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Economics > THEME 3 > Flashcards

THEME 3 Flashcards

1
Q

benefits with minimum wage

A

-reduces poverty, increased productivity, increased investment
-increases incentive to accept a job

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2
Q

problems of minimum wage

A

-unemployment, cost push inflation, black market,

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3
Q

what is a monopsony

A

one main buyer

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4
Q

formula for profit maximisation

A

MC=MR

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5
Q

problems with monopsony in the labour market

A

-can lead to lower wages for workers
-workers paid less than MRP
-firms with monopsony power care less about working conditions as workers don’t have alternatives to the main firm.

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6
Q

what is the concentration ratio

A

the percentage of market share taken up by the largest firms

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7
Q

normal profit

A

minimum profit required to keep factors of production in current use in the long run

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8
Q

super normal profit

A

profit achieved in excess of normal profit

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9
Q

sub normal profit

A

profit that is less than normal profit

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10
Q

characteristics of perfect competition

A

-large number of firms
-products are homogenous
-freedom of entry and exit
-firms are price takers as they have no control over the price they charge
-consumers and producers have perfect knowledge about the market

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11
Q

what is a pure monopoly

A

only 1 producer exists in the industry

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12
Q

what is monopoly power

A

refers to cases where firms influence the market in some way through their behaviour , determined by the degree of concentration in the industry

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13
Q

origins of monopoly

A

-growth of firm
-through takeover/ amalgamation (joining together)
-through license
-through legal means

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14
Q

productive efficiency

A

occurs when products are produced at a level of output where AC is lowest

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15
Q

X-inefficiency

A

inefficiency caused by unnecessary costs and waste

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16
Q

dynamic efficiency

A

improving efficiency through research and development into new products

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17
Q

allocative efficiency

A

efficient market when all goods and services meet the needs and wants of society

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18
Q

what is price discrimination

A

involves charging a different price to different groups of people for the same good.

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19
Q

1st degree price discrimination

A

involves charging consumers the maximum price they are willing to pay

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20
Q

2nd degree price discrimination

A

Involves charging different prices depending on quantity consumed

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21
Q

3rd degree price discrimination

A

involves charging different prices to different groups of people

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22
Q

3 conditions necessary for price discrimination

A

1- firm must operate in imperfect competition.
2- firm must be able to separate markets and prevent resale
3- different consumer groups must have elasticities of demand

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23
Q

disadvantages of price discrimination

A

-some consumers end up paying high prices
-decline in consumer surplus
-those who pay high prices may be poorest
-profits could be used to finance predatory pricing

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24
Q

advantages of price discrimination

A

-able to increase revenue which can be used for research and development
-some consumers benefit from lower fares

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25
Q

what is an oligopoly

A

where the industry is dominated by a small number of very large producers and there is competition between a few firms

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26
Q

features of an oligopoly market structure

A

-price may be relatively stable across the industry
-potential for collusion
-interdependence of firms
-goods could be homogenous
-non-price competition may be existing in large scale
-game theory can be used to explain behaviour
-high barriers to entry

27
Q

Characteristics of a contestable market

A

-No barriers to entry/exit
-low sunk costs
-new companies have access to the same technology

28
Q

Advantages of oligopoly

A

-Competitive oligopoly can lead to price wars which increases consumer surplus
-battle for market share leads to high levels of research and development which improve dynamic efficiency
-high supernormal profits can be taxed

29
Q

Disadvantages of an oligopoly

A

-collusive behaviour can rise prices and cause a loss of allocative efficiency
-high concentration ratio limits consumer choice and barriers to entry deterring smaller firms from profitable entry
-many transnational oligopolies successfully avoid paying tax

30
Q

Barriers of entry a firm might face when entering a market

A

-sunk costs
-level of advertising and brand loyalty
-vertical integration
-access to technology and skilled labour

31
Q

Characteristics of monopolistic competition

A

-Large number of firms in industry
-entry and exit from industry is relatively easy
-may have some element of control over price due to them differentiating their products
-imperfect knowledge between consumer and producer

32
Q

Types of economic efficiency

A
  1. Technical efficiency
  2. Productive efficiency
  3. X- inefficiency
  4. Allocative efficiency
  5. Dynamic efficiency
33
Q

Allocative efficiency

A

-goods and services to meet people’s needs and wants are made and sold
-resources are fully utilised
- price = market price

34
Q

Productive efficiency

A

Occurs when maximum number of goods and services are produced with a given amount of inputs. Occurs at the lowest point on the firms average cost curve

35
Q

Dynamic efficiency

A

Measures the extent to which various forms of static efficiency improve over time. Improvements in dynamic efficiency results from introduction of better methods of producing existing products.

36
Q

Potential pricing strategies

A

1- limit pricing
2- predatory pricing
3- revenue maximisation
4- profit maximisation
5- normal pricing
6- price war
7- sales volume pricing
8- price skimming
9- penetration pricing
10- promotional pricing
11- bundle pricing
12- discrimination pricing

37
Q

1- limit pricing

A

Charge below average cost of your rivals

38
Q

2- predatory pricing

A

Charging a price to form new rivals out

39
Q

3- revenue maximisation

A

Pricing in order to bring in considerable revenue

40
Q

4 - profit maximisation

A

Pricing to satisfy shareholders by making as much profit as possible in a year

41
Q

5- normal pricing

A

Pricing to cover your ATC

42
Q

6- price war

A

Constantly undercutting your equally powerful rival

43
Q

7- sales volume pricing

A

Charging a price where AR = AC

44
Q

8- Price skimming

A

Charge high price and slowly start to drop

45
Q

9- penetration pricing

A

Charge low price and slowly increase

46
Q

10- promotional pricing

A

temporarily reduce price to attract customers

47
Q

11- bundle pricing

A

Charging a number of products as a bundle

48
Q

12 - discrimination pricing

A

Different price for same product

49
Q

Non price strategies

A
  • qualified staff
  • superior products/ equipment
  • safe parking
  • free trial
  • memberships can be frozen
50
Q

Collusion

A

When two or more firms agree to manipulate the market for their own self interest

51
Q

3 types of collusion

A

1- formal
2- tacit
3- price leadership

52
Q

Formal collusion

A

Rival companies agree to collude in setting prices rather than competing against each other

53
Q

Tacit collusion

A

Firms coordinate actions without explicitly communicating or reaching an agreement

54
Q

Price leadership collusion

A

Explicit or implicit agreement to keep price in mutual alignment between dominant firms

55
Q

What is price capping

A

Where firms are only allowed to charge up to an agreed maximum price

56
Q

Price cap diagram

A
57
Q

Benefits of price capping

A
  • protects low income consumers so they can afford essential inelastic goods
  • controls cost push inflation
58
Q

Negatives of price capping

A
  • prevents firms making fair profits
  • deterioration in product quality
  • reduce motivation
  • encourage black market and illegal activity
59
Q

Benefits of regulators

A
  • forces through better standards
  • evidence of heavy fines imposed
  • keeps prices under control
  • prevents excessive profit maximisation
60
Q

Problems with regulators

A

-regulatory capture
-firms need supernormal profits to reinvest
-inflation changed after RPI + X set

61
Q

Natural monopoly

A

A natural monopoly exists because the cost of producing the product is lower if there is just a single producer than If there are several competing producers

62
Q

Privatisation

A

State owned industry is floated on the stock exchange and sold to profit making investors

63
Q

Nationalisation

A

Private owned firms are taken into state ownership

Economics (7 decks)

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