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A Level Economics > Micro Year 2 > Flashcards

Micro Year 2 Flashcards

1
Q

Why may a firm grow?

A

Generate more profit and gain better dividends.
Benefit from economies of scale
Can diversify and protect itself should a product fail
Become a dominant market force

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2
Q

Why may a firm stay small?

A

Lack of finance, banks won’t loan as it’s too risky
They provide a niche product/1-2-1 service
Regulations keeping a firm small
Risk of diseconomies of scale

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3
Q

What is the public sector?

A

Working for the government, being a civil servant

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4
Q

What is the private sector and the 4 types of firms in it?

A

Privately owned firms. The four firm types are sole traders, partnerships, private limited companies (ltd) and public limited companies (plc)

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5
Q

What is horizontal integration? Give examples, and pros and cons of it.

A

Takeover/merger in the same industry at the same point in the production process.
Pros: Less rivals, diversification, cost savings
Cons: more responsibilities, loss of workers
Examples: T-Mobile and Orange merge for EE, Morrisons takeover of Safeway

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6
Q

What is vertical integration? Give examples, and pros and cons of it.

A

Takeover/merger in the same industry at a different point in the production process.
Forward vertical is closer to the consumer, like farmers opening restaurants
Backward vertical is closer to producer, like Tesco buying booker or restaurants buying farms
Pros: Increased market power, can control quality, cheaper
Cons: more risk, higher operational cost, quality can worsen

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7
Q

What is Conglomerate integration? Give examples, and pros and cons of it.

A

Takeover/merger in the different lines of business.
Pros: Wider audience reach, less risk as you’re more spread out
Cons: shifted focus, increase in management costs
Examples: General electric, tata steel

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8
Q

Why firms demerge?

A

Protect value of the firm, avoid attention from competition and market authorities, raise money from asset sales and return to shareholders, reduce risk of diseconomies of scale

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9
Q

Why mergers and takeovers fail?

A

Clash of culture and priorities, huge financial cost funding takeover, paying too much for the firm you’re merging with, bad timing (end of sustained boom)

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10
Q

What are economies of scale?

A

When the LR average cost decreases as production output rises

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11
Q

What are some types of economies of scale?

A

Financial (larger firms can negotiate cheaper deals)
Mangerial (hiring experts like accountants, lawyers)
Technical (specialised labour, increased dimensions)

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12
Q

What are diseconomies of scale?

A

When the LR average cost increases as production output rises

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13
Q

What are internal economies of scale?

A

Advantages that arise as a result of the firm growing

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14
Q

What are external economies of scale?

A

Advantages gained by the growth of an industry

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15
Q

What is productive efficiency and where does it exist on a graph?

A

Productive efficiency is the maximum number of goods and services produced with a given amount of inputs, and exists when producers minimise the waste of resources. It exists at MC = AC

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16
Q

How can a firm improve it’s productive efficiency?

A

Better raw material quality, increased motivation and productivity, less waste, training up skills

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17
Q

What is allocative efficiency and where does it exist on a graph?

A

Allocative efficiency is where goods and services are distributed according to consumer preferences. An economy can be productively efficient, but can also produce goods people don’t want or need, making it allocatively inefficient. Occurs at MC = AR

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18
Q

What is dynamic efficiency? Give examples of it

A

Productive and allocative efficiency improving over time. Done by introducing new tech and working practices, developing new and better products and processes, and training and investment.

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19
Q

What is x-inefficiency? Give an example of it

A

Occurs when firms do not have incentives to cut costs. Common in monopolies and state run firms. Example is organisational slack, when monopolies have little incentive to get rid of surplus labour

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20
Q

Where does profit maximisation occur?

A

MC = MR

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21
Q

What are some benefits of profit maximising?

A

Happy shareholders, personal satisfaction, investment in research and development, dynamic efficiency, economies of scale, increase in international competitiveness

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22
Q

Where does revenue maximisation occur?

A

MR = 0

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23
Q

What are some benefits of revenue maximising?

A

Priced lower than profit max, so increased loyalty
Can put rivals out of business by setting prices low
Can benefit from economies of scale
Long term profitability, by gaining a market share, gaining economies of scale, more sales, more loyalty, then greater ability to increase prices

24
Q

Where does sales maximisation occur?

A

AC = AR

25
Q

What are some benefits of sales maximisation?

A

Less risk of investigation by CMA,
Still making normal profit
More brand awareness and consumer knowledge
Lower production costs.

26
Q

What are the characteristics of perfect competition?

A

Many buyers and sellers, homogenous products, price takers, low barriers to entry and exit, low sunk costs, perfect knowledge, allocatively efficient and productively efficient (LR only)

27
Q

What are characteristics of monopolistic competition?

A

Many buyers and sellers, product differentiation, low/moderate barriers to entry and exit, brand loyalty, asymmetric information, price makers

28
Q

What are characteristics of oligopolies?

A

Few large dominating firms, product differentiation and substitutes, high entry and exit barriers, high such costs, brand loyalty, asymmetric information, price makers

29
Q

What is a cartel?

A

A group of firms acting together to limit output and raise prices. Rarely act in favour of the public and illegal

30
Q

What is collusion?

A

Illegal but collective agreements among firms to restrict competition

31
Q

What is tacit (informal) collusion?

A

Collusion with no formal agreement, such as price leadership

32
Q

What is overt (formal) collusion?

A

Agreement to change output and prices

33
Q

What is price leadership?

A

When one dominant firm in an oligopoly takes the role of setting the price for the market

34
Q

What is predatory pricing?

A

Lowering prices so new entrants make a loss

35
Q

What is limit pricing?

A

Setting prices low enough to deter potential entrants

36
Q

What is non-price competition?

A

Loyalty cards, free delivery, direct mailing

37
Q

What are characteristics of a monopoly?

A

One seller (or over 25% market share), unique product, no close substitute, huge barriers to entry and exit, huge sunk costs, asymmetric information, price makers

38
Q

Which firms make super normal profit in the Long Run (AR > AC)?

A

Monopolies and oligopolies

39
Q

Where are the origins of monopoly?

A

Natural growth, patent, license, nationalisation, merger or takeover

40
Q

Pros of monopoly?

A

Encourages R&D and innovation, economies of scale, consumers may benefit

41
Q

Cons of monopoly?

A

Higher prices exploit consumers, potential of inefficiency, less choice

42
Q

What is a natural monopoly and where does it occur?

A

Only one firm operating, occurs typically where start up costs are high but additional costs are low

43
Q

What is a monopsony?

A

A single dominant buyer in a market

44
Q

What is contestability and characteristics of a contestable market?

A

Ease of new entrants to enter the market. Characteristics are low sunk costs, low brand loyalty, low entry and exit barriers

45
Q

What is a price taker?

A

A firm who has no control over the price and must accept it

46
Q

What is a price maker?

A

A firm who has the power to influence the price it charges for goods

47
Q

What is Marginal revenue product?

A

The addition to total revenue after the sale of another unit

48
Q

What is Marginal physical product?

A

Addition to total production after the sale of another unit

49
Q

What can determine the demand for labour?

A

Ease of substitutes, time period, PED of final product

50
Q

What can influence the supply of labour?

A

Wage rate, terms and conditions, career prospects, level of qualification needed, net migration of labour, state of the economy

51
Q

What is the income effect?

A

As wages rise, people feel better off and therefore may not work as many hours

52
Q

What is price discrimination?

A

when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs of supply

53
Q

How can government intervention control mergers?

A

CMA assesses proposed mergers and takeovers to ensure they are in the public interest

54
Q

How can government intervention control monopolies?

A

Price regulation - ensuring consumers aren’t overcharged
Profit regulation - ensuring firms profits are within their behaviour
Quality standards - ensuring quality of products are good
Performance targets - ensuring firms meet targets

55
Q

How can deregulation promote competition?

A

Removing regulation and hence lowering barriers to entry

56
Q

How can privatisation promote competition?

A

Selling off public sector assets to the private sector encourages efficient based profit motive

57
Q

How can tendering for government contracts promote competition?

A

Firms bid for the right to run a service or gain a contract

A Level Economics (4 decks)

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