micro year 2 Flashcards
marginal returns in the short run
- in SR at least one factor of production is fixed
- increases in other factors of production (e.g. Labour)
- diminishing marginal returns
- total output rises at a slowing rate
- marginal product falls
- marginal cost rises
returns to scale (long run)
- in LR all factors of production are variable
- if inputs double but output less than double
- decreasing returns to scale
- total output rises by less than total inputs
- unit costs rise
economies of scale (long run) and examples
e.g. Bulk buying managerial financial technical marketing risk-bearing scope
bulk-buying, lowers unit input costs which reduces LRATC as output rises
profit maximisation
- Q of total output set where MC=MR
- maximum profit
- no incentive to change production level
- re-invest profit into R&D
- innovate and invent
- dynamic efficiency
- lower prices or increase future profit
how abnormal profit reduced, contestable market
- abnormal profit
- incentives other firms to enter the industry
- increases competition
- increases industry supply (if contestable)
- lowers market price
- lowers AR for firms
- reduces abnormal profits t
revenue maximisation
- managerial pay and rewards may be linked to revenu
- e.g. market share
- increase revenue
- increase monopoly power
- raise price in future
- increase future profit
sales maximisation or normal profit only (ATC=AR)
- for start up firm sales max may be necessary to ensure survival
- increase sales
- economies of scale
- lower unit costs
- increase brand loyalty
- increase market share
- increase monopoly power
- raise price in the future
- increase future profit
characteristics of perfect competition
- homogenous goods
- large number of buyers and sellers
- no barriers to entry or exit in LR
- perfect information
- perfect factor mobility
- all agents price takers
AR and MR curves in perfect competition
- in PC any good priced above equilibrium will not be sold since consumers can switch to an alternate supplier
- firms face perfectly elastic demand
- AR curve is horizontal
- AR for every good sold is equal to market price hence also equal to MR
- MR is constant and equal to TR
- gradient of TR is positive and constant
PC abnormal profits to normal profits in LR
- in SR firms in PC can make abnormal profit
- new firms are attracted to enter the industry
- firms can enter due to lack of entry barriers
- increases industry supple (S-S1)
- reduces industry price (P-P1)
- reduces AR for firms until AR= ATC
- normal profits only in long run
PC losses to normal profits in LR
- in SR firms in PC can incur a loss
2. firms producing where AR
characteristics of monopoly
- pure monopoly= single seller
- working monopoly = 25% or more market share
- monopoly power= P or Q setter
- high or impenetrable barriers to entry
- highly differentiated or unique products
AR and MR curves in monopoly
- market’s quantity demanded is inversely proportional to price
- pure monopoly is a single seller so demand curve is firm’s AR curve
- to increase Q sold monopoly must reduce P
- if AR is falling then MR must be falling at a faster rate
Monopoly power- economies of scale
- economies of scale
- lower unit costs of production for monopolist (falling LRATC as output rises)
- able to charge lower price than small firms
- forms a barrier to entry
Monopoly power- advertising and branding
- advertising and branding
- increase price inelasticity of demand for monopolist’s product
- difficult for new firms to gain a foothold in the market
- monopolist can then charge higher price to increase revenue
monopoly is market failure
- monopolist enjoys monopoly power
- restricts output to MC=MR
- raises prices above allocatively efficient level
- lowers output below productively efficient level
- captures consumer surplus
- increase producer surplus
- causes deadweight loss of overall welfare
advantage of monopoly, econ of scale
- large firm enjoys economic software scale
- lowers production costs
- increases abnormal profit
- reinvest in R&D
- higher innovation and invention
- dynamic effcieincy gains
- increased choice and variety of products for consumers at lower costs
- increased social welfare
Oligopoly, price rigidity, Sweezey’s kinked demand curve
- any price increase above X, other firms maintain at X
- consumers switch to other firms
- demand for firm’s output becomes relatively price elastic, revenue falls
- any price reduction below X, other firms match price reduction
- demand for firm’s output becomes relatively price inelastic, revenue falls
- no incentive to compete on price in oligopolistic markets
oligopoly, uncertainty
- competitor firms could rake any number of responses to a price cut
- firms do not know how their competitors will behave
- a firm could match price reduction, engage in price war or do nothing
- uncertainty leads to inaction and focus on non-price competition
oligopoly, price leadership
- dominant firms raises its price
- dominant firms loses price competitiveness
- PED more elastic
- lower barrier to entry
- loses market to competitive fringe
- loses monopoly power and becomes less dominant
- loses profit
positive outcome of oligopolies
- large firms enjoy economies of scale
- lower production costs
- increases abnormal profit
- reinvest in R&D
5, higher innovation and invention - dynamic efficiency gains
- increases choice and variety of products for consumers at lower costs
- increased social welfare
negative outcome of oligopolies
- interdependence
- collusion (join profit maximisation)
- agree quotas and restrict output to industry profit max (MC=MR) level of output
- raises prices for consumers
- decreases consumer welfare
efficiency in competitive markets
- profit maximising firm operates where MC=MR
- enjoys abnormal prfits
- attracts new firms to enter the industry
- increase industry supply
- reduce industry price
- lower firm’s AR and increases output towards where AR=MC (allocatively efficient) and where MC=ATC (productively efficient)
market contestability increases productive/allocative efficiencies
- reduced barreies to entry or exit
- increased threat of competition
- firm behaves as if there is competition
- increase output and lower price where AR=ATC to prevent incentive of new firms to enter
- increases productive and allocative efficiencies
why is competition policy necessary
- natural monopoly
- high barriers to entry
- no need to pass on lower unit costs to consumers
- abuse of monopoly power
- reduced consumer welfare
why isn’t competition policy necessary
- where abnormal profits exist
- attracts new firms to enter
- increases competition
- incumbent firms must compete on price
- abuse of monopoly power cannot persist
- no need for competition policy intervention
3rd degree price discrimination increases abnormal profit
- firms identity different groups of buyers with different PEDs and keep them separate at low cost
- produce output where MC=MR overall
- sets MC=MR in sub-groups
- charge higher price to inelastic PED and lower price to elastic PED groups
- increase abnormal profit compared to single price
positive outcome of unequal distribution of outcome
- increases incentive to work
- increase supply of labour
- wages rates fall
- lower costs of production for firms
- increase profit
- increase investment in R&D
- raises dynamic efficiency gains for all
negative outcome of unequal distribution of outcome
- lower effective demand at any given price
- demand curves for products more elatic
- lower consumer suplus possible
- lower social welfare
progressive taxation, more equal lorenz curve
- higher income earners pay a higher proportion of income in tax and PA increases
- high income earners keep less whilst low income earners keep more of their earned income
- gap reduces
- more equal lorenz curve
progressive taxation, trickle down
- lower income tax for high income earners
- increased absolute income to spend on goods and services
- increase in derived demand for lower income labour
- increase wages
- reduced income gap
minimum wage benefits workers
- in monopsony
- increase in wage (to W2) and increase in quantity of labour demanded
- kinked curve W2XSL becomes supply curve of labour
- employer must pay wage rate to ALL workers
- W2XYMCL becomes marginal cost of labour
- more workers employed at higher wage rates
minimum wage doesn’t benefits workers
- in PC
- increase in wages (to W2)
- excess supply of labour relative to firm’ demand
- increase unemployment
minimum wage negative impact on firm
- increase in wage
- increase in variable costs of production
- shifts MC and ATC upwards
- lowers abnormal profit
wage differential
- different jobs (pilot and cleaners(
- each worker brings in different marginal reveneu
- each worker brings in different productivity
- different MRPLs justify different wage rates
positive of wage differential
- incentives workers to upskill to increase productivity
- lowers costs of production
- ATC falls
- increases firm’s profit
- dynamic efficiency
- increase consumer choice and variety of goods
- increases social welfare
negative of wage differential
- if based on discrimination (e.g. gender)
- fall in demand for female workers in one market raises supply of female workers in the other
- fall in wage rate in other market
- all females paid less
- widens gender pay gap