Microeconomics Revision Flashcards
Irrational behaviour
Stems from cognitive limitations in consumers as they don’t have access to perfect information or can’t process it, leads to consuming/purchasing sub-optimal quantities of things
Status quo bias
Preference of current state of affairs
Information gaps
When either the buyer or seller does not have access to the information needed for them to make a fully-informed decision (time lag in communication)
Functions of Money - medium of exchange
Enabling specialisation and trade through avoidance of double coincidence of wants and non-divisibility (as used in barter economy)
Functions of Money - store of value
Something that’s expected to retain its value in a reasonably predictable way over time, not perishable
Functions of Money - measure of value
Measure the value of all goods and services exchanged in an economy
Functions of Money - Standard for deferred payment
Accepted way of settling a debt so money functions as a unit in which debts can be denominated
Normative statements
Matter of opinion and referred to as a value judgement
Utility
Satisfaction derived from the consumption of a good service within a given time period derived from the consumption of a good or service
Factors affecting supply
Input prices, number of sellers, expectations, productivity, taxes/subsidies/regulation
Factors affecting demand
Income, number of buyers, expectations, price of related goods
Price elasticity of demand measures
0 = perfectly price inelastic
< 1 = price inelastic
1 = unitary
> 1 = price elastic
∞ = perfectly price elastic
Factors affecting PED
Time, influence of habit, proportion of income for which the good accounts, substitutes (availability of)
Income elasticity of demand measures
negative = inferior good
0=>1 = normal good (income elastic
> 1 = normal good (income elastic)
Cross elasticity of demand measures
negative = complements
positive = substitutes
0 = independent / unrelated goods
Factors that affect price elasticity of supply - time
Momentary period (perfectly price inelastic), short run (at least one FoP fixed), long run (all FoP variable)
Factors affecting price elasticity of supply
Flexibility of resources, availability of resources, stock levels, time
Behavioural economics - Framing
Presentation of a choice in such a way that it has an effect on the final decision
Behavioural economics - Availability
Where judgements about the likelihood of an even are made on the basis of how easily an incident or example can be recalled (easier to recall shark attacks due to media coverage)
Behavioural economics - Herd Behaviour
Individual copies the behaviour of a larger group
Behavioural economics - Overoptimism bias
When people overestimate the probability of positive events but underestimate the likelihood of negative events
Behavioural economics - Anchoring
Exists when individuals are exposed to a number which acts as a reference point for a subsequent decision
Behavioural economics - loss aversion
Humans feel losses more acutely than gains
Why are merit goods under-provided
Lack of info, time horizon, affordability
Forms of gov. intervention
Taxes/subsidies, legislation, direct provision, information/positive advertising
Principal agent problem
Information gap leads to agents taking advantage of principals or other way round (car mechanics, CEOs vs. shareholders)
Causes of gov. failure
Lobbying, administrative costs, info. failure, distortion of price signals
Reasons for firms staying small
Innovation (easier to respond to changes in demand), niche market, personal service, owner objectives (‘lifestyle enterprises’, seek satisfactory returns rather than max. profits)
Methods or internal/organic growth
Expanding consumer base, either through selling new products, marketing, consumers abroad
Benefits of internal/organic growth
Lower risk than external, can be financed using internal funds, can build on company’s strengths, provides more control, preserves organisational culture
Costs of internal/organic growth
Can take long, can be dependent on growth of overall market, can be hard to build on market share if already a market leader, shareholders might want more rapid growth
External growth
When firms merge, take over or form a strategic alliance with other businesses
Types of integration
Horizontal, vertical (backwards), vertical (forwards), conglomerate
Benefits of vertical integration
more control over supply chain (therefore reducing costs and improving quality), better access to raw materials, potential administrative costs
Costs of vertical integration
Risk of different cultures (leads to breakdown in comms and diseconomies of scale), may have little expertise in other aspect of industry
Benefits of horizontal integration
Greater market share, can exploit economies of scale, reduces competition/removes rivals, can exploit already existing experience in this area, wider range of products thererfore diversify and spread risk
Costs of horizontal integration
Cost to consumer (increased market share and less competition), different cultures can lead to diseconomies of scale
Benefits of conglomerate integration
Spreading risk by operating in different market, benefit from more knowledge of different markets
Costs of conglomerate integration
Requirement for different skills, not necessarily benefit from economies of scale, different cultures in each business can lead to diseconomies of scale
Competition regulaters
Competition and Markets Authority, OFWAT, OFGEM, OFCOMM
Reasons for demegers
Splitting company to deal with cultural differences, creates more focused firms, protect value of firm when on element is stronger, reduce risk of diseconomies of scale, raising money from asset sales, meet requirements of competition regulators
Effect of demergers
Businesses - allows firm to focus on core business and raise funds, more scope for specialisation and greater efficiency therefore >competitive
Workers - increased job security, reduced culture conflict, more focus leads to higher profits and potentially higher wages
Consumers - greater efficiency within firm > lower unit costs > lower prices, less market share,
Types of economies of scale
Administrative, managerial, purchasing, financial
Types of diseconomies of scale
Alienation (workers feel alienated from leadership), bureaucracy (less commitment to organisation > greater deal of monitoring required), communication (or lack of)
External economies of scale (shift of LRAC down if size of industry increases (firms bunching together))
R&D (sharing of facilities, ideas and co-operative venues), infrastructure (gov. may improve infrastructure to raise firms’ productivity), finance (banks with industry-specific skills can deal with financial requirements), labour supply (attract specific labour together), education, suppliers (easier for suppliers to access firm)
Economic and accounting profit equation
Accounting = Total Revenue - Explicit Costs
Economic = Total Revenue - (Explicit Costs + Implicit Costs (Opportunity Cost))
Perfect competition definition
Many buyers and sellers that compete vigorously against each other and they’re assumed to sell identical products. No power over market price. No barriers to entry and exit. Perfect information
Monopolistic competition definition
Some degree of pricing power, slight differentiation in products, still assumption that there are many buyers and sellers, no barriers to entry and exit
Oligopoly definition
Only a few firms in the industry, barriers to entry into the market, tend to be highly vigilant of each others behaviour, some price setting power, interdependence between firms (actions of one firms affect performance and actions of others)
Monopoly definition
When firm is the industry (no rivals), can’t choose both price and quantity, barriers to entry
Types of efficiency (static and dynamic)
Productive efficiency (lowest point on AC curve), X-efficiency (any point of AC curve), allocative efficiency (supply=demand, MC=AR), dynamic efficiency (investment product and process funded by supernormal profits)
Shutdown condition - perfect competition
Short run condition: AR < AVC
Long run condition: AR < AC
Benefits of competition
Lower prices because of many competing firms, low barriers to entry, lower total profits and profit margins than in markets dominated by a few firms, greater entrepreneurial activity, economic efficiency (competition ensures firms are productively and allocatively efficient)
Disadvantages of monopoly
Higher price than market equilibrium, productively inefficient, potential waste as firm may devote scarce resources to acquiring or defending its monopoly position
3 criteria for price discrimination
Firms must have some ability to set prices, must be possible to separate buyers into groups of different PEDs, no possibility of resale
Types of collusion
Explicit - firms overtly collude with each other
Tacit - firms act in concert, but do so silently
More likely to hold if = small no. of firms colluding, barriers to entry are high, cost and demand conditions are similar for each firm
Alternative goals for firms
Sales maximisation, revenue maximisation, managerial status
Limit pricing
Keep firms out
Predatory pricing
Kick firms out
