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Economic A Level > Micro - Revenue/cost curves and market structures > Flashcards

Micro - Revenue/cost curves and market structures Flashcards

1
Q

What is production

A

It is the process of converting inputs into outputs with the aim of adding value

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2
Q

What is productivity

A

It is a measure of the rate of change of output

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3
Q

How can productivity be measured

A

Average product per input
Marginal product per input
Physical product
Revenue product

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4
Q

What is the short run

A

It is the time period where firms face at least one fixed factor of production

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5
Q

What is the long run

A

It is the time period in which all factors of production are variable

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6
Q

What is the law of diminishing returns

A

It is where there is rising production but falling productivity in the short run

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7
Q

What is marginal physical product

A

It measures the change in total output when the employment level is changed by 1 worker

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8
Q

What is average physical product

A

It measures the output per worker

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9
Q

Why does diminishing returns happen

A

Because there is an imbalance between the variable and fixed factors

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10
Q

What does the short run production function of total product look like

A

A flattened out S

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11
Q

What does the marginal physical product curve look like

A

A n shape

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12
Q

What does the average physical product curve look like

A

n shape

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13
Q

What is the relationship between the marginal and average graph

A

The marginal graph passes through the average graph in the middle

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14
Q

What are total costs

A

it is the sum of all fixed and variable costs

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15
Q

What are variable costs

A

They are the costs the change as output changes

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16
Q

What are fixed costs

A

They are costs that don’t change as output changes

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17
Q

What is economies of scale

A

The benefits of a long run expansion of output measured by falling unit costs

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18
Q

What is diseconomies of scale

A

The loss of efficiency caused by a long run expansion of output measured by higher unit costs

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19
Q

What are constant returns to scale

A

The outcome where a firms output directly mirrors its change in inputs
No change in unit costs

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20
Q

Internal economies of scale

A

The benefits of long run expansion felt only by the expanding firm

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21
Q

External economies of scale

A

The benefits to all firms in an industry as the industry expands in the long run

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22
Q

Internal diseconomies of scale

A

The costs of long run expansion felt by the firm

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23
Q

External diseconomies of scale

A

The costs felt by all firms in an industry as the industry expands in the long run

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24
Q

Minimum efficient scale

A

The lowest level of ouput that a firm must produce in order to reach the point of minimised unit costs

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25
Q

Profit maximising point

A

MR = MC

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26
Q

What does the fixed cost curve look like

A

A horizontal flat line

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27
Q

What does the variable cost curve look like

A

It increases then flattens off and then increases at a faster rate

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28
Q

What does the total cost curve look like

A

The same shape as the variable costs curve but starts at the fixed cost level

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29
Q

What does the marginal cost curve look like

A

Nike swoosh shape

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30
Q

What does the average fixed costs look like

A

A negatively sloped line which is always decreasing

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31
Q

What does the average variable costs look like

A

A U shape

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32
Q

What does the average total cost curve look like

A

A U shape

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33
Q

What can the position of the ATC curve tell you

A

What type of profits you are making
P>AC abnormal profit
P=AC Normal profits
P<AC economic loss

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34
Q

What is the relationship between productivity and costs in the short un

A

inverse relationship

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35
Q

What is the equation for unit labour costs

A

total labour costs / total output

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36
Q

What is the productivity of the UK like

A

It is very low compared to other modern countries where we only beat Japan

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37
Q

How can the UK improve their unit labour costs/competitiveness against developed countries

A

Close the productivity gap
Accept lower wages

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38
Q

How can the UK improve competitiveness against emerging nations

A

Improve our relatively higher productivity
Pay similar low wages
Wait for the nations to develop and have rising wages

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39
Q

What are the causes of the Uk’s productivity gap

A

Low rates of capital investment
Low rates of spending on research and development
Skills of labour force
Over regulation
Poor management/ poor industrial relations
Inappropriate scale of production
Low wage rates
Excessive work hours

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40
Q

What does the long run average cost curve look like

A

U shaped
Decrease in costs = economies of scale
Increase in costs = diseconomies of scale
The bottom can be flatter

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41
Q

What are technical economies

A

Large firms can afford large investments which is spread over more output
Law of increased dimensions/volume economies

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42
Q

What are volume economies

A

Unit costs are lower for transporting things which are bigger

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43
Q

What are managerial economies

A

Large firms can employ speciality managers who increase efficiency
Form of division of labour

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44
Q

What are marketing or commercial economies

A

Large firms can bulk buy at a lower unit cost and negotiate prices
Firm doesn’t need to increase all labour proportionate to the increase of the firm

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45
Q

What are financial economies

A

Large firms can borrow cheaper and are more creditworthy and less risky
Large firms can also raise money through share sales as well

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46
Q

What are risk bearing economies

A

Large firms can reduce their risk more than smaller firms by:
Diversify products sold
Diversify the markets sold in
Diversify their supply

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47
Q

What are economies of scope

A

It is cheaper for large firms to produce as the costs of some labour is shared over more output and products

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48
Q

What are the types of economies of scale

A

Economies of scope
Risk bearing economies
Financial economies
Marketing/commercial economies
Technical economies
Managerial economies

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49
Q

What are the types of diseconomies of scale

A

Control problem
Co-ordination problems
Communication failure
Motivated problems

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50
Q

What are control problems

A

The bigger the firm, the harder it is to control every aspect of the firm and be efficienct

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51
Q

What are co-ordination problems

A

Large firms normally break into departments, and the more departments there are the harder it is to control and co-ordinate them

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52
Q

What are communication failures

A

The bigger the firm, the more likely there will be communication breakdown

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53
Q

What are motivated problems

A

The larger the firm, the harder to motivate the workers if they feel unimportant to the overall success of the firm

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54
Q

What are agglomeration economies

A

When the firms are clustered in a distinct geographical location

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55
Q

What can the long run cost curve be made from

A

Lots of different MC AC points

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56
Q

What does the LRAC curve look like in a natural monopoly

A

A constantly decreasing curve

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57
Q

What does the LRAC curve look like in market with large scale producers

A

A U shape

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58
Q

What does the LRAC curve look like in a competitive market of small firms

A

A Nike Swoosh

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59
Q

What does the LRAC curve look like in a market containing variety of sized firms

A

Flat horizontal line

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60
Q

What is the equation for total revenue

A

quantity x price

61
Q

What is the equation for AR

A

TR/ quantity

62
Q

What is AR equal to

A

Price
The demand curve

63
Q

What slope is the MR curve

A

Double the rate of AR

64
Q

Where is Total revenue maximised

A

MR = 0

65
Q

What targets can a firm have

A

Profit maximising
Profit satisficing
Short run sales revenue maximisation and long run profit maximisation
Short run limit pricing
Behavioural theories of the firm
Social enterprises

66
Q

What is profit maximising

A

Where the firm produces at the quantity where MR=MC to maximise profit
This point however can be very hard to find

67
Q

What is profit satisficing

A

When the firm is happy to make at a point where there is sufficient profit to keep in business but isn’t the max
This could be for many reasons

68
Q

What is short run sales revenue maximisation and long run profit maximisation

A

Firms may have different aims in the short and long run
They could aim to maximise market share in the short run so they could profit maximise in the long run

69
Q

What is short run limit pricing

A

It is a type of predatory pricing were big firms reduce prices to make smaller firms leave the market or stop other firms coming into the market

70
Q

What are behavioural theories of the firm

A

The aims of the managers of the firm and the owners and shareholders may be different.
Shareholders are likely to want to profit maximise to get a bigger dividend
Managers may want to aim for other things

71
Q

What are social enterprises

A

They are firms where they aren’t profit incentive and instead use the profit to improve social and environmental causes

72
Q

What is the equation for profit

A

TR - TC

73
Q

What is the economist way of calculating profit

A

They count the opportunity cost as a cost whereas an accountant only counts the physical cost

74
Q

What is normal profit

A

When revenue is the same as the total costs

75
Q

What is abnormal profit

A

When there is excess revenue which is profit

76
Q

What roles does profit play in the market

A

The creation of business incentives - causes entrepreneurs to take risks in starting companies
The creation of worker incentives
Source of finance
Measure of efficiency

77
Q

What characteristics are there of perfect competition

A

Large number of buyers and sellers
Firms sell identical good or service
Perfect information
Freedom of entry or exit from the market
No market power for any individual firm or consumer
Firms are profit maximisers
Price takers

78
Q

How are the revenue and costs curves shaped in perfect competiton

A

The cost curves are the same
The revenue curves are one perfectly elastic line

79
Q

What does it depend on if a firm shuts down or not

A

The variable cost
The revenue of the firm

80
Q

What does a firm do if their are making a loss but removing their variable costs lowers the overall loss

A

Shut down in the short and long run

81
Q

What does a firm do if they are making a loss but removing their variable costs increases the overall loss

A

Keep producing in the short run but shut down i the long run

82
Q

What long run position is held in perfect competition

A

Normal profit

83
Q

Why is normal profit held in the long run in perfect competition

A

Because the revenue curve moves up and down depending on whether firms are making losses or abnormal profits

84
Q

What are the 4 important measures of economic efficiency

A

Allocative efficiency
Productive efficiency
Dynamic efficiency
X efficiency

85
Q

What is allocative efficiency and how is it measured

A

It is measuring whether the right number of goods are being produced to maximise welfare
This is the point where demand = supply
If a firm is producing at an output where D=S then it is allocative efficient

86
Q

What are the equivalents to the demand and supply curve

A

The Marginal Cost curve = supply
The Average Revenue curve = demand

87
Q

What is productive efficiency and how is it measured

A

It is a measure of whether the output is being produced efficiently
The productive efficient point is the bottom of the LRAC curve

88
Q

What is dynamic efficiency

A

It investigates the ability of a firm to innovate and invent and bring new products to the market

89
Q

What is X efficiency

A

It is how well a firm is at keeping its production costs down over time
How low they can keep their LRAC curve

90
Q

Is perfect competition productive efficient and X efficient

A

Yes, a firm that is not will make economic loss because of how competitive it is

91
Q

Is perfect competition allocative effieicnt

A

Yes, output is where D=S

92
Q

Is perfect competition dynamic efficient

A

Uncertain, there is not a big incentive to develop new technology because of perfect information

93
Q

What are the characteristics of monopolistic competition market

A

Large number of small firms
Differentiated products
No barriers to entry or exit
Price and non-price competition
Profit maximising
Price maker

94
Q

What are the shapes of the revenue and cost curves in a monopolistic market

A

They are both normal

95
Q

What position is the monopolistic market in the long run

A

Normal profit
The demand and supply curves move as firms move in and out the market

96
Q

Is monopolistic competition productive and allocative efficient

A

No, as the output is not at the bottom of the LRAC
No, as the output is not where MC=AR

97
Q

Is monopolistic competition dynamic effieicnt

A

Uncertain, no much incentive as normal profits in the long run

98
Q

Is monopolistic competition x efficient

A

Likely, to hold onto normal profits in the long run

99
Q

What are the features of an oligopoly

A

Few dominant firms with a high proportion of market share
High degree of interdependence
Long periods of price stability
Product differentiation
Strong barriers to entry to the market
Ability to retain abnormal profits
Potential for competition replaced by collusion
Price makers

100
Q

What are the revenue and costs curves like in oligopolistic markets

A

Kinked average revenue curve and marginal revenue curve because of interdependence
Normal cost curves

101
Q

How are prices set in oligopoly’s

A

Price leadership - dominant firm sets price
Barometric firm - Price is set and smaller firms change prices and big firms follow
This is because small firms are more sensitive to price changes

102
Q

How do firms compete in oligopoly markets

A

Prefer non price competition
Price wars - the firm who can last the longest taking economic losses wins

103
Q

What are the barriers to entry in a oligopoly

A

Patents
Limit pricing - predatory pricing
Cost advantages
Advertising and marketing
Research and development
High start up costs
International trade restrictions
Sunk costs - costs that can’t be recovered if a business leaves the industry
Monopoly control over vital raw materials or distribution channel

104
Q

What is vertical integration

A

Firms buying the other firms that are involved in production or selling of their good
E.g. tea company buying tea plantations

105
Q

What is horizontal integration

A

Firms buying similar firms
A bank buying another bank

106
Q

What is conglomeration

A

Diversification

107
Q

Why does collusion happen

A

So firms can make higher profits by knowing how their rivals will react from price changes

108
Q

Is oligopoly’s productive and allocative efficient

A

No

109
Q

Are oligopoly’s dynamic efficient

A

Likely, profits allow them money to research and increase profit in the long run

110
Q

Are oligooly’s x efficient

A

Uncertain, strong barriers make firms less concerned

111
Q

What are the characteristics of a monopoly

A

Price maker - Price or output is decided by consumer
Inelastic demand curves
Strong barriers to entry
Price discrimination
Profit maximisers

112
Q

How is the strength of a monopoly measured

A

Market share
Size of abnormal profits
Difference between price and marginal costs

113
Q

What is price discrimination

A

When different customers pay different prices for the same good based on the willingness and ability to pay
Leads to a kinked demand curve

114
Q

What are the different types of price dicrimination

A

Third degree - charging different prices for different people
Second degree - Charging different prices for different people based on how much they bought
First degree - charging all people different prices for the same good

115
Q

Are monopoly’s productive effficient

A

No most of the time unless AC = MC at output point

116
Q

Are monopoly’s allocative efficient

A

No, dead weight welfare loss caused

117
Q

Are monopoly’s dynamic efficient

A

Yes, as they have abnormal profits in the long run

118
Q

Are monopoly x efficient

A

No, little competition

119
Q

What is a natural monopoly

A

A market which the optimal number of firms is one

120
Q

How are monopoly’s monitored

A

The CMA watches them for whether competition is being prevented, restricted or distorted

121
Q

What power does the CMA have

A

Penalise monopoly’s
Prevent mergers

122
Q

What policies do the government use against monopoly’s

A

Regulatory body
Maximum price controls
Maximum permitted price increase
Taxation and fines
Bans, divestments or monopoly busting
Nationalisation
Privatisation
Policies that reduce barriers

123
Q

What is public ownership

A

It is the ownership of industries, firms and other social assets by central or local government

124
Q

What is nationalisation

A

The acquisition of industries, firms and other social assets by central or local government

125
Q

What are the arguments for public ownership

A

To protect consumers from private monopoly’s
To run key services with the aim of maximising social welfare
To protect employment in a recession

126
Q

What are the arguments against public ownership

A

The initial price of buying the firm
X inefficiencies from lack of competition
Poor investment decisions
Create unlevel playing field for private firms
Politics can play a bigger part in the decisions in the firm

127
Q

What are the advantages of privatisation

A

Boost to treasury revenue from the sale
Improved degree of competition
Promoting efficiency
Promote enterprise culture

128
Q

What is privatisation

A

It is the transfer of state owned assets to the private sector

129
Q

What are the disadvantages of privatisation

A

Needing a regulator because the risk of monopoly abuse
Short termism of private firms
Revenue boost is not sustainable
Assests are normally sold off cheaply

130
Q

How else can the state reduce their role in the market

A

Deregulation
Contractualisation - contracting services to private operators
Marketisation - Introduce market forces into public services
Public Private Partnerships (PPP) - Joint ventures between public and private firms
Private Finance Initiative (PFI) - Private firms compete for invetsment projects

131
Q

What is contestable market theory

A

It is the threat of potential competition that determines the market efficiency

132
Q

What determines how contestable a market is

A

Barriers to entry

133
Q

What are the conditions of a perfectly contestable market

A

No barriers to entry
Costless entry to and exit from the market
No sunk costs
No technological or scale advantages
No brand loyalty

134
Q

What policies make markets more contestable

A

Deregulation
Forcing existing dominant firms to open up their distribution networks
Opening up domestic markets to greater international competition

135
Q

What is technology

A

It is the knowledge put to practical use to solve problems facing human societies

136
Q

What is technological change

A

It is improving existing technologies and developing completely new technologies
This change can lead to the improvement of existing products or processes or development of new products and processes

137
Q

What is invention

A

It is the creation of a new product or process that previously didn’t exist

138
Q

What is innovation

A

It is when there is a significant improvement to a product or process that has already been invented
The process of turning an invention into a commercial product

139
Q

What does technology impact

A

Production methods
Productivity
Efficiency and costs

140
Q

What is the effect of technology on production methods

A

Technological change has altered the way in which mankind has produced goods and services, often increasing the use of capital

141
Q

What are the effects of technology on productivity

A

Increasing capital intensity has increased the output that can be made per unit of labour or time
Developed nations have increased living standards by providing better capital

142
Q

What are the effects of technology on efficiency

A

Improved productive efficiency leads to lower unit costs of production

143
Q

What is the diagram effect of an improvement in technology

A

Shift the LRAC downwards

144
Q

What is the effect of technology on existing markets

A

They can be highly disruptive to existing firms

145
Q

What is a disruptive innovation

A

One that improves a product or service that destroys the markets for an existing product through lowering the price that existing producers can charge

146
Q

What is creative destruction

A

Created by Joseph Schumpeter in 1942
The evolutionary process where if existing firms can’t adapt to changing consumers needs they will be replaced

147
Q

What are all the causes of market failure

A

Externalities - Allocative inefficiency
Information Failure
Free rider problem - No Market
Tragedy of Commons - Resource depletion
Government Intervention
Inequity/Unfairness
Product Market inefficiencies
Labour Market inefficiencies

148
Q

What are the roles of profit

A

Source of investment funds
Reward for owners of business
Indicator of firms health
Incentive for entrepreneurs
Investment in technology and innovation
Source of income e.g. pensioners
Source of tax revenue

Economic A Level (22 decks)

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