Micro economics Flashcards
Main Reasons for government intervention? (3)
Correct market failure, achieve a more equal distribution of wealth and income, improve performance of economy.
Why is there government intervention?(2)
one or more of the three functions of price mechanisms break down, change allocation of scarce resources to improve social or economic welfare.
Types of government intervention with demerit and negative externalities? (3)
regulation, taxation and quantity control
What is government failure?
When the costs of intervention outweigh the benefits.
2 main types of pricing strategy?
price agreement and price leadership
Composite demand?
A good that is demanded for more than one purpose so an increase in demand for one purpose reduces the supply for the other purposes.
Price competition examples?(3)
Predatory pricing, limit pricing and price wars
Non price competition examples?
loyalty cards, advertisement, branding
Oligopoly features?(5)
high barriers to entry and exit, many small buyers and sellers, interdependency, differentiated goods and price setters
Allocative efficient definition?
Where demand=supply maximising society surplus (P=MC)
Public goods?(2)
non excludable, non rivalry
Quasi public good?
Can become rival
Partial market failure?
wrong quantity or price of goods produced
Market failure?
Inefficient allocation of scarce resources in a free market
What are external costs and benefits caused by?
externalities
Merit goods?(2)
under consumed/produced in a free market, positive externalities in consumption
Demerit goods?(2)
negative externalities in consumption, over consumed in free market
What does maximum price do to consumers? (2)
Increases consumption and makes necessity more affordable
Disadvantages of maximum price?(3)
creates excess demand therefore shortage,firms can leave the market as profit maximisers (leading to less options and potentially lower quality goods), could create a black market
Minimum price affect?(2)
suppliers get a guaranteed price, excess supply and contraction in demand
Indirect tax?
Increase production costs shifts supply left
Direct tax?
Lowers consumer/ firms disposable income
Government intervention with positive externalities?
Subsidies encourages production and leaves a lower price for consumers so an extension in demand
What is the effect of an indirect tax if demand is inelastic?
firms will pass on price to consumers
Factors which affect Ped?(4)
availability of subsititutes, time, proportion of income, whether good is luxury or necessity
Xped?
Measures the responsiveness of quantity demanded of good A to a change in price of good B.
Factors of monopolistic competition? (5)
product differentiation, price making power, elastic demand curve, barriers to entry and exit are low and low concentration ratio
Factors affecting pes?(4)
time,raw materials needing to be extracted, availability of spare capacity, ability to alter production methods
Marginal cost?
extra cost when producing one more unit
Causes of market failure?(6)
Imperfect information, public goods, merit and demerit goods, externalities, inequalities in wealth and income, factor immobility
3 conditions for price discrimination?(3)
Price maker (monopoly, market power), limit reselling and have information about consumers ped
Economies of scale barrier to entry explanation?
Incumbent firms can keep their prices low and costs creating a barrier to entry as new small firms cannot enter the market and compete or price
What shifts the ppf outwards? (5)
improvements in technology, introduction of new resources, increased productivity, increased supply of labour through immigration, improvements in education and training
Examples of anticompetitive practices?
Collusion, predatory pricing and vertical integration
Predatory pricing?
Productive efficiency?
Maximising output at lowest point of AC curve, full exploitation of economies of scale
Examples of barriers to entry? (4)
high start up costs, sunk costs, high MES and laws and regulations
Privatisation?
When the government sells state owned company to the private sector as it has become x inefficient- no profit incentive
Collusion definition?
When two or more firms come together to limit competition
Examples of government intervention?(6)
subsidies, price controls, taxes, regulation, advertisement, state provision
3 main examples of government failures occurring?
imperfect information, unintended consequences, enforcement costs very high (subsidies, price controls)
What efficiency are firms in perfect competition?
static (productively and allocatively)
What does dynamic efficiency require?
Supernormal profit so firms lack the means
Monopolistic competition definition?
A market with many firms selling slightly different products
What happens to monopolistic firms supernormal profit in the long run?
Gets eroded away as new firms enter the market due to low barriers to entry and knowledge widely available. Leads to a shift left of demand as more choice for consumers from other firms.
characteristics of a perfect competitive market?(4)
many buyers and sellers, homogenous products, no barriers to entry and exit, sellers and buyers have perfect knowledge
Characteristics of a Monopoly?(5)
Price maker as only one firm (100% market share), high barriers to entry and exit, supernormal profits in the short run and long run, differentiated products and imperfect information
Contestable markets?
low barriers to entry and exit
monopolistic competition?
many sellers with price setting powers
What profits are possible in the short and long run in monopolistic competition?
short run- supernormal profits
long run-normal profits as supernormal profits eroded away (low barriers to entry)
Define Consumer surplus?
the difference between the price consumers and willing/able to pay for a good/service and the price they actually pay
Define producer surplus?
The difference between the price producers are willing and able to s
internal economies of scale? (6) RMFPTM
technological, financial, purchasing, marketing, managerial and risk bearing
What is internal economies of scale?
when firms become larger and average costs fall with increased output
external economies of scale? (2)
more training facilities and roads improved
Inelastic number?
below 1
elastic number?
above 1
Monopoly power definition?
When a firm has the ability to set prices (price makers)
Monopolistic competition features?
many small buyers and sellers, low barriers to entry and exit, price makers
Deregulation definition?
Removing regulations from markets lowering barriers to entry and encouraging competition
Factors which affect elasticity of labour demand?(3)
time, substitutes and % of total cost
What type of demand is for products which take a high proportion of your income ?
Elastic as expensive goods consumers shop around for the best price
Regressive indirect tax eval?
Tax takes greater proportion of income of poor than rich so overuse indirect tax promotes more unequal distribution of income which is a market failure and leads to government intervention.
Law of diminishing returns definition?
When a variable factor of production increases while others stay fixed (short run)
Barriers to entry examples (4)
sunk costs, economies of scale, brand loyalty and patents,
Monopoly evaluation?
dynamic efficiency? give profit to shareholders via dividens, save it or pay off debts or workers higher wages so not necessarily reinvested, DOS- size of firm, objective of monopoly assume its profit max but what if sales max?, type of good-luxury good we can pay higher prices for
Cons of monopolies?(4)
x inefficiency, allocative inefficiency, productive inefficiency and inequalities in necessity markets (food and drink lower income won’t afford)
Pros of monopolies?(3)
dynamic efficiency, usage of economies of scale large size ( car market), cross subsidisation (large profits can subsidise loss making good
Profit satisficing?
When a firm makes enough profit to satisfy influencers and stay in the market but may pursue other objectives
Marginal physical product of labour?
Amount of output produced by each extra worker
Marginal revenue product? (MRP)
extra revenue an additional worker brings in
Labour market shifts?(
migration, income tax and benefits, cost of capital,
Where does a monopsonist profit maximise?
Where MCL=ACL
Labour market failure?
occupational immobility (labourers lack the skills for new jobs hence becoming structurally unemployed), geographical immobility
Wage differential definition?
Wage rates differ due to economic factors such as MRP, elasticity of labour supply
Complete market failure?
When good would not be provided without government intervention (public good)
Contestable markets?
When there is the threat of competition in a market- features are competitive market features
Diminishing marginal utility?
As you consume more of one good the satisfaction will decrease from each extra good consumed
4 main causes of government failure?
Law of unintended consequences, imperfect information, administration costs and distortion of the price mechanism
