Microeconomics Flashcards
started at video 11
Define allocative efficiency
-where society surplus is maximised (maximum consumer and producer surplus)
occurs at D = S on a supply and demand diagram
occurs at MSB = MSC on an externality diagram
occurs at P = MC on a monopoly diagram
Define Productive efficiency
-when a firm is operating at the lowest point on their AC curve -> by full exploitation of economies of scale
(show on monopoly diagram)
Define X-efficiency
when a firm is minimising their waste -> not large enough to exploit economies of scale and get to the lowest point on the AC curve -> done a little bit to the left on the AC curve
doing this minimises waste + minimises costs by achieving x-efficiency
how could X-inefficiency occur
a monopolist lacks a competitive drive -> could be due to e.g. lack of firms in the market to compete -> no incentive to minimise costs
monopolies are also profit maximisers -> doesn’t make much sense to allow waste to creep in -> however is very unpopular as to reduce it e.g. take away wages, reduce staff perks etc.
Public firms could lead to x-inefficiency -> they are not driven by profit -> not incentivised to reduce costs -> waste creeps in as a result
define dynamic efficiency
Re-investment of long run supernormal profit back into the business
could be in the form of new capital, upgraded capital, new technology, innovation in R and D
you show the money that goes into dynamic efficiency on a monopoly diagram as supernormal profit
what does static efficiency consist of
allocative, productive and x-efficiency
all efficiencies that occur at one specific production point
i.e. P = MC for allocative efficiency
productive efficiency at bottom of AC curve
x-efficiency to the left a bit on the AC curve
Define allocative efficiency, give the condition, consumer analysis points and producer analysis points
Where D = S maximising society surplus
Consumer analysis:
-Resources follow consumer demand -> consumers get what they want at the quantity they want
-Low prices -> Maximisation of CS
-High choice
-High quality -> quality has to stay high to stay ahead of their rivals
Producer analysis:
retain or increase market share
stay ahead of rivals
increase profit
Define productive efficiency, give the condition, consumer analysis points and producer analysis points
Maximising output at the lowest possible average cost -> full exploitation of economies of scale
occurs at the min of AC
Consumer analysis:
lower prices -> lower average costs are passed onto consumers -> high consumer surplus -> full exploitation of EOS
Producer analysis:
More production at lower AC -> higher profit -> lower prices and greater market share
Define dynamic efficiency, give the condition, consumer analysis points and producer analysis points
Re-investment of supernormal profits into innovation, R + D, new tech -> decreases LRAC
Condition is supernormal profit in LR
Consumer analysis:
New innovation products -> lower prices over time -> high consumer surplus
producer analysis:
LR profit max -> lower costs over time -> retain/increase market share -> stay ahead of rivals
Define x efficiency, give the condition, consumer analysis points and producer analysis points
Production with no waste
Condition is production on AC curve
Consumer analysis:
Lower prices-> higher consumer surplus
Producer analysis:
Lower costs -> higher profit -> lower prices and increased market share
define the conditions of perfect competition
Many buyers and sellers in the market
Homogenous goods -> firms are therefore price takers
No barriers to entry/exit
perfect information of all goods in the market
firms are profit maximisers
Draw the supernormal profit diagram for perfect competition in the SR and explain why it will only last in the SR
video to check - https://www.youtube.com/watch?v=2BqFpSN4IsE&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=14
supernormal profit incentivises firms to enter the market -> are able to do this as a perfectly competitive market has no barriers to entry + perfect information of market conditions
Draw a perfect competition diagram in the LR showing that supernormal profit has been competed away
also give conclusions from the diagram
video to check - https://www.youtube.com/watch?v=2BqFpSN4IsE&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=14
makes normal profit in the LR ( AC=AR) as profits are competed away -> show in the firm diagram as the supply of firms in the industry shift right
conclusions:
-allocative efficiency is being achieved -> explain further
-productive efficiency is being achieved -> explain further
-x efficiency is occurring -> explain further
-no supernormal profit in LR -> cannot be dynamically efficient
draw a perfectly competitive market for subnormal profit in the SR and explain why it wont last in the LR
video to check - https://www.youtube.com/watch?v=2BqFpSN4IsE&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=14
subnormal profit shown in the firm diagram as AC > AR
firms will be incentivised to leave the market -> costless to leave market as perfect competition
draw the LR perfectly competitive subnormal profit diagram showing that the market is now operating at normal profit
video -https://www.youtube.com/watch?v=2BqFpSN4IsE&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=14
what are the shutdown conditions of a perfectly competitive firm
define the characteristics of a monopoly
one firm dominating the market:
can either be a :
-pure monopoly
-Monopoly power (can act like a monopoly, has 25% or more market share)
differentiated products -> firm is a price maker
high barriers to entry/exit -> supernormal profits can persist over time for this firm
imperfect information -> keeps firms out of the market
is where MC = MR
draw the supernormal profit monopoly diagram and apply conclusions
diagram - https://www.youtube.com/watch?v=UXC51iTDEJI&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=16
conclusions:
allocative inefficiency -> charging higher than MC -> exploiting consumers -> high prices -> low consumer surplus
not productively efficient -> not producing at the bottom of AC
X-inefficiency -> monopolists are producing above their AC curve -> allowing waste to creep in -> as they become complacent with a lack of competitive drive
dynamically efficient -> can use the supernormal profits made in the LR as no firms will enter due to the high barriers to entry -> reinvest back into company in the form of e.g. new tech, innovative new products from R + D
define price discrimination and describe the conditions needed for it to happen
when a firm charges different prices to different consumers for an identical good or service with no differences in cost of production
the conditions:
-price making ability
-information to separate the market
-prevent re-sale (market seepage)
what are the three different types of price discrimination, draw diagrams and describe each
1st degree price discrimination - when the consumer is charged the exact price they are willing and able to pay for a good or service -> eroding all consumer surplus in the market -> turning it into monopoly profit
diagram for 1st degree - https://www.youtube.com/watch?v=bNyqPR4ch70&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=18
2nd degree price discrimination - excess capacity pricing -> e.g. fixed number of seats need filling -> doesn’t make sense to leave idle as the companies have fixed costs to pay -> lower their prices last minute -> fill that capacity + contribute towards fixed costs
diagram for 2nd degree -
youtube.com/watch?v=bNyqPR4ch70&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=18
consumers gain cs for paying for the last minute deal
3rd degree price discrimination:
segments the market into different groups (e.g. age, income, time) all with different PED -> charge different prices to those different groups (e.g. charging more for peak train journeys)
diagram for 3rd degree -
https://www.youtube.com/watch?v=bNyqPR4ch70&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=18
name the pros and cons of price discrimination
Cons:
Allocative inefficiency -> charging prices way beyond marginal cost -> exploiting consumers
inequalities -> from first degree + 3rd degree inelastic discrimination -> can widen inequality if people buying are low income
anti-competitive pricing -> mainly 3rd degree when very elastic -> could drive out competitors and leave the firm with monopoly power
pros:
Dynamic efficiency -> from greater profits made by price discrimination
greater quantity (in 2nd and 3rd degree) -> greater economies of scale benefits
some consumers might benefit -> those in 2nd and 3rd degree when elastic
what are the characteristics of a natural monopoly and draw it showing the minimum efficient scale
they have huge fixed costs e.g. railroad track, pipes for water distribution etc. -> very high total costs -> to minimise average costs it will take a huge quantity of output -> huge potential for economies of scale
diagram - https://www.youtube.com/watch?v=jmtUbKeDiuE&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=19
one firm dominating the market -> results in allocative efficiency + productive efficiency -> as long as the natural monopolist is regulated
diagram - https://www.youtube.com/watch?v=jmtUbKeDiuE&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=20
why is it rational for one firm to supply the entire market
competition would cause a wasteful duplication of resources -> because the first mover into the market has got the EOS advantage -> other firms entering after wont have the same advantage and will therefore be priced out of the market
when they are priced out -> their resources will be left idle -> waste of duplication of resources and non exploitation of full economies of scale -> allocative and productive inefficiency