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Econ > Theme 3 > Flashcards

Theme 3 Flashcards

1
Q

What is the law of diminishing returns?

A

In the SR, when variable factors of production (labour) are added to a stock of fixed factors of production (land and capital), marginal product will initially rise, then fall

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2
Q

Marginal product equation

A

change in total product divided by change in quantity

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3
Q

Average product equation

A

total product divided by quantity

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4
Q

Why is there an initial increase in product (LoDR)?

A

There’s an increase in labour productivity as specialisation occurs and new workers are learning. There’s an underutilisation of fixed FoPs so we employ more workers and they begin to be used.

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5
Q

Why does product end up falling? (LoDR)

A

Marginal product and labour productivity begins to fall as there aren’t enough fixed FoPs for the increasing labour to marginal product falls

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6
Q

What are the two types of costs?

A

Explicit and implicit

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7
Q

What’s the difference between implicit and explicit costs?

A

Implicit is the opportunity cost and explicit is the things that require payment

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8
Q

What are the fixed explicit costs?

A

rent, salaries, interest on loads, advertising, business taxes

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9
Q

What are the variable explicit costs?

A

wages, utility bills, raw material costs and transport costs

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10
Q

What is the average variable cost curve shaped like on the average cost curve diagram?

A

smiley

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11
Q

What is the TFC shaped like?

A

straight horizontal line

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12
Q

What is the AFC shaped like?

A

a line that descends slowly like the LAC for natural monopoly

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13
Q

What are increasing returns to scale?

A

when percentage change of output is greater than the percent change in input

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14
Q

What are constant returns to change?

A

When percentage change in output is equal to the percentage change in input

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15
Q

What are decreasing returns to scale?

A

When percentage change in output is less than the percentage change in inputs

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16
Q

What is the minimum efficient scale?

A

the lowest level of output required to exploit full EoS

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17
Q

What are economies of scale?

A

As quantity of output goes up, cost per unit goes down

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18
Q

What are internal EOS?

A

They occur within a business

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19
Q

What are external EOS?

A

Occur outside a business but in the industry

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20
Q

What is the acronym for external economies of scale?

A

Really Fun Mums Try Making Pies (risk-bearing, financial, managerial, technical, marketing and purchasing)

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21
Q

What is risk-bearing eos?

A

As a firm grows, they spread their risk/opportunity cost over a larger range of output

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22
Q

What are financial eos?

A

Firms can acquire lower rates of interest as they are seen as less risky

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23
Q

What are technical EOS?

A

Specialist machinery. can be bought so productivity goes up

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24
Q

What are managerial EOS?

A

Specialist managers are hired to quantity goes up

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25
Q

What are marketing EOS?

A

bulk buying advertising

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26
Q

What are purchasing EOS?

A

Buying in bulk at a discounted rate

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27
Q

What are the examples of external EOS?

A
  • better transport, infrastructure, as businesses grow imports, roads and rail links do too which reduces cost
  • suppliers are closer as it’s in their best interest to supply to firms so cost of transport goes down
  • R+D firms move closer again reducing transport costs
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28
Q

What are diseconomies of scale?

A

When a business goes so large so their cost per unit increases

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29
Q

What are the reasons of diseconomies of scale?

A
  • control (harder for managers to control larger workforce, productivity decreases, quantity decreases)
  • communication and coordination - harder for. higher ups to communicate, takes time and productivity decreases
  • motivation decreases if workers think they don’t have much value in a large firm to productivity decreases, decreasing output
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30
Q

What is economic profit?

A

considers both implicit(opp cost) and explicit costs(all other costs)

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31
Q

What is accounting profit?

A

Only considers explicit costs

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32
Q

What are the objectives of firms?

A

Profit maximisation, satisficing, revenue max, sales max, survival

33
Q

What is profit maximisation?

A

Where MC=MR

34
Q

Why do firms profit maximise?

A

for re-investment, dividends for shareholders, lower costs and lower prices for consumers

35
Q

Why don’t firms profit maximise?

A
  • they don’t know their MC/MR
  • to avoid investigations from regulators which usually leads to increasing of costs through fines
  • stakeholders could be harmed
  • other objectives
36
Q

What is profit satisficing?

A

sacrificing profit to satisfy as many stakeholders as possible

37
Q

What is a stakeholder?

A

Someone interest in how a business is performing

38
Q

What is the effect on shareholders, managers, consumers, workers, government, and environmental groups when it comes to satisficing?

A
  • happy as they receive larger dividends
  • happy as they receive more income
  • unhappy as higher prices
  • unhappy as cost cutting leads to lower wages
  • unhappy due to effect on consumers and workers
  • cost cutting usually leads to environmental neglection
39
Q

What is revenue maximisation?

A

Where MR=0

40
Q

Why does revenue maximisation occur?

A
  • economies of scale (diagram)
  • predatory pricing to drive out competitors
  • principle agent problem
41
Q

Why does sales maximisation occur and when?

A

At AC=AR as firm becomes as large as possible without making a loss
- could do it for EOS
- limit pricing at AC=AR which is lowest price point, limits competition as less firms join due to lack of incentive
- principle agent problem
- for future switching of objective

42
Q

What is the objective of survival?

A

In the SR, when a firm newly joins a market, their goal may just be to survive a period of time and their goal may switch after that

43
Q

What is the goal of the public sector?

A

This occurs at P=MC so they act on public interest

44
Q

What are some legal barriers to entry?

A

Patents(firms having sole ownership over something)
licences and work permits
paperwork
excessive standards(costly)

45
Q

What are some technical barriers to entry?

A

Start-up costs
sunk costs
Natural monopoly

46
Q

What are some strategic barriers to entry?

A

Predatory pricing
limit pricing
heavy advertising

47
Q

What is the last barrier to entry?

A

Brand loyalty

48
Q

What are some barriers to exit?

A
  • high redundancy costs
  • penalties for leaving contracts early
  • sunk costs
49
Q

What are the types of efficiencies?

A

X-efficiency, productive, allocative, X-inefficiency, dynamic and static

50
Q

What is X-efficiency vs inefficiency?

A
  • minimising waste and it takes place on the AC curve
  • there is waste and it is hard to reduce as it may mean reducing wages
51
Q

What is productive efficiency?

A
  • production on the lowest point of the AC curve
  • full exploitation of EOS
52
Q

What is dynamic efficiency?

A

Re-investment of LR supernormal profit into things like capital, tech and R+D, but it needs LR supernormal profit

53
Q

What is allocative efficiency?

A

Society surplus is maximised, net social benefit is maximised, D=S, P=MC

54
Q

What is static efficiency?

A

Allocative, productive and X occur at one production point whereas dynamic occurs over time

55
Q

What is the benefits to consumers with allocative efficiency?

A
  • resources follow consumer demand
  • low prices
  • max of consumer surplus
  • high choice
  • high quality of production as firms stay ahead of rivals
56
Q

What is the producer benefits for allocative efficiency?

A
  • retain/increase market share
  • stay ahead of rivals
  • increase profits
57
Q

What is the consumer benefits for productive efficiency?

A
  • lower prices
    • high consumer surplus
    • full exploitation of EOS
58
Q

What are the producer benefits for productive efficiency?

A
  • more production at a lower cost
  • higher profit
  • lower prices and greater market share
59
Q

What is the consumer benefits for dynamic efficiency?

A
  • new and innovative products
  • lower prices over time
  • high consumer surplus
60
Q

What is the producer benefit for dynamic efficiency?

A
  • LR profit max
  • lower costs over time
  • retain/increase market share
  • stay ahead of rivals
61
Q

What is the consumer benefits for X efficiency?

A
  • lower prices
  • high consumer surplus
62
Q

What is the producer benefit for X efficiency?

A
  • lower costs
  • higher profit
  • lower prices
  • market share increases
63
Q

What is a monopoly?

A

Where there is one seller dominating the market

64
Q

What’s the difference between a pure monopoly and monopoly power?

A

Monopoly power is where a firm has 25% or more of the market share and a pure monopoly is where there is one seller

65
Q

What are the characteristics of a monopoly?

A
  • differentiated products
  • firm is a price maker
  • high barriers
  • imperfect info
  • firms profit maximise
66
Q

What is price discrimination?

A

Where a firm charges different prices to different consumers for an identical good/service with no differences in cost of production

67
Q

What are the three conditions for price discrimination?

A
  • price making ability
  • information to separate the market
  • prevent re-sale
68
Q

What is first degree price discrimination?

A
  • CS is turned into monopoly profit as consumers are charged the exact price they are willing and able to pay
69
Q

What is 2nd degree price discrimination?

A

When a firm has fixed costs and spare capacity that needs to be filled so they charge last minute low prices to pay those fixed costs, eg airports, rail companies

70
Q

What is 3rd degree price discrimination?

A

Selling based on inelastic and elastic demand

71
Q

What are the pros of price discrimination?

A
  • more profit, dynamic efficiency
  • some consumers benefit in 2nd degree and 3rd degree
72
Q

What are the cons of price discrimination?

A
  • alllocative inefficiency as it exploits consumers
  • inequalities increase due to exploitation of low income consumers
  • anti-competitive pricing
73
Q

What are the characteristics of a natural monopoly?

A
  • huge fixed costs
  • ration for 1 firm to supply the market
  • competition is undesirable and lead to a wasteful duplication of resources
74
Q

What is an example of a natural monopoly monopoly?

A

Underground railways

75
Q

What is the natural monopoly diagram shaped like?

A

costs on y axis and quantity on x axis
MR AND AR and lras above lmac

76
Q

What are the cons of a natural monopoly?

A
  • allocative inefficiency, consumers often pay more due to costs of production
  • productive inefficiency
  • x inefficiency
  • inequality in necessity markets
77
Q

What are the pros of a natural monopoly?

A
  • dynamic efficiency which could lower costs in the LR
  • greater EOS
  • natural monopoly
78
Q

What is the problem with the pro of a natural monopoly having dynamic efficiency?

A

LR profits may not go into business but instead into paying off debts.

Econ (4 decks)

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