Theme 3 Flashcards
Derived Demand
Demand that comes from the demand for something else
Marginal Product
The amount of output an additional worker produces
Where does profit maximise?
Where Marginal cost equals Marginal revenue (MC=MR)
Problems with working out MR
Often collaborative products, individual productivity difficult to measure. And many people set their own pay.
Factors influencing demand for labour
Wage rate (higher WR, lower demand), Demand for product (higher demand for product, higher demand), Productivity of labour,(higher productivity, higher demand(can be argued)), profitability of firms(higher profitability, higher demand), number of substitutes( cheaper machinery, lower demand), number of buyers of labour (less buyers, less demand)
Demand for labour
How many workers/employees an employer is willing and able to hire at a given wage rate in a give time period
Supply of labour
Number of workers able willing and able to work at a given wage rate
Factors effecting supply of labour
Wage rate, size of working population, migration levels, preferences for work, net advantages of work, relationship between work and leisure
Geographical mobility
The ability of workers within a specific economy to relocate to find a new or better employment
Occupational mobility
The ability to change individual occupational status
Occupational immobility
Lack of training/experience/skills to be able to transfer easily between occupations
Market clearing wage
The wage that brings the demand and the supply of labour into equilibrium
Elasticity of demand for labour in low skilled jobs
Very elastic as low skilled so many people able to do them. A change in wage will see a large change in demand
Elasticity of demand for labour in high skilled jobs
Higher paying jobs, labour supply inelastic as often require more skill meaning less people are able to do them. Therefore, a change in wage sees little change in demand
Benefits of a minimum wage
Reduces poverty, increases productivity, increases the incentive to accept a job, increases investment, counterbalance the effect of monopsony employers
Problems of increasing the minimum wage
Increases unemployment, cost-push inflation, black market, poorest don’t benefit( those on benefits), limited impact on relative poverty ( those just above the poverty line become relatively poorer), regional variations in wage, higher wages passed into consumers, increased number of workers on minimum wage
Monopsony
Market situation where there is only one buyer
Problems of a monopsony
Can lead to lower wages which increases inequality, worker pains less that MRP, have a degree of monopoly selling powers so can increase profits at the expense of consumers, care less about working conditions
How do trade unions help in a monopsony
Can cause higher wages, can be beneficial in a monopsony industry to help productivity by brining in new working practices
Concentration Ratio
The percentage of market share taken up by the largest firms
Normal Profit
The minimum profit required to keep factors of production in their current use in the long run
Abnormal Profit
Profit achieved in excess of normal profit (also known as supernormal profit)
Sub-normal profit
Profit which is less than normal (less than AC)
Characteristics of Perfect Competition
Large number of firms, homogenous products, freedom of entry/exit, firms are price takers, each producer supplies small proportion of industry output, consumers and producers have perfect knowledge of the market
Long-run supernormal profit in perfect markets
Firms have freedom of entry/exit into the market, increase of supply so a fall in price. Returns to normal profit
Perfect Market Short-run loss minimisation
In short run, if revenue is greater than variable cost you should continue to produce
Monopoly Characteristics
1 firm in the industry, only 1 product, high barriers to entry/exit, firms are price setters, producers supply fill proportion of the output, imperfect knowledge
Problems with Monopolies
High price, lack of choice, poor quality, inefficient
Origins of a Monopoly
Growth of firm, merger/takeover, legal means, acquiring patents
Monopolies are allocatively inefficient because…
The price is higher than marginal cost
Monopoly is productively inefficient because…
They don’t produce at the lowest point on the AC curve
Monopoly is X-inefficient because…
they have no incentive to cut costs.
Monopoly long-run supernormal profit
Continues to make supernormal profit, leads to unequal distribution of wealth
Advantages of a Monopoly
Benefit from economies of scale so may be more efficient, better research and development, if grown organically may be more efficient, natural monopoly (may be better to just have one firm in the industry)
Price Discrimination
Charging a different price to a different group of people for the same good
Conditions needed for Price Discrimination
Firms must operate in imperfect conditions, firms must be able to separate tickets and prevent resale, different consumer groups must have elasticities of demand
Advantages of price discrimination
Firms able to increase revenue, increased revenues can be used for R and D, some consumers benefit
Disadvantages of Price Discrimination
Some consumers end up paying higher prices (allocatively ineffecient), decline in consumer surplus, increases inequality, administration costs, predatory pricing
Oligopoly
Where a few large firms dominate the industry
Feature of an oligopoly
Price may be stable, collusion potential, high concentration ratio, interdependence of firms, homogenous or highly differentiated goods, brand loyalty, non-price competition, high barriers to entry, game theory, Long run AC saucer shaped
Advantages of an oligopoly for consumers
Price wars, high levels of R and D (improved dynamic efficiency), economics of scale, high supernormal profits can be taxes
Disadvantages of an Oligopoly for consumers
Price fixing collusion, limits customer choice (high barriers to entry), persuasive advertising distorts the market, oligopolies can avoid paying tax
Shadow Pricing
Companies claim higher profits in countries with less tax
Conditions for contestable Markets
Access to all available technology, absence of sunk costs, low barriers to entry, low rate of customer loyalty
Hit and run entry
When a business enters an industry to take advantage of temporarily high profits
Sunk costs
Costs that can’t be recovered if a business decides to leave an industry - higher costs, less contestable markets
Barriers to entry in contestable markets
Sunk costs, levels of advertising/loyalty, access to supply of goods, access to technology and skilled labour
Methods to increase the contestability of markets
Removal of legal barriers to entry, force firms to allow competitors to use its network, ban predatory pricing, CMA investigate on the use of predatory power
Characteristics of monopolistic competition
Large number of firms, firms have little control over price, few barriers to entry and exit, imperfect knowledge
Organic growth
When a firm chooses to grow from within
External growth
Growing the business by either merging or taking over another business
Benefits of external growth
Allows consumer cheaper prices, allows companies to keep the best staff
Problems of external growth
May cause principal-agent problem as workers aren’t interested in another company, may lose customers if other brand is poor
Conglomerates
When a firm had a merger or a takeover with a firm who they have nothing in common with
Fixed and Variable costs
Fixed costs don’t change with output, variable costs change with output
Deserters
When two firms who had previously joined decide to split
Economies of scale
The more you produce, the cheaper the product becomes
Types of economies of scale
Production, Purchasing, Financial, Marketing, Managerial, Risk bearing
Diseconomies of scale
When firms get too big, AC starts rising again
economies of scale
The more the industry produces, the cheaper each product becomes
Allocative Efficiency
Efficiency which markets are allocating resources - allocatively efficient for producing the right goods for the right people at the right price
Productive efficiency
Where a firm produces at the lowest point on its AC curve
X-inefficieny
When firms don’t have incentives to cut costs, so costs end up being higher than they should be
Technical efficiency
When a firm is producing the maximum output from the minimum quality of inputs
Dynamic efficiency
Measures the extent to which various forms of static efficiency improve over time
Limit Pricing
Charge below the average cost of your rivals
Predatory Pricing
Charge a price to force new rivals out
Revenue Maximisation
Pricing in order to bring in considerable revenue
Profit Maximisation
Pricing to satisfy the shareholders by making as much profit this accounting year
Normal Pricing
Pricing to cover your ATC
Price War
Constantly undercutting your equally powerful rival
Sales Volume Pricing
Charging a price where AR=AC
Non-price strategies
Competing against direct rivals, but on areas other than price
Collusion
When two or more firms agree to manipulate the market for their own self interest
Factors of collusion
Charge the exact same amount, agree not to compete against each other, agree not to compete on location
Reasons to collude
Increase profits, protect market share, reduce costs such as advertising, avoid having to open new shops
Price capping
When firms are only allowed to charge up to an agree maximum price
Regulators
Government set up an independent body who regulate a natural monopoly
Water Regulators
Ofwat - set targets that hold water companies to high standards
Natural Monopoly
A natural monopoly exists because the cost of producing the product is lower if there’s just a single producer than if there
Problems with a natural monopoly
Monopsony power - force producers out of business , same as monopoly problems
Public Private Partnership
Contractors pay for the construction then rent the good back to the public sector
Positives of a public private partnership
Government gets new infrastructure without paying taxes, expert building and running of the operation
Negatives of Public Private Partnership
Profit focused firms so poorer quality, moral issues, government make a loss eventually (more taxes being paid)
Profit capping
Capping the amount of supernormal profit a firm is allowed to earn
Positives of profit capping
Incentive to keep quality high, reduces inequality, firms can’t exploit consumers, firms still make profits, firms forced to be x-inefficient
Windfall tax
A one off additional tax on firms supernormal profits
Deregulation
A reduction or elimination of government power in a particular industry
Self regulation
When the industry sets up its own body to police itself
Privatisation
When a state owned industry is floated on the stock exchange and sole to profit making investors
Nationalisation
When private owned firms are taken into state ownership
Breaking up a monopoly
When the government decides that a monopoly has become too big and forces it to sell off part of its business
