THEME 3 Flashcards
benefits with minimum wage
-reduces poverty, increased productivity, increased investment
-increases incentive to accept a job
problems of minimum wage
-unemployment, cost push inflation, black market,
what is a monopsony
one main buyer
formula for profit maximisation
MC=MR
problems with monopsony in the labour market
-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.
what is the concentration ratio
the percentage of market share taken up by the largest firms
normal profit
minimum profit required to keep factors of production in current use in the long run
super normal profit
profit achieved in excess of normal profit
sub normal profit
profit that is less than normal profit
characteristics of perfect competition
-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
what is a pure monopoly
only 1 producer exists in the industry
what is monopoly power
refers to cases where firms influence the market in some way through their behaviour , determined by the degree of concentration in the industry
origins of monopoly
-growth of firm
-through takeover/ amalgamation (joining together)
-through license
-through legal means
productive efficiency
occurs when products are produced at a level of output where AC is lowest
X-inefficiency
inefficiency caused by unnecessary costs and waste
dynamic efficiency
improving efficiency through research and development into new products
allocative efficiency
efficient market when all goods and services meet the needs and wants of society
what is price discrimination
involves charging a different price to different groups of people for the same good.
1st degree price discrimination
involves charging consumers the maximum price they are willing to pay
2nd degree price discrimination
Involves charging different prices depending on quantity consumed
3rd degree price discrimination
involves charging different prices to different groups of people
3 conditions necessary for price discrimination
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
disadvantages of price discrimination
-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
advantages of price discrimination
-able to increase revenue which can be used for research and development
-some consumers benefit from lower fares
what is an oligopoly
where the industry is dominated by a small number of very large producers and there is competition between a few firms
features of an oligopoly market structure
-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
Characteristics of a contestable market
-No barriers to entry/exit
-low sunk costs
-new companies have access to the same technology
Advantages of oligopoly
-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
Disadvantages of an oligopoly
-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
Barriers of entry a firm might face when entering a market
-sunk costs
-level of advertising and brand loyalty
-vertical integration
-access to technology and skilled labour
Characteristics of monopolistic competition
-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
Types of economic efficiency
- Technical efficiency
- Productive efficiency
- X- inefficiency
- Allocative efficiency
- Dynamic efficiency
Allocative efficiency
-goods and services to meet people’s needs and wants are made and sold
-resources are fully utilised
- price = market price
Productive efficiency
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
Dynamic efficiency
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.
Potential pricing strategies
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
1- limit pricing
Charge below average cost of your rivals
2- predatory pricing
Charging a price to form new rivals out
3- revenue maximisation
Pricing in order to bring in considerable revenue
4 - profit maximisation
Pricing to satisfy shareholders by making as much profit as possible in a year
5- normal pricing
Pricing to cover your ATC
6- price war
Constantly undercutting your equally powerful rival
7- sales volume pricing
Charging a price where AR = AC
8- Price skimming
Charge high price and slowly start to drop
9- penetration pricing
Charge low price and slowly increase
10- promotional pricing
temporarily reduce price to attract customers
11- bundle pricing
Charging a number of products as a bundle
12 - discrimination pricing
Different price for same product
Non price strategies
- qualified staff
- superior products/ equipment
- safe parking
- free trial
- memberships can be frozen
Collusion
When two or more firms agree to manipulate the market for their own self interest
3 types of collusion
1- formal
2- tacit
3- price leadership
Formal collusion
Rival companies agree to collude in setting prices rather than competing against each other
Tacit collusion
Firms coordinate actions without explicitly communicating or reaching an agreement
Price leadership collusion
Explicit or implicit agreement to keep price in mutual alignment between dominant firms
What is price capping
Where firms are only allowed to charge up to an agreed maximum price
Price cap diagram
Benefits of price capping
- protects low income consumers so they can afford essential inelastic goods
- controls cost push inflation
Negatives of price capping
- prevents firms making fair profits
- deterioration in product quality
- reduce motivation
- encourage black market and illegal activity
Benefits of regulators
- forces through better standards
- evidence of heavy fines imposed
- keeps prices under control
- prevents excessive profit maximisation
Problems with regulators
-regulatory capture
-firms need supernormal profits to reinvest
-inflation changed after RPI + X set
Natural monopoly
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
Privatisation
State owned industry is floated on the stock exchange and sold to profit making investors
Nationalisation
Private owned firms are taken into state ownership
