micro yr13 Flashcards
production
the process of converting inputs, including the services of factors of production such as capital and labour into final output
inputs
these are the resources or factors of production, land, labour, capital and enterprise, used in the production process
output
the goods and services produced
productivity
a measure of the efficiency with which inputs are transformed into outputs
labour productivity
output per worker or output per labour hour
fixed costs
costs that do not vary with output; the total costs incurred when output is zero
variable costs
costs that vary directly with output
short run
the period of time in which at least one factor of production is fixed
long run
the period of time in which all factors of production are variable
economies of scale
falling long run average costs (LRAC)
internal economies of scale
due to the growth in output of the firm itself as it expands its own operation; efficiencies in production are gained reducing LRAC
external economies of scale
due to the growth in the size of the industry or the business environment in which the firm operates, reducing LRAC for individual firms (small or large)
total revenue
quantity sold x price
TR = Q X P
average revenue
revenue per unit sold
AR = TR/Q
marginal revenue
the change in TR when one more unit is sold
MR = change in TR/change in Q
profit formula
total revenue TR - total costs TC
normal profit
the profit that the firm could make by using its resources in their next best use; it’s the profit needed to keep the firm in business - earned when TR=TC
supernormal profit
any profit over and above normal profit
automation
technological advancements have improved efficiency in production process
influence of technological change on market structure
- disruption of traditional markets - innovative technologies can disrupt established market structures
- creation of oligopolies - certain technologies may lead to the dominance of a few large firms
- platform markets - technology facilitates the rise of a new market structures such as platform based markets like app store or social media
- globalisation - technology enabled companies to operate on a global scale, impacting market dynamics (eg Ecommerce)
divorce of ownership from control
separation between owners (shareholders) who invest capital and managers who make day to day decisions
conflicts of objectives - shareholders vs managers
- shareholders want high dividends and stock price appreciation, which may be achieved through short term profit maximisation
- managers may prefer long term goals like growth, market share or employee satisfaction, even if they sacrifice immediate profits
characteristics of perfect competition
- large number of buyers and sellers (firms)
- homogeneous goods
- perfect information
- no barriers to entry or exit
- firms are price takers so can’t influence market price
allocative efficiency (P=MC)
both in short and long run - P=MR so when MC=MR, P=MC
productive efficiency (min AC)
in long run firm will produce where AC curve is at it’s minimum so firms are productively efficient
dynamic efficiency
we assume firms make homogenous goods so there is little scope for innovation and differentiated to try to establish some market power (in the real world, firms in competitive markets often are very innovative and entrepreneurial but might not meet criteria for perfect competition)
characteristics of monopoly
- single seller
- unique products (none/few substitutes)
- high barriers to entry
- firms are price makers (can set market price but constrained by demand)
- supernormal profit can be earned in the long run because barriers to entry are high
natural monopoly
a single firm an efficiently serve the entire market due to significant economies of scale (eg transportation networks)
- high fixed costs relative to variable costs and declining average costs
- high minimum efficient scale
natural monopolies can benefit from consumers by providing services at lower costs than multiple competing firms would achieve, but they require regulation to prevent potential abuse of market power
disadvantages of monopoly
- higher prices - prices are higher in monopoly than under competition
- inequality - may worsen because higher prices may affect those on lower incomes
- x inefficiencies - wasteful marketing spending because of the absence of market competition
- diseconomies of scale - may cause a loss of productive efficiency in the long run
- lack of choice for consumers - lower consumer welfare
- monopsony power - firms with market power can often use this to apply pressure on their suppliers to reduce prices
- supernormal profit - this may not be reinvested in the business but distributed to shareholders
advantages of monopoly
- supernormal profit - can be used to fund extra capital investment and research projects that create innovation
- economies of scale - monopoly may have much lower costs than if industry was made up of smaller firms
- increase international competitiveness - a domestic monopoly with economies of scale can compete more successfully on price and cost in international markets
- regulation - laws and industry regulators can ensure monopolies don’t exploit consumers with excessive prices and that they maintain quality
characteristics of monopolistic competition
- large number of buyers and sellers (firms)
- differentiated products
- low barriers to entry or exit
- firms are price makers (can influence market price because products aren’t identical)
- supernormal profit is competed away in the long run
characteristics of oligopoly
- dominated by a small number of large sellers (firms)
- high concentration ratio
- most likely differentiated products
- barriers to entry or exit
- firms are price makers (influence market price because products aren’t identical)
- supernormal profit possible in long run
interdependence of firms
firms in oligopoly are interdependent - they have to consider how the action of one firm affects other firms decision to change price, output etc as can impact quickly on other firms so they try to anticipate their rivals decisions
competitive oligopoly
the firms compete
- price war
- non price competition
collusive oligopoly
the firms act as a monopoly and make agreements together on pricing and output
- unspoken, hard to detect ; may be due to price leadership
- overt/formal ; usually illegal ; firms can face big consequences if caught
firms may engage in a price war to increase market share…
gainers
1. consumers - lower prices, higher consumer surplus
2. surviving firms - gain market share and increase longer term profit
3. firms - may be able to use their monopsony power to depress the prices they pay to suppliers to cut costs and stop profit falling
losers
1. consumers - loss of choice if firm is forced to leave
2. firms - lose profit in short run and weakest firms may have to leave
3. shareholders - may lose profit
4. suppliers - may lose profit if they can’t charge such high prices
oligopolistic firms may decide not to compete using price but instead use…
non price competition methods such as product differentiation, advertising and marketing, loyalty schemes, customer service, free gifts, special offers etc - the kinked demand curve shows why prices may not adjust when the firm’s costs change
collusion
collective agreement between firms which restrict competition
overt collusion
firms openly fix prices, output etc - overt collusion is illegal and can result in big fines and prison sentences
tacit collusion
‘behind the scenes’ agreements
price leadership
firms adjust their prices in line with the actions of the market leader
costs and benefits of collusive behaviour
costs
- damages consumer welfare
- absence of competition reduces efficiency
- reinforces monopoly power
benefits
- industry standards can increase some social welfare
- could help offset monopsony power by suppliers in cooperatives
- profits may be used to improve dynamic efficiency
factors for shifts in labour demand (decrease)
- if demand for their output increases
- if workers are more productive
- if the price of substitute resources
- if the price of the product that labour is making increases
- if an employment subsidy cuts labour costs
reasons for shift in labour supply
- changes in the non monetary benefits of work
- changes in working conditions
- changes in the wages of different occupations
- the occupational and geographical mobility of labour
monopsony
where there is only one major buyer or employer in a labour marker (eg NHS) - the monopsonist could use its market power to pay lower wages because workers have limited alternatives
monopsony and labour market failure
lower wages - underpayment and a reduced standard of living for employees
reduced employment - could lead to higher levels of unemployment or underemployment
diminished job quality - monopsonistic employers may provide suboptimal working conditions, fewer benefits and less job security impacting job satisfaction of workers
economic inequality - monopsony power can exacerbate income inequality
trade union meaning
an organised group of employees who work together to represent and protect the rights of workers, usually by using collective bargaining techniques
trade unions aim to…
gain better wages, protect jobs, improve non monetary aspects of jobs (eg pension rights) and ensure health and safety at work
for a labour market to be competitive it has…
- many buyers and sellers
- perfect information
- homogeneous labour
- mobility of labour
- no monopsony power
wages are determined by the interaction of demand and supply - the market will adjust to changes in the conditions of labour demand and supply
most labour markets are not competitive because…
- monopsony employer
- barriers to entry
- information asymmetry between employer and workers
- trade unions and collective bargaining
- lack of labour mobility
- discrimination
- employment laws/regulation
gig economy
businesses that operate digital platforms/apps - which allow individuals to undertake jobs or ‘gigs’ (eg uber or deliveroo) the gig economy has grown with the rise of technology and the increased demand for flexible work arrangements, including zero hours contracts - it benefits employers who can offer lower wages and reduce their costs. it offers workers more flexible hours but there is less employment protection and fewer employment benefits
wealth
a stock of people’s assets, including property, material goods, private pension funds etc
income
a flow from wages, dividends, rents
income inequality
uneven allocation of income from employment, investments and savings, pensions and rent
wealth inequality
uneven allocation of assets including property, financial assets, private pensions and rent
equality (positive concept)
each individual or group of people is given the same resources or opportunities
equity (normative concept)
fairness - each person has different circumstances, the resources and opportunities are allocated to each more equal outcomes
the relationship between income and wealth can perpetuate inequality…
- wealth can generate more income, like rent on properties and dividends on shares
- higher income allows people to build up more wealth by buying more assets
using the gini coefficient to measure inequality is useful but..
- countries can have the same gini coefficient and very different income distributions
- statistics may be pre tax when a progressive tax system helps create a fairer distribution
- different countries use different stats, making comparisons more difficult
examples of causes of inequality
- wage disparities (low minimum wage)
- employment insecurity (gig economy, zero hours contract)
- educational disparities (skills gaps, access to education opportunities)
- housing market dynamics (renting or home ownership)
- financial assets and investments (inheritance)
- tax policies
examples of causes of poverty
- unemployment
- low paid work
- single parenthood
- lack of education/skills
- old age
- cuts to welfare benefits
- discrimination
- rising income and/or wealth inequality
aims of competition policy
- promote competition for the benefit of consumers (lower prices/better quality & the most innovative, consumer focused companies are the ones which survive as they promote dynamic efficiency)
- investigate mergers to ensure the outcome won’t reduce consumer welfare
- investigate entire markets if there are problems for consumers, especially in concentrated markets
- initiate action against companies involved in cartels or other illegal practises
- encourage market liberalisation
- protect consumers from ‘unfair’ trading practices
- encourage the government and regulators to promote competition
the role of the CMA (competition and markets authority) and regulators is…
- monitor and regulate prices via price caps
- set standards for services/ performance
- ensure competition/contestability increases (reduce barriers to entry)
competition policy in UK
- deregulation/privatisation/ competitive tendering
- trade liberalisation
- nationalise (impose marginal cost pricing on natural monopolies)
nationalisation
the transfer of ownership of assets/businesses from the private sector to the state sector
reasons for nationalisation
- improve health and safety standards
- national interest
- improve equality (of opportunity)
- to gain economies of scale (productive efficiency)
- to increase allocative efficiency)
arguments against nationalisation
- diseconomies of scale
- lack of competition (higher prices, less choice)
- lack of incentives to minimise costs
- lack of supernormal profit
- risk of moral hazard
- regulation of privatised industries may work better than full nationalisation
