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Econ > Micro Theme 3 > Flashcards

Micro Theme 3 Flashcards

1
Q

What is total revenue?

A

The revenue received from the sale of a given level of output
P * Q

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2
Q

What is average revenue?

A
  • Average receipt per unit, the price each unit is sold for
  • AR curve is the firms demand curve
  • AR = Price = Demand
  • Total revenue / quantity
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3
Q

What is marginal revenue

A
  • the extra revenue a firm earns from the sale of one extra unit
    Change in revenue / change in quantity
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4
Q

What does it mean when MR = 0?

A

Total revenue is maximised

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5
Q

Where does MR = 0 occur?

A
  • directly below the midpoint of AR curve
  • middle of the demand curve
  • PED = 1
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6
Q

What does it mean when a firm is a price taker?

A
  • a market participant that is not able to dictate the prices in a market
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7
Q

What does it mean when a firm is a price maker?

A
  • firm has some degree of market power to set its prices within the market
  • found in any imperfectly competitive market structure
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8
Q

What does the AR curve look like in price-takers?

A
  • Horizontal
  • price received for the good is constant because the good is perfectly elastic
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9
Q

Why is the AR curve downward sloping?

A
  • price per unit is reduced as extra units are sold
  • law of diminishing marginal utility
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10
Q

What is total cost?

A
  • how much it costs to produce a given level of output
  • total costs = total variable costs + total fixed costs
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11
Q

What are total fixed costs?

A
  • occur in the short run
  • fixed costs do not vary with output
  • indirect cost
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12
Q

What are total variable costs

A
  • Occur in the long run
  • variable costs change with output
  • all factor inputs can change
  • direct cost
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13
Q

How to calculate ATC?

A

Total costs/quantity produced
ATC = AVC+AFC

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14
Q

How to calculate average fixed/variable costs

A

Total fixed/variable costs / quantity

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15
Q

What is marginal cost?

A
  • How much it costs to produce one extra unit of output
  • Change in TC/Change in Q
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16
Q

What is the effect on MC and AC when a firms total variable costs increase?

A
  • both curves shift upwards
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17
Q

What is the effect on MC and AC when a firms total fixed costs increase?

A
  • No effect on MC
  • only AC shifts upwards
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18
Q

What is the law of diminishing marginal productivity?

A
  • adding more units of a variable input to a fixed input increases output at first
  • after a certain number of inputs are added marginal increase of output becomes constant
  • then marginal increase in output starts to fall
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19
Q

Marginal costs rise with…

A

Increasing diminishing returns

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20
Q

Describe the trend in the cost curves as output increases

A
  • MC, ATC and AVC rise with diminishing returns
  • AFC falls with increasing output
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21
Q

What is the lowest point on the cost curves (apart from AFC) representative of?

A

The point where diminishing marginal productivity sets in

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22
Q

Why does the average variable cost curves tend towards the average total cost curve as output increases?

A
  • because average fixed costs becomes increasingly small in comparison
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23
Q

What is the LRAC curve?

A
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24
Q

Why does the MC curve slope upwards

A

Each additional until requires more effort to produce than the previous one

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25
Q

Why does marginal cost slope down at first as output is increased

A

Specialisation is more powerful than Diminishing Marginal Returns

  • workers can specialise
  • competition encourages motivation
  • teamwork and collaboration
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26
Q

As a firm expands at first they are likely to experience…

A
  • The benefits of internal economies fo scale
  • LRAC is likely to fall
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27
Q

All points on the LRAC show…

A

minimum attainable ATC of production for any given output - assuming the firm is able to adjust its scale accordingly

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27
Q

what is the most important factor affecting the AC, AVC and MC in the short run?

A

Increasing and diminishing returns to a variable factor

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28
Q

what is the LRAC cost curve most affected by

A

economies and diseconomies of scale

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29
Q

What do we call it when an increase in the input of all FoPs leads to a larger increase in output

A

Increasing returns to scale

  • the firm has experienced economies of scale, resulting from a rise of productivity
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30
Q

What is the opposite of increasing returns to scale

A

decreasing returns to scale

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31
Q

What is the MES?

A

Minimum efficient scale
- produces the lowest average cost of production in the long run
- the lowest level of output that a firm can produce and still be cost competitive

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32
Q

What is risk bearing?

A
  • when a firm becomes larger they can expand their production range and spread the cost of uncertainty
  • if one part is not successful they have other back up production channels
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33
Q

what is financial ES

A

banks are willing to lend loans more cheaply to larger firms as they are deemed less risky - they can take advantage of cheaper credit

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34
Q

what is managerial ES

A

Larger firms are more able to specialise and divide their labour, they can employ specialist managers and supervisors, which lowers AC

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35
Q

what is technological ES

A

Larger firms can afford to invest in more advanced and productive machinery and capital, lowers AC

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36
Q

what is marketing IES

A

Larger firms can divide their marketing budgets across larger outputs so AC of advertising per unit is lowering

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37
Q

Why are short run cost curves U-shaped

A

Initially, as production increases, average costs decrease due to spreading fixed costs and increasing efficiency

After, diminishing margins returns cause cost to increase and labour becomes less efficient

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38
Q

why is the LRAC curve u shaped

A

economies of scale

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39
Q

What is purchasing IES

A

larger firms can bulk buy which means lower costs

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40
Q

what is the acronym for internal economies of scale

A

Really Fun Mums Try Making Pies

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41
Q

what are network economies of scale

A

gained from the expansion of e-commerce

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42
Q

When do external economies of scale occur?

A
  • when an industry gets larger
  • more development or research lowering costs
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43
Q

what are Internal diseconomies of scale?

A

-when output passes a certain point and average costs start to increase per extra unit of output produced

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44
Q

what are technical economies of scale

A

an increase in productivity due to a change in the process of production when the scale of a firms operations increase

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45
Q

what are four technical economies of scale

A

Specialistion
- specialised machinery
Indivisibilities
- extremely productive machinery is often large and exspensive and only available in large sizes, only when firms rate large can they use this machinery otherwise they will be operating with excess capacity
Linkage of processes
- to satisfy each machines capacity
Economies of increased dimension
- increasing dimensions of storage or transport vessels leads to a larger increase in capacity

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46
Q

Give three examples of internal diseconomies of scale

A

Bureaucracy:
- it becomes harder to monitor how productive the workforce is as the firm + managerial cost increases
Communication:
- it is harder and complicated to communicate to every worker when the firm is larger (prod decrease)
Alienation:
- workers may feel excluded as firms grow leading to a fall in productivity and increase in LRAC

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47
Q

What does it mean for demand when marginal revenue is positive?

A

Elastic

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48
Q

what does it mean when MR is negative/

A

Demand is inelastic

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49
Q

how does demand change as MR decreases

A

elasticity changes from elastic to unitary to inelastic

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50
Q

what does it mean when MR = 0 for total revenue

A

total revenue is maximised

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51
Q

how does total revenue change as mr changes

A

positive mr = tr increases
Negative mr = tr decreases

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52
Q

How does external economies of scale affect LRAC?

A

shifts the entire curve downwards

53
Q

What is profit

A

TP = TR - TC

54
Q

What is the condition for profit maximisation?

A

Profit: The difference between TR and TC
Profit Max: MC = MR

55
Q

What is normal profit?

A
  • Minimum reward required to keep entrepreneurs supplying their enterprise in the long run
  • covers the opportunity cost of investing funds into the firm and not somewhere else
  • TR = TC
56
Q

What are supernormal profits?

A
  • profit above normal profit
  • exceeds value of opportunity cost of investing funds into the firm
    TR>TC
57
Q

What are losses?

A

a firm makes a loss when they fail to cover their total costs

TR<TC
AR<ATC

58
Q

Firms continue to produce in hte short run if…

A

variable costs are covered

59
Q

Are fixed costs considered when a decision to shut down is being made?

A

no, they need to be paid anyways. Only variable costs are considered

60
Q

what is the short run shut down point

A

AR = AVC
Lowest point on the AVC curve

61
Q

Efficiency can be used to…

A

judge how well the market allocates resources and the relationship between scarce inputs and outputs

62
Q

What is the point on a CR graph where Cost Minimum

A

AC = MC

63
Q

where is profit max on a CR graph

A

MC = MR

64
Q

where is revenue max on a CR graph

A

MR = 0

65
Q

where is sales max?

A

AC = AR

66
Q
A
67
Q

what is allocative efficiency?

A
  • P = MC
  • When resources are used to produce goods and services which consumers want and value most highly and social welfare is maximised
68
Q

what is productive effiency?

A
  • when product are produced at the lowest average cost so the fewest resources are used to produce each product
  • only occurs when firms produce at the bottom of the AC curve
  • in the short run this is MC = AC
  • only possible if their is technical efficiency
69
Q

What is dynamic efficiency

A
  • when resources are allocated efficiently over time
  • concerned with investment which brings new production techniques (falling LRAC)
  • affected by short run factors such as demand, interest rates and past profitability
  • supernormal profits required
  • short run costs might be increased in order to cause long run costs to fall
70
Q

what is the alternative to dynamic efficiency

A

Static efficiency
(Productive and allocative efficiency)

71
Q

what is X inefficency

A
  • when a firm fails to minimise its average cost at a given level of output
  • not on minimum point on AC curve
  • could be due to organisation slack, waste in production process, poor management etc.
  • tends to occur in monopolies due to lack of competition
72
Q

Evaluate dynamic efficeincy

A
  • long time lag between making an investment and having falling average cots and consider how factors change in the long run
  • firms will face a trade off between giving shareholders dividends and making an investment
73
Q

what are the characteristics of a perfectly competitive market?

A
  • many buyers and sellers
  • sellers are price takers
  • free entry to and exit from the market
  • perfect knowledge
  • homogenous goods
  • firms are SR profit maximisers
  • FoPs are perfectly mobile
74
Q

In a perfectly competitive market what is price determined by?

A

The interaction of demand and supply
Firms are price takers

75
Q

Why are profits lower in a competitive market?

A
  • Market power for firms in a competitive market is much lower.
  • if firms make a profit new firms will enter the market, increasing supply and lowering average price
76
Q

Can firms make supernormal profits in a perfectly competitive market in the short run

A

Yes

77
Q

What is the industry and firms diagram for a perfectly competitive market

A
78
Q

Why do profits change in the long run for a perfectly competitive market?

A
  • new firms enter
  • supply increases
  • price level in market falls
  • firms are price takers so accept this new lower price
  • competitive pressure ensures equilibrium is established
79
Q

What are the advantedges of a perfectly competitive market?

A
  • in the long run there is lower price P=MC so there is allocative efficiency
  • since firms produce at the bottom of the AC curve there is productive effiency
  • the supernormal profits produced in the short run may increase dynamic efficiency through investment
80
Q

What are the disadvantages

A
  • dynamic efficiency may be limited in the long run due to the lack of supernormal profits
  • firms are small so there are few or no economies fo scale
  • the model rarely applies in real life. Branding, prod diff., adverts and positive and negative externaliti mean competition is imperfect
81
Q

what does Supply and demand equal in perfect competition

A

MC = S
MB = D

82
Q

Why does MC split from Supply

A

because of negative externalities or lack of perfect competion

83
Q

why does marginal benefit split from demand?

A
  • public goods, MB is big despite D be very low
  • free rider
84
Q

What determines price in a perfectly competitive market?

A

Short run:
- demand
Long run:
- Average total cost

85
Q

how do you figure out a firms output level of the firm at any given price in a perfectly competitive market?

A
  • MR = AR
  • MR = MC
  • AR = MC
  • P = MC = S (if perfect competition)
    Firms are producing at the allocatively efficient point
    Market equilibrium + social optimum are at the same quantity
86
Q

Describe a monopolistically competitive market

A
  • imperfect competition
  • ## firms are short run profit maximisers
87
Q

Describe the products within a monopolistically competitive market

A
  • Firms cell non-homogenous products due to branding (product differentiation)
  • Lots of relatively close substitutes. Making XED of goods and services high
88
Q

Describe how many firms are in a monopolistically competitive market

A
  • large number of buyers and sellers which are relatively small and act independently
  • each seller has a small amount of market power which is the same as other sellers
  • no barriers to entry or exit
89
Q

Describe the demand curve in a market which has monopolistic comeption

A
  • downward sloping demand curve
  • firms can raise prices without losing all customers
  • firms have some degree of price setting power
89
Q

What type of information do buyers and sellers in a monopolistically competitive market have?

A

imperfect

90
Q

What sort of profits can firms making in a market with monopolistic competition in the short run?

A

Super normal profits

91
Q

Why cant firms make supernormal profits in the long run in a monopolistically competitive market

A
  • New firms have entered the market since they saw the supernormal profits in the short run
  • demand for existing firms products become more price elastic, shifting AR downwards
  • firms can try and stay in the short run by differentiating their products and innovating
92
Q

how does brand loyalty play a part in monopolistic competitive markets

A

Raises barrier to entry
Makes demand more inelastic

93
Q

When are companies price setters within monopolistically competitive markets?

A
  • when there is an exogenous shock which makes demand high (short run equilibrium)
  • in the long run, more firms will enter (price takers)
94
Q

Why is a monopolistically competitive market a market failure?

A

Profit Max: MR=MC
AR>MR (demand is not perfectly elastic)
AR>MC
P> MC

As demand curves are fairly elastic the industry will be fairly allocatively efficient but still a market failure

95
Q

What are the advantages of a monopolistically competive market

A
  • consumers get a wide variety of choice
  • the model of monopolistic competition is more realistic than perfect competition
  • supernormal profits produced in the short run might increase dynamic effiecieny through investment
96
Q

What are the disadvantedge of a monopolistically competitive market?

A
  • firms are allocatively inefficient in the short and long run (P>MC)
  • firms do not fully exploit their factors, excess capacity in the market. Making them productively inefficient both in SR and LR
  • in the LR dynamic efficiency might be limited due to the lack of supernormal profits
  • firms are not as efficient as those in perfectly competitive market as they have X inefficiency due to less incentive to minimise costs
97
Q

What is a monopoly?

A
  • Profit maximisation: a monopolist earns supernormal profits in both the short and long run
  • Sole seller in a market (pure monopoly)
  • High barriers to entry
  • Price maker
  • Price discrimination
98
Q

when do firms have monopoly power?

A

When one firm dominates the market with more than 25%

99
Q

How does barriers to entry affect monopoly power?

A

The higher the barriers of entry the easier it is for firms to maintain monopoly power

100
Q

What are examples of barriers to entry which can maintain monopoly power?

A
  • Economies of Scale
  • Limit pricing
  • Owning a resource
  • Sunk Costs
  • Brand loyalty
  • Set up costs
  • Legal barriers
  • Information imbalance
101
Q

How do economies of scale allow monopoly power to be maintained

A
  • as firms grow larger AC falls
  • existing large firms have a cost advantage over new entrants
  • new entrants cannot compete with existing firms
102
Q

How does limit pricing allow monopoly power to be maintained

A
  • existing firms can set the prices of their goods below the production costs of new entrants
  • means that new firms cannot enter profitably
103
Q

How does owning a resource allow monopoly power to be maintained?

A
  • if an existing firms owns a scarce resource then new firms cannot access resources to enter the market (some energy companies own power generation facilities in the UK)
104
Q

how do sunk costs allow monopoly power to be maintained?

A
  • if unrecoverable costs are high, firms will be deterred from entering the market because they will not be able to get the value of their costs back
105
Q

How does Brand loyalty increase firms monopoly power?

A
  • built up by advertising
  • new firms wont have customers and cannot gain market share
  • Supply will be price inelastic
106
Q

Why do set up costs increase monopoly power?

A
  • if it is exspensive to establish the firm then new firms will be unlikely to enter the market
107
Q

How do legal barriers act as barriers to entry

A

Patents prevent new firms from using original firms inventions without permission making it extremely hard to enter the market

108
Q

how does an information imbalance act as a barrier to entry?

A
  • new firms will have to spend exspensive time trying to figure out how an industry works while existing firms already have knowledge on the supply chain and customer base
109
Q

What other factors can influence monopoly power?

A
  • the number of competitors
  • advertising
  • the degree of product differentiation
110
Q

How does degree of product differentiation/product proliferation affect monopoly power

A
  • the more the product can be differentiated the easier it is to gain market share
  • if existing firms have a wide range of products with different aspects, it will be harder. For new firms to find a niche
111
Q

Why does the monopolist have the power to be a price-maker?

A
  • the downward sloping market demand curve must also be the demand curve for the monopolists product
112
Q

why are monopolists said to be constrained by their demand curves

A
  • they can set the price for the quantity demanded by the consumers
  • they must accept the price if they choose to cell a certain quantity
113
Q

why do supernormal profits persist into the long run?

A
  • because of high barriers to entry
  • short and long run equilibrium are identical
114
Q

Why is are monopolies allocaitvely inefficient

A
  • the price charged by the monopolist is above its marginal cost
115
Q

why are monopolies productively inefficient?

A
  • output is below minimum average cost of production
116
Q

why do monopolies have X inefficency?

A
  • as entry barriers protect a monopolist it is under little pressure to behave efficiently and minimise costs
117
Q

What are natural monopolies?

A
  • Industries where the economies of scale are so large that even a single producer is not able to fully exploit them all.
  • decreasing cost industries
  • Royal Mail / national rail
118
Q

Why is competition not encouraged in natural monopolies

A

Pointless
- will raise average costs for the industry
- if a new firm enters the market they will be easily priced due to high starting costs
- raises questions of competition policy and nationalisation
- tend to be found in industries with very high fixed costs

119
Q

what is the diagram for a natural monopoly?

A
120
Q

What is a monopsony?

A

A single buyer in the market
E.g Network Rail for track maintenance

121
Q

A firm with monopsony power is able to…

A

Negotiate lower prices and set market price

122
Q

What is the diagram for a monopsonistic market?

A
123
Q

What are the costs of a monopsonistic market?

A
  • Suppliers are likely to lose profits due to negotiations
  • Employees trained in supply this industry will have lower wages as they have little choice of who to work for - labour can be exploited and workers may be unproductive
124
Q

What are the benefits of a monopsonistic market?

A
  • the NHS has monopsonistic power when buying drugs from companies, therefore they can lower prices and spend money on R&D instead
  • consumers receive lower prices due to lower price paid to suppliers
125
Q

What is Baumols argument?

A

The main driver of firms behaviour is the threat of competition rather than competition itself. Firms would’ve be willing to sacrifice short run profits in order to dissuade potential competitors

126
Q

What are the characteristics of contestavle markets?

A
  • face actual and potential competition
  • new entrants have access to production techniques and tech
  • no barriers to exit or entry (no sunk cots)
  • low consumer loyalty
  • number of firms in the market vary
127
Q

What are the implications of contestable markets

A
  • firms are more likely to be allocatively efficient, in the long run firms operate at the bottom of AC making them productively efficient
  • hit and run
  • firms will produce normal profits in the short run to prevent attracting new entrants
128
Q

What is brand proliferation

A
  • disguises consumers from the actual market concentration
  • the laundry soap market is owned by a few large conglomerates

Econ (11 decks)

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