Microeconomics Flashcards
1
Q
What are the strengths of microeconomic theory? (3)
A
- Consumer behaviour; key factor in the success of companies. Micro looks at the drivers of supply and demands and how this influences consumption
- Production process; Production analyses the impact of costs and revenues and allows us to asses how to maximise profits
- Market structure; looking at whether the market is competitive or monopolistic
2
Q
What are the weaknesses of microeconomic theory? (2)
A
- Complexity; between financial market variable and economic theory creating an inconstant relationship. Models often do not hold what is put into practice - theoretical benchmarks
- Assumptions; economics relies heavily on theory e.g. ‘ceteris paribas’ though this allows us to analyse variables in isolation. Also assumes that individuals are all utility maximisers and therefore completely rational, well in formatted and not prone to errors
3
Q
What is the production possibility frontier? (4)
A
- Shows the production of goods if all resources were available
- If the points are on the PPF curve, all resources are being efficiently used
- If point is within the curve, resources are under utilised
- If point is outside the curve, this may only be done if the economy expands and there is more resources available (shows growth)
4
Q
What is opportunity cost? (2)
A
- The cost of the next best alternative foregone when making a decision
- Not only monetary, but considers risk, time and effort necessary for one against the other
5
Q
What is profit?(6)
A
- Profit = total revenue - total cost
- Accounting profit is the excess revenue income over and above explicit costs (production costs - wages, rent, raw materials)
- Economic loss/sub normal profit = profit does not cover cost
- Normal profit = profit that just covers its costs
- Economic/supernormal profit = in excess of all costs and shows that the producer is making the correct decisions
- Total cost = explicit costs + opportunity costs
6
Q
What is demand? (4)
A
- The quantity of a good that a consumer is willing and able to buy at a given price over a given period of time
- Demand curve is downward sloping
- Changes in price creates movement along the demand curve - expansion/contraction. If prices increase, QD decreases
- Changes in factors affecting demand creates a shift e.g. PASIFIC (population growth, advertising, substitute goods, indirect taxes, fashion and trends, interest rates, complementary goods). Increases lead to shift outwards, decreased cause inwards shift
7
Q
What is supply? (4)
A
- The quantity of a good that a seller is willing and able to produce at a given price at a given time
- The supply curve is upward sloping - the higher the price, the more producers are willing to produce
- A change in price creates a movement a long the supply curve - contract/expansion
- PINTSWC - productivity, interest rates, number of firms in the market, technology, subsidies, weather, cost of production
8
Q
What is equilibrium? (2)
A
- Where buyers and sellers meet - the market clearing price
- Demand = supply
9
Q
What is price elasticity of demand? (6)
A
- The quantity of a good or service a consumer is willing and able to buy with a change in price
- PED = % change in QD/% change in price
- If change in price is > 1, the good is demand elastic (change in price has a larger impact on demand)
- If change in price is <1, the good is inelastic (change in price has a lesser impact on demand)
- If change is 1, the good is unit elastic - change in price = change in QD
- Perfectly inelastic goods have a vertical demand curve and a PED = zero e.g. prescription drugs
10
Q
What is the relationship between total revenue and PED? (6)
A
- Inelastic = change in QD is less than change in price - total revenue will fall
- Elastic = change in QD is greater than change in price - total revenue will increase
- Unit elastic = total revenue is at its maximum
- Top of downward sloping demand curve = elastic
- Bottom = inelastic
- Midpoint = unit elastic
11
Q
What is income elasticity? (4)
A
- Measures sensitive to consumer demand with a change in income
- YED = % change in quantity demand/% change in income
- If demand falls with income falling = inferior goods e.g. travel
- If demand increases as prices increase = given good e.g. Lurpak or staple foods
12
Q
What is XED? (4)
A
- The change in QD of good A with a change in price of good B
- XED = % change in QD good A/% change in price of good B
- Positive cross elasticity = substitute goods e.g if price of petrol goes up, demand for tube will increase
- Negative cross elasticity = complimentary goods e.g if price of petrol increases, demand for cars decreases
13
Q
What is elasticity of supply? (5)
A
- PES = % change in quantity supplied/% change in price
- Result is positive - as price increases, the manufacturers willingness to supply will also increase
- If PES > 1 this is elastic
- If PES < 1 this is inelastic
- A horizontal line = perfectly elastic, a vertical line = perfectly inelastic
14
Q
What impacts PES? (4)
A
- Levels of unemployment - lack of supply/labour
- Types of goods - durability of goods (storable) tend to have higher elasticity as producers can build up inventory, perishable goods have lower elasticity. Manufactured goods have more elasticity than agricultural goods which are impacted by weather conditions
- Freely mobile factors of production - less reliant on fixed costs and more reliant on variable costs, the more elastic the product
- In the long run, PES will be more elastic than in the short run
15
Q
What are the factors of production? (5)
A
- The inputs that help to create a product or deliver a service. The relationship between the 4 factors of production is called ‘production function’ and this is considered both in the long and short run
- Land - land, property, natural resource
- Labour - human input
- Capital - machinery, a good used to make another good
- Entrepreneurship - ideas and innovation
16
Q
What is the short run? (3)
A
- At least one factor of production is fixed e.g. limited skilled labour/limited capacity at a property
- Marginal returns - one extra unit of output for one extra unit of labour employed, assuming that all other factors of production are held constant
- Short run costs: total cost, average cost and marginal cost
17
Q
What is the law of diminishing returns? (3)
A
- An increase in one extra unit of labour will eventually start to reduce marginal product
- Once diminishing returns occur, there is inefficiencies
- Variable input can reduce variable output
18
Q
What is total cost? (3)
A
- Total cost = total fixed cost + total variable cost
- Total fixed costs includes costs that do not variable with output e.g. rates and rents
- Total variable costs are costs that vary with output e.g. labour and raw materials
19
Q
What is average cost? (5)
A
- AFC = TFC/Q
- AVC = TVC/Q
- ATC = (TFC+TVC)/Q
- Firms total cost will decrease as the firm increases output - the firm becomes more efficient
- The limiting factor of production will push up ATC once a certain leaves of output is exceeded
20
Q
What is marginal cost? (5)
A
- The cost of producing an additional unit of production
- There is a close relationship between average total cost and marginal cost
- As long as marginal cost is below average cost, the average cost will reduce as production increases
- When average costs are not rising or falling, it must equal marginal costs
- MC = ATC at the ATC’s lowest point
21
Q
What happens in the long run with factors of production? (6)
A
- Freely mobile factors of production
- Firm can’t produce output more efficiently and the costs will fall
- A low SRATC is achieved through economies of scale (downwards shift)
- A series of short run average cost curves is the LRACC
- Economies of scale = increased reputation, productivity, purchasing power
- At some point, output will increase but average cost will no longer fall
22
Q
What is the minimum efficient scale? (5)
A
- The lowest point of the long run average total cost curve
- The point where internal economies of scale has been fully exploited
- MES is the period where output is increase and long run average costs do not change - constant returns to scale
MES will vary from industry - If MES is relatively small compared to the market size, there are low barriers to entry
- If MES is high, high barriers to entry - utilties companies who have high ratio of fixed costs to variable costs
23
Q
What is diseconomies of scale? (2)
A
- Increased output leadings to increase in average cost in the long run
- Causes: management problems, red tape, loss of control
24
Q
What are the features of a perfectly competitive market? (5)
A
- Perfect information
- Low barriers to entry
- Many buyers, many sellers
- Price takers
- Homogenous product
25
Q
How is profit generated in perfectly competitive markets? (7)
A
- Flat demand curve - perfectly elastic
- Level of output does not impact price - firm is a price taker
- Marginal revenue - extra revenue a firm receives from selling one additional unit of output. Extra revenue received for each unit does not change. MR = P
- Average revenue remains constant and also equals price. AR = P
- Profit maximisation = MR = MC
- Perfectly competitive markets achieve normal profits only
- Long run equilibrium = AR = AC and MR = MC as the firm is maximising profits because the demand curve is flat
26
Q
What are the features of a monopoly? (3)
A
- Many buyers, few sellers
- Price makers
- High barriers to entry
27
Q
How is profit maximisation achieved in a monopoly? (5)
A
- MR = MC
- MR = downward sloping demand curve
- D = AR = P
- Supernormal profits in the long run - not under threat by new entrants
- Price discrimination - time, place, income - monopolist can produce at the price point where demand meets consumption
28
Q
What are the features of monopolistic competition? (5)
A
- Many producers and consumers
- No business has total control
- Non price differences amongst competitors products
- Few barriers to entry and exit
- Producers have a degree of control over price - will rarely reach EOS though and will only make some supernormal profit
29
Q
What are the features of an oligopoly? (3)
A
- Industry is dominated by a few firms
- Firms are dependent on each other
- There are significant barriers to entry
30
Q
What is the price behaviour of oligopolies? (4)
A
- Cartel - few producers colluded to fix a price and level of output at which they produce
- Kinked demand - all members of the oligopoly react to each others price behaviour e.g. supermarkets
- Price leadership - one of the oligopoly is more dominant than the others - dictate price and others likely to follow. Also called predatory pricing - setting prices artificially low to drive out smaller companies - this is illegal in most economies
- Game theory - speculative behaviour where members anticipate price behaviour of competitors
31
Q
What is porters 5 competitive forces which influence price, costs, investment and profitability? (5)
A
- Bargaining powers of suppliers: determines ease of substitution, influence of inputs on industry costs, importance of suppliers to product differentiation
- Bargaining power of customers - availability of substitutes, buyer price sensitivity, costs for buyers to switch firms
- Threat of new entrant - barriers to entry such as EOS, brand loyalty, govt policy
- Threat of substitutes - cost and ease at which buyers can switch
- Rivalry between competitors - affected by product differences, brand identity and switching costs
32
Q
What are the 5 stages of a product life cycle? (5)
A
- Introduction phase: sales growth slow, high promotion costs, low profits/losses
- Growth phase: rapid sales increase, higher profits, attracts competition and leads to a need for innovation
- Maturity phase: well known product, advertising falls, greater economies of scale, more competition, still need for innovation
- Decline phase: loss of market share and profitability, product relaunch
- Obsolescence: profits disappear
33
Q
What is SWOT analysis? (5)
A
- Strengths: the firm should exploit what it is good at
- Weaknesses: the firm should improve what it is lacking
- Opportunities: focus on new markets, tech, competitor weaknesses and changes in external factors. The firm should maximise these
- Threats: adverse economic factors, social and legal changes and competitor activity. The firm should defend against these
- Useful way for examining business environment that the company is exposed to and the company’s place within it
34
Q
What are the 4 P’s? (4)
A
- Product - should be what buyers expect and should do what they are intended to do
- Place - products should be readily available where buyers tend to shop
- Promotions - advertising and others comms should be relevant for the type of customer of that product
- Price - set at a level that represents good value for money to customers
