Micro - Revenue/cost curves and market structures Flashcards
What is production
It is the process of converting inputs into outputs with the aim of adding value
What is productivity
It is a measure of the rate of change of output
How can productivity be measured
Average product per input
Marginal product per input
Physical product
Revenue product
What is the short run
It is the time period where firms face at least one fixed factor of production
What is the long run
It is the time period in which all factors of production are variable
What is the law of diminishing returns
It is where there is rising production but falling productivity in the short run
What is marginal physical product
It measures the change in total output when the employment level is changed by 1 worker
What is average physical product
It measures the output per worker
Why does diminishing returns happen
Because there is an imbalance between the variable and fixed factors
What does the short run production function of total product look like
A flattened out S
What does the marginal physical product curve look like
A n shape
What does the average physical product curve look like
n shape
What is the relationship between the marginal and average graph
The marginal graph passes through the average graph in the middle
What are total costs
it is the sum of all fixed and variable costs
What are variable costs
They are the costs the change as output changes
What are fixed costs
They are costs that don’t change as output changes
What is economies of scale
The benefits of a long run expansion of output measured by falling unit costs
What is diseconomies of scale
The loss of efficiency caused by a long run expansion of output measured by higher unit costs
What are constant returns to scale
The outcome where a firms output directly mirrors its change in inputs
No change in unit costs
Internal economies of scale
The benefits of long run expansion felt only by the expanding firm
External economies of scale
The benefits to all firms in an industry as the industry expands in the long run
Internal diseconomies of scale
The costs of long run expansion felt by the firm
External diseconomies of scale
The costs felt by all firms in an industry as the industry expands in the long run
Minimum efficient scale
The lowest level of ouput that a firm must produce in order to reach the point of minimised unit costs
Profit maximising point
MR = MC
What does the fixed cost curve look like
A horizontal flat line
What does the variable cost curve look like
It increases then flattens off and then increases at a faster rate
What does the total cost curve look like
The same shape as the variable costs curve but starts at the fixed cost level
What does the marginal cost curve look like
Nike swoosh shape
What does the average fixed costs look like
A negatively sloped line which is always decreasing
What does the average variable costs look like
A U shape
What does the average total cost curve look like
A U shape
What can the position of the ATC curve tell you
What type of profits you are making
P>AC abnormal profit
P=AC Normal profits
P<AC economic loss
What is the relationship between productivity and costs in the short un
inverse relationship
What is the equation for unit labour costs
total labour costs / total output
What is the productivity of the UK like
It is very low compared to other modern countries where we only beat Japan
How can the UK improve their unit labour costs/competitiveness against developed countries
Close the productivity gap
Accept lower wages
How can the UK improve competitiveness against emerging nations
Improve our relatively higher productivity
Pay similar low wages
Wait for the nations to develop and have rising wages
What are the causes of the Uk’s productivity gap
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
What does the long run average cost curve look like
U shaped
Decrease in costs = economies of scale
Increase in costs = diseconomies of scale
The bottom can be flatter
What are technical economies
Large firms can afford large investments which is spread over more output
Law of increased dimensions/volume economies
What are volume economies
Unit costs are lower for transporting things which are bigger
What are managerial economies
Large firms can employ speciality managers who increase efficiency
Form of division of labour
What are marketing or commercial economies
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
What are financial economies
Large firms can borrow cheaper and are more creditworthy and less risky
Large firms can also raise money through share sales as well
What are risk bearing economies
Large firms can reduce their risk more than smaller firms by:
Diversify products sold
Diversify the markets sold in
Diversify their supply
What are economies of scope
It is cheaper for large firms to produce as the costs of some labour is shared over more output and products
What are the types of economies of scale
Economies of scope
Risk bearing economies
Financial economies
Marketing/commercial economies
Technical economies
Managerial economies
What are the types of diseconomies of scale
Control problem
Co-ordination problems
Communication failure
Motivated problems
What are control problems
The bigger the firm, the harder it is to control every aspect of the firm and be efficienct
What are co-ordination problems
Large firms normally break into departments, and the more departments there are the harder it is to control and co-ordinate them
What are communication failures
The bigger the firm, the more likely there will be communication breakdown
What are motivated problems
The larger the firm, the harder to motivate the workers if they feel unimportant to the overall success of the firm
What are agglomeration economies
When the firms are clustered in a distinct geographical location
What can the long run cost curve be made from
Lots of different MC AC points
What does the LRAC curve look like in a natural monopoly
A constantly decreasing curve
What does the LRAC curve look like in market with large scale producers
A U shape
What does the LRAC curve look like in a competitive market of small firms
A Nike Swoosh
What does the LRAC curve look like in a market containing variety of sized firms
Flat horizontal line
What is the equation for total revenue
quantity x price
What is the equation for AR
TR/ quantity
What is AR equal to
Price
The demand curve
What slope is the MR curve
Double the rate of AR
Where is Total revenue maximised
MR = 0
What targets can a firm have
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
What is profit maximising
Where the firm produces at the quantity where MR=MC to maximise profit
This point however can be very hard to find
What is profit satisficing
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
What is short run sales revenue maximisation and long run profit maximisation
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
What is short run limit pricing
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
What are behavioural theories of the firm
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
What are social enterprises
They are firms where they aren’t profit incentive and instead use the profit to improve social and environmental causes
What is the equation for profit
TR - TC
What is the economist way of calculating profit
They count the opportunity cost as a cost whereas an accountant only counts the physical cost
What is normal profit
When revenue is the same as the total costs
What is abnormal profit
When there is excess revenue which is profit
What roles does profit play in the market
The creation of business incentives - causes entrepreneurs to take risks in starting companies
The creation of worker incentives
Source of finance
Measure of efficiency
What characteristics are there of perfect competition
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
How are the revenue and costs curves shaped in perfect competiton
The cost curves are the same
The revenue curves are one perfectly elastic line
What does it depend on if a firm shuts down or not
The variable cost
The revenue of the firm
What does a firm do if their are making a loss but removing their variable costs lowers the overall loss
Shut down in the short and long run
What does a firm do if they are making a loss but removing their variable costs increases the overall loss
Keep producing in the short run but shut down i the long run
What long run position is held in perfect competition
Normal profit
Why is normal profit held in the long run in perfect competition
Because the revenue curve moves up and down depending on whether firms are making losses or abnormal profits
What are the 4 important measures of economic efficiency
Allocative efficiency
Productive efficiency
Dynamic efficiency
X efficiency
What is allocative efficiency and how is it measured
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
What are the equivalents to the demand and supply curve
The Marginal Cost curve = supply
The Average Revenue curve = demand
What is productive efficiency and how is it measured
It is a measure of whether the output is being produced efficiently
The productive efficient point is the bottom of the LRAC curve
What is dynamic efficiency
It investigates the ability of a firm to innovate and invent and bring new products to the market
What is X efficiency
It is how well a firm is at keeping its production costs down over time
How low they can keep their LRAC curve
Is perfect competition productive efficient and X efficient
Yes, a firm that is not will make economic loss because of how competitive it is
Is perfect competition allocative effieicnt
Yes, output is where D=S
Is perfect competition dynamic efficient
Uncertain, there is not a big incentive to develop new technology because of perfect information
What are the characteristics of monopolistic competition market
Large number of small firms
Differentiated products
No barriers to entry or exit
Price and non-price competition
Profit maximising
Price maker
What are the shapes of the revenue and cost curves in a monopolistic market
They are both normal
What position is the monopolistic market in the long run
Normal profit
The demand and supply curves move as firms move in and out the market
Is monopolistic competition productive and allocative efficient
No, as the output is not at the bottom of the LRAC
No, as the output is not where MC=AR
Is monopolistic competition dynamic effieicnt
Uncertain, no much incentive as normal profits in the long run
Is monopolistic competition x efficient
Likely, to hold onto normal profits in the long run
What are the features of an oligopoly
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
What are the revenue and costs curves like in oligopolistic markets
Kinked average revenue curve and marginal revenue curve because of interdependence
Normal cost curves
How are prices set in oligopoly’s
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
How do firms compete in oligopoly markets
Prefer non price competition
Price wars - the firm who can last the longest taking economic losses wins
What are the barriers to entry in a oligopoly
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
What is vertical integration
Firms buying the other firms that are involved in production or selling of their good
E.g. tea company buying tea plantations
What is horizontal integration
Firms buying similar firms
A bank buying another bank
What is conglomeration
Diversification
Why does collusion happen
So firms can make higher profits by knowing how their rivals will react from price changes
Is oligopoly’s productive and allocative efficient
No
Are oligopoly’s dynamic efficient
Likely, profits allow them money to research and increase profit in the long run
Are oligooly’s x efficient
Uncertain, strong barriers make firms less concerned
What are the characteristics of a monopoly
Price maker - Price or output is decided by consumer
Inelastic demand curves
Strong barriers to entry
Price discrimination
Profit maximisers
How is the strength of a monopoly measured
Market share
Size of abnormal profits
Difference between price and marginal costs
What is price discrimination
When different customers pay different prices for the same good based on the willingness and ability to pay
Leads to a kinked demand curve
What are the different types of price dicrimination
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
Are monopoly’s productive effficient
No most of the time unless AC = MC at output point
Are monopoly’s allocative efficient
No, dead weight welfare loss caused
Are monopoly’s dynamic efficient
Yes, as they have abnormal profits in the long run
Are monopoly x efficient
No, little competition
What is a natural monopoly
A market which the optimal number of firms is one
How are monopoly’s monitored
The CMA watches them for whether competition is being prevented, restricted or distorted
What power does the CMA have
Penalise monopoly’s
Prevent mergers
What policies do the government use against monopoly’s
Regulatory body
Maximum price controls
Maximum permitted price increase
Taxation and fines
Bans, divestments or monopoly busting
Nationalisation
Privatisation
Policies that reduce barriers
What is public ownership
It is the ownership of industries, firms and other social assets by central or local government
What is nationalisation
The acquisition of industries, firms and other social assets by central or local government
What are the arguments for public ownership
To protect consumers from private monopoly’s
To run key services with the aim of maximising social welfare
To protect employment in a recession
What are the arguments against public ownership
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
What are the advantages of privatisation
Boost to treasury revenue from the sale
Improved degree of competition
Promoting efficiency
Promote enterprise culture
What is privatisation
It is the transfer of state owned assets to the private sector
What are the disadvantages of privatisation
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
How else can the state reduce their role in the market
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
What is contestable market theory
It is the threat of potential competition that determines the market efficiency
What determines how contestable a market is
Barriers to entry
What are the conditions of a perfectly contestable market
No barriers to entry
Costless entry to and exit from the market
No sunk costs
No technological or scale advantages
No brand loyalty
What policies make markets more contestable
Deregulation
Forcing existing dominant firms to open up their distribution networks
Opening up domestic markets to greater international competition
What is technology
It is the knowledge put to practical use to solve problems facing human societies
What is technological change
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
What is invention
It is the creation of a new product or process that previously didn’t exist
What is innovation
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
What does technology impact
Production methods
Productivity
Efficiency and costs
What is the effect of technology on production methods
Technological change has altered the way in which mankind has produced goods and services, often increasing the use of capital
What are the effects of technology on productivity
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
What are the effects of technology on efficiency
Improved productive efficiency leads to lower unit costs of production
What is the diagram effect of an improvement in technology
Shift the LRAC downwards
What is the effect of technology on existing markets
They can be highly disruptive to existing firms
What is a disruptive innovation
One that improves a product or service that destroys the markets for an existing product through lowering the price that existing producers can charge
What is creative destruction
Created by Joseph Schumpeter in 1942
The evolutionary process where if existing firms can’t adapt to changing consumers needs they will be replaced
What are all the causes of market failure
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
What are the roles of profit
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
