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Economics > Theme 3 AO1 > Flashcards

Theme 3 AO1 Flashcards

1
Q

In perfect competition, are firms profit maximisers?

A

Yes

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2
Q

In perfect competition, are products the same?

A

Yes, all products are homogenous.

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3
Q

In perfect competition, is it easy to enter/exit the market?

A

Yes

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4
Q

In perfect competition, how many participants are involved?

A

There is a high amount of buyers and sellers.

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5
Q

In perfect competition, are there any information gaps?

A

No, perfect information exists for both buyers and sellers.

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6
Q

In perfect competition, do firms dictate their own prices?

A

No, firms are price takers and charge the price that is set by the market.

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7
Q

Are monopolies profit maximisers?

A

Yes.

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8
Q

Do monopolies set their own prices?

A

Yes, to some extent.

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9
Q

What type of profit do monopolies make?

A

Supernormal profit.

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10
Q

About markets with monopolies, are there high barriers to entry/exit?

A

Yes as the monopoly dominates the market.

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11
Q

About markets with monopolies, how many participants are there?

A

There are a small number of large firms but there may be a larger number of small firms already existing in the market.

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12
Q

In monopolistic competition, are there a high number of participants?

A

Yes, there are many producers and many consumers.

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13
Q

In monopolistic competition, are all products similar?

A

No, all products are highly differentiated.

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14
Q

In monopolistic competition, do firms dictate their own prices?

A

Firms have some control over their prices.

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15
Q

In monopolistic competition, are there high barriers to entry/exit?

A

No, barriers to entry/exit are low.

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16
Q

In monopolistic competition, are firms profit maximisers?

A

Yes

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17
Q

In monopolistic competition, are firms productively efficient?

A

Firms are not productively efficient as the price is always higher than MC

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18
Q

In monopolistic competition, are firms allocatively efficient?

A

No as price is always higher than MC

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19
Q

Are monopolies productively efficient?

A

It is unlikely as monopolies will only produce at the bottom of AC if MR passes through it.

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20
Q

Are monopolies allocatively efficient?

A

Given that MR is lower than AR, price is always above MC, so no.

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21
Q

In perfect competition, are firms allocatively efficient in SR?

A

Yes as MC crosses AR/MR

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22
Q

In perfect competition, are firms allocatively efficient in LR?

A

Yes as MC crosses AR/MR

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23
Q

In perfect competition, are firms productively efficient in SR?

A

No as AR/MR is higher than AC

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24
Q

In perfect competition, are firms productively efficient in LR

A

Yes as AR/MR passes through the bottom of AC

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25
Q

What is collusion?

A

Collusion is an anti-competitive agreement between rivalling firms that attempts to disrupt the market’s equilibrium. This is illegal.

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26
Q

What is a cartel

A

A group of firms that collude with each other. The only legal example is OPEC.

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27
Q

What is overt collusion?

A

This is when cartels will openly arrange to collude with each other.

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28
Q

Name some examples of overt collusion?

A

Price fixing, market sharing and bid-rigging.

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29
Q

In regards to oligopolies, who dominates the market?

A

The market is dominated by a few large firms and possibly many small firms.

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30
Q

In markets with oligopolies, are there high barriers to entry?

A

Yes, there are high barriers to entry as large firms utilise EOS.

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31
Q

In markets with oligopolies, are there similar products offered?

A

No, there is high product differentiation and firms engage in non-price competition.

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32
Q

What is the predatory pricing strategy?

A

Predatory pricing is firms temporarily set their prices below their average variable costs to eliminate competition. This is illegal.

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33
Q

What is the limit pricing strategy?

A

Large firms will set low prices to eliminate small firms from the market. This is illegal but hard to prove.

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34
Q

In markets with oligopolies, is there any risk of firms colluding?

A

Yes, there is a high risk of the large firms colluding with each other.

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35
Q

What does high contestability mean?

A

It means that it easier to enter a market due to low barriers of entry and exit, no sunk costs, no collusion and perfect information.

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36
Q

What does low contestability mean

A

It is difficult for firms to enter the market due to high barriers and high sunk costs.

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37
Q

What is first degree price discrimination?

A

It is when firms charge the maximum price that consumers are willing to pay (no consumer surplus)

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38
Q

What is secondary price discrimination?

A

Charging different prices to customers depending on how much they buy.

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39
Q

What is third degree price discrimination?

A

Charging different prices to different segments of the market for the same good or service.

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40
Q

How are consumers charged based on their PED for the good or service in third degree price discrimination?

A

The consumers with an inelastic PED are charged a higher price. Consumers with an elastic PED are charged a lower price.

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41
Q

What is a conglomerate merger?

A

A merger between two firms that are not in the same industry.

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42
Q

What is a vertical merger?

A

A merger between two firms in the same industry but at different points in the production stages.

43
Q

What is a horizontal merger?

A

A merger between two businesses in the same industry and stage of production.

44
Q

What form of regulation is there for mergers and takeovers?

A

The Competition Markets Authority (CMA) allows and disallows mergers to be completed.

45
Q

What is the main factor considered by the CMA if a merger is looking to be made?

A

The affect upon the consumer.

46
Q

What is the total revenue formula?

A

Price x quantity sold.

47
Q

What is the formula for average revenue?

A

Total revenue / quantity sold

48
Q

What is marginal revenue?

A

The revenue from a sale of an additional unit.

49
Q

What is the formula for total costs?

A

Fixed costs + variable costs.

50
Q

What is total fixed costs?

A

the sum of all fixed costs.

51
Q

What is total variable costs?

A

the sum of all variable costs.

52
Q

What is the formula for average (total) costs?

A

(total fixed costs + total variable costs) / output.

53
Q

What is the formula for average fixed costs?

A

total fixed costs / output.

54
Q

What is the formula for average variable costs?

A

Total variable costs / output.

55
Q

What is the formula for marginal cost?

A

Change in total cost / output.

56
Q

What is the formula for marginal revenue?

A

Change in total revenue / quantity sold

57
Q

How will a price change for an elastic good affect a firms revenue?

A

Revenue will increase if they decrease the price.

58
Q

How will a price change for a unitary elastic good affect a firms revenue?

A

Revenue will remain the same regardless of the price change.

59
Q

How will a price change for an inelastic good affect a firms revenue?

A

Decreasing the price will lead to a loss of revenue.

60
Q

What is organic growth?

A

The process of a business expanding its operations internally, relying on its own resources to grow its sales and revenue over time.

61
Q

What is an advantage of organic growth?

A

Sustainable and controlled growth.

62
Q

What is a disadvantage of organic growth?

A

It slower and requires time and patience.

63
Q

What is an advantage of vertical integration?

A

Increased control of quality and coordination between the supply chain.

64
Q

What is a disadvantage of vertical integration?

A

High upfront costs for acquisitions.

65
Q

What is an advantage of horizontal integration?

A

Rapid market share expansion.

66
Q

What is a disadvantage of horizontal integration?

A

Internal challenges through culture merging.

67
Q

What is an advantage of conglomerate integration?

A

Diversification and spreading the risk across different industries.

68
Q

What is a disadvantage of conglomerate integration?

A

Complexity in managing unrelated businesses.

69
Q

Name the possible constraints to business growth.

A

Size of the market, access to finance, regulation, owner objectives.

70
Q

Define the law of diminishing returns.

A

If a firm increases their variable inputs (labour) whilst keeping other inputs fixed (capital) then each additional output from each additional variable input will decrease.

71
Q

What is external EOS?

A

When all firms benefit from an industry becoming larger.

72
Q

What are the types of internal EOS?

A

Technical, Purchasing, Marketing, Financial, Managerial.

73
Q

What is purchasing EOS?

A

When a firms buys products in bulk they will receive a discount and therefore decrease their costs.

74
Q

What is financial EOS?

A

As a firm gets larger, it will be able to raise funds more easily through loans etc.

75
Q

What is technical EOS?

A

Large scale producers can employ more advanced and efficient production techniques that smaller firms cannot utilise.

76
Q

What is managerial EOS?

A

Larger firms can attract more advanced and experienced managers as they can pay them a higher salary.

77
Q

What is marketing EOS?

A

Larger firms will pay the same rate as smaller firms for an advert, however larger firms will have more stores to advertise therefore their average advertisement costs will be lower.

78
Q

What is the minimum efficient scale (MES)?

A

It is the point of production where a firm is achieving the lowest possible long-run average cost per unit of output. Any increase isn’t production will lead to an increase in average costs and diseconomies of scale.

79
Q

What are the types of diseconomies of scale?

A

Managerial, Worker alienation, Communication and control problems.

80
Q

What is managerial DEOS?

A

As firms grow, the structure may become overly complex. Communication decreases and bureaucracy increases which increases costs.

81
Q

In terms of DEOS, what is meant by worker alienation?

A

Employees may feel disconnected to a firm as it grows which will lead to higher staff turnover rates and less productivity.

82
Q

In terms of DEOS, what is meant by communication challenges?

A

As a firm grow, communication becomes more challenging which may lead to errors and increased costs.

83
Q

What is internal EOS?

A

It is the cost advantages that a single firm may achieve when they grow in size and production capacity.

84
Q

What is the n-firm concentration ratio?

A

A ratio that compares and measures the combined market share of the largest n firms in an industry. It is done by adding the market share of these firms.

85
Q

What is the significance of the n-firm concentration ratio?

A

A higher ratio indicates that a few dominant firms rule the market whereas a low concentration indicates a high number of smaller competitive firms in the market. This helps identify barriers to entry.

86
Q

What are price wars?

A

Fierce competition of firms continuously lowering prices to gain market share, often leading to lower profits for all.

87
Q

What are some reasons for collusive behaviour?

A

Avoid price wars, maintain high prices, stability and reducing uncertainty.

88
Q

What are some reasons for non-collusive behaviour?

A

Legal constraints, difference in objectives, drive for market share through competition.

89
Q

What is tacit collusion?

A

Firms do not make any agreement to collude but instead they engage in price leadership where one dominant from sets the price and others follow.

90
Q

What are some types of non-price competition?

A

Marketing, product differentiation, innovation, customer service.

91
Q

What occurs in highly contestable markets?

A

Intense price competition, no monopoly power, firms are focussed on the short-term, firms operate efficiently to gain the competitive advantage.

92
Q

What are some examples of barriers to exit?

A

Capital requirements, EOS, Distribution channels, Regulation, Brand loyalty, Patents.

93
Q

What are sunk costs?

A

A cost of a firm that cannot be recovered once made.

94
Q

How do sunk costs affect the degree of contestability?

A

The lower the sunk costs, the easier it is for the firm to leave the market if profitability decreases. This means it is highly contestable.

95
Q

In regards to monopolies, what is the profit maximising equilibrium?

A

When MR equals MC and monopolies maximise their profit.

96
Q

What are the three necessary conditions for a monopoly to be able to utilise third degree price discrimination.

A

The market must be able to be segmented, The firm must have the ability to charge different prices in each segment, Resale between segments should be prevented/discouraged.

97
Q

What are the benefits of third degree price discrimination?

A

Firms will be able to capture more consumer surplus and consumers in the less elastic group will pay lower prices.

98
Q

What are some costs of third party discrimination?

A

Consumers in the more elastic group will pay higher prices which may lead to a reduced consumer surplus.

99
Q

What is a natural monopoly?

A

When one single firm can efficiently serve the entire market.

100
Q

What are some features of a natural monopoly?

A

High fixed costs when compared to variable costs, declining average costs as production increases, usually based in utility and infrastructure industries.

101
Q

How do monopolies affect themselves?

A

They can earn significant profits but may face regulatory scrutiny and potentially government intervention.

102
Q

How are consumers affected by monopolies?

A

Consumers are likely to face higher prices, reduced choice and less consumer surplus.

103
Q

How are employees affected by monopolies?

A

They may receive job security however reduced competition may negatively affect their wages.

104
Q

How are suppliers affected by monopolies?

A

They have limited negotiating power and are pressured for lower prices.

Economics (15 decks)

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