Steedsy Theme 3 Flashcards
Define marginal revenue product of labour
The extra revenue generated when an additional worker is employed
How do you calculate marginal revenue product
Output x price
At what point is it profit maximisation on a labour market diagram
Marginal cost = marginal revenue
Always employ at mc=mr
Evaluate marginal revenue product of labour
Problems:
Measuring labour efficiency can be difficult
Harder to measure productivity in consultancy and education
Collaborative work is difficult to measure individual workers
What are the factors influencing the demand for labour?
The wage rate -Higher wage means lower demand for labour
The demand for the products
Productivity of labour, more productive, greater demand
Profitability of firms can afford to get more workers
Substitutes, machinery replaces demand for workers
The number of ‘buyers’ of labour
Why is labour supply and demand so wage elastic for low skilled and low paid jobs
Labour supply is highly elastic as a small change in wage would cause a large increase in workers offering themselves for work
Labour demand is highly elastic because a small change in wage will cause a large decrease in demand, because there are so many employed, so it would cost a lot more for the business
Why is labour supply and demand so inelastic for high paid occupations?
Labour supply is inelastic due to a smaller amount of people who can work it as requires experience and training as it’s a high skilled job
Labour demand is inelastic as they are needed as they are valued highly so deserve the pay
Define the supply of labour
The labour supply is defined as the number of workers, willing and able to work multiplied by the hours they are willing and able to work
What are factors influencing the supply of labour?
Wage rate
The size of the working population
Migration
Peoples preferences for work
Net advantages of work e.g holiday entitlement, job security, promotion opportunities
Working leisure
Barriers to entry - strict requirements to qualifications will make labour supply less
Labour subsidies
What is the cause of the backward bending supply curve?
A situation in which as real wages increase beyond a certain level, people will substitute leisure for paid work and so higher wages lead to a decrease in the labour supply and so less labour time being offered for sale.
What is the substitution effect? (to do with the backward, bending supply curve.)
A higher wage makes work more attractive than leisure, as wage goes up you work longer hours
What is the income effect? (to do with a backward, bending supply curve)
A higher wage means workers can achieve a target income by working fewer hours
-ve effect : as wage goes up, you work less as you must meet you target income
+ve effect: as wage goes up, income goes up
Benefits of minimum wage
Reduce poverty
Increases productivity
Increased investment
Increase the incentives to accept a job
Problems of the minimum wage
More unemployment
Reduces investment by firms as higher costs
Cost push inflation
What is a monopsony in the labour market?
A monopoly occurs when a firm has market power in employing factors of production. A monopsony means there is one buyer and many sellers.
What happens when you apply a minimum wage to a monopsony?
In a monopsony, a minimum wage can increase wages without causing unemployment. It also won’t increase employment as the wage is already so low
What are the two main factors influencing the mobility of labour?
Geographical mobility - how easy it is for a worker to move between different regions and countries to seek new work
Occupational mobility - how easy it is, for a worker to move from one occupation to another.
Evaluate the impact of geographical mobility
Depends on family, education, house prices, cost of living, immigration policy
Factors that impact occupational mobility
Training
Skill level / qualifications
Experience
What has the government done to reduce geographic immobility?
Support transport links
Working from home
Housing subsidies
Reducing construction for visas
What has the government done to reduce occupational immobility?
Training programs
Laws in education (education till you’re 18)
Apprenticeships and universities
Labour market regulations
What is the concentration ratio?
The percentage of market share taken up by the largest firms
What is subnormal profit?
This is profit which is less than normal- profit < average costs
What is supernormal profit?
Profit achieved in excess of normal profit
What are the characteristics of perfect competition?
Large number of firms
Products are identical
Freedom of entry and exit of the industry
Firms have no control over the price they charge
Each producer has a lower output
Consumers and producers have perfect knowledge about the market
How does wheat farming illustrate perfect competition
- one producer cannot influence the price, many sellers, homogenous products. However there will be a difference in quality so not totally perfect competition
- many producers (200k farms in the uk)
Why is monopolistic competition good and bad
+ innovation
+economies of scale
- Low price
- Limited output
- No strive for quality
- eventually diseconomies of scale
Characteristics of a pure monopoly
Firms are price setters (control over price)
Huge barriers to entry and exit
One seller, many buyers
Not homogenous products
Imperfect information
What are the three ways, monopolies form?
Merger or take over
Organic growth
Through acquired patent
Why is Apple regarded as a monopoly?
49% market share
Huge barriers to entry : substantial capital, infrastructure costs, strategic partnerships, compliance with industry regulations.
Deals with device makers so costs are lower which makes it harder for competitors
Not homogeneous products as there is a difference in camera quality
Price discrimination, so they are price setters
Why is Google an example of monopolistic competition?
90% market share
Huge barriers to entry : technological infrastructure, huge start-up costs
2 billion users, one seller many buyers
Not homogeneous as they have different features e.g image search
Price setters : freemium pricing (free, but you have to pay if you want additional services)
What is productive efficiency and where is it on a monopolistic competition diagram
Producing the largest number of products and services based on the resources available (at the bottom of the AC curve) at the lowest cost
What is allocative efficiency and where would you find it on the monopoly diagram?
Allocative efficiency is a characteristic of a market that performs efficiently by producing the number of goods and services that most closely resemble the demand for those goods and services.
When resources are distributed optimally.
It is when price = MC (go MC = MR first then up to the MC curve). If not operating at this point on the graph then they are inefficient
What is dynamic efficiency?
Involves adapting and innovating to maintain efficiency in the face of changing market conditions, consumer preferences and technology.
It will be dynamically efficient if the AC curve moves down
What is X inefficiency?
A firms inability to fully utilise its resources, resulting in higher production costs than required.
What is X inefficiency?
A firms inability to fully utilise its resources, resulting in higher production costs than required. Higher costs so higher prices
What efficiencies do monopolies have and don’t have
X inefficient
Productively inefficient
Allocatively inefficient
Dynamically efficient
Diseconomies of scale
What is price discrimination?
Involves charging different prices to different groups for the same good
What are the requirements for price discrimination to work?
Markets must have:
Different elasticities
Must be kept separate from each other
No resale
Must be an imperfect market
Advantages to the producer of price discrimination
Greater revenue and greater profits
Greater investment due to greater revenue
What are the disadvantages to the producer of price discrimination?
Some have a higher price causing reduction in consumer surplus
Those who pay for the highest prices may not be able to afford it
What is an oligopoly?
A large number of firms in the industry, but the industry is dominated by a small number ofvery large producers
Characteristics of oligopolies
Price setters -stable prices
Similarity in price
Compete on nonprice characteristics e.g quality
Dominated by a few firms
Interdependence of firms
Good’s usually highly differentiated
High barriers to entry
What are the barriers to entry for oligopolies?
Economies of scale
Brand loyalty
Patent protection
Expertise and reputation
Explain how broadband providers are an example of an oligopoly
- Few dominant firms - 4 firm concentration ration is 80%
- Interdependence - similar pricing : virgin $24/m , sky $15/m
- barriers to entry - large economies of scale. Technological sunk costs
- non price competition - offers free subscriptions
What is monopolistic competition
NOT MONOPOLY COMP
This is an adaption of perfect competition
Characteristics of monopolistic competition
- Large number of firms in the industry
- May have some element of control over price, due to the fact they are able to differentiate their product in someway from their rivals - products are therefore close, but not perfect substitutes
- entry and exit from the industry is relatively easy - few barriers to entry and ext
- non price competition
- consumer and producer knowledge is imperfect
Why does the long run perfect competition the AR curve return to equilibrium
As more firms enter or leave the market, depending on whether it’s a loss or profit in the short run
Ways of differentiating products (non-price)
Quality
Product performance
Packaging
Demonstrate how craft beer manufacturers are an example of monopolistic competition
Many micro-firms in the UK - 2000
Slight differential in product - some citrus flavoured
Not too many barriers to entry, but can be higher start-up costs
No dominant producer
What are contestable markets?
A market in between oligopoly’s and monopolistic competition
Characteristics of contestable markets
- Firms behaviour influenced by the threat of new entrants to the industry
- no barriers to entry or exit
- No sunk costs
- Firms may deliberately limit profits to discourage new entrants - entry limit pricing
- Firms may attempt to erect artificial barriers to entry e.g lower prices until the competition decreases
What are the barriers to entry for contestable markets?
Overcapacity - provides opportunity to flood the market and drive down price in the event of a threat of entry
Aggressive, marketing and branding strategies to tighten up the market
Potential for predatory or destroyer pricing
Find ways of reducing costs and increasing efficiency to gain competitive advantage
What tactics are used by firms in contestable markets
Hit-and-run tactics - enter the industry take the profit and get out quickly- due to the freedom of entry and exit
Cream skimming - identifying parts of the market that are high in value and exploiting those markets
Define contestable market
Where an entrant has access to all production techniques available to new firms and entry decisions can be reversed without cost
Explain how the fast food industry is an example of a contestable market
- Many burger vans and small businesses
- low start up costs for burger vans so low barriers to entry
- artificial barriers - som sell as low as $2
- No sunk costs
- 3 firm concentration ratio is 40%, others is 55%, therefore not an oligopoly as others dominates
Eval: could be high barriers to entry as they still have to purchase the vans and high health regulations
How does a monopsony damage consumer and producer welfare? Supply side monopsony
- They use their buying power to squeeze lower prices out of suppliers - lower wages to workers
- consumers have less choice and higher prices in the long run. If farmers and other growers leave the industry.
- monopsony employers might use the power in the labour market to drive wages down
- notoriously slow payers which impacts cash flow for suppliers
What does the government do to try and control the impacts from a monopsony? Monopsony of suppliers
Price capping
Minimum wage
Regulation
May block mergers and takeovers
Can be inforced to pay suppliers quicker
What is minimum efficient scale?
This is where all the internal economies of scale have been fully exploited
Correspond to the lowest point on the long run, average cost curve
Example of wage differentials due to a difference in education
Medicine (8 years at uni) - £90k
bus drivier (1 year apprenticeship) - $30k
example of wage differential when you join at a level as opposed to after a degree
army officer ater a levels - $27k
after degree - $50k
examples of where pay is signifcantally different between skilled and unskilld jobs
neurosurgeon - $126k
waiter -$28k
research examples where pay is significantally differentbecuase of gender differences
female footballer - $47k a year
men - $3m a year
explain why house prices are different du to geographical differences. provide an example
London median = $520k
newcastle median = $200k
reasons:
cost of living
education standards
transort links
how has globalisation impacted UK wage rates
- cheaper labour over seas
- imports
- greater wage competition
How have the government used supply side policy to increase participation rates
- decreasing income tax
-increasing the mobility of labour - training programmes
What are participation rates
A measure of the percentage of the working population that is currently employed or actively seeking employment
What is the employment rate for each sector
Primary - 1%
Secondary - 18%
Tertiary - 81%
What is the participation rate of the uk
80%
In theory workers from the north could move to the south for better employment opportunities. Why dont they
Attatchment to their local communities
Expensive housing
