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Economics > Year 13 microeconomics > Flashcards

Year 13 microeconomics Flashcards

1
Q

Monopoly features…

A
  • Single firm dominates the market.
  • Firm is a price-maker.
  • Firm is a profit-maximiser.
  • High barriers to entry and high barriers to exit.
  • Imperfect information.
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2
Q

Perfect competition and its features…

A
  • It’s a theoretical thing that does not actually exist…
    Features such as:
  • Consumer + producers have perfect information
  • Firms are profit maximisers
  • No barriers to entry or barriers to exit.
  • Infinite no. of suppliers and consumers.
  • Products are homogenous + no brand loyalty.

(This does NOT lead to DYNAMIC EFFICIENCY but RATHER STATIC EFFICIENCY)

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3
Q

What’s dynamic efficiency?

A
  • Improving effficiency in the LR via investment in R&D,training etc.
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4
Q

What’s x-efficiency?

A
  • Measures how successfully a firm can keep its costs down.

X-inefficiency is when firms waste FoPs or pay too much for FoPs.

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5
Q

What’s static efficiency?

A
  • When productive and allocative efficiency is achieved, they eventually would become outdated.
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6
Q

Where are profits max. on a diagram?

A

MC = MR

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7
Q

Where are sales max. on a diagram?

A

AC = AR

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8
Q

Where is allocative efficiency on a diagram?

A

P = MC OR AC = MR

(The price links with marginal cost due to what consumers would pay)

(AC = AR) is sales max.

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9
Q

When do SRAC curves shift above LRAC?

(EoS—->Diseconomies of scale with LRAC curve under)

A
  • SRAC curves shift when ALL FoPs change.
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10
Q

What is a deadweight welfare loss?

A
  • A loss to society that cannot be recovered.
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11
Q

Monopolistic competition features…

(Realistic market structure)

A
  • Many buyers and sellers
  • Slightly differentiated goods
  • Firms are price-makers
  • Price elastic demand
  • Low barriers to entry and barriers to exit
  • Good information
  • Firms are profit-maximisers
  • Non-price competition
  • Firms don’t fully benefit from EoS (especially in the LR)
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12
Q

Reasons for high barriers to exit

A
  • Sunk cost fallacy
  • Govt. regulation or patents
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13
Q

Reasons for high barriers to entry

A
  • High start-up costs
  • Govt. regulation
  • Patents
  • Price wars/aggressive pricing tactics
  • Brand loyalty.
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14
Q

Monopolistic competition in the SR and LR

A

SR - supernormal profits made (AR > AC)
LR - Normal profits made (AR = AC) with tangential AC curve -> not productively efficient as not producing on lowest point of AC + Not allocatively efficient at P > MC

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15
Q

Define price discrimination…

A
  • When sellers charge different consumers different prices for exactly the same product.
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16
Q

Conditions for price discrimination…

A
  • Some monopoly power
  • Seperate different consumer via PED, e.g. inelastic PED = charge higher prices and elastic PED = charge lower prices
  • Good information
  • ## Prevent re-sale, (prevent someone else from buying lower and selling higher…)
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17
Q

Types of price discrimination…

A
  • (1st degree) When consumers are charged the maximum they’re willing to pay, (eliminating consumer surplus and turning it into revenue for the firm).
  • (2nd degree) Used in wholesale markets when lower prices are charged to people who purchase high quantities, (Consumer surplus turns into supernormal profit).
  • (3rd degree) When a firm charges different prices for the same product to different segments of the market, e.g. higher prices for inelastic PED and lower prices for elastic PED.
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18
Q

Pros and cons of price discrimination…

A

+ Consumer surplus turned into revenue could mean that the revenue could be reinvested into the firm. +++
+ Despite consumers not treated equally, people with higher incomes often pay more. +++
- EoS means lower AC can be passed on to consumers in low prices +++
- No allocative efficiency as P = MC or (AR= AC) not met, as AR > MC. —

No allocative efficiency overrides all the pros so its not a good thing!

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19
Q

Oligopoly features…

A

The theoretical model:
- Few firms dominate the market
- High concentration ratio (7 firms with approx. 70% market share)
- Differentiated goods + Firms are price-makers
- High barriers to entry and high barriers to exit.
-> Firms’ INTERDEPENDENCE + price rigidity (prices don’t change easily).
- Profit max. not sole objective!
- Oligopolies can be collusive or non-collusive.

(Links to kinked demand curve)

e.g. car market, fuel providers, airlines etc

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20
Q

Firms’ objectives

A
  • Max. profit
  • Max. revenue (perhaps for the SR) where MR = 0.
  • Profit satisficing…
  • To aid others e.g. NGOs.

(Maximising profit might only be an objective for the LR).

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21
Q

Define labour productivity…

A
  • Output per hour worked.
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22
Q

What do concentration ratios show?

A
  • Shows how dominant the big firms are in a market.
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23
Q

Factors that promote a COMPETITIVE oligopoly…

A
  • Many firms (oligopoly with less concentration ratio)
  • New market entry possible (low barriers to entry)
  • One firm with significant cost advantages (may open up chances for collusion)
  • Homogenous goods
  • Saturated market (price wars etc happen to gain market share)
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24
Q

Pros and cons of a Competitive oligopoly market…

A
  • Allocative, produtive and x-efficiency gained, and static efficiency lost.
  • However, dynamic efficiency lost and EoS benefits lost.
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25
Q

Factors that promote a collusive oligopoly…

(cartel)

A
  • Tacit collusion (firms co-ordinate their actions to signal to other firms for collusive behaviour)
  • Overt collusion (formal agreements between colluding firms)
  • Small no. of firms
  • Similar costs
  • High barriers to entry
  • Ineffective competition policy
  • Consumer loyalty (if consumers are loyal to rival firm), collusion won’t be o any benefit.
  • Consumer inertia (if consumers are lazy to switch products), collusion will not be of any benefit.

(This collusion may lead to a monopoly)

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26
Q

Pros and cons of a collusive oligopoly

A
  • Benefits of a monopoly may occur from higher market share (e.g. EoS)
  • However, this is illegal as it leads to an unfair gain in market share.
  • Also, this monopoly may come about may cause things like information failur, which copuld lead to market failure.

(May be the same pros and cons of a monopoly, as this may come about)

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27
Q

Perfect competiton in the SR…

(Losses)

A

Market:
- Left shift in supply from Q1 to Q3, this may not last.
Firm:
- Loss is made, however, this may not last as firms will leave the market to produce opportunity costs.
- AR1 = MR1 = D1 will upshift to AR2 = MR2 = D2
- (AR2 = MR2 = D2) is the normal profit so AR tangential to AC.

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28
Q

Perfect competition in the LR:

(Equilibrium)

A

Market:
- Supply in equilibirum
Firm:
- Normal profits made so AR tangential to AC.

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29
Q

Perfect competition in the SR + diagram briefing…

(Supernormal profits)

A

Market in the SR:
- Right shift in supply from Q to Q3.
- Due to more firms entering the market, costs will lower as the costs spread across more firms.
Firm in the SR:
-> MC cuts AC at lowest point, and AR = MR = D will downshift to AR2 = MR2 = D2, as tis curve will keep happening until all supernormal profits are competed away by new firms.

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30
Q

Some details of the oligopoly curve…

(theoretical)

A
  • A rise in price = higher proportIonate fall in QD
  • A fall in price = lower proportionate rise in QD
  • If firm is a proft-maximiser, P1 and Q1 will always be charged.
    Some conclusions:
  • Price wars may happen for market share (e.g. supermarkers and airlines)
  • Non-price competition (firms compete via advertising, quality etc)

Profits maximised at MC = MR

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31
Q

Perfect competition and efficiency…

(Additional info)

A
  • This is allocatively efficiently (P = MC), productively efficient (MC = AC) and x-efficient.
  • Not dynamically efficient as no supernormal profits in the LR.
  • SR supernormal profits
  • LR normal profits due to firms undercutting eachother.

(Productively efficient and x-efficient may be the same thing).

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32
Q

When is competitive behaviour likely within a market?

(Oligopolies)

A
  • When one firm has lower costs than the others.
  • Large no. of firms within a market
  • Firms produce similar products to eachother.
  • Low barriers to entry.
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33
Q

When is collusive behaviour likely within a market?

(Oligopolies)

A
  • Firms have similar costs.
  • Few firms in the market.
  • ‘Brand loyalty’ making customers less likely to buy from another firm.
  • High barriers to entry.
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34
Q

How can oligopolies bring similar outcomes to a monopoly?

A
  • Collusive oligopolies could lead to higher prices and restricted output.
  • Not allocatively efficient or productively efficient.
  • Despite having means to reinvest to achieve dynamic efficiency, there is no incentive to do this.
  • Collusive oligopolies make supernormal profits at expensive of consumers, and they don’t lower prices despite being able to.
  • These firms are x-efficient and due to high prices (due to not lowering prices).
  • Colluding firms may agree to restrict output to maintain higher prices.

(Market failure can occur from underconsumption).

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35
Q

How may firms that collude on prices still compete in other ways?

(This makes marketing policies important)

A
  • Product differentiatation from other firms.
  • ‘Loyalty rewards’ e.g. loyalty cards.
  • New export markets.
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36
Q

Pros of oligopolies…

A
  • Potential dynamic efficiency, good for consumers if it led to better quality products.
  • Firms unlikely to raise price very highly, due to high prices incentivising new firms to enter, even if there are high barriers to entry.
  • Competitive oligopolies may achieve high efficiency levels.

(Oligopolies may be unstable or they may not last long).

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37
Q

Two types of collusion…

(Oligopolies)

A
  • Formal collusion entails an agreement between firms, e.g. they form a cartel.
  • Informal collusion is tacit, it happens without an agreement, (they know its not in their best interest to compete as long other firms do the same).
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38
Q

Pros and cons of a monopoly…

A

Pros:
- Dynamic efficiency (LR supernormal profits can be reinvested in R&D)
- Greater EoS
- Natural monopoly benefits (a regulated natural monopoly) one can give society desirable outcomes).
- Cross subsidisation (A monopoly can reinvest supernormal profits into areas where losses are made).

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39
Q

Nash Equilibrium conclusions…

(Prisoners’ Dilemma and oligopolies)

A
  • Nash Equilibrium leads to price rigidity as firms don’t want price change, leading to non-price competition (ads,branding,product quality etc).
  • Nash Equilibrium may NOT be best outcome for both firms as they can both charge at a higher price leading to higher profits.
  • If ONE FIRM CHARGES HIGHER PRICE, this firm will be at risk as the other firm will undercut them by charging a lower price (and make more profit than them).
  • To break interdendence, firms may collude, allowing BOTH firms to CHARGE THE HIGHER PRICE and profit more! (However, one firm may want to rival other firm for more profit and market share).

(See diagram)

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40
Q

What makes a market have high/low contestability?

A

For high contestability:
- High contestability = low barriers to entry/ low barriers to exit.
- Good information of market conditions so that firms can enter (know about technology for a level playing field).
- Firms subject to ‘hit and run’ tactics (firms enter during supernormal profits and when normal profits are being made.
For low contestability:
- Low contestability = high barriers to entry/high barriers to exit.
- New firms failing to attain correct information on technology (preventing a level playing field).

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41
Q

The formula for calculating concentration ratio…

A
  • revenue of each firm / total market value x 100

(check flashcard 14)

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42
Q

Monopolies and efficiency…

A
  • Dynamically efficient due to supernormal profits in SR and LR.#
  • NOT allocatively efficient as P > MC.
  • NOT productively efficient as MC DOES NOT meet AC.
  • Not x-efficient as there’s waste, and they may be producing above average cost curve.
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43
Q

Monopolistic firms and efficiency…

A
  • Not allocatively, dynamically or productively efficient.
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44
Q

Monopolistic firms and efficiency…

A
  • Not allocatively, dynamically or productively efficient.
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45
Q

Perfect competition and efficiency

A
  • Allocatively, productively efficient + x-efficient.
  • NO dynamic efficiency, as there are no LR supernormal profits.

(LR equilibrium)

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46
Q

Monopoly and efficiency…

A
  • Not allocatively, productively or x-efficient.
  • They ARE dynamically efficient.
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47
Q

Oligopolies and efficiency…

A
  • Not efficient.
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48
Q

Explanation of the kinked demand curve…

(Oligopolies)

A

FALL in price = LESS proportionate RISE in QD (firms will not do this)
RISE in price = MORE proportionate FALL in QD (firms will do this to protect market share). -> May lead to a price war.

(FLR, RMF)

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49
Q

Explanation of the kinked demand curve with MC curves…

(Oligopoly)

A
  • AR and MR curves with slope changes…
  • 2 MC curves (MC1 up to MC2) -> In this same vertical gap as P1 will always be charged

(check diagram)

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50
Q

What is a perfectly competitive labour market?

A

Employers are wage-takers.

(Employers have no control over what they can pay their employees).

Employers have to pay employees market set wage.

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51
Q

Why would firms not hire workers above MCL?

(Labour markets)

A
  • This would mean C > MRP.
  • Costs = wages which costs the firm
  • MRP is the additional revenue from another worker.

(Employers/firms should hire workers where MRP = MCL)

52
Q

Why would firms not hire workers below MCL?

(Labour markets)

A
  • This would mean MR > C.
  • MRP is the additional revenue from another worker.
53
Q

Details on monopsony…

(Monopsony is a single buyer)

A
  • Wage-making power
  • ## Maximise revenue by hiring where MRP = MCL
54
Q

What may shift labour to the right?

A
  • Rise in wages
  • Rise in business confidence
  • Rise in education + training
55
Q

Why is there an inverse relationship between wage and quantity of workers and labour?

(As one decreases, the other one rises and vice versa).

A
  • In the short-run, law of diminishing returns.
  • In the long-run, substitutability of labour and capital.

(Higher wages cost firms more, which is why qty of workers decrease).

56
Q

What type of demand is labour?

A
  • Derived demand.
57
Q

FoPs in the short-run and long-run…

A

Short-run - FoPs cannot easily change
Long-run - FoPs can be changed (FoPs are variable)

58
Q

Causes of labour demand curve shifts…

(PDPC)

A
  • Change in the final price of the product labour is making (rise in MPP = rise in MRP = right shift in demand and vice versa)
  • Change in demand for final product (rise in demand = rise in labour and vice versa)
  • Changes in labour productivity (rise in labour productivity = rise in MRP = right shift in demand and vice versa)
  • Change in the price of capital (decrease in price of capital = decrease in labour demand = left shift and vice versa)

(Labour is a derived demand)

59
Q

How do MRP and demand link…

A

Rise in MRP = Right shift in demand as demand rises
Decrease in MRP = Left shift in demand as demand decreases

60
Q

A monopsony is…

A
  • A monopsony is the sole employer of labour in a given profession e.g. teachers, doctors etc

(Or in a given market)

61
Q

Features of a monopsony…

(Almost like a monopoly)

A
  • Wage-maker
  • ## Will maximise revenue from wokers by hiring up to where MRP = MCL.
62
Q

Monopsony results in the market…

A
  • Low employment due to low wages, from wage-making power.
63
Q

Why is the supply curve upward sloping for a monopsony curve?

(Labour markets)

A
  • The more workers employed, wages increase more.

(So MCL > ACL).

64
Q

Why is MCL > ACL on a monopsony curve?

(Labour markets)

A
  • The more a monopsony increase wages, the more wages increase for all workers, not just every additional worker -> This makes the marginal cost of labour exceed avg. cost of labour.
65
Q

Monopsony details…

(Labour markets)

A
  • The lower wages are compared to MRP, the higher the monopsony power in the market and vice versa.
    -> A monopsonist reduces qty of workers compared to competitive labour markets, and they give lower wages than competitive labour market outcomes.
66
Q

Contestable market features…

A

-> Low barriers to entry/exit
-> Good information about market
-> Many firms want to enter the market
-> Incumbent firms subject to ‘Hit and run’ tactics’

67
Q

Details on ‘Hit and run’ competition…

A
  • Firms enter the market when super normal profits are made, and then exit the market when normal profits are made.
68
Q

Contestable markets and efficiency…

A
  • Allocatively efficient + productively efficient.
  • Not dynamically efficient
69
Q

Pros and cons of contestable markets…

A

Pros:
- Allocatively, productivity and x-efficient.
- Job creation
Cons:
- Lack of dynamic efficiency
- Cost cutting in dangerous areas (cuts in safety costs, wages etc)
- Creative destruction - More tech could lead to job losses
- Anti-competitive strategies (collusion etc)

70
Q

Where is profit maximised on a monopsony diagram?

A

MRP = S (ACL)

71
Q

Where should NMW be on a monopsony diagram?

A

Where MRP = S(ACL)

72
Q

Tacit collusison…

A
  • When firms agree to limit consumption…
73
Q

Contestable market features and other things…

A
  • Low B2E/ exit
  • Good information about market
  • Incumbent firms subject to ‘hit and run’ competition.
  • To deter new entrants, limit pricing would take place where AC = AR on the diagram (sales maximised)
  • So, profit and price falls, and qty rises.

(Check diagram)

74
Q

Details on the substitition effect and the income effect…

(Short-run supply curve)

A

Substitution effect - When wages rise -> individuals work more as opportunity cost of leisure rises.
Income effect - When wages rise -> individuals work less + they prioritise leisure.

75
Q

Details trade-off between inflation and unemployment…

(Short-run Phillips curve)

A
  • Economist A.W Phillips found that as inflation falls, unemployment rises.
  • To combat rising unemployment, govt. could boost A.D -> Inflation would fall too.
  • HOWEVER, people dispute this as if inflation rises, people may expect it to remain high -> People will change their behaviour accordingly, (adaptive expectations).

Monetarists state there is no trade-off between inflation and unemployment.

76
Q

Where would labour be employed in a competitve market?

A
  • Where MRP = MCL
77
Q

Kinked demand curve to show why firms do NOT want to change price…

(Oligopolies)

A

Illustration:
- Demand curve elastic from top, then inelastic from 1/4 down -> Label this D = AR -> An AR curve
- Draw MR curve (twice as steep), then vertical from 90% down from top, then inelastic from x-axis and underneath. -> Label this MR and plot this on x-axis at Q1.
- Draw 2 MC curves where MR curve vertical section is -> Label bottom curve MC1 and top curve MC2.

(May explain price rigidity)

(Check diagram)

78
Q

Evaluation points for trade unions’ impact on a competitive labour market…

A
  • Strength of trade union power (higher union density means mpre power for them)
  • Union markup (wage differences between trade unionmemebrs and non-trade union members)
  • Real wolrd evidence proves limited power of TUs
79
Q

Factors that effect elasticity of labour demand…

A
  • More price elastic (PED) a product is, there’ll be elastic labour demand and vice versa.
  • If labour can easily be substituted by capital, there’ll be elastic labour demand and vice versa.
  • If wages make up a small proportion of a firm’s total costs, there’ll be inelastic labour demand.
80
Q

What’s elasticity of demand for labour?

A
  • Change for demand for labour when wage level changes.
  • When labour demand is elastic, small wage changes cause large changes in the qty of labour demanded.
  • When labour demand is inelastic, large wage changes can cause small changes in the qty of labour demanded.
81
Q

What is elasticity of supply of labour?

A
  • This measures changes in labour when wage levels change.
  • When labour supply is elastic, a small rise in wages would cause a larger rise in the qty of labour supplied.
  • When labour supply is inelastic, a large rise in wages would cause a smaller rise in the qty of labour supplied.
82
Q

Factors that affect elasticity of labour supply…

A
  • Skill level for a job (More lower skill required for a job, more elastic, more higher skill level required for a job, more inelastic)
  • If workers are occupatioanally mobile (they can switch to another job easily), wage rises will cause higher rises in labour supply, there’ll be elastic labour supply.
  • Same thing if workers are geographically mobile (they can move locations to where the jobs are)
83
Q

Pros and cons of a NMW…

A

Pros:
- Can help those on low incomes and can reduce poverty in a country.
- NMW can boost morale of workers, which could boost productivity.
- Could incentivise people to get a job.
- Govt. tax revenue could rise if NMW is implemented.
Cons:
- NMW would cost more for firms, which may increase unemployment from cutting jobs.
- NMW could decrease competitiveness of UK firms compared to abroad firm who have lower wage costs.
- UK firms may pass on higher wage costs to consumers by higher prices, (could lead to inflation).
- There are doubts as to whether this work as poorest and disabled members of society are not in work.

84
Q

Pros and cons of a maximum wage…

A

Pros:
- This could reduce a firms’ total costs.
- This could limit inequality in a country.
Cons:
- Unfair to not reqard greter efffort or ability with higher income.
- Higher pay can motivate workers to work harder.

85
Q

What is the NMW…

A
  • The NMW set a legal minimum hourly rate of pay for different age groups.
86
Q

What is a maximum wage…

A
  • This limits a worker’s wage rate
87
Q

Pros and cons of privatisation…

(Regulation is tranferring ownership from the public sector to the private sector)

A

Pros:
- Better efficiency and competition
- Govt. gains revenue from selling firms
- Privatised firms can react better to market forces.
Cons:
- Perhaps private firms have less focus on safety and more focus on profits.
- May need regulating ti orevent a private monopoly.

88
Q

Pros and cons of deregulation…

A

Pros:
- Better resource allocation
- Better efficiency by reducing ‘red tape’
Cons:
- Less safety and protection for consumers.
- Can be difficult to regulate natural monopolies.
- rise in avg costs + wasteful duplication of resources can lead to allocative efficiency
- can potentially lead to monopolies and oligopolies forming

89
Q

Role of the CMA…

A
  • They monitor mergers and takeovers to prevent those that do not help the efficiency of the market or to consumers. + They may stop a merger if it gives a firm too much market share.
  • Prevent cartels and collusion
  • ## Offer financial support, and make sure this is fair
90
Q

Why do wage differentials occur?

A
  • Due to discrimination on things like…
  • Age, race, gender etc
91
Q

Define privatisation…

A
  • The transfer of ownership of a firm/industry from the public sector to the private sector.

(Privatisation can improve efficiency)

92
Q

Privatisation and efficiency…

A
  • Allocatively efficient
  • Reduces x-inefficiency
  • Perhaps could lead to dynamic efficieny

((AC = AR), or being allocatively efficient means maximised sales).

93
Q

Deregulation and efficiency…

A
  • Rise in consumer choice will lead to allocative efficiency (AC = AR)
  • Productively efficient (MC = AC)
  • x-efficient and dynamically efficient

(Dynamic efficiency due to LR supernormal profits)

94
Q

How can a NMW lead to unemployment?

A

NMW could lead to inflation as firms may pass on their higher costs to customers, and this may cause unemployment

95
Q

Pros and cons of privatisation…

A

Pros:
- Govt. gains revenue from selling firms
- Rise in competition boosts efficiency and reduces x-efficiency
- PFIs enable important buildings to be built that the govt. may not be able to afford.
- PFIs means lower taxes in the short run because the govt. won’t pay for the new facility immediately.
Cons:
- PFIs mean high taxes for future generations to pay for the cost of the govt. leasing the facility
- A privatised public monopoly could become a private monopoly, so deregulation may be needed
- Safety may be somewhat ignoored, due to want for profits
- PFI may cost more in long run than its worth, adding to govt. debt and may misrepresent money value.

(Privatisation can introduce competition into market with a public monopoly).

96
Q

What is a PPP?

(Public Private partnership)

A
  • A private firm that workd with the govt. to build something or provide a service to the public
  • A PFI (Private Finance Institute) can allow a govt. to contract a private firm to run a project.
97
Q

Ways in which regulation can help…

A
  • Reducing the use of demerit goods
  • Reducing monopoly power
  • Providing protection for consumers and producers from asymmetric information

(Consumer Rights Act protects consumers against firms supplying substandard goods).

98
Q

Why can regulations be difficult to set…

A
  • Can be difficult for a govt. work out what is correct and what is not correct
  • Regulation may be needed worldwide and just in one country e.g. pollution
  • Following excessive regulations can be expensive, which could lead to firms moving abroad or even close. -> ‘red tape’
  • Monitoring regulation adherance may be expensive for a govt. + if punishments aren’t harsh enough for breaking regulation, it mahy not be enough of a deterrent.
99
Q

Define regulation…

A

Rules that are enforced by an authority usually backed up with legislation, which means that legal action can be taken against those that break the rules.

100
Q

Define deregulation

A

Removing or reducing regulations, it can be used to increase competition in markets and even tackle market failure

(Deregulation is often used alongside/as part of privatisation, effective privatisation of an indsutry can prevent a privatised public monopoly become a private monopoly).

101
Q

Pros and cons of deregulation…

A

Pros:
- Improves resource allocation, with higher competition as markets made more contestable
- Can be used alongside privatisation of a public monopoly to prevent the privatised firm from becoming a private monopoly.
- Efficiency rises with ‘red tape’ and bureaucracy removed.
Cons:
- Difficult to deregulate some natural monopolies e.g. utilities -> They need large infrastructures
- Deregulation cannot fix other market failures such as negative externalities, consumer inertia or immobile FoPs. + Less safety and protection for consumers…

102
Q

What factors could determine whether deregulation will work or not depends on…

A

-> Oligopolies or monopolies may cause contestability to fall in the long-run, not the short-run.
- Low B2E/exit doesn’t necessarily mean firms will enter market -> could be due to high start-up costs
- Govt. regulation -> To prevent oligopolies or monopolies

103
Q

Define price mechanism…

A
  • The price mechanism is the means by which decisions of consumers and businesses interact to determine allocation of resources in a market
104
Q

Pros and cons of the price mechanism…

A

Pros:
- Resources efficiently allocated to satisfy consumers’ needs and wants.
- Price mechanism can operate without employing people to regulate it.
- Consumers decide what is and isn’t produced by producers.
- Prices are kept to their minimum as resources are used as efficiently as possible.
Cons:
- Inequality in wealth and income
- Due to supply and demand of merit and demerit goods not at socially optimal level -> this will entail under-provision of merit goods and over-provision of demerit goods.
- People with limited skills or ability to work will receive low wages or will be unemployed.
- Public goods won’t be produced.

105
Q

How can the price mechanism cause unintended consequences…

A
  • e.g. with blood donors, there’s been a rise in the costs of screening to prevent ‘unsuitable’ donors donating
106
Q

What is the ‘tragedy of the commons’?

A
  • The ‘tragedy of the commons’ refers to a situation in which individuals with access to a public resource act in their own interest and in doing so, ultimately deplete the resource.
  • This can lead to environment market failure
  • The govt. may introduce quotas, taxation, subsidies and more.
107
Q

Pros and cons of nationalisation…

A

Pros:
- More economies of scale
- More focus on service provision
- Less chance of market failure from externalities
- Public sector could provide more macroeconomic control
Cons:
- Chances of diseconomies of scale due to lack of supernormal profits
- Disincentivised to minimise costs
- Could lead to wasteful production
- Higher prices + Higher chance of moral hazard

108
Q

Pros and cons of state provision…

A

Pros:
- Can correct market failure e.g. street lighting provided due to a ‘missing market’ things
- Can provide things like free education etc
Cons:
- Less incentive to be efficient due to no price mech
- There may be failure in responding to consumer demand, due to no profit -> Which may cause inadequate supply
- Opp. cost of state prov of other goods
- Can reduce individuals’ self-reliance + moral hazard

109
Q

Pros and cons of tradable pollution permits…

(Tradable pollution permits use the market mechanism, as it has a value, and firms can buy and sell these).

A

Pros:
- Encourages firms to pollute less
- Firms selling their permits could allow them to expand
- Govt. could use invest revenue from e.g. fines towards reducing pollution schemes
- Permit may internalise negative externality of pollution
Cons:
- Optimal pollution lvl can be hard to set -> If too high, no incentive to reduce emissions -> If too low, firms may relocate + New firms may not be able to start up at all
- Pollution permit scheme creates new market -> Potential market failure OR black market?
- High lvls of pollution in areas could harm environment
- High costs in enforcing such schemes

(Firms may trade permits with other firms, as if their pollution is low, the other firm can pollute more with the permit).

110
Q

Property rights and the market mechanism…

(With pros and cons).

A
  • Property rights can tackle market failure (absence or propty rights can lead to market failure).
    Pros:
  • Negative externalities internalised
  • Could improve resource management + negative externalities more closely monitored or regulated
  • Revenue from charging polluters could reduce effects of negative externalities.
    Cons:
  • Can be difficult or costly to implement
  • Difficulty to extend propty rights to overseas
  • Suing propty rights can be costly, dettering action being taken
  • Can be difficult to value a propty
  • Can be difficult tracing source of environmental damage
111
Q

‘Living wage’ things…

A
  • Covers an individual’s basic cost of living
  • Not mandatory but govt. encourages it

(Similar pros and cons to NMW)

112
Q

Pros and cons of max. wage…

A

Pros:
- Rises in wages could cause inflation, so a max. wage prevents this.
- Max. wage could limit inequality
- Could reduce a firm’s costs
Cons:
- Perhaps unfair to not reward higher productivity
- Higher pay may motivate harder work
- People may leave industry with max. wage, for a higher wage

113
Q

Real wage unemployment + consider the diagram…

A
  • When real wages are pushed about the equilibrium level
  • An NMW above the equilibrium would occur
  • Due to a rise in labour supply and fall in labour demand -> excess supply -> unemployment
    -> However, labour demand could increase with a right shift (from a rise in productivity or consumer spending) -> unemployment rise could be reduced
114
Q

What points will firms hire workers at?

(Labour markets)

A
  • Firms will hire workers where MRP = MCL and where MRP > MCL
  • MRP = MCL -> Firms will maximise profits as they have an optimum no. of workers
  • MRP > MCL -> Firms could boost profits by hiring more workers -> Firms hiring insufficient workers
  • MRP < MCL -> Firms hiring too many workers -> Due to workers adding more costs to revenue

(MCL = market equilibrium wage)!

(MR and MC things)

115
Q

Pecuniary benefits and non-pecuniary benefits

A
  • Pecuniary benefits -> The welfare a worker gains from the wage they receive
  • Non-pecuniary benefits -> The welfare a worker can gain from non-wage benefits
116
Q

Pros and cons of price mechanism…

A

Pros:
-> Allocative efficiency as consumers’ wants and needs satisfied
-> No cost required to operate price mechanism
-> Consumers decide what is/isn’t produced by consumers
-> prices kept to minimum due to allocative efficiency of resources
Cons:
-> inequality in wealth and income likely
-> market failure from over/underprovision
-> people with low skills will be subject to low wages or unemployment
-> public goods not provided

117
Q

How can the price mechanism lead to unintended consequences?

A

-> It can reduce supply… + higher costs from screening prior to blood donations

118
Q

Pros and cons of govts. nationalising industries…

(Govt. intervention)

A

Pros:
- Can ensure the country provides goods and services the country needs
- Govts. can set output at a level which benefits society
- Can be more easily regulated
- A fair wage can be provided
Cons:
- They may be inefficient
- Nationalised firm may not act sensibly due to ‘moral hazard -> If firm is in trouble, govt, will aid them or bail them out

119
Q

At what point do firms shutdown?

A
  • When total revenue is less than total variable costs
120
Q

marginal physical product of labour…

A

The amount of products that each extra worker will produce

(MPP)

121
Q

marginal revenue

A

The amount of money that each extra product can be sold for

122
Q

Define elasticity of labour supply

A
  • Measure the responsiveness of labour supplied to a change in the wage rate
123
Q

Determinants of labour supply…

A
  • occupational mobility
  • geographical mobility
  • training time
  • vocation
124
Q

Determinants of labour demand…

A
  • MRP of workers
  • Price of product
  • PED of product
125
Q

Determinants of labour demand

A
  • Substitutability of capital for labour
  • Elasticity of demand for the product
  • Cost of labour as a % of total cost
  • Time period
126
Q
A
127
Q

Define contestable market

A
  • A market in which there are low barriers to entry and exit resulting in a constant threat of competition

Economics (16 decks)

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