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
What are the pros and cons of monopoly (highly concentrated market)
cons:
Allocative inefficiency -> prices are higher than MC -> consumers are exploited to pay more -> reduction in consumer surplus
diagram - (one on left) https://www.youtube.com/watch?v=GgsDqQ2IU4Y&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=20
productively inefficient -> forego economies of scale -> don’t operate at the bottom of the AC curve -> costs are higher -> prices are higher as a result
pros:
dynamic efficiency -> reinvest supernormal profit back into business -> innovative products, higher quality, better technology in LR -> can patent these new technologies and keep earning those profits over time
evaluation of monopolies
Dynamic efficiency -> profits can be used elsewhere e.g. give to shareholders via dividends, owners, save it etc. -> not a guarantee it will be used to reinvest
are EOS or DOS more likely -> depends on the size of the firm
objective of the monopolist -> could be other things than profit e.g. sales maximisation (AC=AR)
a regulative monopoly can be used to reduce inefficiencies
could prevent major inefficiencies if market is competitive still (legal monopoly) e.g. tesco -> or could prevent the inefficiencies by the threat of competition (market contestability)
type of good -> bad news if it is a necessity -> may not be bad news if a luxury good e.g. electronics -> because constant reinvestment from dynamic efficiency as a result
Pros and cons of competitive markets
https://youtu.be/Ybw4Y71CXoM
what are the characteristics of monopolistic competition
many buyers and sellers
slightly differentiated goods -> firms are price makers but only slightly as there is price elastic demand (lots of substitutes available) -> firms cant raise price too significantly exploiting their price making power
low barriers to entry and exit
good information of market conditions
as firms cant raise prices significantly to make supernormal profits -> lots of non-price competition instead (branding, advertising, quality of goods/service)
firms are profit maximisers MC = MR
draw a monopolistically competitive market in the SR
selling slightly differentiated goods -> profit maximise -> monopoly diagram making supernormal profit
diagram (SR at top) - https://www.youtube.com/watch?v=DHgSBazfTEk&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=22
why will profits be eroded away in a monopolistically competitive market in the LR
new firms enter the market attracted by the supernormal profit -> can enter due to low barriers to entry and good market information -> erodes supernormal profit as a result so all firms now make normal profit AC=AR
diagram (LR at bottom)- https://www.youtube.com/watch?v=DHgSBazfTEk&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=22
what are the conclusions made from monopolistic competition
Allocative efficiency not achieved in LR -> consumers are exploited -> prices are greater than costs -> output is restricted + consumer choice is restricted as a result
productive inefficiency in LR -> not at lowest point on AC so foregoing economies of scale -> another reason for higher prices as costs are not being minimised
dynamically inefficient in LR -> no long run supernormal profit being made -> not enough profit to be reinvested back into the company
evaluation points for monopolistic competition
decent competition in market -> price making ability of monopolistic firms are much lower than e.g. monopoly -> loss of consumer surplus is nowhere near as bad
in perfect competition there is productive efficiency -> might not be very many economies of scale in perfect competition whereas in monopolistic competition there is -> any economies of scale being exploited might be to a greater extent in perfect competition -> prices then might still be lower in perfect competition
may be dynamic efficiency if short-run supernormal profits are enough to be reinvest
in a very competitive market -> still dynamic efficiency even if normal profits are being reinvested -> could be just part of competition in the market for firms to have to reinvest e.g. if clothing firms don’t reinvest and bring in new fashion lines as new seasons come along they will fall behind significantly
what is a concentration ratio
the collective market share of the largest firms in an industry
concentration ratio:
n:total market share
4 firms: 70% market share
4 : 70
ignore if there is an others% value
what are the characteristics of an oligopoly
few firms dominate the market -> high concentration ratio
differentiated goods -> firms are price makers
high barriers to entry/exit
interdependence (make decisions based on the actions or reactions of rival firms) -> price rigidity -> firms compete in non-price competition instead
profit max not sole objective
draw a kinked demand curve diagram to show price rigidity and explain why this is
diagram - https://www.youtube.com/watch?v=Ec19ljjvlCI&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=24
firms don’t want to change their price -> with a price rise other firms wont follow and output will fall for that firm -> decreasing price will only increase quantity output very slightly as the curve is inelastic -> firms don’t want to risk causing a price war so avoid lowering price
what are the conclusions made from a kinked demand curve
there may still be price competition although it doesn’t make sense -> firms may want to try and reduce price in order to gain market share and out compete rivals (price war)
Non-price competition -> if firms agree to keep the prices rigid/sticky -> more non-price competition (branding, advertising, quality etc.) e.g. like soft drink industry
temptation for firms to collude -> formal (agreement with other firms to collude, is illegal. Or tacit, happens without any kind of agreement, its in the best interest of firms to not compete
in what situation would a competitive oligopoly occur
when there is a large number of firms -> colluding with a large number of firms is much more difficult
if new market entry is possible -> colluding to make large supernormal profit is not as attractive -> encourage new firms to enter the market and take the supernormal profits away
one firm with significant cost advantages -> makes it very difficult to organise and fix a price or quantity to produce at in collusion
Homogenous goods -> firms don’t have the price making power to fix prices
saturated market (lots of price wars and competition) -> can only get ahead of firms is by snatching market share away
in what situation would a collusive oligopoly occur
when there is a small number of firms -> easier for firms to get together and organise
similar costs -> easier to decide a price and level of output to collude at
high entry barriers -> no risk of colluding and other firms entering the market to compete the supernormal profits away
ineffective competition policy -> likely to get away with colluding together
eval point of oligopolies
all it takes is one firm to undercut the others who have agreed to collude -> to gain market share -> other firms follow and triggers a price war as a result
define a contestable market and the conditions of one
where there is a threat of competition but not necessarily actual competition -> the threat however could be enough to change the behaviour of incumbent firms -> to disincentivise new firms from entering the market as a result
conditions:
low barriers to entry/exit
large pool of potential entrants
good information -> new firms looking to join must know about costs + technology so if they were to join they could complete on a level playing field
incumbent firms are subject to hit and run competition -> when new firms enter the market quickly, snatch some supernormal profit and leave before incumbent firms can react and lower their profit margins
how has technology increased contestability in markets
-technology has massively reduced barriers to entry and exit -> as businesses dont have to be physical anymore -> reducing start up costs, sunk costs, firms dont need to hire as many workers (therefore dont need to meet as many regulations)
economies of scale are easier to achieve (e.g. technical)
advertising is easier -> easier to overcome brand loyalty
technology has increased innovation -> increased the pool of firms that can enter the market with something brand new to disrupt the market e.g. Uber, AirBNB
Technology has allowed firms to find cheaper ways of producing things -> can disrupt the market in this way rather than having something brand new to offer
Increased information due to the internet -> firms can find out easier about costs and technology in the market
Draw a diagram of a supernormal profit monopoly market that is being contested and explain what it is doing
Diagram - https://www.youtube.com/watch?v=UxTbiVOW9bU&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=27
if contestable -> firms will shift towards where AC=AR where firms it will make normal profit (limit price) -> lowers profit margins to take away incentive for firms to enter market -> attempts to eliminate threat
if firm does enter however -> ready to compete with lower prices and higher quantities
Pros and cons of a contestable market
as the diagram is moving towards the limit price -> it is moving towards these efficiencies
pros:
allocative efficiency -> lower prices -> higher consumer surplus for consumers
productive efficiency -> implies greater exploitation of EOS -> lower prices for consumers
X-efficiency -> minimising waste
getting these competitive outcomes as the firm is getting ready for competition
job creation -> higher quantity in the market -> increased derived demand for labour
Cons:
lack of dynamic efficiency -> eval. however if new firms come in with innovative ideas, that itself is the benefit of dynamic efficiency
cost cutting in dangerous areas -> e.g. wages, product safety, environmental standards etc.
creative destruction -> the creativity of new firms coming into the market destroys firms -> job losses
evaluation of contestable markets
if new firms coming in can patent ideas -> market will not be contestable over time
technology provide consumer data to firms -> firms can practise price discrimination (1st and 3rd degree)
dynamic efficiency -> new firms come in with innovative ideas, that itself is the benefit of dynamic efficiency
who enacts competition policy
Competition and markets authority
they have regulatory bodies beneath them that look over and regulate specific industries and the firms within them
What are the aims of competition policy
to ensure the public interest is protected
aims:
to prevent excessive pricing by firms -> e.g. monopolists, oligopolists
promote competition
ensure quality, standards and choice
regulate natural monopolies
ensure effective privatisation of natural monopolies
promote technological innovation -> e.g. supernormal profits made by monopolies are being used in the public interest rather than being given to shareholders
when will competition authorities intervene?
anti trust + cartel agreements
mergers
liberalise concentrated markets
monitor state aid control
COMPETITION POLICY Y2 28
make notes
what is privatisation, what will it do to the firm
when state run organisations are sold off to the private sector -> idea being when the private sector is in charge of these organisations it will run much more efficiently -> as they will have a profit motive + more competition allowed to occur in the market -> lowering costs + increasing efficiency
draw a deregulation diagram
diagram - https://www.youtube.com/watch?v=9jvz6sSWzQA&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=30
what are the advantages of privatisation
leads to increased allocative efficiency as there is an increased drive to become more efficient in competitive markets-> lower prices -> increased consumer surplus
profit motive incentivises firms to be as efficient as possible -> dynamic efficiency gains that occur over time
what are the disadvantages of privatisation
limited competition -> productive and allocative inefficiency
loss making services cut even if socially desirable
loss of economies of scale -> increased average costs -> increased costs to consumer
what is deregulation and show a diagram showing this
when governments reduce the legal barriers to entry in industries -> reduces barriers to entry -> incentivises firms to enter the market as barriers to entry are now reduced -> promote competition -> promote efficiencies (allocative, productive, x-efficiency)
diagram - https://www.youtube.com/watch?v=3jeKA4V30kk&list=PLWeicFreBUYDwmBZ0AiJwhCNSCb0di9eI&index=31
DEREGULATION LESSON 30
make notes
what is nationalisation
the process of taking an industry into public ownership
arguments in favour of nationalisation
-greater economies of scale -> productive efficiency gains -> lower average costs -> potentially lower prices
more focus on service provision as government aim is to maximise social welfare and fulfil the needs and wants of society
less likely to be market failure arising from externalities -> because governments intend to maximise social welfare
arguments against nationalisation
state run natural monopoly is huge -> risk of diseconomies of scale
lack of incentive to minimise costs -> risk of complacency and wasteful production creeping into the production process -> static inefficiency (allocative, productive x-efficiency)
lack of supernormal profit -> dynamic inefficiency -> no massive R + D gains
high taxpayer burden -> increased risk of moral hazard (i.e. taxpayers pay the risk of reckless decisions made by the firm)
evaluation points for nationalisation
Public Private Partnerships -> i.e. private sector pays for the construction and maintenance of a project and the public sector prays on this to rent and uses it e.g. school buildings. -> best of both as efficiency gains from private sector + maintaining of public services to make sure service quality is high
may not need to nationalise the industry -> strong regulation of private industries
competition in private sector -> has better outcomes than
Moral hazard
Big taxpayer burden
Technological change TO DO LESSON 32
notes
DO BEHAVIOURAL ECONOMICS
end of playlist
what is the basic economic problem
allocating scarce resources between unlimited needs and wants
what are the four types of factors of production and what they do
capital (e.g. machinery) -> used to assist production of goods and services
enterprise (e.g. entrepreneurs) -> risk takers that innovate to produce goods and services -> incentivised by profit
land (e.g. farmland) -> where goods can be produced or taken
labour -> people used to produce goods and services
define opportunity cost
the cost of the next best alternative when a choice is made
draw a ppf curve and describe what it shows
diagram - https://www.youtube.com/watch?v=IzccVWouIxM&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=3
shows the maximum possible production of 2 goods/services within the given factors of production
define what determines demand and describe different factors that will make a demand curve shift
the quantity of a good or service that a consumer is willing and able to buy at a given price level
Population -> increase in population will increase demand
Advertising -> good advertising will get more eyes on the product and increase demand
Substitute’s price -> if a substitute good is at a higher price then consumers will choose an alternative -> increasing demand
income -> people with higher incomes will demand more as they have more disposable income
fashion/tastes -> different tastes over time will effect demand e.g. fidget spinners were very popular in 2016
high interest rates -> high interest rates will encourage consumers to save their money as they would benefit more from them
complement price -> if the complement good’s price is low -> demand for the other good will increase e.g. bread and butter
define what determines supply and describe different factors that will make a supply curve shift
the quantity of a good or service producers are willing and able to produce at a given price in a given time period
Productivity -> can produce more of a good with the same amount of input -> shift out
Indirect tax -> cost of production is more expensive -> decrease in supply
technology innovations -> increases efficiency of production -> shift out in supply
subsidy -> makes production cheaper for firms -> increases output
overall costs of production -> the more expensive the less the firm is able to produce
what different things make up the cost of production for firms
cost of transport -> of e.g. goods
cost of labour -> paying wages
cost of oil -> often used in production in the making of goods and services
cost of raw materials
cost of regulation -> government regulation can increase the costs of production e.g. health and safety standards, environmental policies
why will disequilibrium not last in a free market where there is excess supply + demand
market signals that price is too high/low (excess supply/demand) -> incentivises producers to decrease/increase their price to increase profit -> rations excess demand/supply -> perfect allocation of scarce resources
define consumer surplus + producer surplus and draw a diagram showing both
consumer surplus:
the difference between the price consumers are willing and able to pay for a good/service and the price they actually pay
producer surplus:
the difference between the price the producers are willing and able to supply a good/service for and the price they actually recieve
define consumer surplus + producer surplus and draw a diagram showing both
consumer surplus:
the difference between the price consumers are willing and able to pay for a good/service and the price they actually pay
producer surplus:
the difference between the price the producers are willing and able to supply a good/service for and the price they actually receive
define what price elasticity of demand is and what integer is what elasticity when calculated using the equation
PED = percentage change in quantity demanded/ percentage change in price
> 1 demand is price elastic
<1 demand is price inelastic
0 price is perfectly price elastic
1 demand is unit price elastic
define what price elasticity of supply is and what integer is what elasticity when calculated using the equation
PES = percentage change is quantity supplied / percentage change in price
PES
> 1 supply is price elastic
< 1 supply is price inelastic
0 supply is perfectly price inelastic
infinite - supply is perfect price elastic
1 supply is unit price elastic
define what cross elasticity of demand is and what integer is what elasticity when calculated using the equation
measures the responsiveness of quantity demanded of a good/service given a change in price of another
XED = percentage change of quantity in good a / percentage change in price of good b
if outcome is positive - substitute goods
if outcome is negative - complement goods
> 1 demand between the goods is price elastic (Strongly related)
<1 demand between the goods is price inelastic (weakly related)
0 demand between the goods is perfectly price elastic (no relationship)
define what income elasticity of demand is and what integer is what elasticity when calculated using the equation
YED measures the responsiveness of quantity demanded given a change in income
YED = percentage change in quantity demanded / percentage change in income
if outcome is positive - normal goods
if outcome is negative - inferior goods
normal good:
>1 demand is income elastic (normal luxury)
< demand is income inelastic (normal necessity)
inferior good:
> 1demand is income elastic
< 1 demand is income inelastic
0 demand is perfectly income inelastic
what are taxes, name different types and draw diagrams for them
indirect tax:
expenditure tax that increases the cost of production of firms -> transferred to producers via higher prices
two types of indirect tax:
ad valorem - tax as a % of price
diagram -https://www.youtube.com/watch?v=Q6bf-7fhvI8&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=17
specific - tax per unit (fixed amount)
diagram - https://www.youtube.com/watch?v=Q6bf-7fhvI8&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=17
direct tax - tax on income that cant be transferred e.g. income tax, National Insurance, Corporation tax
define subsidies, why they are used, draw a diagram for them
money grant to firms by the government to reduce costs of production and increase output
to solve market failures -> encourage consumption of merit goods that will benefit society e.g. merit goods
increase affordability -> low income earners can now afford goods that are subsidised by the government
diagram - https://www.youtube.com/watch?v=41p5WFd-y5A&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=19
evaluation of subsidies
how is the subsidy funded -> does it take money away from other key areas e.g. transport -> is it the best use of public money if this is the cost?
producers may not be using the subsidy money as intended -> e.g. may be paying off debt, paying higher dividends to shareholders
producers may become reliant on the subsidy -> complacent + inefficient -> costs of production rise
define a minimum price
a minimum price is a price floor enacted by government usually set above the market price
diagram -> https://www.youtube.com/watch?v=pswcCfqqmuM&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=20
benefits of a minimum price on producers, draw a diagram of the market
protects producers from price falls -> keeps the industry going -> providing consumers a guaranteed minimum income
can be used to solve market failure -> raise prices to discourage the consumption of demerit goods
diagram - https://www.youtube.com/watch?v=pswcCfqqmuM&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=20
conclusions of minimum price
consumers dont like -> pay higher prices -> consumer surplus is being eroded -> quantity + choice is lower
liked by producer -> huge increase in revenue + increase in producer surplus
what is a max price, why is it used, draw a diagram
a fixed price enacted by the government usually set below the equilibrium market price
to encourage the consumption of necessity goods/services by increasing affordability -> e.g. increase consumption of merit goods
diagram - https://www.youtube.com/watch?v=EQnhi6P-nng&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=21
conclusions made to maximum price diagram
consumers benefit as long as they can access the market (due to the excess demand) -> greater affordability -> increase in consumer surplus
people who cant get access to the limited supply may turn to alternatives -> black market
consumers lose out -> fall in producer surplus
government meet their goal of making it more affordable -> unintended consequences of black markets falling
name the different types of market failure
Negative/Positive externalities in production and consumption -> self interest
Demerit goods +
Merit goods - information failure
Public goods - free rider problem + profit motivated firms
Common access resources
(tragedy of the commons) -> self interest
income inequality -> inequity
monopoly power -> higher barriers to entry
factor immobility
what are negative externalities and draw a diagram showing both
negative externalities are costs to 3rd parties as a result of the actions of producers
diagram for both in production and in consumption - https://www.youtube.com/watch?v=2bI_EX3U5xc&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=24
what are positive externalities and draw a diagram showing both
Benefits to third parties as a result of the actions of consumers
diagram - https://www.youtube.com/watch?v=mcQvtKDiTho&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=25
what are merit goods, why are they under consumed
goods that are deemed beneficial as they provide positive externalities upon consumption
they are under consumed -> consumers have imperfect information -> don’t fully understand the benefits as they may only consider SR
diagram positive externalities in consumption - https://www.youtube.com/watch?v=wiHjVeX3DKc&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=26
what are demerit goods, why are they under consumed
demerit goods are harmful to consumers upon consumption and provide negative externalities as a result e.g. alcohol
overconsumed -> consumers don’t have full information on the costs of consumption or they dont consider the long run impacts of doing it
negative externalities in consumption graph - https://www.youtube.com/watch?v=wiHjVeX3DKc&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=26
define public goods and what are quasi public goods
non-excludable - cant stop anyone from consuming the good and benefitting as a result
non-rival - one person consuming the good doesn’t stop someone else from doing so
quasi public goods e.g. roads contain some similar properties but are slightly different
define common access resources, and how tragedy of the common can be described on a graph
natural resources over which no private ownership has been established
lack of private ownership leads to the tragedy of the commons -> where there is an overuse of a public resources diminishing its returns
can be shown on negative externalities of production graph - https://www.youtube.com/watch?v=iBQ0-DzeoIM&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=28
define government failure and give 4 examples explaining each
when the costs of intervention outweigh the benefits of intervention
the end result is a worsening of the allocation of scarce resources, harming social welfare
information failure -> may not have full information on markets so therefore make bad policy decisions
unintended consequences of intervention -> e.g. black markets, impact on firms, employment
regulatory capture -> occurs when government tries to regulate monopoly power -> where CEO’s influence the regulator to reduce the extent of the regulation working in the interest of the firm
describe how indirect taxes can solve market failure when there is a negative externality in production, however also describe the costs of this
increase indirect tax on firms -> increases tax revenue which can be used to internalise the negative externality produced by the firm
shown in the diagram negative externalities in production: https://www.youtube.com/watch?v=6D_qvKjiye4&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=30
regressive tax -> increases costs of goods for lower income people
increases the risk of a black market
describe how a subsidy can be used to solve a market failure where there are positive externalities in consumption
governments subsidies firms -> decreases their costs of production -> can pass these decreased costs onto consumers in the form of lower prices -> increases demand for merit goods -> raises consumption to socially optimum level
diagram - https://www.youtube.com/watch?v=KTsXGkK7Lkg&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=31
however firms may not use the subsidy as the government intended
firms may become reliant and complacent due to the subsidy
what is regulation, name types of regulation, how they are controlled, the outcomes of implementing them, and give the costs of implementing regulation
rules set by government backed by legislation that encourages changes in behaviour
non market approach (no diagram)
COMMAND/CONTROL
bans on certain goods
limits e.g. age limits on alcohol
caps e.g. emission caps
compulsory e.g. graphic images on cigarette packets
how they are controlled:
-strong enforcement of regulation
-effective punishment e.g. fines to deter firms from breaking rules
outcomes:
allocative efficiency -> welfare gain
incentive to change behaviour
costs:
increases costs for firms
black markets -> unintended consequences
what are tradeable pollution permits, draw a diagram, and the issue with it
permits that are issued by government to firms which limit the amount of pollution the firm can produce -> revenue from permits can be used to internalise the externality
diagram - https://www.youtube.com/watch?v=D21dOHBAGT8&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=33
however:
larger firms in the market can buy up the extra permits allowing them to produce more while other firms suffer and have to produce less as a result
what is state provision and give examples, how it can solve a market failure where there is an underconsumption/production of merit goods, draw a diagram, give drawbacks
direct provision of good/services by the government free at the point of consumption
e.g. healthcare, education
goods are free to consume -> becomes a public good
diagram: https://www.youtube.com/watch?v=HHSNincXdkE&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=34
what is information provision, how can it be used to solve market failure, draw diagrams to represent this, give drawbacks
government funded information provision/advertising/education to encourage or discourage consumption
e.g. advertising campaigns to eat healthy -> increased consumption of merit goods
e.g. advertising campaign for smoking, alcohol consumption -> increased consumption of demerit goods
diagram - https://www.youtube.com/watch?v=loYQpOdztuk&list=PLWeicFreBUYCOFC2A0SlKrpEYgwaSF63t&index=36
costs:
very expensive to advertise
no guarantee of success of policy
how can property rights solve tragedy of the commons market failure
Incentive not to exploit common access resources -> negative externalities internalised -> if enforced, will reduce quantity to the socially optimum level
but:
enforcing rights are very costly to firms
What is a free market, the pros and cons, and a diagram
any place where buyers meet suppliers to exchange goods and services, free from government intervention
simple S=D diagram with allocatively efficient point
pros:
allocatively efficient
encourages competition -> prices low + cs is high + choice and quality is high while also keeping costs as low as possible and passing the cost savings onto consumers in the form of lower prices
dynamic efficiency -> investment to stay ahead of other firms -> increased choice + quality of goods
job creation and economic growth -> quantity is at its maximum level -> derived demand for labour is increased
no risk of government failure -> as no government intervention
consumers are free to consume, choose what they want without being cohersed by government
cons:
inequity given inequality -> the allocatively efficient point is unaffordable for some consumers -> excludes some people from buying the good -> bad if the good is a necessity
prices are very volatile as very price inelastic -> when prices go up its a burden on consumers -> when prices go down its a burden on producers
what is specialisation, give pros and cons
the concentration of production on a narrow range of goods and services
advantages:
Higher output -> increased trade, increased growth
wider range of goods/services
greater allocative efficiency
higher productivity through better use of workers
quality improvements
disadvantages:
finite resources
changes in fashion/tastes
industrialisation
national interdependence
what is division of labour, give pros and cons
breaking down the production process into separate tasks upon specialisation
advantages
workers highly productive -> increased wages, increased time savings, decreased costs of production, decreased prices
disadvantages:
workers demotivated
high worker turnover
risk of long term unemployment
show a diagram that shows how a tax affects producer and consumer surplus, illustrating the consumer surplus, the producer surplus, tax revenue, and the dead weight loss from the tax
https://i.stack.imgur.com/tiJQv.png
axis will be different the image is just to make it clear
what does the demand curve in labour markets show and how you calculate it
the demand curve for labour shows how many workers will be hired at any given wage rate over a given period of time (MRP)
MRP = MPP x MR
what can shift the labour demand curve
- change in the price of the good the labour is making -> as MRP = MPP x MR
change in the demand for the final product -> labour is a derived demand
changes in labour productivity -> increased labour productivity would increase MRP as -> MRP = MPP x MR
if price of capital decreases in LR-> demand for labour will decrease -> cheaper for firms to use machinery if substitutable for labour -> demand for labour shifts left
elasticity of the labour demand curve , show on diagram
measures the responsiveness of labour demanded given a change in the wage rate
the more elastic -> capital is more substitutable for labour as the higher wages incentivise firms to decrease quantity of workers
more inelastic -> capital is less substitutable for labour -> may be due to the skill of the job at hand so therefore cannot be replaced by e.g. machinery
diagram - https://www.youtube.com/watch?v=_dxoco_5uzE&list=PLWeicFreBUYCs7NjXgFhQpoEDvnryFip2&index=6
shifts of the labour supply curve
wage on offer in substitute occupations -> workers move to the other occupation due to higher wage -> shift left
barriers to entry -> skills + qualifications may decrease the supply available in the market
non-monetary incentives - perks, company car, promotion opportunities, bonuses etc.
improvements in occupational mobility of labour -> more people with the qualifications to enter market -> shift right in supply
size of the working population
elasticity of the labour supply curve, draw it
measures the responsiveness of labour supplied given a change in the wage rate
the more skills the job requires, the more inelastic the supply is
what are the characteristics of wage determination in a perfectly competitive labour market
large number of potential workers and employers
labour is homogenous -> i.e. no difference in skill
there is perfect information -> workers know what the going wage rate is + skills, qualifications productivity required
firms are wage takers
there are no barriers to entry/exit
draw a perfectly competitive labour market at the point where firms are looking to maximise revenue from workers
MRP = W
diagram - https://www.youtube.com/watch?v=Xy_fLczbIOY&list=PLWeicFreBUYCs7NjXgFhQpoEDvnryFip2&index=12
draw a monopsony market, define what it is, giving key characteristics and conclusions
diagram - https://www.youtube.com/watch?v=Apng99ArphY&list=PLWeicFreBUYCs7NjXgFhQpoEDvnryFip2&index=14
monopsony -> sole buyer of labour in market -> wage maker
will maximise revenue from workers by hiring up to where MRP = MC
decrease in employment
decrease in wages
as a result
what can a trade union do
-trade unions collective bargaining power -> influence firms to raise minimum wage
diagram - https://www.youtube.com/watch?v=WJTwE2jrllY&list=PLWeicFreBUYCs7NjXgFhQpoEDvnryFip2&index=15
trade unions in a monopsony labour market
in playlist
why do men earn more than women?
women move in and out of labour force due to e.g. pregnancy -> maternity leave -> skills reduce or not developing -> reduction in their MRP
whereas males instead stay in work -> stay learning -> increased MRP
why are wage differentials good
incentivises workers to develop skills and train to gain qualifications
encourages enterprise -> entrepreneurs will take more risk in order to make more profit
encourages work -> potential to earn more than others not the same
high wage earners spend money -> causes multiplier effects throughout economy -> increasing employment -> increasing spending -> increasing tax rev
why are wage differentials bad
income inequality -> restraining spending in economy as Low income earners have the highest marginal propensity to consume whereas the rich have the lowest marginal propensity to save
Trickle down effect may not occur -> no guarantee that
what is income
a flow concept - flow measured onto a given period of time e.g. at the end of the year how much income was earned?
what is wealth
stock concept
assets with market value that generate income
what are the reasons for differentials in income and wealth
Age - wealth is accumulated over time -> increased incomes with higher MRP over time
education
ownership of financial assets
ownership of property
wage differentials
what is a lorenz curve
a visual idea of what income inequality looks like
diagram - https://www.youtube.com/watch?v=ns9f2FOc26M&list=PLWeicFreBUYCs7NjXgFhQpoEDvnryFip2&index=23
what is a gini coefficient
a mathematical indicator
closer to 1 is perfect inequality
closer to 0 is perfect equality
what is poverty, the two types
absolute poverty - incomes below a threshold to access the most basic life sustaining goods
relative poverty - incomes below a given average in society
compare equity and equality
equity - fair distribution of income
equality - equal distribution of income
what is horizontal equity
equal treatment of equals, those with the same incomes are taxed the same
what is vertical equity
higher income taxed more -> progressive taxes
what are the causes of poverty
unemployment (cyclical, structural)
poor education/skills
poor health/healthcare
wage differentials (relative poverty)
born into poverty
tax cuts for well off -> less money to be used on lower income people e.g. public schools
national minimum wage pros
poverty alleviation -> eliminates absolute poverty
incentive to work -> reduces economically inactive labour
increase in productivity -> morale boost
national minimum wage cons
those not on the NMW may ask for more to keep wage differentials
increased cost to businesses -> less labour employed as a result
national min wage diagram
https://www.youtube.com/watch?v=U2DcQfJyQP0&list=PLWeicFreBUYCs7NjXgFhQpoEDvnryFip2&index=25
laffer curve
https://www.youtube.com/watch?v=XuZg93Bm4_Y&list=PLWeicFreBUYCs7NjXgFhQpoEDvnryFip2&index=26
policies to redistribute income/wealth
https://www.youtube.com/watch?v=m_Jwn2H801I&list=PLWeicFreBUYCs7NjXgFhQpoEDvnryFip2&index=27
Why does gov intervene in public goods
To provide a public good where there is a missing market
what is the law of diminishing utility
as the quantity consumed increases the marginal utility derived from each extra unit decreases
Total utility is maximised where Marginal Utility = 0
draw a diagram: https://www.youtube.com/watch?v=cEdDOzoa8wM&list=PLWeicFreBUYDiPDqmdQafZ3eSxVUEdOPX&index=1
what is information failure, the two different types, and what they can lead to
lack of information - information doesn’t exist at all or isn’t presented clearly -> could lead to an overconsumption of a demerit good or an underconsumption of a merit good
asymmetric information - where information exists but isn’t being shared equally between two markets - labour markets -> e.g. information between the employer and employee, employees are very well aware of their skills but their employer isn’t aware of these -> employer may make an irrational decision to employ them
asymmetric information may lead to moral hazard -> where the individual takes more risks because they are not going to bare the costs of them, the insurance company will
what is behavioural economics
behavioural economics disputes rationality and utility maximisation arguing that emotional, social and psychological factors can influence decision making.
traditional econ will think -> take time and make utility maximising decision -> doesn’t take into account emotional, social and psychological factors
what is bounded rationality
consumers may not have all the time to make a utility maximising decision
maybe the choice available is so large to evaluate and find the utility maximising option is too much to ask
asymmetric information
what is bounded self-control
consumer may have all information to maximise utility but lack of self control gets in the way
want to cut down on e.g. demerit goods but cannot e.g. cigarettes
may want to increase consumption of merit goods e.g. education but bounded by self control stopping us
stops us making decisions that maximise our utility
what are rules of thumb
simple ways of making decisions
making a satisficing decision (some utility may be sacrificed, but a satisfactory outcome is produced)
cognitive bias
anchoring -> a value imprinted in our mind to compare other prices to e.g. having recommended retail prices on labels in shops
social norms -> when our decisions are influenced by rules that society has dictated e.g. tipping culture
availability bias -> when we conjure up examples that may inflate the actual chance of that thing happening e.g. avoiding going swimming in Australia because they are afraid of a shark attack
framing -> being influenced by the way information is being presented to us e.g. shark attacks have decreased by 200% over the last year when in reality its a decrease of 2
loss aversion -> the idea that people don’t like to give things up that people have a value towards e.g. money -> may not take risks such as investment because people don’t like the idea of losing money
leads to the endowment effect -> attaching too much monetary value to something you have compared to something else you could gain
herd behaviour -> jumping on the bandwagon -> doing things because other are e.g. making restaurant orders based on what others are ordering
choice architecture -> our decisions are based on location or placement of something o the way information is presented to us e.g. salad bar in the middle of restaurant would encourage people to consume salad
what are the different choice architecture policies (nudge)
a slight influence into making a certain choice
framing e.g. labels for contents on drinks so consumers make more informed decisions, saying the amount paid on a subscription monthly rather than yearly to make it seem like a smaller amount
nudges e.g. location of salad bars, recycle bins, to encourage healthy options and good habits and discouraging bad habits e.g. smoking by putting them behind a counter and they have to be requested in order to buy them
default choice i.e. being opted into something and you have to say something to opt out i.e. organ donation -> more donations as a result as people will be unaware or cannot be bothered to change it
mandated choice
what is the problem with choice architecture (nudge) policies
very unpredictable and costly -> there is no guarantee that these policies will actually work -> if the cost outweighs the benefit there is a risk of government failure
are the policies actually strong enough?
How is a gini coefficient calculated on a lorenz curve
the ratio of the area between the perfect equality line and the Lorenz curve (A) divided by the total area under the perfect equality line (A + B)
why would a firm want to profit max
Re-investment -> dynamic efficiency
Dividends for shareholders
Lower costs + lower prices for consumers
reward for entrepreneurship
Why would a firm want to revenue maximise and where does it take place
on a monopoly diagram when MR = 0
Economies of scale -> produces greater amount so can lower prices further
Predatory Pricing -> firms sacrifice profit to undercut rival to drive out competitors in the market
‘Principle agent problem’ -> Divorce between ownership and control -> those who own do not control -> managers may decide to revenue max to use as leverage to goto shareholders and get greater perks in their job
why might firms decide to profit satisfice
sacrifice profit to satisfy as many key stakeholders as possible
Shareholders
Managers
Consumers
Workers/TU’s
Government
Environmental groups
Why might a firm want to sales maximise (growth)
a firm may want to become as large as it can possibly be without making a loss -> occurs at where AC = AR normal profit
greater economies of scale
limit pricing -> for contestable markets to stop other firms entering
divorce of ownership and control -> where those who control do not own -> managers may decide to sales maximise to have more leverage when speaking to shareholders to get better perks in their job
flood the market -> consumers see your product everywhere -> develop loyalty to it -> down the line change from sales maximisation to profit maximisation
What are the types of barriers to entry
Legal
Technical
Strategic
Brand Loyalty
Role of profit
Supernormal profit
Normal profit
Subnormal profit
