Microeconomics (2.8 to 2.12) Flashcards
1
Q
What is legislation and regulation for positive externalities ?
A
Laws enforced by the government to ensure certain behavior from consumers and producers.
2
Q
Advantages of legislation and regulation for negative externalities ?
A
- Effective in reducing externalities from a command and control approach
- Implemented quickly and can happen over night
3
Q
Disadvantages of legislation and regulation for negative externalities?
A
- Monitoring and enforcing costs incurred by the government
- Political pushback
- People may choose to break rules if penalties are not significant enough
4
Q
What is education and awareness creation for positive externalities?
A
Governments may educate public about benefits of merit goods through advertisements, campaigns and schools to encourage consumption.
5
Q
Advantages of education and awareness creation for positive externalities?
A
Effective campaigns can change consumer behavior for long term.
6
Q
Disadvantages of education and awareness creation for positive externalities?
A
- Education campaigns only encourage people to change behavior
- Requires time for message to be accepted and behavior to change
- Opportunity cost of government spending
7
Q
What is direct provision?
A
- Many public goods and services improve the lives of a country’s population. Governments often provide services to improve the level of equity
8
Q
Advantages of direct provision
A
Increase in consumption of good or service that may be unaffordable for low income consumers
9
Q
Disadvantages of direct provision?
A
- Opportunity cost for government spending
- Goods and services provided free of charge resulting in overconsumption
- Government may prioritize to certain groups
10
Q
What are subsidies for merit goods?
A
Governments may also provide subsidies to producers to reduce the cost of production to encourage consumption and production.
11
Q
Advantages of subsidies?
A
More accessible towards low income groups due to lower price’s
Producers receive higher profit margins due to government subsidies
Increase in consumption of merit / neccesity goods to optimal level
12
Q
What are indirect taxes?
A
Placed on the expenditure of goods and services, paid by producers to government to help externalize external costs within market consumers
13
Q
Advantages of indirect taxes?
A
- Price increase discourages consumption
- Higher costs discourages production
- Tax revenue generated for government
14
Q
Disadvantages of indirect taxes?
A
- Low income groups pay higher portion of income for tax
- Ineffective for goods with inelastic PED
- Imperfect market information means size of tax is unlikely equal to external costs
- Emergence of parallel markets, illegal selling of goods
15
Q
What is legislation and regulation in fixing negative externalities?
A
Laws enforced by government to ensure certain behaviors from consumers and producers
16
Q
Advantages of legislation and regulation for negative externalities?
A
- Effective in reducing externalities from command and control approach
17
Q
Disadvantages of legislation and regulation for negative externalities?
A
- Monitoring and enforcing costs incurred by government
- Political pushback
- People may choose to break rules if penalties are not high enough
18
Q
What is education for negative externalities?
A
Government may discourage consumption of demerit goods through education and awareness campaigns so public is more aware of negative effects of the goods
19
Q
Advantages of education for negative externalities?
A
- Effective campaigns may change consumer behavior for long term
20
Q
Disadvantages of education for negative externalities?
A
- Encourages people to change behavior, effectiveness may vary
- Requires time for message to be accepted and behavior to change
- Opportunity cost of government spending
21
Q
What is collective self governance?
A
Voluntary communal actions that combat negative externalities. Successful campaigns may change social norms and cultural behaviors.
22
Q
What are carbon emissions?
A
Carbon emissions are release of carbon into atmosphere which is one of the most common and significant negative externalities which occur from economic activity.
23
Q
What are carbon taxes?
A
Imposed on consumers for carbon emissions from production activities with aim of minimizing environmental pollution
24
Q
Advantages of carbon taxes?
A
- Creates incentives for firms to use cleaner technologies in production
- Internalize externality, producers and consumers pay for environmental costs
- Tax revenue generated
- Easily implemented
25
Disadvantages of carbon taxes?
- Low income groups pay higher position of income for tax
- Ineffective for products with inelastic PED
- Imperfect market information thus difficult to predict accurate level of externalities and carbon tax to achieve socially optimal output
- Unfair advantage for small firms vs large firms
26
What are tradeable permits?
Limits level of pollutant to a level determined by government, firms issued with tradeable perms have right to pollute up to level permitted.
- Can freely be traded between firms
- more pollutant producers create, more permits required to purchase
- more environmentally producers may sell excess permits to gain revenue
- Creates incentives for firms to switch to cleaner production technologies
27
Advantages of tradeable permits?
- Limits carbon emissions to predetermined level
- More incentive to switch to clever technology
- Consumers / producers pay for external costs
- Flexibility for firms, can choose to switch to cleaner technology or pay for permits
28
Disadvantages of tradeable permits?
- Potential job decrease as increased production cost for producers
- MNC's may shift production to other countries to avoid permits
- Difficult to determine optimal level of pollutant and permits allowed per year
29
What is perfect competiton?
Market structure with a lot of suppliers of a particular good or service with many substitutes and low barriers of entry thus making them price takers.
30
What is a monopoly?
Market structure with a single supplier for a particular good or service with no substitutes and high barriers of entry making them price makers.
31
What are barriers to entry?
Branding
Legal barriers
Anti competitive practices
Domination of resources
Economies of scales
32
What is an oligopoly?
Market structure with a few firms that dominate the industry and do not collude together. Market share of the dominant firms that matters.
33
What are characteristics of oligopoly?
- Differentiated or homogenous product
- High customer loyalty
- Price maker
- High barriers to entry
- Few competitors / substitutes
- No efficiency in resource allocation
- Abnormal profits
- Inelastic demand
34
What is monopolistic competition?
A market structure is one in which there are many firms offering a similar product but with some product differentiation
35
What are characteristics of monopolistic competition?
- Differentiated products
- Low customer loyalty
- Low ability to set the price (Price taker)
- Low barriers to entry
- Many competitors / substitutes
- More competition pushes better efficiency
- Abnormal profit or loss in the short run, normal profit in the long run
- Elastic Demand
36
Formula for total revenue
Price x quantity
37
Formula for Average revenue
Total revenue / Quantity
38
Formula for profit
Total revenue - Total cost
39
Formula for total fixed cost
Average fixed costs x Quantity
40
Formula for average fixed cost
Total fixed costs / Quantity
41
Formula for average variable cost
Total variable cost / Quantity
42
Formula for total variable cost
Average variable cost x quantity
43
Formula for total costs
Total fixed costs + Total variable costs
44
Formula for average cost
Total costs / Quantity
45
Formula for marginal revenue
Change in total revenue / Change in quantity
46
What is abnormal profit?
Profit that is greater than normal profit, creating incentives for producers to increase output and for potential rivals to enter the market
47
What is normal profit?
Firm earns just enough to cover its total costs of production and remain operational in the industry
48
What are losses?
Firm's total cost of production exceeds total revenue and cannot cover its unit costs of production, they can only remain operational in the short run.
49
What is a natural monopoly?
Type of monopoly where economies of scale exists in industry so significant that only one room for one industry to operate in market.
50
What happens if there are 2 firms in a natural monopoly?
With one firm there is sufficient demand to provide profit but with second demand both businesses have lower demand and forced to shut down. Natural monopolies typically occur in infrastructure projects, electricity supply, gas and water supply and more.
51
What is allocative efficiency?
Socially optimal point where resources are produced in a way that consumers and producer surplus maximized. Thus no resources wasted and social welfare maximized.
52
Why do monopolies lack incentive to provide at allocative efficient level?
No incentive due to lack of competition therefore consumers need to pay more for lower output (P>MC)
53
what is productively effeciency?
Output level is where AC is minimized, no wastage of resources thus MC = AC.
54
Why do monopolies lack incentive to provide at productively efficient level?
Lack incentive to operate at lowest point on AC curve thus will charge at higher prices
55
What is market power?
FIrm’s ability to control prices of a product and can be categorised into market structures.
56
Formula for economic profit?
Total revenue - Total costs
57
Characteristics of perfect competition?
- There are many buyers and sellers
- There are no barriers to entry and exit
- Buyers & sellers possess perfect knowledge of prices
- The products are homogenous
58
Benefits of perfect competition
- Allocative efficient
- Productive efficient
- Low prices for consumers
- Competition leads to closing down of inefficient producers
- Market responds to customer tastes
- Market responds to changes in technology or resources prices
59
Drawbacks of perfect competition?
- Unrealistic competition
- Limited options to take advantage of economies of scales
- Lack of product variety
- Waste of resources in long run adjustment
- Limited ability for R and D
60
Why are monopolistically competitive firms unsustainable in the long run when making economic profits
As producers have perfect information and will enter market for economic profits, new firms increase the number of substitutes thus demand curve for individual firm will decrease. Producers making economic profit will then make normal profit in long run.
61
Why are monopolistically competitive firms unsustainable in the long run when making economic losses.
Rational producers will exit market thus less firms in the market meaning less substitutes thus demand curve shifting upwards for individual firms. Thus producers with economic loss will eventually make normal profits.
62
Characteristics for a monopoly?
- Unique product
- High customer loyalty
- Price maker
- Extreme barriers to entry
- No competitors / substitutes
- Abnormal profits
- Very inelastic demand
63
Why will a monopolistic firm earn economic profits?
High barriers of entry means potential firms unlikely to enter the industry to compete for economic profits thus monopolist will continue to earn supernormal profits in long run.
64
Why will a monopolistic firm earn economic loss?
Due to high barriers to exit, monopolist will continue to incur economic loss in long run.
65
How does government intervention work with monopolies?
At profit maximizing level for monopolistic firm, welfare loss incurred thus social optimal price would be AR=MC but no incentive to do so. Thus subsidy granted to cover losses when producing at P=MC.
66
What are concentration ratios?
Sum of market share held by largest firms in the industry.
67
What is collusion?
Collusion is an agreement between oligopolists to fix prices and collectively limiting output which creates artificial barriers to entry. This is due to incentive to earn supernormal profits.
68
What are economies of scales?
As production increases, long run average costs will decrease as fixed costs are spread over large range of units. Can be internal or external.
69
What is innovation?
Large firms with significant market power earn supernormal profit and invested into R and D. Includes innovations in production to allow for more efficient production
70
Risks with oligopolies for market supply?
Under profit maximizing assumption, firms always produce at MR=MC, this is allocatively inefficient as P doesn't equal MC leading to underprovision and consumption of a product leading to welfare loss.
71
Risks with oligopolies for market prices?
Restricted output will lead to higher prices reducing consumer surplus as large firms have market power to control prices.
72
Risks with oligopolies for consumer choice?
Lack of competition, lowers incentive for large firms to innovate thus consumers have less option to choose from.
73
Common access resources
non-excludable but rivalrous in consumption
- Non-excludable means that anyone can access these resources without having to pay for them
- Rivalrous means that these resources can be used up
74
Tragedy of the commons
occurs when common pool resources are used in production in an unsustainable way
- This creates negative externalities of production
75
Asymmetric information
occurs when one party in an economic transaction has more or better information than the other party. This imbalance can lead to market failures, as the less informed party is at a disadvantage, potentially resulting in inefficient market outcomes.
76
Free market
occurs when the price mechanism determines the allocation of resources without any government intervention and can lead to unequal distribution of income and wealth
77
Adverse selection
Occurs when the party with more information (typically the buyer) has an advantage in knowing their own risk profile as compared to the party offering the service or product
78
How to companies reduce adverse selection
To reduce adverse selection, companies may use various strategies such as risk-based pricing or medical underwriting to ensure that premiums accurately reflect the risk profile of the insured person
79
Moral hazard
Occurs when one party in a transaction is protected from risk and so they are likely to behave differently than if they were fully exposed to the consequence of the risk. Moral hazard leads to market failure as a party will act in their own self-interest leading to inefficient market outcomes
80
Provision of information
provide additional information about goods and services or require firms to do so, so that consumers make more informed choices
81
Adv of provision of information
- Influence individuals to make better choices in terms of consumption of merit goods and goods/services which generate positive externalities
- information targeted to the individuals who specifically need the information
82
Dis of provision of information
- If information is not presented clear manner, targeted individuals may not make correct decisions
- There is an opportunity cost involved in the cost of information provision
83
Signalling
- Strategy used by individuals or firms with private information to convey that information to others
- Useful in situations where one party has superior information about their qualities or characteristics, they may use signals to communicate this information to others, particularly to gain a competitive advantage or establish trust
84
Adv of signalling
- It provides a good indication to consumers about the quality of a good/service
- leads to more informed choices for the consumer as asymmetric information is reduced
85
Dis of signalling
- additional costs associated with signalling which private firms may not be willing to incur
- only effective if the private agent decides to reveal the necessary information
86
Screening
Provides buyers with the opportunity to screen out biased, inaccurate or misleading information to make better purchasing decisions
87
Adv of screening
- Screening allows individuals to gather more information
- improved purchasing decisions
88
Dis of screening
- There may be additional costs and time associated with gaining more information
- Reviews used to base decision on may be flawed or manipulated by sellers
89
Socially optimal point
occurs at the level of output where the (MSB) = (MSC)
