unpredictable influences, such as weather and variable transport links,
Market instability happen mainly in what market?
Agricultural market
To solve Market instability, the GOV use what??
Buffer stock schemes
What is Short-termism and why it is arised frequently?
Since people tend to overstate **short-term benefits and costs and understate **longer-term benefits and costs.
principally?
mainly, most importantly
"”the** under-provision **of **merit **and **over-provision **of demerit good”” is happened due to ??
Short-termism
* Since as people find it hard to estimate future need for goods like healthcare, education and insurance, and focus only on their short-term requirements.
Private Goods have how many features and what are they?
- Excludable
- Rival
What is Rival?
- once a good has been consumed by one person it is not available to another person.
Waht is Excludable?
If the** supplier of that good can prevent people** who** do not pay** from consuming it.
Public goods features? 2
- Non-rival
- Non-excludable
Excludable in other word?
Rejectable
Examples of Public goods
military
* Police and the court and prison system
Street lighting
* Provision of clean air.
quasi-public goods. in other word?
non-pure public goods
Quasi goods have waht types of features?
- They have characteristics of pubic and private goods **but **It has some of the characteristics of a public good especially when it becomes rival in consumption at times of peak demand
- .Goods that have the feel of public goods but do not completely satisfy the definition of a public good.
Examples of Quasi-public goods and why we assume these as Quasi?
- public beaches and parks (still need to pay)
- roads (toll fee), tunnels, bridges.
How public roads become quasi-public? under what 3 circumstances?
(i) excludable - if a toll (usage fee) is placed on them
(ii) rivalrous (to some extent) - if they are** overused** (e.g. during rush-hour congestion).
(iii) rejectable – if users** choose a different route** to travel on.
What is Free Rider problem?
A free rider is a person who benefits from something without expending effort or paying for it. In other words, free riders are those who utilize goods without paying for their use.
The Free Rider Problem Example?
- Wikipedia
- Hundreds of millions of people use Wikipedia every month but only a tiny fraction of users pay to use it. A large majority of Wikipedia users do not pay to use the site but are able to benefit from the information provided by the website.
How to prevent The Free Rider Problem?
- Taxation to public goods
- make public become private goods
Which types of goods are facing free-rider problem?
Public goods
the free rider problem can lead to what type of Market failure ? And why?
- Complete market failure
- Due to Missing Market sincer there is no equilibrium
Quasi goods have to be?
exculdable , non-
**Should include 1 “non”
Common resources are public goods but consumed beyond certain point, it becomes?
Quasi-public goods
Common resources are Quasi-public with waht type of particualr characteristics?
**non-excludable, but rival
Example of (non-excludable, but rival) Quasi-public goods?
**“common” grazing land in England used to be land where anyone could let their animals feed on the grass. Legal ownership was held “in common”, so no one could be excluded from using the land (non-excludability
**common resources are often limited in amount. Consequently, it s likely to make them rivalrous.
How can we call Tragedy of the commons in other word?
- Quasi public with (non-excludability and rivalrous features)
How to tackle Tragedy of the commons?
- by assigning property rights to the asset.
why assigning property rights to the Common goods is the right way?
If there is a owner, it is likely to get maintained.
If ther’s no owner, on one will maintain them.
Merit Goods features? and Example?
- externalities
- under-provision and under consumption
**Healthcare, pensions, education
Why Merit goods are under-provided or under-consumed?
Due to
1. information failure\Asymmetric info
2. short-terism
3. principal -agent problem
Reasons for over-provision/over-consumption of demerit goods??
- short-termism (When people are consuming a demerit good, it is difficult to imagine the harm)
- Small Marginal Costs
(The marginal cost of each cigarette or glass of wine is tiny, even though the combined effect of years of consumption is huge. It is easy, therefore, to underestimate the harm of each cigarette in comparison to the perceived benefit.)
3.Addiction
Why we should provide Public goods?
- 1-They are essential to society. (Streetlight, police, army)
- 2-They benefit everyone. Both Rich and Poor.
- 3- They provide + externalities.
Diff: between Public goods and Merit goods?
- Public- for everyone
- Merit- for targeted groups
Why should we provide Merit goods?
1-They provide + externalities (healthcare, education)
2- Helps the poor.
3- People tend to lack of Information. So, by providing them make them consume.
Why Gov shouln’t provide both Public and Merit goods?
- Expensive to provide
- shortage
- high tax for general public
- paying twice (Rich people for healthcare)
Government tries to correct Market failure through? 3 policies
- Command and control policies
- Market-based policies
- Information provision
What is Command and control policies ?
Gov using legalisation to prohibit, restrict or encourage the econ agents .
What is market-based measures? and examples?
- Giving consumers and producers incentives to change their actions
- max and mini prices,
- taxation,
- subsidy,
- ‘pollution permits” or “cap and trade “
Information provision examples?
- Nudge theory
- education
- adverts
There are 3 policies to corrext the market Failure. How should we use these 3?
Comibine two or more policies is perfect
Why should Gov use “legislation”?
- Government can directly tackle market failure and set appropriate controls
- Government can quickly and easily impose their will on consumers and producers
3.** Lower cost **involved than with subsidies.
why Gov shouldn’t use “legislation”??
- Reduces individual freedom ( less choice about wht to produce or consume)
- Government involvement may lead to “government failure” which may be more costly than the anticipated market failure.
- It creates “red tape” (bureaucracy) and damages competitiveness among businesses.
- Black market
- It is Expensive to implement the policies and hire people to** Supervise.**
what is “red tape” (bureaucracy) ?
Formailised decsions making which takes longer time.
It is used in government agencies, large corporations, and the military
Why should gov use Market-Based policies?
Why should gov use Market-Based policies?
1.They give direct and strong economic signals
2.More flexible than command policies (more freedom of choices)
3.easy to implement.
4. cheaper to implement as well as governments will receive revenue from taxation and use them for R&D.
what is the aim of the Market-Based policies?
Alter behaviour via price incentives
Why Gov shouldn’t use Market-Based policies?
- Subsidies and enforcement involve extra cost to government
- Price may be relatively unimportant to consumers (inelastic demand, e.g. petrol and alcohol). Needs to raise tax to get a significant impact.
- Hard to know at what level to set a tax or subsidy to have the greatest effect
- There may be time-lags before a policy becomes effective
To Tax the goods, what should be considered?
PED ans PED
Questions to ask, when using one of the 3 policies. “ Legislation”
- Will people follow it?
- How will it be implemented/policed?
3.Will this be costly and who will pay (taxpayer)? - Does it reduce people’s economic/social freedom (is it anti-libertarian?
Questions to ask, when using one of the 3 policies. “Taxation”
- PED – will this reduce its effectiveness (e.g. addictive products/necessities may be price inelastic)?
- Are lower income groups more adversely affected (increased inequality)?
- Only “Pigovian taxes” on negative externalities can usually be seen as increasing welfare –
otherwise focus may be on reduced market activity and deadweight loss, caused by the tax. - Is it reducing people’s economic/social freedom?
- Time scale (long/short term).
- What level should tax be set at?
Questions to ask, when using one of the 3 policies. “Subsidy”?
- Cost to government and taxpayer?
- PED - will lower prices for consumers and increase demand?
- PES - can supply increase quickly if price received by supplier after subsidy increases?
- Time scale?
5.What level should subsidy be set at?
Questions to ask, when using one of the 3 policies. “Price Floor and Ceiling”??
- Will maximum price create shortages or a “black” market?
- Will minimum price create surpluses (labour minimum wage)?
- What price should it be set at (if it is too high or low it may not work).
- Time scale?
Government legislation’s main aim?
force people to change their behaviour through government-imposed laws
* and produce and consume fewer goods with negative externalities.
Price Ceilings’ aims?
- to Benefit consumers
- make **merit **goods cheaper and increase **demand **for them
Price Floors’ aims?
- to assist producers
- Makes demerit goods more **expensive **
Eg of Market-based policies?
Indirect taxes and Subsidies
indirect taxes and subsidies can give econ agent both??
Incentives and disincentives
What is Subsidy?
Money granted by Gov
In which situation the gov impose indirect tax ?
- When the production or consumption of a particular good creates external costs
Ideally, the tax should be Equal to ?
the external cost of producing the good.
Which tax increase social efficiency, **internalise **the externality, making the polluter pay”.
Pigovian taxes
If the production or consumption of a particular good creates **positive externalities **which is used as the primary method? **Indirect taxes **or Subsidy?
Subsidy
If the production or consumption of a particular good creates positive externalities, then a **subsidy **is often used as the primary method for What Purpose? And eg?
to internalise positive externalities
subsidising gym memberships
Gov use indirect taxation in which situation?
the overproduction (and consumption) of demerit goods like cigarettes and alcohol
Indirect tax is levied on ??
Producers
Indirect taxis levied on the producer, However, they will try as much as they can to pass on whom?
Consumer
There are **2 types **of indirect tax, what are they?
- Specific Tax
- Ad Valorem Tax
Specific Tax features?
- levied on the volume.
- More amount, more tax
example of Specific tax?
Excise Duties
Ad Valorem tax features
- levied on value
- more expensive good has more taxation
Example of Ad Valorem tax?
VAT (value added tax)
How can we call “How much tax the consumer has to pay and how much tax falls on the producer”
- the incidence of tax or tax burden
The incidence of tax(tax burden) on the consumer and producer depends on ??
PED and PES
If PED is more** inelastic**, tax burden is on?
Consumers
Subsidy can encourge producers to produce more?
Merit gods
”Tradable Permits” in other word?
“Cap and Trade” policy
In Short Run which are fixed and which are variable?
- Fixed- at least one factor of production(input) is fixed
There are 4 FOP, among them, which is more fixed and more variable?
- Fixed- Capital (factory)
- Variable- Labour
In long run, which are fixed and which are variable?
Variable- All FOP and can be chaged by firms
**No fixed factors of inputs **
what is Marginal in general?
- one More or one Less
If there are tooo many labour in one place, what can happen.
productivity will decrease. So, the output wil decline.
In Lonf run, suppy is elastic or inelastic? And why
- elastic
- because, all factors of inputs are variable(can be changed by the frim)
What is the Product in Production?
- quantity produced (or) Output
What is Marginal Product?
2nd TP- 1st TP
Why Marginal product is always declining?
Because, if there are many workers, productivity decreases. So, diminishing margin returns
How to calculate Average product?
Total Product\ No. of workers
Labour productivity is the same as?
Output per worker
When does the law of Diminishing returns?
In short run, more units of Variable Factors are added, Diminishing returns will apply.
For eg: more labours are employed while the capital (factory) is fixed
.
.
Homgeneous
The same
In short run, there are 5 possible stages for output if there’s an increase in Input. What are they?
- Increasing returns
- Constant returns
- Diminishing returns
- Zero returns
- -ve returns
When the marginal product declines, the production function becomes ??
Flatter
How many Short-run costs are there?
- Fixed costs
- variable costs
- Total costs
Fixed costs VS Variable costs?
- FC- not related to variations in outputs. (rent, business rates, insurance)
- VC- related to variations in Putputs. (raw materials)
How to calculate TC?
FC+VC
How to calculate AFC?
TFC/Q
How to calculate AVC?
TVC/Q
AC, in other words?
ATC
If you want “Average”, divide what by what?
T/Q
What is the Marginal Cost?
This. isthe cost of producing One More unit or One Less unit.
TP will still rise, even though What is decreasing?
MP
If the output is zero, there is no What cost?
Variable cost
What does Product mean in Production?
Outputs
MC and MP have what kind of effect?
Mirror due to law of diminishing marginal returns
Ap and AVC have what kind of effect?
Mirror due to the law of diminishing marginal returns
Short run AC is what kind of shape?
U shape.
Where the AC is at its Lowest on graph?
Where MC cuts AC.
Where MC cuts AC, average costs are minimum. So, this is ideal for firms. Why?
Cuz, it is producing at its lowest costs as possible.
Whenever marginal cost is less than average total cost, average total cost is ? And what retuns will apply?
- ATC=falling
- Increasing returns
Whenever **marginal cost **is greater than average total cost, average total cost is
- AC=rising
- Diminishing returns
When MC cuts AC at its lowest point, what costs are equal?
MC=AC
What are Key Inputs?
- CLL
What is Capital?
- not used for its own sake But for the contributation whuch leads to Production.
- building, machinery, eqipments
The assumptions of long term and short term varies according to Firms and Industries. Eg?
- Long term for nuclear plant- 30 years
- but
- Long term for resturant- 5 years
MC equls to which curve?
- Supply curve (upward sloping)
MR equals to which curve ?
- Demand curve
If MC<MR, it is worth doing what ?
expanding outputs
What is the most desirable situation in an economy?
- Economics Efficiency
What is Econmomic efficiency?
- When scare resources are used in the most efficient way to produce maximium output.
- As. a result, infinite wants are met by scare resources.
When does Productive Efficiency occur?
- This occurs when the firms is producing at the lowest possible cost.
- This can be done by Using most up-to-date Tech.
When does Allocative Efficiency occur?
- It occurs when the Producer and Consumer Surpluses are equal
- When there is no waste
When P=MC, how does Cnsumers behave?
- Consumers are willing to pay what it costs to produce
Productive Efficiency in other words. (Maths expression)??
Price is at the lowest point of AC.
PPF is the best way to explain?
- Efficiency
Is LAw of Diminishing Returns apply in Long run?
No
In long run, if Inputs are increased, there are Three things that can happen to Outputs. What are they?
- Increasing Returns to Scale
- Constant Returns to Scale
- Decreasing Returns to Scale
Difference situations of COSTS in long run and short run?
- In Long Run- All costs are variable
- In Short Run- Some Costs are fixed.
long Run is made up of ??
- Lots of Short Runs
What Does LRAC show?
- The long-run average cost (LRAC) curve shows the lowest cost for producing each quantity of output when fixed costs can vary
LRAC is Equal or below the relavent SRAC or Both?
Both can be happened. Equla or below the SRAC
Any point on the SRAC curve that is **tangential to the LRAC is the lowest possible cost or highest possible cost **of producing the output ?
- Lowest possible cost of producing the Outputs.
Where is MES on the graph?
- Between the beginning of Constant Returns to Scale and the** beginning** of the DIseconomies of Scale.
At MES, costs are at he highest or Lowest level for producing outputs?
- At MES, Costs are at the HIGHEST level.
Which is the most Efficient situation?
1. Economies of Scale
2. Constant Returns to Scale
3. Diseconomies. of Scale
2- Constant Returns of Scale
What happens in Economiews of Scale? Is this +ve or -ve situation?
- When the Output increases, the AC of production is Decreasing.
- It is +ve for the firms
In real life, LRAC curve is L-Shape. Why?
Since there is no Economies of Scale in real life because costs are remaining constant.
Economies of Scale is happened in Long run or Short run?
- Only in Long Run
In economies of scale, what happens?
- Total Costs of production (TC)increases.
- However, the Quantity far more increases.
- Consequently, AC(average cost decrease)
If firm is not TOO BIG, what cannot happen? And LRAC curve will be what Shape?
- Diseconomies of Scale can never be happened
- LRAC- L- Shaped
What are 5 types of Internal Economies of Scale?
- TECHNICAL ECONOMIES
2.MARKETING ECONOMIES
3.FINANCIAL ECONOMIES
4.RISK-BEARING ECONOMIES
5.NETWORK ECONOMIES
F,M,T,R,N
How may sub-topics under Technical Economies?
- SPECIALISATION AND THE DIVISION OF LABOUR
- The law of increased dimensions ( the “container principle”)
- Indivisibility of capital.
- Research and Development (R&D)
* S,C,I,R
Advantages of the Division of Labour (6)
1) Greatly increased production.
2) Enormous increase in labour productivity (i.e. output per worker).
3) Lower average costs of production.
4) More goods and lower prices for consumers.
5) Larger profits for firms.
6) More workers could be employed and given good wages because of large profits.
Disadvantages of Division of labour (3)
- For workers: Monotonous and boring jobs and Alienation
- For consumers: Lack of choice (cuz goods are tend to be identical)
- For producers: Division of labour means production lines are set up and these can be badly affected by strikes and other stoppages.
What does Container Principle states?
The larger the size of eqipment, the more efficient it is.
Who are not able to use Container principle? Why?
- Small firms
- Since they are not making enough Outputs to afford larger equipment.
What does Indivisibility of capital state?
- Some capital can only be used efficiently if it is used on a large scale.
An example of Invisibility of Capital for Big firm and Small firm.
- E.g. A supermarket might invest in new database technology that improves stock control and reduces transportation and distribution costs. It may not be viable for a small corner shop to buy this technology
How can R&D help the firm?
- improving the **quality **of its product and its methods of production
How may sub-topics under Marketing Economies?
- Specialist buyers
- Specialist sales Staff
- Bulk buying
- Marketing IOperations
- Quality Control
What does Specialist Buyers mean?
- Large firms can employ people just to concentrate on the buying of materials.
- They know when and where to make the best deals.
What does Specialist sales staff mean?
- Large firms can employ people just to sell their output.
- They know the best features of their firm’s products and how to sell them.
Why Bulk Buying is Beneficial for a firm?
- Large firms can buy raw materials in large quantities - this should mean buying at a discount on the price
- For eg: single can of cola costs 1 $, If you buy 6 cans in bulk, it costs just 0.7$ per cans.
Bulk Buying, in other words?
- Monopsony
Who can do Marketing operations? And why?
- Large firms
- Cuz it is expensive
How may sub-topics under Financial Economies?
- Creadit-worthiness
- Sources of finance
Creadit-worthiness is for whom? And how can a firm benefit from it?
- For large firms, it is easier to raise money and getting Loan
- cheaper loans with lower Interest rates.
Eg: of a wide variety of sources fo Finance for a large firm?
- commercial bank
- issue new Shares on Stock Exchange
Risk-Bearing Economies are obtained through?
- Diversification
There are 2 types of Diversifications in Risk-Bearing economies. What are they?
- Diverse the Product
- Diverse the Market
How to Diverse the Product and the benefit of Diversify the product? Eg?
- Producing a virety of products
- Even if demand for one product falls, they will still have others to make a profit
* e.g. a tobacco company will make other goods in case the demand for cigarettes like Vapes
How to diverse the Market and the benefits of Diversify the Market?
- by competing in more than one market (regional, national and international) to avoid localised fluctuations in demand
- If demand in one area falls, they can still be profitable in another area
Networks are important to which cost?
- Long run cost
Why Networking is vital for long run costs?
- Netwoks make Economies of scale
- marginal costof adding one more customer to a network is close to zero, **but **the resulting financial benefits may be huge because each new user to the network
External economies of scale result in ?
- a decrease in costs for all companies within that industry
- Consequently, the LRAC curve of each individual firm in the industry shifts downwards.
The example of External Economies of Scale?
- Formula 1 makes Tech, enginnering, design, components firms sprung up (grow)
What makes External Economies of Sacle?
1.Expansion of the industry
2.Improved infrastructure (social capital) (road, rail network)
3. Agglomeration ecomomies
4.
external economies of scale occurs?
- occurs outside of the firms but within the industry
Examples of EEOS? more detailed?
- University Research
- Transport Networks
- Influx of Human capital (higly skilled-workers)
Economies of scale in simpe def?
- reducing cost per unit of production
If Business becomes too large, what happens? Why?
- Diseconomies of Scale
- Cuz they are Beyond their Optimum Size
What causes Internal Diseconomies of Scale?
- Techanical reason (overproduction which means not enough buyers, inventory costs will bid up dramatically)
- Not co-ordination
- Managerial rreasons (loss of Motivation, poor communication)
In DISECONOMIES OF SCALE, what rise up?
LRAC costs bid up
Causes of external diseconomies of scale?
- High regulatory costs (employement law, safety)
- taxes regulation
How to calculate profit ? (Maths?)
- P= TR- TC
How to calculate TR?
- Price x Quantity
How to calculate AR?
- TR / Q
What kind of RS do MR and AR have? Why (on graph)
- fixed RS
- Cuz MR shares the same intercept with AR curve
When MR is 0 (meets x-axis) what happen to TR?
- TR is maximised
- But, Eventually TR begins to fall (sad face-sahped on graph)
PED and Revenue, the best thing to compare is by drawing?
- 2 graph as comparision
- (AR,MR, TR,)
- TR (sad-shaped face)
- AR, MR, (2 cuves with ELastic, unit elastic, inelastic)
- MR is twice steeper than AR
If PED is Elastic, TR starts to?
- starts to rise
When PED is unitary, TR is?
- remains the same
When PED is Inelastic, TR starts to ?
- Fall
Firms have to make what kind of Costs to stay in this industry (keep the current position)???
- Firms have to make implicit cost or normal profit to keep in the industry.
Accountant VS Economists view of Costs?
- Accountant just look at explicit cost however,
- Economists look at all cost including opportunity cost.
Explicit cost?
- input costs that require a direct outlay (spending)of money by the firm
wages and salaries, rent
Implicit costs?
- input costs that do not require an outlay(spending) of money by the firm
**Specific type of Opprtunity cost - EG: an entrepreneur who owns a business could use her labor to earn income at a job
Expict cost VS Implicit cost. Example?
- money from your bank account to do shopping.
- Whereas, use vouncher to use for shopping, it is implicit cost.
Does Accountant consider Implicit cost?
No
When TR exceeds both “Explict” and “Implict cost”, a firm is making?
- Abnormal or Econ profit
Economics profit is Larger or Smaller than Acoounting profit?
- Smaller
What is Economic profit, Accounting profit and Normal profit?
- Econ profit- remaining surplus left after deducting total costs from total revenue. (TR- Toatal cost)
- Accounting profit- the excess of total revenue over the expenses (TR-Explicit)
- Normal Profit- the least amount of profit needed for its survival.
Aims of Economic profit, Accounting profit and Normal profit?
- Econ- Shows how well the company is allocating its resources.
- Accounting- Reflects the Profitability of the company.
- Normal- Helpful in knowing the future prospects of the company
How to calculate Total Opportunity costs?
- Implicit costs + Explicit costs
Normal profit (in other word)?
- Implicit profit
Economic profit or abnormal profit (in other word)
- Explicit profit
The objectives of Firms (5)??
- Short-run Profit Max
- Revenue Max
- Sales Max (to gain market ppower and growth)
- Profit Satisficing
- Other objectives (improve firm’s image, ethics, environment, CSR)
When the profit is maximised ?
- When MC=MR
If TR>TC, the frim, is making what kind of profit?
- Economic profit
If TR<TC, the firm is making ?
- Economic Loss
If TR=TC, thee firm is AT…..?? And what kind of proift is made?
- At Break-even point
**only **Normal profit
At Break-even point, what kind of profit is made and is it Max or not?
- Normal profit and it is Maximised
When MC=MR, the Gap between TR and TC is at its?? And, profit is?
- Greatest
- Maximised
What is Break-even?
- TC=TR
- Which means, there’s No Gain or No Loss (you’ve reaches the level that Your Production Cost =Your Revenues)
What is the best long-term Tactic? Why? Profit-Max or Revenue Max or Sales Max?
- Revenue Max
- Bonuses and salary depends on Revenue. Not Profit.
- sell to many people as possible so that the capital for Advertising is available.
- Therefore, PROFITS will be automatically be Max.
Revenue Max is the best tactic for long-run. But, what’s the other reason for Revenue Max?
- wanna come money in the company. To be able to survive in recession.
- And to get more Market shares.
When Revenue-Max occurs? (on graph)
- MR=0
- x-axis on graph
Who own the company and who control it?
- Owner- Shareholders
- Controllers- Managers
- Principal-agent problem
Why Managers wannt to fous on Revenue MAx and the owners want to focus on Profit Max?
- Managers are employees. Their bonuses are based on revenue
- They need to make day-to-day survival
Different between break-even point and Sales Max?
- Break-even = TR=TC
- Sales Max = AR=AC
Sales Max can help?
- growth
- increase market shares
- domination of the market in the long run
Which Maximisation do owners and managers agree on?
- Sales Max
- Since both have a lot to gain from a growing company
Why “PROFIT SATISFICING” is more common than Profit-Max?
- because businesses do not have the necessary information available to allow them to maximise profits
- And due to principal-agent problem: Manager’s interest is to satisfy the profit
What are other objectives for a firm apart from Prot-Max, Sales-Max and Rev-MAx
- CSR
- Environment
- Ethics
- Substainability
CBA looks at?
- Social costs and Benefits
- Not Private
What makes CBA difficult ?
- Calculating Social costs and benefits for **the Future **
Can Costs and Benefits be changed over time? Give example?
- Yes
- $1 today worth less than $1 in the future
- Because of the rate of discount( rate of interest) (compound interest)
- $1 with 10% rate of interet a year, $1.10 in ayear, $ 10.83 in 5 years
$1 today worth less tahmn $1 in the future due to?
- investing
- rate of interest (discount)
Which is more difficult and why?
Calculating private benefits and costs or social benefits and costs?
- Social is way more harder
- Because of the Shadow Prices that need to be estimated
- For example, how much is a human life worth, a beautiful area of countryside, what is the financial cost of pollution
Pros of CBA?
- Positive (objective)
- Calculatinf Net benefits help to make decisions (should this project go ahead or not)
- Allow policymaker to compare diff projects
Cons of CBA?
- Some costs and benefits are difficult to measure (Shadow prices) (pollution) (a beautiful countryside)
- Some are highly subjective (noise pollution, lower stress level)
- C and B can change over time
- Estimation can make marginal error.
Can Social costs and benefits be valued in Monetary terms?
- No
Tradable Permit (in other words)?
- Cap and Trade policy
Which is more stict policy? Cap and Trade or Carbon tax?
- Cap and Trade
Why Cap and Trade is more Flexible than Carbon tax?
- government provides polluting companies with a limited number of permits each year to cover their emissions
- Companies that have lower emissions than this level can make money by selling permits on the open market
Waht does Cap mean?
- a limit on emissions
example of a cap and trade policy?
- European Union’s Emissions Trading Scheme (ETS)
example of a cap and trade policy?
- European Union’s Emissions Trading Scheme (ETS)
Is Cap and Trade market based policy?
- Yes
What does “Cap and Trade” Policy give the comany with lower emissions level?
- Economic incentives
- Because they can sell their permits to the others
Pros of Cap and Trade over Carbon tax?
- It is hard to set the correct level of taxation(what is the true economic cost of CO2 emissions and their impact on climate change?)
- Taxation (producers will try as much as they can to pass their tax to comsumers ) (low income households might suffer)
- Lower costs (legal stuffs)
- Tax- if it is inelastic goods, taxation will not make Notable changes
- Some countries “Free ride” on the other countries’s Carbon taxes
Cons of Cap and Trade?
- Setting emissions levels (Cap) at too high
- Over-allocation of carbon quotas (too much supply of permits and a resulting failure of the system. )
- Could be an example of government failure (policy to remove market failure leads to other problems caused by government action
When gov buy buffer stock?
- when there is surpluses
Does Buffer stock scheme work? Why?
- No, cuz it’s really expensive to buy and keep the commodities
Why gov use Buffer stock scheme?
- To balance Supply and Demand so that Price fluctuations can be prevented
In buffer stock, what knid of stock is stored and their action?
- Surplus stock is stored and it acts against Shortages and price rising
Why buffer stock is common in agricurtural industry?
- due to the changes in weather
- The market price of primary goods (butter, wheat, Farm produce) tends to fluctuate more than manufactured goods
the European Union’s (EU) Common Agricultural Policy which was set up after World War 2, abbriviation?
CAP
Cons of Buffer stock schemmes?
- Very expensive to buy stock and store them
- Buffer stock may not be big enough to change market price
- Perishability- can’t store perishable fo rvery long time (mostly agri goods)
- High administrative and storage costs
- Danger of over-production by farmers, if their incomes are guaranteed.
- Moral issues of storing food/cost of storage, when many people in the world are going hungry.
- Setting a target price is a very difficult due. tothe volatility (fluctuation of prices) for primary goods due to the weather
Long-term alternatives to Buffer stock scheme?
- Mobile tech to help farmers
- Encourage branding by farmers
- Micro insurance policy for poor farmers
- improve storage facilities
What is the main Aim of Buffer stock?
- help** farmers** to get reasonable income.
What is PPF?
- A representation o fthe max level of output than an economy can achieve with the existing resources
WHAT IS PERFECT COMPETITION?
- a market structure where many samll companies with a high level of competitions
IS PERFECT COMPETITION price makers or takers? Why?
- price takers
- cuz they are not large enough to influence price.
- So, they have to accept the Market Price
In PERFECT COMPETITION, Barries of entry and exits?
- No barriers of Entry nor exit
Type of goods in PERFECT COMPETITION?
- Homogenous (idnetical)
What is Homogeneous product? Example?
- They can be substituted easily
- cement, steel and chemical inputs for other products.
What is Heterogenous product? Example?
- Can’t be replaced by others
- Differentiated product
- PC and Macbook
Are firms in PERFECT COMPETITION, independent or dependent?
- Independent (the actions of one firm will not affect the actions of others)
In PERFECT COMPETITION, buyers and sellers have waht kind of knowledge about the price? And consequence of this?
- Perfect knowledge
- Therefore, no firm can charge above the market price, without losing all demand for its product.
There is no Perfect competition and Monopoly in the real life, but, some industries are nearly to be perfectly competivite. Why?
- PC- foregin exchange, agrcultural produce, internet-related industries
- Because, in FX, Agr, Internet, prices are the same, products are identical and consumers can Compare Prices easily and buy from the cheapest ones.
Nearly Monopoly in real life? Why?
- Local water supply,
Natural gas, electricity companies, and other utility companies - Because, the cost to enter the industry is high and new companies are unable to provide the same services at lower prices and in quantities comparable to the existing firm.
Is Demand Elastic or Inelastic or perfectly elastic in Perfect Competition? Why?
- perfectly Elastic (horizonal curve)
- Cuz, consumers have perfect knowlede about price
What kind of profit is made in PERFECT COMPETITION? Why?
- Normal profit (Long run)
- Cuz, consumers have perfect knowlde about price
- Consumers can compare prices and buy from the lowest one
For firms in perfect competition the price of the good equals both of its?
- AR and MR
The objective of a competitive firm is ?
- maximise the profit
What kind of profit is made in short run and loung run in Perfect Competition?
- Short run- abnormal profit (excess profit)
- Long run- Normal profit
When AR>AC, what kind of Profit is made?
- abnormal profit (excess profit)
Is “Shut Down” a long run decision?
- No
- Long run decision is “Exit”
What are Sunk Costs?
- fixed costs that have already been committed and cannot be recovered
- e.g. payments under a rental contract for a factory, even if the firm decides not to produce
A firm consider sunk costs wehn deciding to “Exit” or “Shut down”?
- Consider Sunt cost when deciding to exit (Cuz it’s a long run decision)
When a frim Shut down (short run decision) in Perfect Competition?
- P < AVC
On gragh, in perfect competition, what lies above? MC or AVC?
- MC is above AVC
In the long run, if at least some firms in perfect competition are making losses, then they will leave the market. Therefore, shift the industry supply curve to the left, raising the price. Why Prices are raised?
- Prices are raised to increase AR.
- The price will be rising until it reaches the point that normal profits are made
in a perfectly competitive market a firm in long-run equilibrium is operating at the point where:??
- AC = AR = MR = MC
The Firm’s Long-Run Decision to Exit or Enter a Market.
Exit when?
Enter when?
- Exit- when P<AC (when it cannot make Normal profit)
- Enter- when P>AC (when making Abnormal or normal profit)
Why Do Perfectly Competitive Firms Stay in Business even though they are making Zero Profit?
- Profit = TR - TC
- TC includes all Opprtunity costs
- Which means, TC includes Normal Profit
- In the zero-profit equilibrium, the firm’s revenue covers all costs (including normal profit)
- And compensates the owners for the time and money they provide to keep the business going. (survive)
Pros of Perfect Competition?
- Productively efficient - cuz price(MC) is at the lowest point of AC curve
- Allocatively efficient- P=MC
- Firms are encouraged to be as efficient as possible(Inefficient firms will go out of business)
- Consumer welfare is maximised (Competition leads to productive and allocative efficiency, which forces price down to the lowest possible level and ensures consumer surplus is maximised)
- The market is responsive to consumer preferences.
Disadvantages of Perfect Competition?
- No R&D (Long-run normal profits may be insufficient to fund ) (No Dynamic efficiency)
- Perfect information (rival firms can duplicate innovation) (copy=duplicate)
- Homogenous products (No variety of choices for consumers)
- Limited ability to benefit from economies of scale (cuz, this market contains lots of samll firms)
- Unrealistic assumptions
How Many firms in Monopolistic competition and what kind ofproducts do they sell?
- Many products selling products that are similar but not identical
How Many firms in Oligopoly and what kind ofproducts do they sell?
- Only a few sellers, each offering a similar or identical product to the others.
Why Monopolistic Competition haas a bit of market power?
- Due to Product differentiation
Monopolistic Competition in other words? And why?
- mini monopolies
- Since they can set hteir own prices
Monopolistic Competition real-life examples? And why they can be considered as Monopolistic?
- Grocery stores: as there are a large number of firms that sell many of the same goods but with distinct branding and marketing.
- Hotels: Each hotel company offers a similar service with slight variations in pricing and quality levels.
- Clothing stores
- Bars and Night clubs
- Hair dressing salon
- Food (sandwich bars and coffee shops)
Barrier sto Enter and Exit in Monopolistic ?
- relatively easy
Are companies in Monopolistic big or small?
- small
What kind of products in Monopolistic? Why?
- Heterogenous (differentiated) through branding and promotion
Do firms influence each other?
- no
- They are independent
What kind of knowledge in Mnopolistic?
- Perfect knowledge
Main difference between Monopolistic Competition and Monopoly?
- Price making ability: the firm can set the price for its own product but not that of the market as a whole
Distincit features of Monopolistic ?
- Firms are Short-term Profit Maximisers
- Downward sloping Demand ciurve
- Relatively price elastic demand.
How can products can be Differentiated?
- through branding, promotion, adverts, packaging, service
In Monopolistic, do frims differentiate price as well or Products alone?
- Just products
- So, it is non-price Differentiation
price differentiation cann increase and makes demand curve to be?
- brand loyalty
- inelastic
incumbent firms?
- those already existing in the market
In monopolistic, Short-run economic (abnormal) profits encourage new firms to enter the market. This can lead to??
- Increases the number of products offered.
- Reduces demand for firms already in the market.
- Shifts incumbent firms’ demand curves to the left.
WHy ther’s deadweight losss in Monopolistic?
- Since P>MC
In perfect competition, are there any deadweight loss? Why?
- No
- Since, P=MC
Frims in Monopolistic competition, allocatively or productively efficient?
- No efficiency in both long run and short run
When Socially optimum (productively effienct)?
- AC=MC
Cons of Monopolistic competition?
- Consumers have too many choices since the barriers to entry is low, too many choices = hard to kae optimum desicions
- Product differentiation - lead to wastage and external costs (plastic from packaging)
- Long-term normal profit or zero economic profit even though they experience positive economic profit in short-run
Pros of Monopolistic?
- Consistent quality of products or services (since they need to differentiate their product from the rivals)
- Multiple choices for consumers
- Decision-making power for frims
There are some arguments about Advertising and Brand name? (product-differentiation methods)
- Critics of advertising argue that firms advertise in order to manipulate people’s tastes. They also argue that it impedes competition by implying that products are more different than they really are
- Critics argue that brand names cause consumers to perceive differences that do not really exist.
