Revision For Feb Mocks Paper 1 Flashcards
1
Q
What is Opportunity Cost?
A
The benefits lost from pursuing the next best alternative.
2
Q
What is the function of the PPF?
A
It shows the maximum possible combinations of captial and consumer goods that the economy can produce with its current resources and technology.
3
Q
What is specialisation?
A
Specialisation is the production of a limited range of goods by a company/individual/country which means that trade is essential as it is the only way they are able to acccess all that they need.
4
Q
What is division of labour?
A
When labour becomes specialised in a particular part of the production process.
5
Q
What did Adam Smith believe about specialisation/division of labour?
A
They can increase labour productivity, allowing firms to increase efficiency and lower their costs of production.
6
Q
Advantages of specialisation and the division of labour in organising production
A
The division of labour enables labour productivity to be increased.
Workers more skilled at their jobs, so maybe higher quality of goods and services.
It is more cost effective to develop specialist tools, improving speed or quality.
Time is not wasted moving between jobs and getting out tools etc.
Workers only need to be trained to do one specific task, rather than many, saving time and money.
7
Q
Disadvantages of specialisation and the division of labour in organising production
A
One task can be boring, poor quality of work - can be solved with playing music.
Reduction of craftmanship and a more standardised product because of mechanisation.
If for some reason production in one process is delayed, every other task has to stop until that problem is solved.
Not a lot of training leaves the workforce prone to structual unemployment.
8
Q
Advantages in specialising in the production of goods and services to trade
A
Countries specialise in producing those goods where they have a lower opportunity cost, and so they are relatively best at producing.
This helps boost their economy, and there is greater output globally.
9
Q
Disadvantages in specialising in the production of goods and services to trade
A
Countries may become over-dependent on one particular export - developing economies specialise in farming, and the economy suffers if crops fail due to weather.
Other countries specialise in non-renewable resources and these could run out, which will result in a huge loss of income for that country. It will also mean the loss of these resources.
High interdependence, will cause problems if trade is prevented through examples such as war.
Some say that increased specialisation means there will be more competition to cut costs and therefore wages will fall, but this is not necessarily true.
10
Q
What are the functions of money?
A
Medium of exchange - the problem with bartering was that both parties would need to want the good the other party offers.
A measure of value
A store of value - can keep its value for a long time, unlike fruits for example
A method for deferred payment - money can allow debts to be created.
11
Q
Assumptions of rational economic decision making
A
Consumers aim to maximise utility
Firms aim to maximise profit
Government aim to maximise social welfare
12
Q
What can cause a shift in demand? (8)
A
Population
Income
Related goods - if a substitute good price falls, then the demand for the original good may fall.
Advertising
Taste/fashion
Expectations (use oil crisis in UK)
Seasons
Government legislation
13
Q
What is diminishing marginal utility?
A
By assumption that people act rationally in purchasing the good:
The satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed, assuming the consumption of all other goods remains constant.
14
Q
Factors influencing PED (5)
A
Availability of substitutes
Time (the longer the time, the easier it will be for a person to find an alternative supplier)
Necessity (if needed, inelastic)
How large of a % of total expenditure
Addictive
15
Q
Significance of PED with tax
A
Determines the effects of the imposition of indirect taxes and subsidies.
The more elastic the demand curve, the lower the incidence of tax on the consumer.
16
Q
YED - Values for Inferior, Normal and Luxary goods
A
Inferior - YED<0 (Inelastic, as necessity)
Normal - YED>0 (Inelastic, as necessity)
Luxury - YED>1 (Elastic)
17
Q
Significance of YED
A
Important for businesses to know how their sales will be affected by changes in the income of the population.
It may have an impact on the type of goods that a firm produces.
18
Q
Cross elasticity of demand
A
%change in quanitity demanded of A / %change in price of B
19
Q
Factors that cause a shift in supply (8)
A
Costs of production
Price of other goods (if price of beef rises, man will kill cows, less production of milk)
Weather (agricultural goods)
Technology
Goals of the supplier (if supply motivated by helping society, not profit)
Government legislation (can increase production costs)
Taxes and subsidies
Producer cartels
20
Q
Factors affecting PES (5)
A
Time
Stockpile of goods (if a business has a stockpile of goods, when the price goes up, they’ll use the stockpiles up, supply is elastic)
Availability of factors of production (labour may need skills/training to increase production)
Ease of entry into the market
Availability of substitutes (car models as substitues)
21
Q
The price mechanism
A
Rationing - when prices increase, people will no longer be able to buy the product and others may no longer have the desire to buy the good. Limited resources can be rationed and allocated t the people who can afford them and those who value them most highly.
Signalling - when prices rise, producers move resources into manufacturing that product.
Incentive - Buyers realise the more money they have, they are able to buy more products. Low prices act as an incentive to consumers to buy more of a good, and producers to sell more of a good.
22
Q
Ad valorem tax with example
A
Tax payable increases in proportion to the value of the good. The tax is the percentage of the cost of the good, for example VAT.
23
Q
Specific tax with example
A
Amount is added to the price of a good (not proportional), and based on amount bought rather than the value of the good.
For example, excise duty on alcohol, tobacco and petrol.
24
Q
4 reasons why consumers don’t always act rationally
A
Influences of other people, social norms, bias.
Influence of habitual behaviour.
Consumer weakness at computation (consumers aren’t willing or able to make comparisons between prices so they will buy more expensive goods than needed)
Brand loyalty
25
3 types of market failure
Externalities
Under-provision of public goods
Information gaps
26
How can the government intervene to ensure the market considers the external costs and benefits? (5)
Indirect taxes and subsidies - Taxes put on goods with negative externalities, subsidies on goods with positive externalities. Internalising the externality.
Tradable pollution permits - Allows firms to produce up to a certain amount of pollution, trading amongst firms, gives them the choice.
Provision of the good - The government may provide the good through taxation revenue - healthcare and education.
Provision of information - Some externalities are associated with information gaps, the government can provide information to help people make informed decisions and acknowledge external costs.
Regulation - Banning advertising of smoking, for example.
27
Characteristics of public goods
Non-rivalrous (one person's use of the good doesn't stop someone else from using it)
Non-excludable (you cannot stop someone from accessing the good and someone cannot chose not to access the good)
28
What is the free rider problem?
People who do not pay for a public good still receive benefits from it, so the private sector will under provide the good as they cannot make a profit.
29
How can advertising lead to information gaps?
It's designed to change attitudes of the consumers to encourage them to buy the good. It could cause them to think the benefits are greater than they actually are.
30
Why do information gaps lead to market failure?
There is a misallocation of resources because people do not buy things that maximise their welfare. Economic agents are unable to make rational decisions due to the information gap.
31
What is the principle-agent problem?
When the goals of the principle (the person who gains from the decision) are different from the agents (those making deicisons on behalf of the principle).
Example: Education. Child is principle, and the agents are parents/govts. The child has imperfect information as they do not see the benefits of education and so therefore will devote too few resources to education, if allowed.
32
Advantages of indirect taxation to address externalities (2)
Internalises the externality - the market now produces at the social optimum position and social welfare is maximised.
It raises govt revenue, which could be used to solve the externality in other ways such as through education.
33
Disadvantages of indirect taxation to address externalities (6)
It is difficult to know the size of the externality, and so it is difficult to target the tax - the govt suffers from imperfect information when setting the tax.
There could be conflict between the govt goal of raising revenue and solving the externality, which makes setting the tax difficult.
It could lead to the creation of a black market.
If demand for the good is inelastic, then the tax will be ineffective at reducing output.
Taxes are politically unpopular, and so govts may be reluctant to introduce them.
They are regressive, meaning that the poor spend a larger proportion of their income on indirect taxes than the rich do.
34
Advantages of subsidies to address externalities (2)
Society reaches the social optimum output and welfare is maximised
They can have other positive impacts, such as encouraging small businesses, bringing about equality and encouraging exports.
35
Disadvantages of subsidies to address externalities (4)
The govt has to spend a lot of money, high opportunity cost.
As with taxes, theya re difficult to target since the exact size of the externality is unknown.
Subsidies can cause producers to become inefficient, especially if they are in place for a long time.
Once introduced, subsidies are difficult to remove.
36
Advantages of minimum/maximum prices (2)
They can be set where MSB=MSC, so allow for some consideration of externalities, and so help to increase social welfare.
A minimum price will ensure that goods are affrodable, whilst a maximum price will ensure that producers get a fair price. Both of these are able to reduce poverty and can increase equity/equality.
37
Disadvantages of minimum/maximum prices (3)
There is a distortion of price signals and this causes excess supply/demand.
It is difficult for the govt to know where to set the prices, because of the difficulty of knowing the size of externalities and because it will have implications on the size of excess supply/demand.
Both can lead to the creation of black markets. Maximum prices may also lead to illegal bribes or discriminatory policies in allocating goods.
38
What is a buffer stock scheme?
Where both minimum and maximum prices are implemented at the same time. This is often the case with agricultural products whose prices fluctuate massively.
The govt will buy up excess supply when the equilibrium price is below minimum price and vice versa to sell.
This helps prevent price fluctuation and provides stability but causes inefficiency and places a large cost on the government. Often, prices remain below the minimum price since farmer produce as much as they can as they know the govt will buy whatever they produce at the minimum price.
39
Advantages of pollution permits (4)
Since the govt caps the number of permits, it is guaranteed that pollution will fall to the targets set by the govt, maximising social welfare.
The govt can raise revenue by selling permits and by fining firms who exceed their limits.
This encourages companies to use and invest in green technology.
Firms are able to make their own decisions about whether to cut pollution or buy more permits. This helps encourage efficiency.
40
Disadvantages of pollution permits (4)
This can be expensive to monitor and police, but it will only work if it is monitored well.
The govt needs to impose fines that are large enough to ensure firms follow the regulation.
It will raise costs for businesses, and it is likely that these higher costs will be passed onto consumers.
It may be difficult to know how many permits the govt should allow.
41
Advantages of state provision of public goods (4)
This corrects market failure by providing important goods which would otherwise not be provided. It will lead to improved social welfare.
It can help to bring about equality, by ensuring everyone has access to basic goods.
There will be benefits of the goods themselves, like for healthcare, helping the workforce, boosting economic growth?
By using competitive tenders, the government can ensure efficiency.
42
Disadvantages of state provision of goods (4)
This is expensive and represents a high opportunity cost for the govt.
The govt may produce the wrong combination of goods as consumers cannot indicate their preferences. Democracy aims to reduce this problem.
The govt may be inefficient at production since they have no incentive to cut costs.
Govt officials may suffer from corruption and conflicting objectives.
43
Advantages of government provision of information (2)
This helps consumers to act rationally, which allows the market to work properly.
It is best if the government uses this alongside other policies. For example, it can make demand more elastic in the long run and so help indirect taxes to become more effective at reducing output.
44
Disadvantages of provision of information (3)
This can be expensive for the govt to do, incurring an opportunity cost.
The government may have imperfect info themselves.
Consumers may not listen to the information provided due to irrational behaviour.
45
Advantages of government regulation (1)
This can ensure consideration of externalities, prevent exploitation of consumers and keep consumers fully informed. This will help to overcome market failure and maximise social welfare.
46
Disadvantages of regulation (5)
Laws may be expensive for the govt to monitor.
They don't account for the different costs of following the laws for different companies.
The govt can suffer from regulatory capture.
Firms may pass on costs to the consumer in the form of higher prices.
Excessive regulation may reduce competition in a market and efficiency, by increasing bureaucracy and reducing innovation.
47
What is Government Failure?
When govt intervention in the market leads to a net welfare loss and a misallocation of resources.
The total social costs arising from the intervention are greater than the social benefit.
48
What can cause government failure? (4)
Distortion of price signals (can keep inefficient companies in business, max/min prices lead to excesses, price mechanism allocates resource to their best use/where consumers want).
Unintended consequences (consumers and producers may react to new policies in unexpected ways and so the policy doesn't have the effect it should).
Excessive administration costs (afterwards, social costs may exceed social benefits once admin costs are taken into account)
Information gaps
49
Advantages of Organic growth (2)
Integration is expensive, time-consuming and high risk, with evidence suggesting that the long-term share price of the company falls following integration.
The firm is able to keep control over their business
50
Disadvantages of Organic growth (3)
Sometimes another firm has a market or an asset which the company would be unable to gain through organic growth. For example, integration would allow a European company expand into the Asian market which it has no expertise in.
Organic growth may be too slow for directors who wish to maximise their salaries.
It will be more difficult for firms to get new ideas.
51
Advantages of vertical integration (4)
There is increased potential for profit as the firm takes the potential profit from a larger part of the chain of production.
There will be less risks as suppliers do not have to worry about buyers not buying their goods and buyers do not have to worry about suppliers not supplying the goods.
With backward integrationm businesses can control the quality of supplies and ensure delivery is reliable, and prices will not be extreme.
Forward integration secures retail outlets and can restrict access to these outlets for competitors.
52
Disadvantages of vertical integration (1)
Firms may have no expertise in the industry they took over.
For example, a car manufacturing company would have deep knowledge of car manufacturing, but little knowledge of selling cars and vice versa.
53
Advantages of horizontal integration (3)
This helps to reduce competition as a competitor is taken out and increases market share, giving firms more power to influence markets.
Firms will be able to specialise and rationalise, reducing the areas of the businesses whch are duplicated.
The business is able to grow in a market where it already has expertise, more likely to be successful.
54
Disadvantages of horizontal integration (1)
Will increase risk for the business as if that particular market fails, they have nothing to fall back on. They are placing their all eggs in one basket.
55
Advantages of conglomerate integration (3)
Useful for firms where there may be no room for growth in the present market.
Range of products reduces risk for firms if a whole industry fails.
It will make it easier for each individual part of the business to expand than if they were on their own as finance can be easily obtained and mergers can be transferred from company to company within the firm.
56
Disadvantages of conglomerate integration (1)
Firms are going into markets in which they have no expertise, which can be damaging for the business.
57
Constraints of business growth (4)
Size of the market (not all businesses can mass produce and consumers will buy it all, niche markets)
Access to finance (retained profits and loans)
Owner objectives (some owners may be happy with their current profits and don't want to take extra risks)
Regulation
58
William Baumol on revenue maximisation
He suggested managers are most interested in their level of revenue since this is what their salary depended on.
Even when their salary is not directly connected to sales revenue, they knew that a growth in revenue was always likely to be a positive for the business. It increases their prestige and is used as a justification to shareholders for managerial rewards.
A fall in revenue would be negative as it would not only reduce their salary but could signal the start of a downward spiral for the company. It could lead to a fall in staff and financial institutions may be worried and less willing to lend money.
As a result, many firms may aim to revenue maximise as long as they provide some profit for the owners.
59
At what point of the cost/revenue graph is revenue maximised?
MR=0
60
What did Robin Marris say about sales maximisation?
Managers aim to maximise the growth of their company above any other objective. This is because their salary may be linked to the size of the company.
It is often easier for people to judge the level of growth achieved rather than the level of profit. This will increase the prestige of the business.
Growth will also increase market share, and may push other firms out of business. It will enable a firm to have more market power and more power over prices.
This tends to be a short-term strategy, and in the long term firms are more likely to profit maximise.
61
At what point of the cost/revenue curve do you sales maximise?
AC=AR - the highest level of sales possible without making a loss.
They want to ensure sufficient returns to keep the owners happy, so will aim for normal profits.
62
What is satisficing?
Managers will make enough profit to keep owners happy whilst following other objectives and not profit maximising.
These 'other' objectives are likely to be their own benefits. for example, they may increase their own salaries, which increases costs and therefore decreases profit.
63
Managerial utility maximisation
Oliver Williamson said that managers will make decisions to maximise their own satisfaction. This will be dependent on their salary, the number of staff they control, their power over decision making and the other benefits they receive.
64
Definition + How to calculate marginal cost
The extra cost of producing one extra unit of a good
Change in total cost / Change in output
65
Diminishing marginal productivity or Law of Diminishing Returns
If a factor of production is fixed, this will affect the business if it decides to expand.
More workers can be added, and this will see an increase in production as machinery is used more efficiently.
However, it'll get to the point where adding labour has less of an impact on the amount produced as they get in the way and have no machines to use.
66
Economies of scale relates to the short-run or the long-run?
Long-run
67
Why is the LRAC an 'envelope' for all associated SRAC curves?
The LRAC is either equal to or below the relevant SRAC curve.
The firm may initially be set up to produce a certain amount a day and have enough machinery to do so effectively.
They may become popular and need to produce more than that amount, and in the short run this will cause a rise in SRAC due to the law of diminishing marginal returns as some factors of production are fixed.
In the long run, all factors of production become variable and so the SRAC curve can be shifted, with the new SRAC curve being lower due to economies of scale.
68
What is the long run average cost curve?
It's a boundary representing the minimum level of average costs attainable at any given level of output.
69
Minimum efficient scale
The minimum level of output needed for a business to fully exploit economies of scale, the lowest point of the LRAC curve.
70
Name all 5 internal economies of scale
Technical economies (specialisation, increased dimensions, indivisibility of capital, research and development)
Financial economies (more assets so more security, interest rates lower due to lower risk)
Risk bearing economies (operation in multiple markets, as if that area fails, their entire business doesn't collapse)
Managerial economies (large companies can afford to appoint specialist managers in every field, they have greater knowledge, better performance)
Marketing and purchasing economies (buying in bulk, specialised buyers and sellers, distribution with preferential rates from transport companies)
71
What is an external economy of scale?
An advantage which arises from the growth of the industry within the firm operates, independent to the firm itself, causing the LRAC curve to shift downwards.
72
2 examples of external economies of scale
Labour - People are more likely to move to an area which has a lot of successful firms in the industry they want, reducing cost and time taken to recruit. Local education/training may also set up in the area, and firms will be able to hire staff trained by other businesses. This all works out cheaper and more efficient.
Support services - Businesses who provide products or services for large businesses will naturally move to the area where those businesses are based, which reduces transport cost/time delays for the business.
73
Name 5 diseconomies of scale
Workers (motivation down if work goes unnoticed, can lose their sense of belonging in large firm)
Geography (larger distances to transport products)
Change (it takes much longer for a large firm to respond to a change)
Prices of materials (demand increases, but this could also cause prices to rise and therefore increase production costs)
Management (coordination and control is more difficult globally than locally in producing a car for example, and communication can be slow and can lose accuracy as it passes through many people)
74
Conditions for profit maximisation
When TR and TC are furthest apart (with TR above)
OR
When MC=MR
75
Conditions for normal profit
AC=AR
OR
TC=TR
76
Conditions for Shut-down points
If AVCAR, then firms should leave the industry immediately.
77
4 Efficiencies defined with graph
Allocative: P=MC, point of social welfare maximisation.
Productive: MC=AC or lowest point of AC, products are produced at their lowest average cost.
Dynamic: Resources are allocated efficiently over time, concerned with investment bringing innovation. SNP profits.
X-Inefficiency: Not producing on the lowest AC curve. Organisational slack.
78
Characteristics of perfect competition
Homogenous products
All firms have access to factors of production
Large number of buyers and sellers
Free entry and exit from the market
Perfectly elastic demand curve
Perfect knowledge/information for buyers/sellers
Profit maximisation is assumed as key objective - and consumers assumed to be utility maximisers
79
Efficiencies for perfect competition
Productively efficient
Not dynamic efficient - no supernormal profits
Allocatively efficient
80
Characteristics of monopolistic competition
Large number of buyers and sellers
Low barriers to entry/exit
Producers have some control over prices
Product differentiation
81
Examples of monopolistic competition
Shoe repairs/key makers
Taxi/Minibus companies
Sandwich bars/coffee stores
Hairdressers
Dry cleaners/laundrettes
Bars/nightclubs
82
Evaluation of perfect competition (6)
Most firms have some price-setting power - they are price makers not price takers!
Dominance in real world markets of differentiated/branded products.
Highly complex products, there are always information gaps facing consumers.
Impossible to avoid search costs even with the spread of digital/web technology.
Patents, control of intellectual property, control of key inputs are all ignored by the competitive model.
Rare for entry and exit in an industry to be costless.
83
Why does the demand curve eventually shift until it's tangetial with the AC curve in monopolistic competition?
Consumers opt to buy products offered by new or alternative companies.
84
Efficiencies in monopolistic competition
Not allocatiely efficient - prices are above marginal cost
Not productively efficient - AC does not equal MC
Dynamically efficient - differentiated products, SNP in the short run.
85
Draw a kinked demand curve
Look on 3.4.4 Physicsandmathstutor
86
Characteristics of an oligopoly
Best defined by the actual behaviour of firms
A market dominated by a few large firms
High market concentration ratio
Each firm supplies branded products
Barriers to entry and exit
Interdependent strategic decisions by firms
87
Collusion works best when...(6)
Industry regulators are weak/ineffective
Penalties for collusion are low
Participating firms have a high percentage of total sales, easier to control market supply
Firms trust each other, communicate well and have similar strategic objectives
Industry products are standardised and output is easily measurable
Brands are strong so that consumers will not switch demand when collusion raises price
88
What is the aim of collusive behaviour?
Aim of maximising industry profits
Reduces uncertainty firms face and reduces the fear of engaging in competitive price cutting or advertising
89
What's the difference between overt and tacit collusion?
Overt is a direct, formal agreement, while tacit is indirect and no agreement is reached.
90
Costs of collusive behaviour
Damages consumer welfare (prices, allocative inefficiency, low income families worse off)
Absence of competition hits efficiency (x-inefficiencies, incentives with dynamic inefficiency, output quotas penalising firms expanding)
Harder for new businesses to enter the market - reduces market contestability.
91
Potential benefits from collusion
General industry standards can bring social benefits (pharmaceutical research, car safety technology)
Fairer prices for producer cooperatives in LEDCs (could reduce rates of extreme income poverty)
Profits (capital investment projects, R&D, higher wages for employees means increased consumption)
92
What is the dominant strategy?
No matter what the other firm does, you work in your best interests. Game theory.
93
What is the Nash Equilibrium?
In game theory:
Where neither playeris able to improve their position and has optimised their outcome based on the other players expected decision.
94
3 Types of price competition
Price wars
Predatory pricing
Limit pricing
95
What is limit pricing?
Firms will set the limit price to prevent new entrants, high enough for them to make at least normal profit but low enough to discourage any other firm from entering the market.
The greater the barriers to entry, the higher the limit price.
96
6 types of Non -price competition
Advertising
Loyalty cards
Branding
Quality
Customer service
Product development
97
Efficiencies for oligopoly
Not productively efficient
Not allocatively efficient
Dynamically efficient (likely)
98
Characteristics of a monopoly
One dominant firm in the industry
Barriers to entry prevent new firms from entering the market
The monopolist is a short-run profit maximiser
99
What percentage of the market does a monopoly need to have?
At least 25% of the market
100
What is price discrimination?
When a business charges different consumers different prices for the same product
101
1st degree price discrimination
Charging different prices for each individual unit purchased
Examples include bartering at flea markets
102
2nd degree price discrimination
Prices varying by quantity sold (bulk purchase discounts)
103
3rd degree price discrimination
Charging different prices to groups of consumers segmented by price elasticity of demand, income, age, sex
104
Conditions for Price Discrimination
Firms must have sufficient monopoly (market) power
Identifying different market segments (like groups of consumers with different elasticities of demand)
Ability to separate different groups (requires info on purchasing behaviour of consumers)
Ability to prevent re-sale (arbitrage)
105
The welfare case against price targeting
Exploitation of the consumer - the majority of consumers still pay more than the marginal cost.
Extraction of consumer surplus turned into higher producer surplus/supernormal profit
Possible use of discrimination as a limit pricing tactic/a barrier to entry to rival firms.
If successful, reinforces the monopoly power/dominance of existing firms.
106
Arguments in support of price targeting
Some customers may pay less, maybe for activities that bring about social benefits.
Making better use of spare capacity - this can have environmental benefits - less waste etc.
It brings new consumers into the market - who would otherwise be excluded by a 'normal' higher price.
Use of monopoly profit for research - this is a stimulus to innovation/dynamic efficiency gains.
107
What is a natural monopoly?
Economies of scale are so large that even a single producer is not able to fully exploit all of them.
It's more efficient for there to be a monopoly than many sellers.
108
Give an example of a natural monopoly
Railways:
Very high fixed costs with route creation.
109
Are natural monopolies efficient?
They are neither allocative or productively efficient.
110
Benefits for firms on monopolies (4)
Monopolists have the potential to make huge profits for their shareholders through profit maximisation.
The existence of supernormal profits means firms will have finance for investments and will be able to build up reserves to overcome short term difficulties.
Firms with monopoly power will be able to compete against large overseas organisations.
Large firms will be able to maximise economies of scale, reducing costs and increasing profit further.
111
Costs for firms on monopolies
Firms may not always choose to profit maximise due to X-inefficiencies, sales or revenue maximising, profit satisficing or contestability leading to limit pricing.
In the long run, the lack of competition may mean that firms become complacent and so they may not make maximum profits.
112
How are employees affected by monopolies?
Monopolists produce at lower outputs, so will employ fewer workers.
However, the inefficiency of the monopoly may mean employees receive higher wages, particularly directors and senior managers. Profit satisficing or sales/revenue maximising may mean output is higher and so more employees are employed.
113
How are suppliers affected by monopolies?
Depends if the monopolist is a monopsonist. If it is, then it will reduce the suppliers' profits with its bargaining power.
114
How are consumers affected by monopolies?
GOOD:
Natural monopolies mean that consumers tend to be better off than if there was competition.
When firms enjoy economies of scale, they become more efficient, and customers enjoy a higher surplus, lower prices.
Monopolists may produce an increased range of goods or services due to cross subsidisation.
OK-ISH:
The use of price discrimination will allow for survival of a product or service, and benefits some customers whilst is negative for others.
BAD:
Consumers may pay higher prices and see a poorer quality service, due to a lack of competition.
Less consumer choice, as there's only one firm producing the good.
115
Is a monopoly efficient?
Not productively efficient
Not allocative efficient
Can be dynamically efficient, but there is no incentive to invest with little competition.
X-inefficient due to lack of competition possible
116
Monopsony characteristics
Only one buyer in the market.
They will pay their suppliers the lowest price possible to minimise their costs and make the most of their position as the only buyer.
Similar characteristics to monopoly, but backwards.
117
Effect of monopsony on firms (1-2)
They gain higher profits by being able to buy at lower prices, increasing funding for R&D and leading to more return for shareholders.
They achieve purchasing economies of scale, which will lower costs and increase profits.
118
Effect of monopsony on consumers
Customers may gain from lower prices as reduced costs are passed on.
It could lead to a fall in supply, since the business buys fewer inputs. The extent to which supply to customers will fall will depend on price elasticity of supply in the market of which the monopsonist is a buyer.
May act as a counter-weight to monopolists.
There may be a fall in quality as prices are driven down.
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Effect of monopsony on employees
Higher wages as higher profits
The supplier will sell less goods and employ less people, while the monopsonist may employ fewer, more or the same amount of people since they have less inputs to use for production.
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Effect of monopsony on suppliers
Suppliers will receive lower prices, some suppliers may leave the market
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Characteristics of contestable markets
Perfect knowledge for firms to enter/exit the market.
This is freedom of entry and exit (relative absence of sunk costs)
There will be low product loyalty
We assume firms are short run profit maximisers and do not collude with each other
Only normal profits can be earned in the long run
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Likely efficiencies in a contestable market
Productive efficiency
Allocative efficiency
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Types of barrier to entry and exit
Legal barriers (for example, patents and exclusive rights to production)
Marketing barriers (high advertising means more loyalty, demand becomes inelastic)
The pricing decisions of incumbent firms (predatory pricing, limit pricing)
Some industries have high capital start up costs. Sunk costs may also be high.
Economies of scale
Barriers to exit like the cost of writing off assets, pay leases and making workers redundant.
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What is a sunk cost?
A sunk cost is a fixed cost that a business cannot recover if it leaves the industry.
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Give examples of sunk costs
Capital being sold secondhand
Property/capital renting
Advertising
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Why increasing contestability has been occuring
The recession has meant that entrepreneurs do not accept the existing market structure is fixed.
The deregulation of markets has allowed a reduction of some barriers to entry in some industries, such as telecommunications and postal services. Moreover, competition policy has meant firms can no longer use predatory pricing and cartels.
European single market has opened up new markets for firms and so these firms can enter into the market. Globalisation also means foreign firms can enter domestic markets.
Changes in technology reducing entry costs as capital is more mobile.
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Derived demand
Demand for labour is derived from demand for the product the labour produces.
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Factors influencing demand for labour
Wage rates
Demand for the product
Substitutes to labour/technology
Productivity of workers
Wages in other countries
Non-labour costs like redundancy pay/health insurance/national insurance
Regulation, can make it more costly to hire workers
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What is the price elasticity of demand for labour?
The responsiveness of the quantity demanded of labour to the wage rate
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Factors affecting PED of labour (5)
Directly correlated to the price elasticity of demand for the product. If the good is elastic, then a rise in wages and hence a rise in price for consumers will have a large impact on quantity demanded.
Proportion of wages to the total cost of production
Substitutes - if many, demand is elastic.
Skill of jobs - high skill jobs are more inelastic as the labour cannot be easily replaced
Time - in the long run, hiring workers may be expensive, so elastic.
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Factors influencing supply of labour (7)
Wages
Population and distribution of age
Non-monetary benefits (job satisfaction, location, free private healthcare, flexibility of work, opportunities for promotion)
Education/training/qualification (more educated workers means higher supply)
Trade unions/barriers to entry (degree barriers for better quality)
Wages and conditions of other jobs
Legislation (government rules can affect supply of labour, like school leaving age and retirement age)
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What is the positive income effect?
When higher wages cause people to want to work more hours in order to reach a target/desired income.
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What is the negative income effect?
When a target income has been reached and people prefer spending more time on leisure rather than earning more income.
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What is the substitution effect?
A rise in the real wage increases the opportunity cost of leisure.
Therefore, higher wages will always cause people to be incentivised to work longer hours via the substitution effect.
But the income effect may work in the opposite direction.
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Types of labour immobility
Occupational immobility - lack of transferable skills when moving jobs, difficult for short term
Geographical immobility
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Determinants of labour elasticity of supply
Level of qualifications and training (lower skilled means supply is elastic)
Availability of suitable labour in other industries (more elastic as a consequence)
Time period (short-run is inelastic)
Vocational nature of work (in vocational jobs like nursing, people are less sensitive to changes in wages, inelastic)
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Perfect competition in labour market characteristics
Labour is homogenous
Perfect knowledge in the labour market
Perfect mobility of labour
All workers and employers are price takers
No barriers to wage adjustment (eg wages falling)
Firms aim to maximise profit and minimise costs of production
Workers aim to maximise wages
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Monopsony in the labour market (imperfectly competitive market) examples
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NHS
Armed forces
Big Out-Sourcing Businesses
Amazon
Supermarkets
Local councils
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What is the purpose of a trade union?
Using collective bargaining with employers to protect their members:
Protecting and improving the real living standards/real wages of their members
Protecting workers against unfair dismissal (employment rights)
Promoting improvements in working conditions
Promoting better workplace training and education
Protection of pension rights for union members
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What is a bilateral monopoly in a labour market?
When there is a monopoly and monopsony in a labour market.
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Draw the diagram for the kinked supply curve for a bilateral monopoly and competitive market.
Check iPad 3.5
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Labour market issues
Skills shortages
Young workers (more likely to be unemployed as newer workers are let go)
Retirement (pensioners makeup over 50% of welfare spending)
Wage inequality (raising questions over relative poverty)
Zero-hour contracts (little notice for people to work, don't know how much they're getting paid)
The 'Gig economy' (self-employment and short term contracts - concerns over the rights of these workers and pay)
Migration (wages?)
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Arguments for national minimum wage
Reduces poverty
Can reduce male/female wage differentials (women more likely to take up lower paid jobs)
May make employees less likely to leave their job
More motivated workforce (by assumption everyone is motivated by money)
Prevents the unemployment trap
Ensures people are not exploited for low wages
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Arguments against national minimum wage
Potential loss of jobs in the industry
Raises costs for the companies, may increase prices
Wage spiral (high paid workers may ask for a rise too to maintain the gap)
No consideration of regional differences
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Ways for govt to tackle geographical mobility of labour (5)
Improve the supply of houses, and reduce the price of properties making it easier for people to move.
Improve transport links
National advertising so people know about jobs all over the country
Govt subsidies on houses, taxes where there are labour shortages
Move public agencies out of London, balances excess demand/supply for labour in two different areas.
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4 ways to improve occupational mobility of labour
Vocational training can be increased
Encouraging further study, such as university or technical courses at college
They could encourage greater spending on training within work
Education could be targeted at improving skills shortages and helping with job applications, for example interview skills.
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What is the purpose of the CMA?
They work to promote competition for the benefit of consumers and investigate mergers and breaches of UK and EU competition law, enforce consumer protection law and bring criminal cases against individuals who particiapte in cartels.
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Explain how price regulation works
Regulators force monopolists to charge a price below profit maximising price, sometimes by RPI-X+K.
Can use RPI-X+K, where K represents the level of investment.
Gives an incentive for firms to be as efficient as possible.
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Advantages of price caps
Improved allocative efficiency
Lower prices
Firms can be more productively efficient
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Disadvantages of price caps (RPI-X + K)
The firm could easily lie about their efficiency gains.
It's difficult to know what the expected efficiency gains of the firms are.
Difficulty with knowing the exact allocative efficient output
Could decrease dynamic efficiency because firms can't maximise profit
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RPI-X+K what does it stand for?
X is the expected efficiency gains of the firms.
K represents the level of investment
RPI is the rate of inflation
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Advantages of profit caps
May push firms to invest into more capital
Lower prices
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Disadvantages of profit caps
Industry regulators need good information about the industry to implement profit regulations
Firms can employ too much capital to increase their profits
Reduction costs will not improve the firm's situation - there is little incentive to be efficient.
Can encourage firms to take less risky moves (pharmaceuticals)
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Advantages of quality standards
Better quality goods
Less profits, less monopoly power maybe?
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Disadvantage of quality standards
Needs political will and understanding to introduce
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Advantages of performance targets
Flexible - prices, quality, consumer choice and costs of production can be set as a performance target.
Increase in the welfare of consumers.
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Disadvantages of performance targets
Firms will resist the introduction of targets, so needs political will and understanding.
Firms meeting targets without actually improving? Train timetables can be changed to prevent trains from arriving late.
Firms may fail to meet their performance targets, maybe the fines aren't large enough.
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Name 4 types of regulation for monopolists that aren't quality standards, performance targets, profit or price caps.
Windfall taxes (taxes imposed after the event has occured, but firms could underreport their profits eventually)
Breaking up the monopolist (could lead to loss of economies of scale)
Subsidies
Self-regulation (weak, however)
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Ways the government can promote SMEs
Improve access to finance, subsidy?
Reduce barriers to entry
Giving training or entrepreunal grants
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Advantages of promotion of small businesses
Improves innovation
Could drive down prices
Incumbent firms will no longer be able to be X-inefficient
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Disadvantages of promotion of small businesses
May cut into the government's spending plans - may come at the expense of other public sector spending.
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Deregulation advantages
Could increase allocative efficiency, can improve economic welfare
Perhaps lower prices
Can remove 'red tape', excessive regulation limiting the quantity of output that a firm produces (like environmental laws, corporation tax)
Revenue raised for the government
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Deregulation disadvantages
Less consideration for the welfare of society
Poor business behaviour, poor quality of goods
Missing markets
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What is competitive tendering
Goods can be produced by the private sector and then bought by the public sector.
The govt could also contract out the provision of a good or service to private companies - private firms could be employed to run hospitals (PFI).
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Advantages of competitive tendering
Competition can be introduced into the market, somewhat monopsonist
Minimises costs for the govt and ensure efficiency - private sector will have more experience, better management?
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Disadvantages of competitive tendering
Collecting bids is costly and time-consuming.
The private sector aims to maximise profit, not welfare, so reduction in quality?
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Examples of govt intervention to protect suppliers and employees
Restrictions on monopsony power - monopsonists exploit suppliers by reducing prices. Can get regulator to make it fairer, fines possible, minimum prices possible.
Workers' rights - Health and safety laws, employment contracts, redundancy processes, maximum work hours, rights to trade union. Employment practice.
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Advantages of privatisation (6)
Competition up, x-inefficiency down.
Lower prices.
Higher quality to stay competitive.
Managers become more accountable, since they know poor performance will mean a fall in share prices
Reduces govt interference - investment with more certainty rather than worrying about elections
Utilities into the hands of people - they can own shares. Workers will be more motivated because hard-work = high dividends.
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Disadvantages of privatisation
When there are natural monopolies, it may be better for the govt to own it.
Utility industries are better if the govt owns it.
There are problems over externalities and inequality.
Negatively affecting the Public Sector Net Cash Requirement - firms are under-priced when they are sold, govt doesn't receive profit.
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Advantages of nationalisation
Investment is needed for long term, but a private company investment is only short term, shareholders don't see long term benefits.
Better for monopolies to be run by the state - won't abuse their position.
The govt will consider externalities.
The govt will guarantee a minimum level of service for people who suffer the risk of being cut off from the service, due to the lack of potential profit from providing for them.
It could be dangerous to allow key strategic industries to fall into private hands, potential disastrous effects.
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Disadvantages of nationalisation (3)
X-inefficiency could cause higher prices for consumers, especially since the industry will become a monopoly.
Nationalised industries suffer from the principal-agent problem and moral hazard - managers know their losses are covered by govt.
They will be influenced by the govt's decision and the govt may not have enough money to invest.
