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Econ micro advanced information > PAPER 3 > Flashcards

PAPER 3 Flashcards

1
Q

What is PED?

What is the formula?

A

The responsiveness of quantity demanded to a change in price.

-% change in QD / % change in price.

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2
Q

What are the range of values of PED and what do they mean?

A

-1 unitary, a change in price will cause the exact same change in quantity demanded.
0 and -1 relatively inelastic
Between 1 and infinity relatively elastic
Infinity = perfectly elastic.
0 = perfectly elastic.

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3
Q

What are the factors influencing price elasticity of demand?

A

PANT

  • proportion of income spent-
  • Availability of substitutes
  • Necessity or luxury
  • Time
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4
Q

What is income elasticity of demand?

A

-This is the responsiveness of demand to a change in income.

% change in quantity demanded / % change in income

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5
Q

What are the numerical values of income elasticity of demand?

A

less than 0 = inferior good, eg people demand less essential products as their income goes up.
Greater than 0 is a normal good, a rise in income will cause a rise in demand for the good.
A luxury good is when greater than 1.

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6
Q

What is the significance of YED on firms?

A
  • Firms want to know how their sales will be impacted by a change in the income of the population. If the economy is rising a business must know if this will impact their sales.
  • May impact the types of good a firm produces: in times of prosperity they will produce luxury goods and inferior goods in times of recession.
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7
Q

What are the different categories of good in income elasticity of demand?

A
  • Necessity YED between 0 and 1
  • Inferior good YED is less than 1
  • Luxury good YED is greater than 1.
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8
Q

What is cross-price elasticity of demand?

A

-The responsiveness of demand of good A to a change in price of good b.

% change in demand for good A/ % change in price for good b

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9
Q

What are the categories of numerical values in Cross-elasticity of demand?

2-What does the size of the XED show?

A
  • Substitutes when XED>0, increase in price of good a will increase demand for good b.
  • Eg coke and pepsi.
  • Complimentary goods XED<0, when the the price of good b increases, QD for good a decreases. eg DVDS and DVD players
  • Unrelated goods XED=0 as change in one will not change the other.

2-shows the strength of relationship.

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10
Q

What is the significance of PED?

A
  • PED can cause a differing impact of subsidies and taxes.
  • the more elastic the demand the less consumer burden of the tax
  • the more inelastic the demand the bigger the burden on consumers.

-Subsidies on goods with inelastic demand will have little impact on quantity demanded.

A rise in price for elastic demand, will decrease revenue
A rise in price for inelastic demand will increase revenue
a fall in price for elastic demand will increase revenue
a fall in price for inelastic demand will decrease revenue.

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11
Q

How do you draw a negative externalities in production diagram.

A

Step 1- draw upward sloping costs and downward sloping demand.
Step 2- shift cost curve inwards and label initial curve MPC
Step 3- deadweight loss, go up to social curve and points towards socially optimum eq

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12
Q

How do you draw a positive consumption externality diagram?

A
  • Step 1 draw upward sloping costs and downward sloping benefits
  • Step 2 shift benefits to the right and label the initial marginal private benefit
  • Step 3 go up to social curve and area points towards socially optimal eq deadweight loss.
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13
Q

What are the limitations of externalities?

A
  • Difficult to work out the size of the externality as it tends to be on value judgement
  • Many externalities are involved with information gaps.
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14
Q

What are private costs/ benefits?

What are social costs/benefits?

What are external costs/benefits?

What is the formula for social costs?

A
  • costs and benefits to the individual involved in the economic transaction
  • costs and benefits to society as a whole
  • costs and benefits to a third party who is not involved in the economic transaction
  • Social costs = private costs+ external costs.
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15
Q

What are merit and demerit goods?

A
  • Merit goods have positive externalities in production and are under provided at the free market eq
  • Demerit goods have negative externalities and are over provided at the free market eq
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16
Q

What is the outcome of a monopsony labour market?

A
  • Employment is reduced
  • Wage rate is reduced
  • Wage rate is less than MRP.
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17
Q

What is a monopsony in the labour market?

What is the impact of this on the firm changing its labour force?

Where do monopsony employ workers?

A
  • This is when there is a sole employer of labour in a given profession
  • To increase quantity of labour they must increase the wage for all the workers before and after
  • MC = MRP
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18
Q

How do you draw a monopsony labour market diagram?

A
  • Demand = MRP curve and Supply = AC curve.
  • MC is above AC.
  • This causes competitive wage to be above monopsony wage
  • This causes competitive quantity to be above monopsony quantity.
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19
Q

What are the macroeconomic impacts of an increase in the minimum wage?

A
  • They are able to reduce inequality
  • They will rise in AD as poorest have high MPC, so this will lead to economic growth and employment.
  • Could lead to government budget deficit as they employ many people on min wage.
  • increase in business costs could reduce business competitiveness.
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20
Q

What is the national minimum wage?

A

-Introduced in 1999 for the UK legally enforced minimum wage rate that a firm can pay.

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21
Q

What are the arguments for the minimum wage?

What are the arguments against the minimum wage?

A

ARGUMENTS FOR:

  • Can help to reduce poverty as it mainly impacts the lowest wages and ensures people have enough to live on
  • Could cause a more content workforce which makes them more productive.
  • Prevents ‘unemployment trap’ when benefits are higher than the wage people would have got.

ARGUMENTS AGAINST:

  • Loss of jobs in the industry (unemployment)
  • Raise costs for businesses which could reduce supernormal costs in the long run
  • No consideration on regional differences
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22
Q

What are max wages?

What is the impact of max wages?

A

Wage above the eq-maximum wage rate for CEOS or public sector workers to keep spending down.

  • The introduction of max wages will leas to excess demand within the industry.
  • Max wages may have limited impact based on the prices elasticity of supply and demand. Demand for CEOS is seen to be inelastic as there is few in supply and a firm only needs one.
23
Q

How does the government intervene to control mergers?

A
  • In the UK mergers are assessed for SLC (substantial lessening of competition). The CMA will consider the competitive situation before and after the merger goes ahead.
  • A merger will be investigated if it gets a market share over 25% or combined turnover of over 70 million.
24
Q

Why does the CMA prevent mergers and what is a failure of the CMA?

A
  • The CMA prevent mergers so they do not exploit customers by increasing price, reducing quality or reducing choice.
  • The CMA investigates few mergers every year and may have limited information to make a decision and suffer from regulatory capture,
25
Q

What are examples of government intervention in mergers?

A

-The CMA allowed the 2.7 billion takeover of booker by tesco.

26
Q

What are the ways that the government can intervene in monopolies?

A
  • Price regulation, RPI-X formula
  • Profit regulation
  • Quality standards
  • Performance targets
27
Q

What are the ways that the government can intervene to promote competition and contestability?

A
  • Enhancing competition between firms through the promotion of small businesses
  • Deregulation
  • Competitive tendering for government contracts
  • Privatisation
28
Q

What are the ways that the government can intervene to protect suppliers and employees.

A
  • Restriction of monopsony power

- Nationalisation

29
Q

How does price regulation work?
What are the two main methods?

  1. Why is it beneficial.
A
  • RPI - X is the rate of inflation - the expected efficiency gains of the firms which make the pass on the increased efficiency to the consumers.
  • RPI-X+K this also adds the K for the level of investment and has been used in the water industry for 130 million investment.
  1. It gives firms incentive to be as efficient as possible as if they decrease costs more than X they can increase profits
30
Q

-How does profit regulation work?

A

-Rate of return regulation is used where prices are set to cover operating costs and earn a ‘fair’ rate of return on capital invested, based on typical rates in a competitive market.

31
Q

-How do quality standards work?

A

-Monopolists will produce high quality goods, only if this is the best way to maximise profits. The government can enforce standards that ensure they are not exploiting customers.

Eg Post office has to deliver letters daily to all areas and energy providers must have enough capacity to prevent blackouts.

32
Q
  • How do performance targets work?

- What are the negatives of performance targets?

A
  • Regulators can introduce yardstick competition, such as setting punctuality targets based on other European train services.
  • Firms will resist targets and they may find ways to meet targets without actually improving.
  • Other firms may fail to achieve targets and therefore arrive late. Regulators must ensure fines are hard enough that targets are met.
33
Q

-How can the government encourage growth of small businesses?

A
  • The government can give grant and training to new entrepreneurs and encourage small businesses through tax breaks and subsidies. This will increase competition as there will be more firms in the market.
  • It increases innovation and efficiency as new firms will bring new products that could stop incumbent firms from being X-inefficient.
  • The red tape challenge aims to decrease regulation, particularly for small firms.
34
Q

-What is deregulation? (What is an example)

What is a negative?

A
  • This is when government removes legal barriers to entry to a previously protected market to allow firms to compete. This will increase efficiency in the market as more firms are allowed to enter than before. (The 2015 deregulation act aims to continue deregulation).
  • Regulation is often needed to ensure standards are upheld. Some have argued the deregulation of financial markets led to the GFC in 2008.
35
Q

What is competitive tendering?

What are the benefits and drawbacks?

A
  • The government can contract out to the private sector the provision of goods or services. Private finance initiatives.
  • Competition can be introduced into the market as the government draws up a specification for the good and then firms are invited to bid for it. The firm offering the lowest price earns the contract.

BENEFITS: helps to minimise cost for the government and ensures efficiency.

DRAWBACKS: the bidding process is time consuming and expensive. In addition, the private sector may cut quality as they have no regard for social welfare.

36
Q

how can the government reduce monopsony power?

A
  • They can pass anti-monopsonist laws which make some practices illegal and can introduce and independent regulator that makes them buy fairly
  • Fines can be put in place for those who exploit and minimum prices may be introduced.
37
Q

how can the government protect workers rights?

What is the negative of this?

A
  • Through health and safety law and the right to be in a trade union.
  • if the workers become too strong firms will be unwilling to hire labour.
38
Q

What is the difference between nationalisation and privatisation?

A
  • Privatisation is the sale of government equity to private investors, with an aim to revitalise inefficient industries.
  • Nationalisation is when a private sector company or industry is bought under state control.
39
Q

What are the advantages of privatisation?

what is an example of privatisation?

A
  • Encourages competition which reduces x-inefficiencies, ensures low prices and high quality as firms need to be competitive.
  • Raises revenue for the government and reduces the private sector net cash requirement.
  • Increases investment as it reduces uncertainty about when a government is going to be reelected.
  • the railway sector was privatised and has seen a rise in passenger satisfaction.
40
Q

What are the disadvantages of privatisation?

A
  • For natural monopolies it may be fairer for the government to own them as they will not exploit monopoly position.
  • Some argued that water and electricity industries impact the performance of other industries and should be coordinated by the government.
  • Negative over government budget as they are underpriced and no longer earns the firms profit.
  • Could lead to negative externalities as private sector does not have the goal of maximising social welfare.
41
Q

What are the advantages of nationalisation?

A
  • For a natural monopoly it is better for it to be run by the state as they will not abuse position.
  • The government will consider externalities.
  • The government will provide a minimum level of service for the people who risk of being cut off.
42
Q

What are the disadvantages of nationalisation?

What is an example of a nationalised firm?

A
  • Will experience to x-inefficiency and this will increase prices for consumers.
  • May lead to moral hazard as managers know that any losses are covered by the gov.

The NHS is a nationalised firm which suffers from lack of funding.

43
Q

What are the positive impacts of government intervention?

A
  • Governments can prevent monopolies from charging excessive prices
  • Can prevent x-inefficiencies.
  • They are likely to be allocative efficient as they want to maximise welfare.
44
Q

What are the limits of government intervention?

A

-Regulatory capture.
The firm meets regularly with the regulator which could make them see things from their perspective and reduces their impartiality. (Regulatory may have also worked in the industry and have personal connections).

-Asymmetric information- regulators use information provided to them when making decision which could make them set RPI-X at the wrong level leading to government failure.

45
Q

What is significant about the public sector wage setting?

A
  • As the trade unions in the UK are weak, in the short run, the government can make any wage decisions it decides..
  • Between 2010 and 2015 when there was a public sector wage freeze this put downward pressure on private sector wages as they knew they would not move to the public sector.
  • In the long run, people will move from the public sector to private if they receive a pay rise.
  • Therefore, public and private sector wages tend to rise by the same amount.
46
Q

how can the government improve geographical immobility of labour.

A
  • Increase the supply of houses and reduce the price of properties making it easier to move.
  • They could increase transport links
  • The government could give subsidies on houses where
47
Q

How can the government improve occupational immobility of labour?

A

IMPROVING EDUCATION

  • Vocational training could be increased
  • Encourage higher study eg engineering degrees.
48
Q

What is a monopoly in the labour market?

How can they increase wages?

What does this cause?

A

-The existence of trade unions means they can operate as the single seller of labour.

  • Firstly they could increase barriers to entry to decrease supply
  • They could impose wages at a certain wage rate and not let workers work for less

Wage is set above equilibrium price
Causes kinked supply curve.
This creates new supply curve which increases wages.
This cases unemplyoment.

49
Q

What is a bilateral monopoly?

What outcome will this have?

A
  • This is when there is a monopsony buyer of labour and a monopoly seller of labour (trade union).
  • The outcome will be in favour of which party has the strongest bargaining power.
50
Q

How does bargaining power vary for trade unions?

A

-In times of recession, bargaining power decreases and in times of full employment bargaining power is likely to be higher.

51
Q

How can the government tackle geographical immobility?

A
  • Increase the supply of houses / decrease the price of houses.
  • Improve transport links
  • National advertising
  • Move government organisations like the DVLA out of areas like London into Swansea.
52
Q

How can the government tackle occupational mobility of labour?

A
  • Offer more occupational vocational training
  • they could encourage further study such as university or technical courses.
  • Education could be aimed at tackling skills shortages.
53
Q

What are the issues in the UK labour market?

A
  • Skills shortages- skill shortage in Scotland for construction workers.
  • Young workers, only 28% of UK businesses can attract young workers and accommodate for their needs.
  • gig-economy, rise of short-term contracts for firms like uber and deliveroo which makes payment uncertain.
  • Migration, causes a fall in wages but allows firms to recruit from a larger pool of labour.

Econ micro advanced information (5 decks)

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