Microeconomics knowledge Flashcards
consequences of price ceilings
protecting low-income workers, shortage, non-price rationing, underground markets, welfare loss
price ceiling example
rent controls, food price controls
consequences of price floor
supporting producers, surpluses, government measures to dispose of surpluses, welfare loss
price floor example
minimum wages
reasons for government intervention
earn revenue for the government, provide support to firms, provide support to households on a low income, influence levels of production or consumption by firms or consumers, correct market failure, promote equity
negative production externalities market-based policies
indirect taxes, carbon taxes, trade permits
negative production externalities non-market-based policies
government legislation and regulation, education, international agreements
negative consumption externalities policies
indirect taxes, government legislation, nudges, education
positive consumption externalities policies
direct government provision, subsidies, government legislation and regulations, nudges, education
positive production externalities policies
direct government provision, subsidies
adverse selection
government regulations, government provision of information, licensure
non-price determinants of demand
income, preferences of consumers, price of substitute goods, price of complementary goods, number of consumers
non-price determinants of supply
costs of factors of production, technology, price of related goods (joint supply or competitive supply), taxes and subsidies, number of firms, firm price expectations
rational consumer choice assumptions
consumer rationality, perfect information, utility maximization
consumer choice - biases
rules of thumb, anchoring, framing, availability, bounded rationality, bounded self-control, bounded selfishness, imperfect information
choice architecture
default choice, restricted choice, mandatory choice
rational firm business objective
profit maximization
alternative firm business objectives
social corporate responsibility, market share, growth maximization, satisficing
determinants of PED
number and closeness of substitutes, necessities vs. luxuries, length of time, proportion of income spent on a good
determinants of PES
length of time, mobility of factors of production, spare capacity of firms, ability to store stocks, rate at which marginal costs increase
profit-maximizing level of output
MR=MC for all market structures
types of profit
abnormal, normal, loss
reasons for economies of scale
specialization of labor and management, bulk buying inputs, financing economies (lower interests for large firms)
reasons for diseconomies of scale
co-ordination, monitoring, and communication problems, poor worker motivation
perfect competition
- large number of firms in the industry
- undifferentiated (homogenous) products without brand names
- no barriers to entry
monopoly
- a single dominant firm in the industry
- firm sells unique good or service with no close substitutes
- high barriers to entry
oligopoly
- small number of large firms in the industry
- products may or may not be differentiated
- high barriers to entry
monopolistic competition
- a fairly large number of small or medium firms in the industry
- differentiated products
- no barriers to entry
perfect competition basic traits
price-taker, perfectly elastic (horizontal demand curve), every firm makes a normal profit in the long run
perfect competition other traits
allocative efficiency, low prices for consumers, no inefficient firms due to competition, unrealistic assumptions, lack of product variety, cannot take advantage of economies of scale, limited product development
monopoly basic traits
price-maker, downward sloping demand curve, can make an abnormal profit indefinitely in the long run
monopoly other traits
allocative inefficiency, high price for consumers, low output, possibly less innovative, negative impacts on the distribution of income, economies of scale
barriers to entry
economies of scale, natural monopoly, anti-competitive behaviour, branding, legal barriers (patents, licenses, copyrights, tariffs, or quotas)
monopolistic competition basic traits
price-maker, more elastic demand curve than in monopoly, every firm makes a normal profit in the long run
monopolistic competition other traits
product differentiation, allocative inefficiency, product variety, both price, and non-price competition
product differentiation
physical differences, quality differences, location, services, product image
oligopolies basic traits
price-maker, downward sloping demand curve, can make an abnormal profit indefinitely in the long run
oligopolies other traits
interdependence (strategic behavior, conflicting incentive- to collude/ to cheat in a collusive agreement), only non-price competition due to prisoner’s dilemma, collusion, allocative inefficiency, higher prices for consumers, low output, possibly less innovative, negative impacts on the distribution of income, economies of scale, product variety
types of collusion
cartel, informal collusion (price leadership)
reasons for collusion
gain market power, increase profits, limit competition
non-price competition
product development, branding, advertising, services
abuse of market power
unreasonably high prices, artificially low prices…legislation to protect competition (in case of natural monopoly government ownership or government regulations such as average pricing or marginal cost pricing)
explanation of the law of demand
income effect (if price of good changes, a consumer’s purchasing power increases), substitution effect (if price of a good falls, consumers buys more of now less expensive good)
carbon tax advantages
internalising the negative externality, incentivise R&D, source of government revenue, easily and quickly adjustable
carbon tax disadvantages
may hurt poor people, can cause bankruptcies, carbon tax is politically unpopular, companies may relocate their production facilities to other countries (unemployment), requires strong institutions, difficulty in estimating the correct tax price
subsidies advantages
preventing the long-term decline of industries, lowering prices for consumers (increasing standards of living), increasing employment
subsidies disadvantages
burdening government budget, worsening resource allocation, producers can become subsidy dependent
implications of inelastic PED
if PED is inelastic then the firm can increase its revenue by increasing the price per unit, government can make large profits from taxing inelastic goods
implications of elastic PED
if PED is elastic then the firm can decrease its price to increase revenue, government can significantly decrease consumption of taxed goods even with a lower tax rate
short-run
a period of time in which at least one factor of production is fixed
long-run
a period of time in which all factors of production are variable
