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Econ micro advanced information > Theme 3 > Flashcards

Theme 3 Flashcards

1
Q

What does the supply of labour curve show?

A

-Shows the ability and willingness of people to make themselves available at different wage rates.

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2
Q

What is a diagram that shows the supply of labour?

What is the shape and what is on the axis?

A

X-axis = hours worked
Y-axis = Wage rate
Flipped parabola with peak on right side.

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3
Q

What does the backward bending curve show?

A
  • That at lower wages the substitution effect is greater

- At higher wages the income effect is greater.

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4
Q

What are the factors influencing the supply of labour?

and what is the word for it?

A

LEPT WN

  • Legislation
  • Education
  • population and distribution of age
  • Trade unions.
  • Wages
  • Non-monetary benefits
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5
Q

Why is there market failure in the labour market?

A
  • Geographic immobility- When the worker cannot or will not move from an area of higher employment
  • Occupational mobility - When a worker in one industry is not able to move to another due to lack of transferable skills.
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6
Q

What does labour immobility cause?

A

-Causes excess demand in one and excess supply in another.

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7
Q

What is the elasticity of supply of labour impacted by?

A
  • If a high level of education is needed, people will not easily be able to take the job so supply will be inelastic.
  • Time, as the long run labour supply curve is more elastic as people have time to train up
  • How easily firms
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8
Q

What are the characteristics of contestable markets?

A

PPPF.

  • Perfect knowledge
  • Profit maximisers
  • Product loyalty low
  • Freedom of entry and exit.
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9
Q

What are the implications of contestable markets?

A

-Forces firms to be efficient:

  • Lower prices (allocative efficient)
  • Increases incentive to cut costs (x-efficient)
  • Increased incentive to respond to consumer preference.
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10
Q

What are the types of barriers?

A
  • Legal barriers- prevents firms for entering due to patents or rights to production.
  • Advertising- can introduce brand loyalty that can stop new firms from entering.
  • Pricing- limit pricing and predatory pricing can prevent firms from entering the market.
  • High sunk costs
  • Economies of scale
  • Costs to firms leaving the market.
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11
Q

What are costs of leaving market?

A

-Leases and redundancies.

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12
Q

What is the degree of contestability?

A

-The extent to which gains to market entry exceed the costs.

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13
Q

What are the types of efficiency?

A
  • Allocative efficiency
  • Productive efficiency
  • Dynamic efficiency
  • X-inefficency.
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14
Q

What is allocative efficiency?

A

-When resources are used to produced that consumers want and value most highly and maximise social welfare.
Occurs when P=MC, this maximises utility.

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15
Q

What is productive efficiency?

A

-When firms are producing at lowest average cost so smallest amount of resources are used.
This is at the lowest point of AC curve.
Where MC=AC in short run
only possible if a firm is technically efficient.

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16
Q

What is dynamic efficiency?

What is needed for dynamic efficiency?

A

Dynamic efficiency is when resources are allocated efficiently over time. Concerned with investment which brings new production techniques.

-Competition as it requires innovation and there is also supernormal profits.

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17
Q

What is the diagram for dynamic efficiency?

A
  • X axis quantity, Y axis costs

- LRAC0 above and LRAC1 below.

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18
Q

What is the diagram for X-inefficiency?

A

When a firm is not operating on the lowest point of ATC, possibly due to organisational slack or no incentive.

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19
Q

How to show x-inefficiency on diagram?

A

-X-axis quantity , Y-axis costs, show that Actual cost curve is above lowest potential cost curve.

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20
Q

Why does x-inefficiency happen?

A

-Managers have different objectives or it is a very large firm.

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21
Q

What are the efficiencies in a monopoly?

A
  • not allocative as P does not equal MC
  • Not productively efficient as there is no competition
  • X-inefficiency could arise as there is no competition.
  • Dynamic efficiency possible as there is supernormal profits.
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22
Q

What are the efficiencies in oligopoly?

A
  • Productive efficiency: v unlikely/ no, few firms dominate market.
  • P does not equal MC in oligopoly.
  • X-inefficiency possible
  • Dynamic efficiency possible.
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23
Q

What are the efficiencies in Perfect competition?

A
  • Productively efficient in long run as MC=AC
  • Allocative efficient
  • No dynamic efficiency in long run
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24
Q

What are economies of scale?

A

-Advantages of large scale production that allows larger firms to produce at lower costs. % increase in output is greater than % increase in input.

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25
Q

What are diseconomies of scale?

A

-Disadvantages of large scale production for a large business. When % output is lower than % increase in input.

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26
Q

What are constant returns to scale?

A

-When % increase in inputs is the same as % increase in output.

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27
Q

What is the minimum efficient scale?

A
  • The point of the LRAC curve which is the minimum point that businesses can exploit economies of scale.
  • Point where LRAC curve first levels off.
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28
Q

What are the points of minimum efficient scale?

A
  • Decreasing function for economies of scale
  • 0 gradient for constant returns.
  • Increasing function for when decreasing returns to scale.
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29
Q

What are the two types of economies of scale?

And what are they?

A
  • internal economies of scale- an advantage due to growth in firm.
  • External economies of scale- decrease in LRAC due to growth of industry
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30
Q

What are the types of internal economies of scale?

A
  • Technical
  • Financial
  • Risk bearing
  • Managerial economies
  • Marketing and Purchasing
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31
Q

What are technical economies of scale?

A
  • Specialisation, large firms will be able to purchase specialist workers and machines which will allow them to do the job more quickly.
  • Balanced teams of machines, large firms can afford to buy a number of every kind of machine for each stage of production
  • Indivisibility of capital, some processes require huge machinery that can only be done by large firms.
  • Research and development, only large firms can afford to carry out the research that is needed for cheapest production techniques.
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32
Q

What are financial economies of scale?

A
  • Larger firms have more assets so are less likely to be forced out of business overnight.
  • Easier for them to get loans.
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33
Q

What are risk bearing economies of scale?

A

-Large companies can operate in a range of different markets, which means if one market fails the whole business will not collapse.

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34
Q

What are managerial economies of scale?

A

-Large firms can hire the best managers who are more specialised and can do job better.

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35
Q

What are marketing and purchasing economies of scale?

A
  • Buying in bulk: large firms can buy in bulk so can buy raw materials at cheaper price
  • Specialisation: larger firms can take on specialised buyers and sellers who are more efficient due to the extra knowledge.
  • Distribution: Larger companies get get cheaper transport rates from transport companies.
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36
Q

What are the types of external economies of scale?

A
  • Labour

- Support services

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37
Q

What are the types of diseconomies of scale? and why do they happen?

A
  • Workers- In a large firm people think firms can go unnoticed and work less hard
  • Geography - in a large firm products are moved greater distances
  • Change - takes longer for a large firm to respond to change.
  • Prices of materials - the increase in demand could cause an increase in price
  • Management- coordination and control, as a business grows it is more difficult to control.
  • Communication, in a large business it can be harder to communicate.
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38
Q

what is profit maximising condition?

A
  • where TC and TR are furthest apart

- MC=MR as up until this point the extra revenue generated is greater than the extra cost of producing it.

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39
Q

What are the types of profit and what are they?

A
  • Normal profit, this is the sufficient returns for factors of production to be committed to the business.
  • Supernormal profit this is where AR is greater than AC
  • Loss when AC is greater than AR
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40
Q

Why is profit different in economics and what can this be compared to?

A
  • Economic profit takes into account opportunity costs

- Accounting profit only takes into account physical costs

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41
Q

What is the short run and long run shutdown position and why is this?

A
  • Short run shutdown position is AR=AVC as firms will continue to produce if they generate more revenue than it cost to make as this can go towards paying fixed costs.
  • Long run position firm should be making at least Normal profit.
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42
Q

How to show short run shutdown position on a diagram?

A

-Costs and revenues diagram with AC curve above AR and AVC curve below AR.

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43
Q

What does demand for labour show?

A

-it shows the quantity of labour that a firm will employ at each wage rate.

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44
Q

What is the demand for labour determined by?

Why is the demand downward sloping?

A

-Determined by MRP. Higher the MRP, higher the demand for labour.

  • In the long run factors of production vary so at high wage rates they will replace Labour for capital
  • In the short run, firms have fixed levels of capital so diminishing marginal productivity, so hiring more workers gives a lower return, so wages will fall.
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45
Q

What is MRP?

A

MRP is the extra revenue generated by an extra worker.

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46
Q

What type of demand is labour?

A
  • Labour is a derived demand.

- This means the demand of labour is derived from the demand for the good or service.

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47
Q

What are the factors impacting the demand for Labour?

A
  • POW DTR
  • Prices of other factors of production- if capital is cheaper firms will switch to capital and demand for labour decreases.
  • Other countries, if wages are lower in other countries demand for labour in UK will decrease.
  • Wages, wages are the price of labour. As wages increase demand for labour contracts as the MRP must be greater than the cost of the labour for it to be worthwhile.
  • Demand for the product, as MRP= marginal output x price any change to the quantity demanded or the price will increase the demand for labour.

-Technology- improvements in technology mean that labour can be replaced with capital eg, Amazon robots.
By 2040 47% of jobs may be replaced.

-Regulation- high regulation decreases the demand fo4 labour as it increases costs and is more time-consuming eg in France.

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48
Q

What is the formula for MRP

A

MRP = MPP x MR

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49
Q

What are the factors impacting PED of labour?

A
  • Directly correlated to the PED of the product. If demand for the product is inelastic so too will the demand for the labour.
  • Proportion of costs, if labour is a high proportion of costs then an increase in wages will impact costs more.
  • Substitutes- if labour can be substituted with capital this means the demand is elastic. High skilled jobs are inelastic.
  • TIme- in the long term new machines can be developed and takes time to make people redundant.
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50
Q

What is MPP?

A

The extra product produced by a unit of labour.

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51
Q

What does the MP curve look like?

A

negative x^2 parabola.

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52
Q

What is the demand for labour in perfect competition?

A

-horizontal line

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53
Q

What is the short-run and what is the long-run?

A
  • Short-run when at least one factor of production is fixed

- Long-run all factors of production are variable.

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54
Q

Describe all the following costs and why they take the shape they do?

  • Average fixed cost curve.
  • Average total cost
  • Average variable cost
  • Marginal cost
A
  • Starts high because AFC are divided by a small output but decreases as output increases.
  • Average total cost has U shape due to law of diminishing productivity, costs initially fall as machinery is used more efficiently, but it then becomes overused and costs increase.
  • Average variable costs, also U shaped but gets closer to ATC as when output increases AFC gets smaller.
  • Marginal cost, also U shaped as initially costs fall as machinery is used more efficiently and then MC increases as machinery is overused.
55
Q

Why do the cost curves have a U shape?

A

-Due to the law of diminishing marginal productivity, as machinery is used more efficiently costs fall, then machines are overused and costs increase.

56
Q

What are short run cost curves?

A

-This is when at least one factor of production is fixed, so they have a U shape due to law of diminishing marginal productivity.

57
Q

What is diminishing marginal productivity?

A
  • Means that is a variable factor is increased against a fixed factor, there will come a point when each unit of the variable factor will produce less extra output than the previous unit.
  • Marginal output will decrease as more inputs are added in the short run.
58
Q

Why do SRAC curves and LRAC have the shapes they do?

A
  • SRAC have the shape due to law of diminishing marginal productivity.
  • LRAC has shape due to minimum efficient scale.
59
Q

What is relationship between AC and MC

Why is this?

A
  • MC will cut AC at minimum point.

- When MC is less than AC, AC is falling.

60
Q

What is TR?

A

Price x quantity

61
Q

What is average revenue?

What is average revenue the same as?

A
  • Total revenue / quantity

- Price.

62
Q

What is marginal revenue?

A
  • change in revenue / change in output.
63
Q

What do revenue curves look like in perfect competition.?

A
  • TR is upward sloping

- Perfectly elastic demand AR=MR=D

64
Q

What do revenues curves look like in imperfect competition?

A
  • MR is on the inside
  • AR is on the right

-TR is the n parabola.
When MR positive TR is increasing
When MR is negative TR is decreasing

65
Q

What is the relationship between MR and TR?

A
  • When MR is positive TR is increasing
  • When MR is negative TR is decreasing
  • When MR = 0 TR is maximised.
66
Q

What is average revenue the same as?

A

-AR= D as AR dictates the price

67
Q

what is organic growth and what are the advantages and disadvantages of it?
what is an example of a firm who did this growth?

A
  • Organic growth is when a firm grows internally through increasing output. eg more labour or new product service.
  • Lego firm did this through creating lego friends.

ADVANTAGES-

  • Better alternative to mergers, as they are high risk and evidence shows that share price falls after mergers.
  • Owners get to keep more control of the business.

DISADVANTAGES:

  • other firms may have assets/expertise that organic growth will never get
  • Organic growth is slow
  • It will be difficult for firms to get new ideas.
68
Q

What is integration?

-What is vertical integration?

A
  • when a firm grows through amalgamation, merger or takeover.
  • When a firm takes over firms in the same in the same industry but at different stages of the production process.
  • If it takes the firm back towards the supplier it is called backwards vertical.
  • Forward is when it gets closer to the consumer.
69
Q

What are the advantages and disadvantages of vertical integration?

A
  • Advantages
  • There is increased potential for profit as the firm takes the profit from a longer chain of the production process.
  • There will be less risks as suppliers do not have to be worried about buyers buying goods and buyers do not have to be worried about supply.

-Disadvantages
Firm may have no knowledge about that aspect of the production line

70
Q

What is horizontal integration?

What are the advantages and disadvantages of horizontal integration?

A

-When firms in the same industry at the same production stage merge

-ADVANTAGES:
Increases market share which gives firm more power to influence markets.
-Firms will be able to specialise, which reduces areas of duplication
-The business will be able to grow in an area it has expertise.

-DISADVANTAGES
increased risk for firm as if that part of the market fails they have nothing to fall back on.

71
Q

What is conglomerate integration?

A

-This is firms in different industries with no obvious reason to integrate.
1970s General Electric was founded as a lighting company but went into oil, aircraft and water.

72
Q

What are the advantages of conglomerate integration?

A
  • Useful for firms with no room in the present market.
  • Reduces risk as if a whole industry fails they have more to fall back on.
  • Easier to expand as finance is more available to if they were on their own and managers can be transferred.

-DISADVANTAGES
Going into markets for which they have no expertise.

73
Q

What are the constraints on business growth?

A
  • SIZE OF MARKET: A market is limited to certain size and not all business can produce as the goods would not be sold. Eg Niche markets, luxury markets
  • ACCESS TO FINANCE- firms use loans and retained profit to grow if one or the other is lacking cannot grow

OWNER OBJECTIVES- some owners may not want growth as they do not want the risk attached to growth.

REGULATION- in some markets the government may introduce legislation that stops businesses fro growing.
CMA investigates any mergers that may cause over 25% market share.

74
Q

What are the different business objectives?

A
  • Profit maximisation
  • Revenue maximisation
  • Sales maximisation
  • Satisficing
75
Q

What is profit maximisation and why do firms do it?

A
  • This is when MC = MR
  • Neo-classical economists argue that the interest of shareholders is most important and therefore the goal of the firm should be to maximise profit in short run.
  • By short run profit maximising firms can raise funds for investment and help them survive a slowdown in the economy.
76
Q

What are examples of companies that profit maximise?

A

Apple and Glaxosmithkline profit maximise as they need the profit to reinvest into research and development to innovate.

77
Q

What is revenue maximisation and why do firms do it?

A

MR=0

William Baumol suggested that managers are most interested in revenue as this is what their salary depends
on.
-Even when salary is not directly linked to sales revenue they know growth of revenue is good for the business.
-Fall in revenue can show a downward spiral in a business managers earnings, less staff and financial institutions less willing to lend money.

-Firms as a result revenue maximise as long as they can provide some profits for owners.

78
Q

What is an example of a firm that revenue maximises?

A

-Amazon follow revenue maximisation with revenue nearing 120 billion but profits staying stable

79
Q

How do you show revenue maximisation on a profit and costs curve?

A

-go to MR = 0 and go up to the curves above.

80
Q

What is Sales maximisation and what are the arguments for it?

A

AC=AR whilst increasing output as much as possible
-When firms try and sell as many units as possible whilst not making a loss

-Robin Marris suggests that managers put growth of their company above any other objective

81
Q

What are the negatives of revenue and sales maximisation?

A

-Necessitates a fall in price, which other firms may copy and could not increase price or revenue eg oligopoly.

82
Q

Why does satisficing happen and what does it do?

How does this change in time?

A
  • Owners want to profit maximise whilst directors want to maximise personal benefits.
  • Managers are likely to follow satisficing, making enough profit so owners are happy whilst following other objectives. Increasing their own salaries.
  • The amount of profit needed changes relative to other firms.
83
Q

What are two other two business objectives?

A
  • Managerial utility maximisation- Oliver Williamson said managers will make decisions to maximise own satisfaction. This depends on salary, staff and power over decision making.
  • Allocative efficiency- some firms like nationalised industries aim to maximise social welfare so where P=MC
84
Q

What firms do sales maximisation.

A

Netflix and Spotify

85
Q

What is government failure?

A

When government intervention leads to a net welfare loss.

86
Q

What are the causes of government failure?

A

ICAUSED

  • INFORMATION GAPS- any decisions that the government makes must be based on some data but the information they have will always be limited .
  • Costs and benefit forecasts are often wrong.

-CONFLICTING OBJECTIVES-

  • ADMINISTRATIVE COSTS, a lot of money that is allocated to the government is actually used up on basic administration costs.
  • A lot of money is given to NHS is mostly used on administrative costs rather than social care.
  • UNINTENDED CONSEQUENCES- consumers and producers may react differently to how it is expected by government. CAP buffer stock scheme was meant to smooth out price fluctuations but it led to overproduction in EU and fall in prices in other places.
  • SELF INTEREST
  • EXPERTISE
  • DISTORTION OF PRICE SIGNALS, some gov intervention changes the free market signals and distorts them. As a results it keeps inefficient businesses
  • min and max prices lead to excess demand and excess supply
  • Government distorts the mechanism and so resources are allocated inefficiently.
87
Q

What is a pure monopoly but what is seen in the real world?

A
  • A pure monopoly is one there is one seller, closest to this is google with 88% market share.
  • In the real world firm is seen to legally have monopoly power if they hold 25% or more market share
88
Q

What are the characteristics of a monopoly?

A
  • One seller/ have 25% or over market share
  • High barriers to entry
  • Imperfect information
  • Firms make supernormal profit in the long run.
89
Q

What is the profit maximising equilibrium for a monopolist?

A
  • profit maximising mc=mr

- They can make supernormal profits in the long run as there is no threat of entry.

90
Q

What are the arguments for and against a monopolist?

A

Against-Deadweight welfare loss to society

  • Lower consumer surplus
  • X-inefficiency

For- Dynamic efficiency due to supernormal profits
-They prevent duplication of resources and

91
Q

How do you show the welfare loss to society on a diagram?

what is the supply curve in this instance?

A

-Draw a costs and revenues diagram with two revenue curves and show that triangle above competitive price and under monopoly price is deadweight loss to consumers.
Show that competitive is producing at allocative efficiency
Show that monopoly is producing at mc=mr
-The marginal cost curves is the same as the supply curve.

92
Q

What is price discrimination?

A

-This is when monopolists charge different prices to different markets for the same product with identical costs of production

93
Q

What are the conditions for 3rd degree price discrimination?

A
  • Firm must have price making ability
  • Must have information to separate the market
  • Must be able to prevent arbitrage (buying in cheaper market and selling in the other)
  • Different elasticities in each market.
94
Q

How do you show 3rd degree price discrimination on a diagram?

A

-Draw the elastic market and the inelastic market with a constant AC=MC curve going through.

Draw inelastic market with steeper MR and AR curves
Draw elastic market with shallower MR and AR curves

95
Q

What are the benefits of 3rd degree price discrimination?

A
  • Increases profits for firms as they can have two profit maximising eq rather than 1, DYNAMIC EFFICIENCY
  • Consumers in the elastic market benefit from a lower price, due to the cross subsidisation. However, this could increase inequality. SOME CONSUMERS BENEFIT.
  • Consumers lose consumer surplus to producers
  • CROSS subsidisation potential, high profits that they make could be used to cross-subsidise loss making goods/ services.
96
Q

What are the negatives of 3rd degree price discrimination?

A
  • Allocative inefficiency and consumers get exploited
  • Inequalities
  • Anti-competitive pricing (as prices are lower in the elastic market this could drive out other firms out of the market giving them more power).
97
Q

What are the other types of price discrimination?

A
  • 1st degree is when the monopolist charges the price that the consumer is able and willing to pay (eroding consumer surplus).
  • 2nd degree is charging a different price for different quantities such as discounts on purchasing in bulk.
98
Q

What are natural monopolies?

What are examples?

A
  • Companies in industries where economies of scale are so high that even a single producer is not able to exploit them all.
  • Rational for 1 firm to supply the whole market.

Any new firm would not be able to reach the economies of scale of the incumbent firm.

-National rail and royal mail

99
Q

What does the LRAC curve look like for a natural monopoly?

A

-Downward sloping for a very high quantity as the economies of scale are possible at very high quantities.

100
Q

Why is it rational for natural monopolies?

A

-As firms entering the market will not have the same economies of scale as the firm already in the market so they will be priced out.

101
Q

What does a natural monopoly costs and revenues curve look like?

A

-AR and MR as normal but AC is above MC and they both continue to slope down.

102
Q

What are the costs and benefits of monopolies to firms?

A
  • Potential for huge profits for their shareholders through profit max
  • Firms with monopoly power can compete with overseas organisations
  • Large firms will be able to exploit economies of scale and reduce LRAC further
103
Q

What are the costs and benefits of monopolies on workers?

A
  • Monopolists produce at lower outputs so employ less workers.
  • However, the inefficiency of monopolies could mean the workers get higher wages.
104
Q

What are the impacts on suppliers of monopolists?

A

Depends the extent to which the monopolist in a monopsonist as it may decrease supplier prices

105
Q

What is the impact on consumers of monopolies?

A
  • Consumers are better off in natural monopolies
  • Monopolist may offer a higher range of goods due to cross-subsidisation
  • The use of price discrimination can allow for the survival of another product
  • Consumers may pay higher price for poorer service due to low competition
  • There is less choice for consumers.
106
Q

What efficiencies do natural monopolies have?

A

-not allocatively efficient nor produtively efficient.

There is no minimum on AC curve and allocative efficiency would be a loss.

107
Q

What are the efficiencies in a monopoly?

A

-Not productively efficient, since they do not produce at MC=AC.
They are also not allocative efficient as P>MC/
-They are likely to be dynamically efficient as supernormal profits allow it.
However, there is no incentive to invest due to low competition.
-Monopolists may be x-inefficient due to low competition.

108
Q

How can you show the effects of a monopolist compared to perfect competition?

A
  • Williamson trade off.
  • Costs are assumed to be constant in the industry.

Which causes area BCD deadweight loss.

109
Q

Who is an economist who argues about the benefit in efficiencies for monopolies?

A

-Schumpter argued that monopolies will have large retained profits and will be able to exploit new production techniques. This would make them productively efficient, as costs are lower, more allocative efficient as more products and dynamically efficient.

110
Q

What is creative destruction?

A

-Monopolies are not permanent as they give incentives for other firms to break down the monopoly through a process of creative destruction.

111
Q

What is the overall judgement on monopolies? in short turn and long run

A
  • In the short run as it provides incentive to innovate and and invest.
  • However, in the long run they become inefficient as they are complacent due to the reduced competition.
112
Q
  1. What is an oligopoly?
  2. What are the characteristics of an oligopoly?
  3. what are the examples of oligopolies?
A

1-A market where few large firms have a large market share of the industry.
(no more than 7 firms with 70% market share).
-Market power is concentrated amongst a few large firms
-Products tend to be differentiated/branded
-High barriers to entry
-Firms are interdependent.

-Supermarkets, airlines.

113
Q

What is the n-firm concentration ratio?

What are the two ways of working out n firm concentration?

A
  • percentage of the total market supply that the biggest n firms hold.
  • method one add up the markets shares of the biggest n firms
  • method two: total sales of industry/ total size of market
114
Q

What is the kinked demand curve model?

A
  • two parts of the curve elastic and inelastic.
  • when firm raises price above p1 other firms will not follow and will cause a large decrease in quantity.
  • when firm decreases price, other firms will follow so there will only be a proportionally small increase in quantity demanded.
115
Q

How does interdependence link to oligopolies?

What does this lead to?

A
  • When firms consider the actions and reaction of other firms in the market before making a decision.
  • causes price rigidity. ‘sticky price’ and
116
Q

What does sticky prices cause in an oligopoly?

A
  • means that non-price competition will be used

- Profit maximisation may not be the only objective.

117
Q

How do you show that oligopolies do not need to increase prices?

A

-if the oligopolist is a profit maximiser due to the vertical gap in the mc curve the quantity will not change so price stays the same. (as long as costs were to change within this vertical gap.

118
Q

How do you draw MC on kinked demand curve?

A
  • MC decreases with the decreasing part of the kinked demand curve.
  • Gets to kink and then is vertcial and then bends right again.
119
Q

What is collusion?

What are the types?

What is formal collusion called?

A

-When firms make collective agreements to reduce competition in markets.

  • Overt and tacit
  • Overt- when firms get together to agree a price
  • tacit- when firms acts as if they have an agreement in price but they do not.

Formal collusion is called a cartel.

120
Q

Why does collusion happen?

What are the risks?

A
  • To maximise industry profits
  • Reduces uncertainty that firms face and reduces the fear of price wars.

-CMA can fine up to 10% turnover.

121
Q

What are the conditions favouring collusion?

A
  • there are few firms that are well known to each other
  • they produce similar products
  • there are high barriers to entry.
122
Q

What is an example of overt collusion?

A

2002/2003 asda colluded with dairy producer Wiseman dairies to increase the price of dairy products in supermarkets.
OFT did investigation and fined them 116m

123
Q

What is game theory?

A

-Explores the reaction of a player to changes in strategy of another player.

124
Q

What conclusions does game theory show about oligopolies?

A
  • Price rigidity non price competition as the nash-eq in the long term.
  • Temptation to collude as high, high is the max joint profits and nash equilibrium does not max profits.
  • Even when there is a collusive decision the firm can undercut and cheat// or if they are scared.
125
Q

How do you draw a payoff matrix?

What is the nash equilibrium?

A 
-Have high and low price and high and low prices.
Make high high 3,3
Make low high 0.5,4
Make high low 4,0.5
Make low, low 1,1

-The rational equilibrium where both firms take the dominant strategy

126
Q

What are the forms of price competition?

A
  • Price wars
  • Predatory pricing
  • Limit pricing
  • Cost plus pricing
  • Psycological pricing
  • Penetration pricing
127
Q

What are price wars?

What industry does this?

A
  • Price wars is when firms decrease prices and cause firms to make losses and increases industry profits.
  • Supermarkets often have price wars
128
Q

What is predatory pricing?

A
  • Illegal practice that when a firm decreases prices to a level where profit can no longer be made.
  • when the firm leaves they will put prices back up.
129
Q

What is limit pricing?

A
  • This is when firms set price at a point where it is no longer profitable for other players to join the market.
  • The greater the barriers to entry the greater the limit price.
130
Q

What is cost plus pricing?

A

-When firms set prices by looking at average costs and adding a percentage increase

131
Q
  • What is the impact of sticky prices in oligopoly?
  • What are the types of non-price competition?
  • What are the negatives of non-price competition?
A

-they cause non-price competition

  • Advertising
  • Loyalty cards
  • Branding quality

-It is expensive and there is no guarantee it will be successful.

132
Q

What are the efficiencies in oligopoly?

A
  • Allocative no
  • Productive no
  • X-inefficiencies possible
  • Dynamic efficiency possible due to supernormal profits.
133
Q

What might you notice if markets are contestable?

A

-Low / no supernormal profits in the long run
-High price competition eg limit pricing
-Hit and Run entry
-

Econ micro advanced information (5 decks)

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