W5 Flashcards
Can indifference curves cross?
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
What are some of the factors that impact a firms choice of price and quantity?
- input costs - that go into making the goods
- price elasticity of demand for their goods
- market power - that can prevent competition
What is economies of scale? An examples?
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
What is the equation for profit?
profit = Q x (price-cost)
or price = Profit/Q + cost
What are some of the considerations for profit maximisation along the demand curve?
- 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?
What are the MRS and MRT in demand curves?
MRS = trade off firm is willing to make
MRT = trade off firm is able to make
Can you desribe where the consumer and producer surplus would be on a demand curve?
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
If quantity of output changes what would mean it wouldn’t be a good idea?
If the costs outweigh the increase in producer surplus - decrease in producer surplus caused by a change in price
what is the equation for price elasticity of demand?
% change in quantity of good demanded /% increase in price of good
How do graphs of inelastic and elastic demand differ?
Elastic - flatter
inelasitc - steeper
What is a markup?
profit margin as a proportion of the price - it is inversely proportional to elasticity of demand
How do profit and competition link?
a firms profit margin depends on elasticity of demand which is determined by competition
If price is relatively inelastic what does that mean for competition?
there are few close subsitutes
What is market powers relationship with competition?
firms with market power have enough bargaining power to set prices without losing customers to competitors
What impact does competition policy have to consumers?
Competition policy limits market power - this can benefit consumers when firms collude to keep prices high
How do competition and nash relate?
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
Where are the consumer and producer surplus on a supply and demand curve with a P=MC line?
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
What is the relationship between competition and pareto efficiency?
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
Why would a supply or demand curve shift?
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
What are some of the characteristics of competitive markets?
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
What is the relationship with competition and innovation? - who is a theorist about this kinda sounds like a greek god
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
What does Aghion et al (2005) curve look like?
an unhappy face
competition on the bottom and innovation on the up axis
What is the relationship between competition, pollution and innovation?
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
What is the relationship between competition, pollution and innovation?
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
What is a price setter and where do you find them?
P>MC
monopoly
What are some of the characteristics of price stters?
p. efficiency?
economic rents?
advertising
innovation?
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
What are price takers and where do you find them?
P= MC
perfect competition
What are some of the characteristics of price takers?
p. efficiency?
economic rents?
advertising
innovation?
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
How do you work out the total surplus?
producer + consumer surplus
GDP and externalities relationship
there has been rapid tech growth and capitalism but there are negative extneralities associated with it
