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A-level Economics > Theme 3 > Flashcards

Theme 3 Flashcards

1
Q

What is the principal agent problem?

A

Its a form asymmetric information where the agent acts in his/her own interests

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2
Q

What does a Not-For-Profit organisation maximise?

A

Social welfare

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3
Q

What is organic growth?

A

Internal growth, done by increasing output and products , using more R&D and technological improvements.

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4
Q

Internal growth is…

A

A long term but low risk strategy, with no debt so more sustainable.

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5
Q

What is vertical integration?

A

Is where a firm merges or takes over a firm in the same industry but at a different stage of production

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6
Q

What are the impacts of vertical integration?

A
  • Can increase efficiency and so reduce average costs
  • Firms gain more control over the market
  • Gain more certainty of production
  • May face diseconomies of scale
  • Can create barriers to entry
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7
Q

What is horizontal integration?

A

Is the merger or takeover of a firm in the same industry at the same stage of production

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8
Q

What are the impacts of horizontal integration?

A
  • Allows firms to grow very quickly
  • Disagreements may form between merged firms
  • Increase output very quickly
  • Can spread costs such as advertising
  • Can gain more control over the market
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9
Q

What is conglomerate integration?

A

Its the combining of 2 firms with no common connection

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10
Q

What constraints are on business growth?

A
  • The size of the market
  • The access to finance
  • The owners objectives
  • Regulation
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11
Q

What are demergers?

A

When a large firm is is separated into smaller firms

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12
Q

What are the reasons for demergers?

A
  • Lack of synergy
  • Have diseconomies of scale
  • Grow faster on their own
  • Raise finance
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13
Q

Impacts of demergers?

A
  • May eliminate diseconomies of scale
  • Change in job roles and job cuts
  • Lead to lower prices for consumers
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14
Q

What is profit maximisation?

A

When a firm produces at MC=MR to get the most profit

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15
Q

What is revenue maximisation?

A

When a firm produces at MR=0 allowing a firm to gain the most revenue possible and so the largest market share possible

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16
Q

What is sales maximisation?

A

When a firm produces at AC=AR allowing a firm to achieve rapid growth

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17
Q

What is profit satisficing?

A

Where profit is not the main objective at a certain time

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18
Q

If demand is perfectly elastic…

A

D=AR=MR

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19
Q

What are total costs?

A

They are the fixed costs and variable costs combined

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20
Q

What is the law of diminishing marginal productivity?

A

Its when producing more actually leads to a reduction in productivity

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21
Q

Where does the MC curve always cut?

A

The lowest points in the ATC curve (also AVC curve)

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22
Q

What are internal economies of scale?

A

When a firm becomes larger and average costs fall

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23
Q

What types of economies of scale are there?

A
  • Risk bearing
  • Financial
  • Managerial
  • Technological
  • Marketing
  • Purchasing
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24
Q

What are external economies of scale?

A

They’re economies of scale which occur from factors outside of the firm

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25
What are diseconomies of scale?
When output passes a certain point that AC's begin to increase
26
Why do diseconomies of scale occur?
- Less control - Worse coordination - Lack/harder communication
27
What are normal profits considered?
A cost
28
When would a profit maximising firm shut down?
When they can't cover their average costs
29
What is allocative efficiency?
When resources are distributed to the goods and services customers want, maximising utility P=MC
30
What is productive efficiency?
Where a firm produces at the lowest point of the AC curve
31
What is dynamic efficiency?
Where resources are allocated efficiency over time and the rate of innovation is optimum
32
What is X-inefficiency?
Is when a firm is producing within the AC boundary, costs are higher than they should be.
33
What are the factors of perfect competition?
- Many buyers and sellers - Sellers are price takers - Free entry and exit - Perfect knowledge exists - Homogenous products - Firms are short run profit maximisers
34
When can firms make supernormal profits in a perfectly competitive market?
Only in the short run
35
What are the advantages or perfect competition?
- Lower prices in the long run - Firms produce at the bottom of the AC curve - Short run supernormal profits can be used for investment
36
What are the disadvantages of perfect competition?
- Lack of dynamic efficiency in the long run - Small firms don't benefit from economies of scale - Model rarely applies in real world
37
What are the characteristics of monopolistic competition?
- Short run profit maximisers - Firms sell differentiated goods - No barriers to enter and exit - Firms have some ability to set prices - Buyers and sellers have imperfect knowledge
38
Advantages of monopolistic competition?
- Consumers get a wide range of choice | - Short run super normal profits increase dynamic efficiency
39
Disadvantages of monopolistic competition?
- In the long run lack of supernormal profits can cause dynamic inefficiency - Firms aren't as efficient as in perfect competition
40
What are the characteristics of an oligopoly?
- High barriers to entry - High concentration ratio - Firms are interdependent - There is product differentiation
41
What is overt collusion?
It's a formal agreement between firms which is illegal in the US,UK and EU
42
What is tacit collision?
Is not formal but collusion is implied
43
What are the costs of collusion?
- Loss of consumer welfare due to higher costs - Less efficiency - Makes barriers to entry larger - Lower quantity supplied leads to less allocative efficiency
44
What are the benefits of collusion?
- Firms can save costs on things such a research - Large profits can be used for re-investing - Firms can benefit from economies of scale
45
What is a cartel?
A group of firms which set prices eg. OPEC
46
Types of price competition...
Price wars, Predatory pricing, Limit pricing
47
Types of non-price competition...
Improvements in service, Special offers, Advertising and marketing, Brand loyalty
48
Monopolies can be characterised by...
- Make supernormal profits in the short run and long run - Very high barriers to entry - Price setters - Can use price discrimination
49
What is the definition of a monopoly in the UK?
When a firm has at least a 25% market share
50
What is monopoly power influenced by?
- The size of the barriers to enter and exit - The economies of scale being achieved - The ownership of important resources - Amount of brand loyalty - The amount of competition and product differentiation
51
What is price discrimination?
It's when different groups of people are charged different prices
52
Why do natural monopolies arise?
When there are very high fixed costs and very high set-up costs
53
What is a monopsony?
It's a single buyer in a market
54
What are the drawbacks of monopsony power?
- Force prices down so suppliers can barely make normal profits - Employees are likely to get lower wages however trade unions off-set this
55
What are the advantages of monopsony power?
- NHS can negotiate lower prices for drugs | - Consumers should get a cheaper price if suppliers are paid less
56
What are the characteristics of contestability?
- Entrants has free access to technology and production techniques - Very low customer loyalty - Varying number of firms - Firms likely to be allocative efficient so firms can't take supernormal profits and leave the market
57
Why is labour derived demand?
The demand for labour is related to the demand of what is being produced
58
What is demand for labour effected by?
- The productivity of the labour - The substitutes available for the labour - The number of firms employing in the market
59
What is the supply of labour?
The number of workers willing to work at a given wage rate
60
What is the supply of labour effected by?
- The demographics of the population - The amount of immigration - The wage rate compared to benefits - What skills are required
61
What is geographical immobility?
Obstacles which prevent the factors labour moving between areas
62
What is occupational immobility?
Obstacles which prevent the factors of production changing their use
63
What did Keynes say about wages?
That they were sticky downwards
64
What effects the wages received for a job?
- Formal education - Skills/experience - Gender and discrimination
65
Effects on the labour market due to migration?
- More competition for jobs - More skilled workers may improve productivity - It may depress wages for low skilled jobs - Could lead to more domestic workers unemployed
66
How can the government intervene in the market?
By setting a minimum or maximum wage rate
67
What is the elasticity of demand for labour?
The responsiveness of the demand for labour to a change in wage rate
68
What is the elasticity of supply for labour?
The responsiveness the quantity of labour supplied to a change in wage rate
69
How can the government intervene in a market?
- Price regulation (RPI-X) - Profit controls - Quality standards - Performance targets
70
What is regulatory capture?
When regulators start working in the interests of the firm

A-level Economics (6 decks)

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