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Economics A Level > Theme 3 > Flashcards

Theme 3 Flashcards

1
Q

Derived demand

A

The demand that comes from the demand for something else

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2
Q

When does the profit maximisation occur

A

When MC=MR

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3
Q

Evaluation points for marginal revenue product

A
  • MRPL is taken as the basis for the labour demand curve
  • measuring labour efficiency
  • relatively easy to measure productivity in construction industry and in-call-centres
  • much harder to measure productivity in consultancy
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4
Q

Factors influencing marginal revenue

A
  • the wage rate (the lower the demand)
  • the demand of products
    -productivity of labour
  • profitability of firms
  • substitutes
  • number of ‘buyers’ of labour
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5
Q

Labour of supply

A

Defined as the number of workers willing and able to work, multiplied by the hour they are willing and able to work

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6
Q

Factors influencing the supply of labour

A
  • wage rate
  • size of the working population
  • migration
  • people’s preferences for work
  • net advantages of work
  • work and leisure
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7
Q

Income effect ?

A

The ride in income as wages rise but with the potential of individuals reaching a target income

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8
Q

Substitution effect?

A

As wage rises the opportunity cost of leisure time increase providing an initiative to work

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9
Q

What’s the type of demand in labour market

A

Derived demand for a product or service

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10
Q

Monopsony

A

One buyer, multiple sellers
Has buying or bargaining power in one or more markets
Maximise profit by negotiating lower prices from suppliers

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11
Q

What might monopsony power be used to do

A

Bring down the average and marginal costs for a firm
Results in a lower equilibrium price
Increases supernormal profit

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12
Q

Strategies to counter monopsony power

A

New regulators - grocery adjudicator
Competition policy - block mergers and takeovers
Producer co-operatives as a counter balance to monopsony buyers
Tougher laws on standards

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13
Q

What are big businesses told to do (payments)

A

Speed up their payments to smaller firms as they are more dependant on this income

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14
Q

How to calculate the concentration ratio

A

Top 3 / Total Number x 100

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15
Q

What can trade unions do?

A

They can bargain wages above the competitive equilibrium

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16
Q

Reasons not to move ( geographic immobility)

A

Transport
Family and social ties
Financial costs
Cultural and language barriers

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17
Q

What has the government done to increase geographic mobility?

A

Housing subsidies- the government offers subsidies to key workers
Increase transport e.g. trains
Move jobs outside of London
Work from home

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18
Q

What are some barriers to geographic mobility

A

Skills
Training
Qualification
Education

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19
Q

General factors of labour mobility

A

Minimum wage
Labour market regulation
Trade unions
Zero-hour contact

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20
Q

Normal profit

A

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

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21
Q

Subnormal profit

A

The profit which is less than normal

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22
Q

Supernormal profit

A

Profit achieved in excess of normal profit

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23
Q

Characteristics of perfect competition

A

Large number of firms
Products are homogeneous (identical) - consumer has no reason to express a preference for any firm
Freedom of entry and exit into and out of the industry
Firms are price takers
Consumers and producers have perfect knowledge about the market

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24
Q

Examples of near perfect competition

A

Food markets
Agriculture
Betting (horse racing)

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25
Q

Monopoly -pure

A

Where only one producer exits the industry

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26
Q

Origins of monopoly

A

Through growth of firms
Through merger or takeover
Through acquiring patent or license
Through legal means

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27
Q

Critisms of monopoly

A

Higher prices
Quality gets worse
Lower output
supernormal profit - long run
Productive inefficiency is always at the lowest point of the AC curve. Lowest average curve
X-inefficiency
Allocative efficiency - where price = marginal cost
Dynamic efficiency

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28
Q

Evaluation for monopoly

A

Some companies produce high quality e.g. apple
Economies of scale

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29
Q

Benefits of a monopoly

A

Economies of scale
Research and development- investment
A firm may gain monopoly power if more efficient

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30
Q

Price discrimination

A

Involved charging a different price to different groups of people for the same groupn

31
Q

First degree price discrimination

A

Involves charging consumers the maximum price they are willing to pay

32
Q

Second degree price discrimination

A

Involves charging different prices presenting of the quality used

33
Q

Third degree price discrimination

A

Involves charging different prices to different groups of people

34
Q

Benefits of inequality

A

Creates incentives for people
Encourages risk and investment

35
Q

What are the conditions necessary for price discrimination

A

A firm must operate in imperfect competition, must be a price maker with downwardly sloping demand curve
The firm must be able to separate markets and prevent resale
Must have different elasticities

36
Q

Costs of inequality

A

Underconsumption of merit goods, overconsumption of de-merit goods
Decreased quality of life
Increased rates of crime

37
Q

Disadvantages of price discrimination

A

Some consumers will pay higher prices - might be the poorest
Define in consumer surplus

38
Q

How to reduce inequality

A

Progressive tax system
Benefit system
Greater investment in education

39
Q

Disadvantages of price discrimination

A

Some consumers will pay higher prices - might be the poorest
Define in consumer surplus

40
Q

Advantages of price discrimination

A

Firms will be able to increase revenue
-> can be used for research and development

41
Q

Oligopoly

A

Competition between few
-> may be a large number of firms in the industry but is dominated by a small number of very large firms
-> concentration ratios - the proportion of total market sales held by the top 3,4,5 firms

42
Q

Features of an oligopoly

A

Prices may be relatively stable across the industry -kinked demand curve
Potential for collusion
Behaviour of firms affected by what they believe their rivals might do - interdependence of firms
Good could be homogenous or highly differentiated
Branding and brand loyalty may be potential source of competitive advantage
Non price competition may be prevalent
Game theory can be used to explain same behaviour
AC curve may be saucer shaped - minimum efficient scale could occur over large range output
High barriers to entry

43
Q

Concentration ratio for an oligopoly

A

As a rule of thumb an oligopoly exists when the 5 firm concentration ratio

44
Q

Barriers to entry in a oligopoly

A

Economies of scale
Vertical integration
Brand loyalty
Set up costs
Control of important platforms
Expertise, good will and reputation
Patent protection

45
Q

Problems with economic sustainability

A

Subsidies will run out
Opportunity costs
Time lags
More costs
Unknown

46
Q

An example of external growth

A

Merger or takeover

47
Q

Advantages of becoming a bigger firm

A

More money to reinvest
Opportunities for more innovation
Increased demand for products or services
Can influence market price
Attract investors

48
Q

The types of mergers

A

Backward vertical
Forward vertical
Horizontal
Conglomerate

49
Q

What’s backwards vertical integration

A

When a company buys another company that supplies the products or services needed for production

50
Q

Forward vertical integration

A

Involves acquiring a business further up the supply chain, guaranteeing a place to sell your products

51
Q

Characteristics of monopolistic competition

A

Large number of the firms in the industry
May have some element of control over price due to the fact that they are able to differentiate their product in some way 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 exit
Consumer and producer knowledge is imperfect

52
Q

Demergers

A

The separation of a large company into two or more smaller firms, often the result of an earlier merger

53
Q

Reasons to merge

A

Less money spent on paying employees
Invest more money into other things
Greater market share (clients)
Increasing revenue

54
Q

Characteristics of oligopoly

A

Few dominant firms
Interdependence
Barriers to entry
Non price competition

55
Q

Why would you choose to de merge

A

So you don’t have to share profit
Discourages a takeover
Doesn’t work culturally
Better off returning to organic growth

56
Q

Monopolistic competition

A

Products are differentiated
Imperfect competition
Branding

57
Q

Conglomerates

A

When a firm has a merger or takeover with another firm whom they have nothing in common with

58
Q

Economies of scale

A

When your average costs start to fall

59
Q

What are differentiated products

A

Product quality
Product performance
Branding
Functioning/reliability
Provenance of product
Quality of after sales service

60
Q

Internal economies of scale

A

The more you produce the cheaper the product becomes
Production/ technological
Purchasing
Financial
Marketing
Managerial
Risk bearing

61
Q

What the different scales on the economies of scale graph mean

A

Return to scale - AC is falling
Minimum efficient scale - lowest point on ac curve
Diseconomies of scale - when average costs rise again

62
Q

Contestable markets

A

Firms behaviour influenced by the threat of new entrants to the industry

63
Q

What can cause average costs to go up in large firms

A

Too many employees
Machines breaking down
Poor quality staff / managers
Availability and raw materials cost
Poor co-ordination and communication
Office politics

64
Q

What can cause average costs to go up in large firms

A

Too many employees
Machines breaking down
Poor quality staff / managers
Availability and raw materials cost
Poor co-ordination and communication
Office politics

65
Q

Characteristics of contestable markets

A

No barriers to entry or exit
No sunk costs
Firms may deliberately limit profits made to discourage new entrants - entry limit pricing
Firms may attempt to erect artificial barriers to entry
Over capacity
Aggressive marketing and branding strategies to tighten up the markets
Potential for predatory pricing

66
Q

Solutions for average costs increasing in large firms

A

Better communication- more meetings
Smaller groups - easy to manage
Levels of output - have better supervisors
New machinery

67
Q

Characteristics of monopsony

A

Multiple sellers and one buyer
Has buying or bargaining power in one or more markets
Means they can exploit bargaining power with suppliers to negotiate lower price
The reduces costs of purchasing power reduces costs and maximises profits

68
Q

Characteristics of monopsony

A

Multiple sellers and one buyer
Has buying or bargaining power in one or more markets
Means they can exploit bargaining power with suppliers to negotiate lower price
The reduces costs of purchasing power reduces costs and maximises profits

69
Q

Benefits to firms (monopsony’s)

A

Allows firms to achieve purchasing economies of scale leading to lower long run average cost
Lower purchasing costs bring about height per supernormal profits and increased returns for shareholders
Extra profit (producer surplus)

70
Q

How might monopsony damage consumer welfare?

A

Businesses may use their buying power to squeeze lower prices out of supplies
Example was battle of milk farmers - covers the average cost of milk
Not paying a ‘fair price’
Consumers may have less choice or higher prices in long run
Monopsony employers

71
Q

Strategies to counter monopsony power

A

Creating new regulator such as the grocery adjudicator
Competition policy might block some mergers and takeovers
Establishing producer co operatives as a counter balance to monopsony buyers
Tougher laws
Using technology for suppliers

72
Q

Natural monopoly

A

It is more efficient for one firm to be the sole provider of a specific good or service due to economies of scale

73
Q

Natural monopoly

A

It is more efficient for one firm to be the sole provider of a specific good or service due to economies of scale

Economics A Level (5 decks)

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