W5

Question 1

Can indifference curves cross?

Answer 1

not for the same individual but there can be a cross over for two different people

it doesn’t follow that at this crossing over point there will be the same utility

Question 2

What are some of the factors that impact a firms choice of price and quantity?

Answer 2

• input costs - that go into making the goods
• price elasticity of demand for their goods
• market power - that can prevent competition

Question 3

What is economies of scale? An examples?

Answer 3

a firm’s costs depend on its scale of production

economies of scale occur when doubling all production inputs more than doubles the output

eg. Worker specilisation - Adam Smith’s Pin factory
fixed costs - up-front investment in a factor or payment for patents are spread over more putout

there can also be diseconomies of scale

Question 4

What is the equation for profit?

Answer 4

profit = Q x (price-cost)

or price = Profit/Q + cost

Question 5

What are some of the considerations for profit maximisation along the demand curve?

Answer 5

• how much price reduction am i willing to accept for an increase in quantity while still having a profit
• how much price reduction do I have to accept for an increase in quantity?

Question 6

What are the MRS and MRT in demand curves?

Answer 6

MRS = trade off firm is willing to make

MRT = trade off firm is able to make

Question 7

Can you desribe where the consumer and producer surplus would be on a demand curve?

Answer 7

Consumer surplus = below the feasible frontier and ends on the price line (which is above the marginal cost line)

Producer surplus is the square under the Price and above the marginal cost of production

deadweight loss would be the triange between the feasible frontier or MRS and the quantity produced ending at the marginal cost of production

Question 8

If quantity of output changes what would mean it wouldn’t be a good idea?

Answer 8

If the costs outweigh the increase in producer surplus - decrease in producer surplus caused by a change in price

Question 9

what is the equation for price elasticity of demand?

Answer 9

% change in quantity of good demanded /% increase in price of good

Question 10

How do graphs of inelastic and elastic demand differ?

Answer 10

Elastic - flatter

inelasitc - steeper

Question 11

What is a markup?

Answer 11

profit margin as a proportion of the price - it is inversely proportional to elasticity of demand

Question 12

How do profit and competition link?

Answer 12

a firms profit margin depends on elasticity of demand which is determined by competition

Question 13

If price is relatively inelastic what does that mean for competition?

Answer 13

there are few close subsitutes

Question 14

What is market powers relationship with competition?

Answer 14

firms with market power have enough bargaining power to set prices without losing customers to competitors

Question 15

What impact does competition policy have to consumers?

Answer 15

Competition policy limits market power - this can benefit consumers when firms collude to keep prices high

Question 16

How do competition and nash relate?

Answer 16

a competitive equilibrium is a nash equillibrium

• given what other sellers and buyers are doing
  the best strategy of a buyer is to buy at that price
  the best strategy of a seller is to sell at that price

Question 17

Where are the consumer and producer surplus on a supply and demand curve with a P=MC line?

Answer 17

the consumer surplus ..
is above the P=MC (=MR) and below the demand curve

the producer surplus..
is below the P=MC(=MR) and above the supply or marginal cost line

Question 18

What is the relationship between competition and pareto efficiency?

Answer 18

a competitive equilibirum is pareto efficient

not possible to make any of the consumers or firms better off without making at least one of them worse off

Question 19

Why would a supply or demand curve shift?

Answer 19

a shock eg. a technological change or popularity

buyers and sellers adjust their behaviour so that the market clears

eg. improved baking technology –> increased supply of bread –> excess supply so demand falls

Question 20

What are some of the characteristics of competitive markets?

Answer 20

all transactions take place at a single price

buyers and sellers are price takers

the market clears - supply=deamand
there are no deadweight losses- all potential gains from trade are realised

perfect competition may not hold completely in reality but can be a good approximation to actual firm behaviour

Question 21

What is the relationship with competition and innovation? - who is a theorist about this kinda sounds like a greek god

Answer 21

a lack of competition is a market failure

Aghion et al (2005) - inverse u shape of competition and innovation

more competition is not always good for innovation

• more competition can increase incentives for innovation as one might be able to escape the competition
• reduces rewards for innovators thereby reducing incentives to compete

Question 22

What does Aghion et al (2005) curve look like?

Answer 22

an unhappy face
competition on the bottom and innovation on the up axis

Question 23

What is the relationship between competition, pollution and innovation?

Answer 23

If consumers dont care about the environment, there will be increased competition and therefore more pollution

if they care enough there will be an increase in competition which will trigger innovation and reduce emissions - innovation escapes into cleaner products

if pro-environment preferences are strong enough competition is always reducing pollution

Question 23

What is the relationship between competition, pollution and innovation?

Answer 23

If consumers dont care about the environment, there will be increased competition and therefore more pollution

if they care enough there will be an increase in competition which will trigger innovation and reduce emissions - innovation escapes into cleaner products

if pro-environment preferences are strong enough competition is always reducing pollution

Question 24

What is a price setter and where do you find them?

Answer 24

P>MC
monopoly

Question 25

What are some of the characteristics of price stters?
p. efficiency?
economic rents?
advertising
innovation?

Answer 25

p. efficiency?
- there are deadwieght losses therefore it is p inefficient

economic rents?
- owners receive economic rents in both long and short run

advertising
firms can spend on advertising their unique products

innovation?
firms can invest in R&D seek to prevent copying through IPR

Question 26

What are price takers and where do you find them?

Answer 26

P= MC
perfect competition

Question 27

What are some of the characteristics of price takers?
p. efficiency?
economic rents?
advertising
innovation?

Answer 27

p. efficiency?
no deadweight losses - p efficient

economic rents?
no economic rents in the long run

advertising
less advertising expenditure

innovation?
less inventive for innovation

Question 28

How do you work out the total surplus?

Answer 28

producer + consumer surplus

Question 29

GDP and externalities relationship

Answer 29

there has been rapid tech growth and capitalism but there are negative extneralities associated with it