Microeconomics year 10 - Custom Scholars
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Microeconomics year 10

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Free goods
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Goods that are not scarce and therefore available without limits. Zero opportunity cost e.g. Air
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Economic goods
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A consumable item that is useful to people but scarce in relation to its demand
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Opportunity cost
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The value of the next best alternative foregone
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Economic agents
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Decision makers that have effects on the economy of a country by buying selling, producing, investing, taxing, etc. Government, firms and households
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Government
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Elected representative of the consumers that should act on behalf of the people. The government must decide whether or not to intervene in the economy or leave it as is.
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Firms
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An organisation that uses factors of production alongside each other in order to produce output. They produce goods and services demanded by consumers
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Households
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A group of consumers that buy goods and services. They also supply their labour to firms to produce goods and services in order to earn the income needed to purchase g+s
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Factors of production
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The available resource inputs used in the production process of g+s (Capital, Enterprise, Land and Labour)
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Capital
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Man made aids for production; goods used to make other goods
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Entrepreneurship
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The willingness of an entrepreneur/individual to take risks and organise production. An entrepreneur is someone who bears the risk of a business and organises production
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Labour
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The human resource that is available in the economy; the quantity and quality of human resources
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Land
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The natural resources available in the economy; the quantity and quality of natural resources
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Factor payments/rewards
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Capital=Interest
Enterprise=Profits
Labour=wages
Land=rent
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A model
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A simplified representation of reality used to create hypotheses about economic decisions and events
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Production
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Any economic activity that leads to a flow of goods and services for which people are willing and able to pay
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Production possibility frontier
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A curve showing the maximum quantities of different combinations of goods and services that can be produced in a set time period given the available resources and current state of technology
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Law of diminishing returns
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As a firm adds variable factors of production(usually labour) to fixed capital, the marginal returns that the firm gains will gradually begin to decrease
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Consumer good
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A finished good that is sold for consumption
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Capital good
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Ant tangible asset that an organisation uses to produce goods or services such as office buildings, machinery etc.
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Specialisation
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Where individuals, businesses and whole economies are not self-sufficient but concentrate on producing certain goods and services, then trading their surplus.
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Productivity
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Output of a good or service, per factor of production, per period of time
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Resource allocation
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The way in which a society's factors of production are divided amongst their alternative uses
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Objectives of households
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Households make decisions about how to allocate expenditure based on the utility they derive from consuming a good or service
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Objectives of firms
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Firms make decisions about what to produce and how much to produce (how to use their factors of production) in order to receive a return/profit for their endeavours.
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Objectives of the government
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Government's objectives are to maximise social welfare and will do this through decision making regarding taxation to fund public expenditure, enforcement of laws and regulation that provide a system for the market to work in. May aim to achieve 'macroeconomic performance indicators'
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Profit maximisation
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The aim of trying to achieve the highest levels of profit possible
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Market economy
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An economy in which the market forces of demand and supply determine the allocation of resources
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Centrally planned economy
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An economy in which the state determines the allocation of resources
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Mixed economy
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An economy in which both the market forces of supply and demand, and also the intervention of the state, determine the allocation of resources
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Capitalism
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An economic system characterised by the private ownership pf productive resources, and the ability of individuals to freely pursue their self-interest with minimal interference from the government
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Market economy characteristics
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Self-interest
Private ownership of property
Free choice and enterprise
Competition
Decentralised decision making-'The invisible hand'
Limited government intervention
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The invisible hand
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A term coined by Adam Smith to describe the way in which buyers and sellers are brought together due to self-interest as the buyer wants the product, the seller wants to sell the product to fulfil their objectives.
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Market economy advantages/Centrally planned disadvantages
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Choice
Innovation
Efficiency
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Market economy disadvantages/Centrally planned advantages
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Public, merit, demerit good provision
Unequal distribution of income
Environment
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A market
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An arrangement by which buyers and sellers negotiate the exchange of goods and services
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The price mechanism
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Provides the information needed to co-ordinate the workings of a market economy and ensure that decisions can be taken at a decentralised level by millions of individual consumers and producers operating in thousands of different markets.
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Functions of the price mechanism
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Rationing-Scarce resources are divided among their competing uses according to what is demanded
Signalling-The price of a product reflects the market conditions and signals if producers should increase or decrease production
Incentive-Prices act as an incentive for both consumers and producers, low prices encourage consumers to purchase more and suppliers will leave the market due to low profit margins forcing the price back up, whilst high prices encourage producers to enter the market or produce more, increasing supply and pushing the price back down.
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Demand
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The quantity of a good or service that consumers are willing and able to purchase at a given price
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Law of demand
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A law that states that, ceteris paribus, there is an inverse relationship between the quantity demanded and price of a product
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Notional demand
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The desire or want for a product
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Effective demand
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The willingness to buy a good or service, backed up by the purchasing power to buy it
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Demand curve
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A graph that shows how much of a product will be demanded at any given price
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Demand schedule
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The collection of data that is used to draw a demand curve for a product
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Individual demand
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The amount of a good or service that an individual consumer is willing and able to buy at any given price over a period of time
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Market demand
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The sum of all the individual demand curves
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Why is the demand curve downward sloping?
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The law of diminishing marginal utility-as more of a product is consumed, the marginal benefit to the consumer falls, hence the consumer is prepared to pay less
The income effect-As prices rise, the amount of disposable income falls
The substitution effect-As prices rise, consumers will start to evaluate alternatives
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Demand shifters
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Population
Price of related goods
Changes in interest rates
Expectations of future prices
Seasons
Changes is tastes and advertising
Legislation
Average disposable incomes
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Consumer surplus
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The difference between the amount the consumer would be willing to pay and the amount the consumer actually paid
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Marginal social benefit
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The additional benefit that society gains form consuming one more unit of a product
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Supply
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The quantity of a good or service that producers are willing and able to offer at different price levels over a period of time
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Law of supply
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A law that states that, ceteris paribus, there is a direct relationship between the quantity supplied and the price of a good or service
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Supply curve
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A graph that shows how much of a product will be supplied at any given price
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Market supply
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The sum of all the individual supply curves/the total supplied to the market
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Competitive supply
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When a firm can use its factors of production to produce more than one type of product
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Composite supply
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(Rival supply)-when supply of a product comes from more than one source; a product whose demand can be satisfied through various sources e.g. electricity as it can be satisfied through various sources like hydroelectric, geothermal, wind energy, gas etc
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Joint supply
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When a firm can produce more than one type of product with roughly the same factors of production e.g. the supply of beef and leather both using cows
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The market period
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The ultra short-run. Day of the market, and supply is perfectly inelastic with all factors of production fixed
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The short-run period
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At least one factor of production is fixed whilst others can be varied-supply can be increased but only by a small amount
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The long-run period
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All factors of production are fully flexible although the state of technology is fixed. Output can be significantly increased
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Producer surplus
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The difference between the amount that a seller receives for a product, and the price at which they would have been prepared to sell it
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Why is the supply curve upward sloping?
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The profit motive-When the price of a product rises, it becomes more profitable for businesses to increase their output as they can increase potential return
Production and costs/Law of diminishing returns- When a firm increases output, this tends to lead to an increase in their costs, so a higher price is needed to cover these extra costs. As variable f.o.p are added to fixed state of capital, marginal costs of production will rise so a higher price is needed to cover this
New suppliers/entrants into the market- Higher prices can incentivise other suppliers to enter, leading to an increased quantity supplied as more firms are willing and able to provide output
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Determinants of supply
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Productivity and costs of production
Raw material costs
Technology
Subsidies and taxation
Seasons/weather
Prices of related goods
Capacity expansion
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Elasticity
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Measures the responsiveness of the quantity demanded or supplied of a product to a small change in its price or other variables such as incomes.
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Price elasticity of demand
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Measures the responsiveness of quantity demanded relative to a change in the price of a good or service
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PED formula
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If...
PED=0 Perfectly price inelastic demand
0<PED<1 Price inelastic demand
PED=1 Price unitary elastic demand
PED>1 Price elastic demand
PED=infinity Perfectly price elastic
[negate the negative sign]
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PED Conditions
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Quantity demanded of a product is sensitive to a change in price e.g. luxuries, goods with many substitutes, goods that are bought frequently
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Price elastic demand
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Quantity demanded of a product is insensitive to a change in price e.g. addictive goods, few substitutes, necessities, small % of income expenditure
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Price inelastic demand
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Where the percentage change in the quantity demanded of a product is equal to a change in price of the product
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Price unitary elastic demand
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Habit forming goods
Proportion of income expenditure
Time period (SR=inelastic)
Availability and closeness of substitutes
Brand loyalty
Necessities
Durability
A04: Elasticity may change over time
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PED determinants
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A measure of the responsiveness of quantity demanded to a change in incomes
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Income elasticity of demand
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If...
YED<1 Income inelastic demand
YED>1 Income elastic demand
YED=1 Income unitary elastic demand
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YED Formula
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Goods for which a change in income produces a less than proportionate change in quantity demanded (YED<1) eg. necessities
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YED Conditions
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Goods for which a change in income produces a greater than proportionate change in quantity demanded (YED>1) eg. Luxury goods
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Income inelastic demand
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A good where the quantity demanded increases when income rises (YED>0)
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Income elastic demand
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A good where the quantity demanded increases by a proportionately greater amount than a rise in income (YED>1)
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Normal goods
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A good where the quantity demanded increases by a proportionately smaller amount than a rise in income (0<YED<1)
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Luxury good
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A good where the quantity demanded decreases as incomes rise (YED<0)
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Necessity good
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A measure of the responsiveness of quantity demanded for one product relative to a change in price of another product
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Inferior good
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If...
XPED=0 Goods are unrelated
XPED > 0 Substitutes
XPED < 0 Complements
XPED=infinity Perfect substitutes
XPED=neg. inf Perfect complements/must be bought together
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Cross price elasticity of demand
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Products that can be used for similar purposes, such that if the price of one product rises, demand for the other product is likely to rise
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XED Formula
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Products that tend to be consumed jointly, such that the price of one product rises, demand for the other product is likely to fall.
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XED Conditions
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Measures the responsiveness of quantity supplied relative to a change in price
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Substitutes
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If...
PES=0 Perfectly price inelastic supply
0<PES<1 Price inelastic supply
PES=1 Price unitary elastic supply
PES>1 Price elastic supply
PED=inf Perfectly price elastic supply
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Complements
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Where the percentage change in the quantity supplied of a product is insensitive to a change in the price of the product
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Price elasticity of supply
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Where the percentage change in the quantity supplied of a product is sensitive to a change in price of the product.
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PES Formula
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Production lag
Existence of spare capacity
Number of suppliers
Substitutability of the f.o.p
Time period
Availability of stocks of the product
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PES Conditions
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The mechanism by which the market forces of demand and supply determine prices and the economic decisions made by consumers and firms
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Price inelastic supply
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The sum of money that is paid for a given quantity of a particular product
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Price elastic supply
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The method of allocating resources via the free movement of prices
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PES determinants
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When the price is such that the quantity consumers are willing to buy is equal to the quantity that firms are willing to supply
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Free market mechanism
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When internal or external forces prevent market equilibrium from being reached, such that demand and supply are not equal
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Price
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An excess of quantity supplied over quantity demanded
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Price mechanism
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An excess of quantity demanded over supply
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Market equilibrium
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Difficult to measure economic value when it comes to jobs such as teaching etc.
Government intervention means that the government has an influence over the provision/price of some goods
Firms may not be rational/ may have different objectives such that if price is below the equilibrium level, it may not choose to expand but to stay small.
Issues of equity-in several markets, prices are not being determines by market forces, but by considerations of equity and being 'fair'
Volatile prices-some goods are quite volatile in price as supply can vary and demand tends to be inelastic
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Disequilibrium
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When a firm produces at the lowest point on the lowest average cost curve (any point on the ppc) allows for output to be maximised from the given resources
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Surplus
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When resources are used to produce the goods and services that consumers want in such a way that consumer utility or welfare is maximised (P=MC)
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Shortage
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A situation in which both allocative efficiency and productive efficiency have been achieved; a situation in which society is producing the mixture of products that consumers desire at minimum cost
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Demand and supply evaluation
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When no reallocation of resources can make one individual better off without making some other individual worse off.
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Productive efficiency
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Occurs when a lack of effective/real competition in a market or industry means that average costs are higher than they would be with competition
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Allocative efficiency
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The expenses that a business incurs from the production of a good or service. They can be fixed or variable
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Economic efficiency
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Total costs = total variable costs + total fixed costs
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Pareto efficiency
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Costs that fluctuate with the level of output in the short run, usually by the same proportion eg. wages
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X-inefficiency
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Costs that do not fluctuate with the level of output in the short tun and are paid even if output is zero e.g. rent
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Costs of production
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The unit cost/cost per unit of output (AC= total costs / quantity)
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Total costs formula
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The cost of producing an extra unit (Change in costs/change in output)
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Variable costs
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Costs incurred by a firm that cannot be recovered if the firm leaves the market e.g. spending on advertising
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Fixed costs
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Those whose input can only be changed with time and effort. They tend to be durable and long-lasting e.g. factory buildings, capital
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Average costs
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Those whose input can be quickly as easily changed e.g. raw materials, labour
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Marginal costs
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A summary of the known production techniques available to a firm. It shows the relationship between the input of f.o.p and the output of goods and services that can be produced [Q = F(K,L)] where F=function, K= capital, L = labour. This states that output is a function of the inputs of capital and labour.
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Sunk costs
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The cost savings to a firms average total costs resulting from an increase in the scale of production
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Fixed factors
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The lowest level of output at which full advantage can be taken of economies of scale
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Variable factors
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Economies of scale occurring within a firm as a result of its growth
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The production function
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Economies of scale occurring due to the growth of the industry in which a firm is operating
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Average costs diagram
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An increase in a firm's long-run average costs resulting from an increase in the scale of production
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Economies of scale
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D.O.S occurring within a firm as a result of its growth
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Minimum efficient scale
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D.O.S occurring due to the growth of the industry in which a firm is operating
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Internal economies of scale
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Purchasing
Selling
Technical
Financial
Managerial
Risk-bearing
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External economies of scale
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Research and development
Pools of skilled labour
Specialisation
Country reputation
Better infrastructure
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Diseconomies of scale
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Bad communication
Lack of management control
Detachment and lack of workers' morale
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Internal Diseconomies of scale
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Increasing resource costs
Road congestion/overcrowding
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External diseconomies of scale
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When the free market mechanism does not result in an optimal allocation of resources, thus, causing allocative inefficiency
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Economies of scale diagram
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Externalities
Information asymmetries
Monopoly
Immobilities
Public goods
Merit goods
Inequality
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Types of internal economies of scale
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A negative or positive spill over effect to a third party resulting from the consumption or production of a good or service
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Causes of external economies of scale
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The additional benefit that society gains from consuming one more unit of the product
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Causes of internal diseconomies of scale
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The cost to society of producing one more unit of a product
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Causes of external diseconomies of scale
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Costs incurred by an economic agent as part of its production or other economic activities
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Market failure
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Costs that are imposed on a third party due to an economic agent's production or other economic activity
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Causes of market failure
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Benefits experienced by an economic agent as part of its production or other economic activities
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Externality
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Benefits accrued by a third party due to an economic agent's production or other economic activity
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Marginal social benefit
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Economic agents not directly involved in a specific economic decision
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Marginal social cost
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Private costs+external costs
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Private costs
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Private benefits+external benefits
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External costs
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Marginal social costs>Marginal private costs. E.g. Factory creating toxic smog
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Private benefits
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MSC<MPC. Potential welfare gain e.g. Bee keeper
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External benefits
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Marginal social benefits<Marginal private benefits e.g. smoking
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Third party
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Marginal social benefits>Marginal private benefits e.g. education/health care
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Social costs
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A good that must be purchased to be consumed, and whose consumption by one person prevents another person from consuming it; excludable and rivalrous
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Social benefits
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A good that one person can consume without reducing its availability to others- non rivalrous and non excludable
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Negative production externality
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A good that has some, but not all of the characteristics of a public good
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Positive production externality
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Someone who directly benefits from the consumption of a public good, but who does not contribute to its provision
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Negative consumption externality
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When a person cannot be excluded from consuming a good, and thus has no incentive to pay for its provision
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Positive consumption externality
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A good that is under valued and under consumed in the free market. They tend to bring more private benefits than consumers actually realise and also tend to have positive externalities e.g. health and education
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Private good
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A good that is over consumed and overvalued in a free market as consumers tend to overestimate the benefits that consumption brings e.g. fast food
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Public good
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A lack of information resulting in economic agents making decisions that do not maximise welfare
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Quasi-public good
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A situation in which some economic agents in a market have better information about market conditions than others; when information is unequally shared between two parties
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Free rider
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A situation in which those who are at higher risk/more likely to need insurance, are more likely to take out insurance
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Free-rider problem
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A situation in which an individual or firm is more likely to make risky decisions knowing that it is protected against the risk by another party that will incur the cost. It is a type of asymmetric information
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Merit good
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When government intervention to correct a market failure creates inefficiency, does not maximise welfare and leads to a misallocation of scarce resources
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Demerit good
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Measures - based on statute law- used by the government to control a market e.g. information provision, fines for polluting. AO4: Fines have to be sufficiently large, regulations are costly to impose and maintain, regulatory capture, firms may move elsewhere
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Information failure
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A compulsory charge levied on the sale of goods and services
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Asymmetric information
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A tax of a fixed amount for each unit of a good or service sold
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Adverse selection
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An attempt to deal with an externality by implementing an external cost or benefit into the price system
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Moral hazard
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The way in which the burden of paying a sales tax is shared out between buyers and seller
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Government failure
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Good as it can internalise externality, raises tax revenue for the government to spend on alternatives, may be a sufficient deterrent to pollute. A04: depends on price elasticity of demand, useless if demand is inelastic, difficult to measure the size of an externality/know how big a tax should be. Incidence of tax falls disproportionately on consumers, high taxes may encourage tax evasion, taxes tend to be regressive EVAL: Tax revenue should be hypothecated, such a tax needs to be applied internationally to be effective and the government needs to face costs in term of reinforcement
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Regulation
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A sum of money given by the government to producers to encourage production of a good or service.
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Indirect taxation
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Subsidy should shift supply rightwards causing price to fall A04: Hugely costly for the government and may have to raise taxes in order to cover this, there is an opportunity cost of spending on subsidies, if demand is inelastic the subsidy will be ineffective, susidies may encourage inefficiency as firms rely on their subsidy to stay afloat. Government failure may arise if the government has poor information about who to subsidise, may be subsidising very inefficient firms. EVAL: Most effective when combined with other policies e.g. taxation and subsidies
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Per unit tax
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The government can provide public goods and merit goods directly to consumers free of charge in order to overcome market failure
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Internalisation of externalities
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Everyone can access the merit good so provides equality regardless of incomes which can lead to productive potential gains in the long run. A04: Difficult to measure the size of an externality, therefore can be virtually impossible for a government to know how much of a good or service to provide. State provision is very expensive, opportunity cost, taxation would have to be increased in order to justify increased spending. Government provision completely discounts the ability of the private sector to provide any help in the supply of the product. It is likely that the private sector would be much more efficient. EVAL: A mixture of public and private provision should be used, public-private partnerships can be very effective e.g. private sector builds infrastructure and the public sector pays to rent it.
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Incidence of tax
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A scheme intended to stabilise the price of a commodity by purchasing excess supply in periods when supply is high, and selling commodity reserves when supply is low.
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Tax evaluation
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Useful for stabilising the price of commodities, this may attract agricultural investment and provides farmers with a more steady income, knowing how to plan for the future. Consumers are less likely to be harmed by prices rising too high for necessities such a wheat A04: Historically haven't been very successful, it is impossible to know the correct price at which to buy; if the price is too high, the government are likely to be buying up the stocks too frequently so it will become a loss-making endeavour.
Many of these goods tend to be perishable, can lead to huge amount of wastage if the price is too high and government has too many stocks
Extremely costly, often costing billions of pounds, opportunity cost. Taxes may increase, disposable incomes fall and demand for wheat falls, creating a vicious circle for the government.
Abuse of the system; issue of moral hazard whereby farmers know they are guaranteed a good price so will do all in their power to exploit the system and get a good harvest- bad for environment.
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Subsidy
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The reward to owners of a business, entrepreneurs or shareholders for taking a financial risk in investment. Profit=Revenue-costs
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Subsidy evaluation
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The opportunity cost of capital and enterprise. The return needed for a firm to stay in a market in the long run
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State provision
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The level of profit made over and above normal profit. Can only be made in the long run by firms with monopoly power
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State provision evaluation
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In the short-run, a firm may choose to remain in a market even if it is not covering its opportunity costs, provided its revenues are covering its variable costs. Since the firm has already incurred fixed costs, if it can cover its variable costs in the short-run, it may be better off remaining in business and paying off part of the fixed costs rather than exiting the market and losing all of its fixed costs. Thus, the level of average variable costs represents the shut down price.
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Buffer stock scheme
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Occurs where MC=MR. Economists generally assume that all firms are aiming to maximise their profits as this is the basis of the traditional theory of the firms
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Buffer stock evaluation
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Revenue is maximised where MR=0, this happens at an output higher than Profit maximisation and a firm will keep increasing output as long as adding more output leads to greater revenue.
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Profit
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A firm aiming to maximise sales will produce where AR=AC, this is the highest level of output the firm can sustain in the long run. This is higher output than profit maximisation and revenue maximisation. Firms may be willing to make a lower level of profit in order to gain market share, enabling increased monopoly power and may enable firms to make more profits in the long run by forcing rivals out of business
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Normal profit
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Firms undertaking the aim of welfare maximisation may be willing to incur extra expenses to chose products and raw materials that don't harm the environment/test on animals e.g. LUSH. This can help the firm to develop a more favourable reputation through demonstrating a commitment to acting in ways that benefit society at large. It is possible that this extra expenditure becomes a necessary part of firm's running costs in order to maximise profit, therefore welfare maximisation may be compatible with profit maximisation in the lr
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Abnormal profit
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Describes a divorce in ownership and control that can arise as directors may have different objectives compared with those of the owners. Owners may want to maximise profits in order to keep stakeholders happy, but managers have less incentive to do this as they do not get the same reward.
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Shut-down point
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Proposes a solution top the principle-agent problem. This objective means managers trying to gain just enough profit to satisfy important stakeholders, but beyond this point they are free to pursue their own objectives such as improving their golf handicap. The principal-agent problem can also be overcome by introducing performance-related pay to align the objectives of owners and managers. Directors could also be encouraged to buy stakes in the company in order to align interests.
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Profit maximisation
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Aims of owners-some may be motivated by the prospect of profit, others may not
Public opinion-adverse publicity can encourage firms to prioritise social welfare
Finance-the financial position of a firm can influence the scope and scale of marketing activities
Human capital- the quality and quantity of the workforce is a key factor in influencing marketing objectives
Business culture - E.g. a marketing-orientated business is constantly looking for ways to meet customer needs and preferences whereas a production-orientate culture may result in management setting unrealistic or irrelevant marketing objectives
External influences include the economic environment, competitor actions, market dynamics, technological change, social&political change
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Revenue maximisation
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Growth, through increasing economies of scale, increasing market share and reducing competition and expanding into new markets.
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Sales maximisation
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A.K.A. Organic growth is growth as a result of a firm expanding its own operations rather than merging with or taking over another firm. This type of growth is much less risky and firms have control over exactly how this growth occurs; however, it is a lengthy process.
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Corporate social responsibility
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A model describing how a market would work if certain conditions were satisfied. Conditions:
Infinite number of suppliers and consumers
Perfect information for both
consumers and producers
Products are homogenous
No barriers to entry/exit
Firms are profit maximisers
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Principle-agent problem
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The conditions ensure that the price mechanism works perfectly, producers are rewarded for the goods and services they provide at the level that reflects the benefits those g+s bring to customers. Will be allocatively efficient. Productively efficient as firms produce on the lowest average cost curve. X-inefficiencies are very low A04: Supernormal profits are competed away in the long run meaning there are no dynamic efficiency gains.
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Profit satisficing
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Any potential difficulty or expense a firm might face if it wants to enter a market. They allow incumbent firms to make supernormal profits before new entrants come and erode the profits away.
Patents
High sunk costs
Strong branding and brand loyalty
Aggressive pricing tactics
Threat of a price war
economies of scale
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Factors that influence the choice of objectives
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Where a single firm is the supplier of a product with no close substitutes i.e. the firm is the industry. A legal monopoly is where the firm has 25% market share.
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How do firms increase profit?
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Economies of scale, r&d, international competition, may have gained monopoly power due to efficiency, avoids wastage, can provide stable employment. A04: Allocative inefficiency, productively inefficient, x-inefficient, less choice for consumers and higher prices, lower quality products, can eliminate all consumer surplus through price discrimination, welfare loss.
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Internal growth
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When the LRAC curve falls continuously over a large range of output. The result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available as duplication would be unnecessary and wasteful.
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Perfect competition
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The process by which a firm can charge different customers different prices for essentially the same product. Three conditions:
Firm must have price making power (monopoly/oligopoly)
Must be able to identify different market segments with different PED's
Must be able to prevent seepage- customers who bought at a low price cannot resell at a higher price to consumers who could've been charged more. Main aim of PD is to increase firm's total revenue and profits by reducing consumer surplus.
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Evaluation of perfect competition
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A market structure in which there are a small number of large firms, each with a significant share of the market:
Interdependence
Barriers to entry
Strategy
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Barriers to entry
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The way firms will be affected by how other firms set their prices and output
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Monopoly
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A marketing strategy in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and service.
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Evaluation of monopoly
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Commercial competition characterised by the repeated cutting of prices below those of competitors
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Natural monopoly
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When an established firm reduces its price to below its rivals' costs of production in order to eliminate competition or to strengthen its position in the market
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Price discrimination
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When the various firms in an oligopoly cooperate with each other, especially over what prices to charge.
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Oligopoly
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An unwritten agreement where firms observe informal rules, such as not undercutting rivals as each firm knows it is in their best interests not to compete
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Interdependence of firms
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a.k.a. explicit collusion which is a formal agreement to control output or set an industry price enabling them to achieve a common objective e.g. OPEC
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Non-price competition
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The market structure that resembles many real-life industries whereby the conditions for perfect competition are relaxed. Conditions:
Some product differentiation
Low or no barriers to entry
Many buyers and sellers
Abnormal profit in SR, not in LR
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Price warfare
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Markets are relatively contestable as there are no barriers to entry, differentiation creates diversity and choice, more efficient than monopoly, less than perfect competition. A04: Differentiation creates unnecessary wastage and the creation of false wants arises. Allocative inefficiency in SR and LR. Firms in mono comp have chosen to restrict output in order to maximise profits so they don't benefit from all of the economies of scale that they could.
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Predatory pricing
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Contestability refers to how open a new market is to competitors. Low barriers to entry/exit, so if excess profits are made by incumbent firms, new firms will enter to erode profits. Supernormal profits can be made in SR. If a market is contestable, incumbent firms may have to accept a lower price level to avoid attracting new entrants or they may try to create higher barriers to entry to keep their market share. In LR, firms in contestable markets will move towards productive and allocative efficiency because supernormal profit is competed away and firms must settle for normal profit.
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Collusion
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Low barriers to entry/exit mean that entrants can enter a market when supernormal profits are made, erode it away and then leave when normal profits are made.
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Tacit collusion
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The stock of skills and expertise that contribute to a worker's productivity.
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Overt collusion
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Wages, salaries and other costs of using labour, divided by output per worker.
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Monopolistic competition
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Organisations of employees that seek to improve the pay and working conditions of their members e.g. RMT
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Evaluation of Monopolistic competition
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The movement of people from one place to another, usually for economic, social or political reasons
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Contestable markets
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Increases supply of labour
Migrants bring skills
Fill unemployment gaps
A04: Push lowest wages down
Substitute native workers
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Hit and run competition
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The unjust or prejudicial treatment of different categories of people on the grounds of factors such as race, gender, age etc.
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Human capital
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The statistical characteristics of humans and populations such as age/gender and the changes seen to these structures.
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Unit labour costs
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Where there is a monopsony (single buyer of labour e.g. the Underground) and a monopoly (single seller of labour e.g. the RMT) in the same market.
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Trade union
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Not working and not looking for work
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Migration
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When barriers to entry/exit prevent the free movement of workers between all of the different jobs that are available
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Eval of migration
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The ability of real wages to change in response to changes in demand for and supply of labour
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Discrimination
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A price floor, below which employers cannot legally employ workers. It sets a legal minimum hourly rate of pay for different age groups introduced into the UK in 1999 to stop exploitation of workers.
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Demographic changes
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Occurs where the market forces of supply and demand do not result in an efficient allocation of resources
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Bilateral monopoly
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Occur between firms, industries, occupations and regions. In a perfectly competitive labour market, all workers would be paid the same amount as labour in homogenous, but in the real world, wages differ as each worker is a unique factor of production, possessing a unique set of employment characteristics: ability, education+training, age, gender, location etc.
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Economically inactive
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A flow of payments received over a period of time in return for factors of production
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Segmented labour markets
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The accumulated stock of assets that households own at a fixed point in time
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Wage flexibility
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A method used by governments to decide whether a project would be beneficial for society. 1. Identify all costs and benefits including future c+b
2.place a common monetary value on all of these
Advantages: Evaluates the most effective use of scarce resources
Social benefits and costs are evaluated
Allows for a more informed decision to be made
Allows for projects to be prioritised
Not useful:
Hard to place a monetary value on external benefits and costs
Shadow pricing leads to inaccuracy
Data may be skewed by bias
Hidden costs may exist
CBA cannot include the unpredictable e.g. natural disasters
Planning takes a long time and costs can constantly change
Costs of undertaking a CBA may be greater than the usefulness of the information that it provides.
Eval: depends on the accuracy of the information gathered, no other alternatives-best solution would be to find a better way of calculating the costs and benefits
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National minimum wage
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The selling of state assets to the private sector e.g. the sale of the Post office.
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Labour market failure
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undefined
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Wage differentials
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undefined
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Income
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undefined
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Wealth
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undefined
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Cost-Benefit analysis
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undefined
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Privatisation
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undefined
1 of 216
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Free goods
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Goods that are not scarce and therefore available without limits. Zero opportunity cost e.g. Air
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Economic goods
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A consumable item that is useful to people but scarce in relation to its demand
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Opportunity cost
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The value of the next best alternative foregone
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Economic agents
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Decision makers that have effects on the economy of a country by buying selling, producing, investing, taxing, etc. Government, firms and households
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Government
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Elected representative of the consumers that should act on behalf of the people. The government must decide whether or not to intervene in the economy or leave it as is.
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Firms
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An organisation that uses factors of production alongside each other in order to produce output. They produce goods and services demanded by consumers
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Households
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A group of consumers that buy goods and services. They also supply their labour to firms to produce goods and services in order to earn the income needed to purchase g+s
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Factors of production
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The available resource inputs used in the production process of g+s (Capital, Enterprise, Land and Labour)
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Capital
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Man made aids for production; goods used to make other goods
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Entrepreneurship
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The willingness of an entrepreneur/individual to take risks and organise production. An entrepreneur is someone who bears the risk of a business and organises production
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Labour
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The human resource that is available in the economy; the quantity and quality of human resources
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Land
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The natural resources available in the economy; the quantity and quality of natural resources
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Factor payments/rewards
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Capital=Interest
Enterprise=Profits
Labour=wages
Land=rent
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A model
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A simplified representation of reality used to create hypotheses about economic decisions and events
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Production
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Any economic activity that leads to a flow of goods and services for which people are willing and able to pay
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Production possibility frontier
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A curve showing the maximum quantities of different combinations of goods and services that can be produced in a set time period given the available resources and current state of technology
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Law of diminishing returns
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As a firm adds variable factors of production(usually labour) to fixed capital, the marginal returns that the firm gains will gradually begin to decrease
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Consumer good
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A finished good that is sold for consumption
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Capital good
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Ant tangible asset that an organisation uses to produce goods or services such as office buildings, machinery etc.
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Specialisation
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Where individuals, businesses and whole economies are not self-sufficient but concentrate on producing certain goods and services, then trading their surplus.
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Productivity
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Output of a good or service, per factor of production, per period of time
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Resource allocation
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The way in which a society's factors of production are divided amongst their alternative uses
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Objectives of households
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Households make decisions about how to allocate expenditure based on the utility they derive from consuming a good or service
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Objectives of firms
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Firms make decisions about what to produce and how much to produce (how to use their factors of production) in order to receive a return/profit for their endeavours.
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Objectives of the government
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Government's objectives are to maximise social welfare and will do this through decision making regarding taxation to fund public expenditure, enforcement of laws and regulation that provide a system for the market to work in. May aim to achieve 'macroeconomic performance indicators'
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Profit maximisation
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The aim of trying to achieve the highest levels of profit possible
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Market economy
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An economy in which the market forces of demand and supply determine the allocation of resources
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Centrally planned economy
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An economy in which the state determines the allocation of resources
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Mixed economy
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An economy in which both the market forces of supply and demand, and also the intervention of the state, determine the allocation of resources
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Capitalism
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An economic system characterised by the private ownership pf productive resources, and the ability of individuals to freely pursue their self-interest with minimal interference from the government
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Market economy characteristics
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Self-interest
Private ownership of property
Free choice and enterprise
Competition
Decentralised decision making-'The invisible hand'
Limited government intervention
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The invisible hand
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A term coined by Adam Smith to describe the way in which buyers and sellers are brought together due to self-interest as the buyer wants the product, the seller wants to sell the product to fulfil their objectives.
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Market economy advantages/Centrally planned disadvantages
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Choice
Innovation
Efficiency
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Market economy disadvantages/Centrally planned advantages
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Public, merit, demerit good provision
Unequal distribution of income
Environment
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A market
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An arrangement by which buyers and sellers negotiate the exchange of goods and services
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The price mechanism
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Provides the information needed to co-ordinate the workings of a market economy and ensure that decisions can be taken at a decentralised level by millions of individual consumers and producers operating in thousands of different markets.
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Functions of the price mechanism
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Rationing-Scarce resources are divided among their competing uses according to what is demanded
Signalling-The price of a product reflects the market conditions and signals if producers should increase or decrease production
Incentive-Prices act as an incentive for both consumers and producers, low prices encourage consumers to purchase more and suppliers will leave the market due to low profit margins forcing the price back up, whilst high prices encourage producers to enter the market or produce more, increasing supply and pushing the price back down.
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Demand
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The quantity of a good or service that consumers are willing and able to purchase at a given price
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Law of demand
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A law that states that, ceteris paribus, there is an inverse relationship between the quantity demanded and price of a product
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Notional demand
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The desire or want for a product
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Effective demand
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The willingness to buy a good or service, backed up by the purchasing power to buy it
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Demand curve
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A graph that shows how much of a product will be demanded at any given price
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Demand schedule
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The collection of data that is used to draw a demand curve for a product
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Individual demand
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The amount of a good or service that an individual consumer is willing and able to buy at any given price over a period of time
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Market demand
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The sum of all the individual demand curves
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Why is the demand curve downward sloping?
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The law of diminishing marginal utility-as more of a product is consumed, the marginal benefit to the consumer falls, hence the consumer is prepared to pay less
The income effect-As prices rise, the amount of disposable income falls
The substitution effect-As prices rise, consumers will start to evaluate alternatives
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Demand shifters
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Population
Price of related goods
Changes in interest rates
Expectations of future prices
Seasons
Changes is tastes and advertising
Legislation
Average disposable incomes
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Consumer surplus
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The difference between the amount the consumer would be willing to pay and the amount the consumer actually paid
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Marginal social benefit
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The additional benefit that society gains form consuming one more unit of a product
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Supply
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The quantity of a good or service that producers are willing and able to offer at different price levels over a period of time
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Law of supply
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A law that states that, ceteris paribus, there is a direct relationship between the quantity supplied and the price of a good or service
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Supply curve
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A graph that shows how much of a product will be supplied at any given price
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Market supply
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The sum of all the individual supply curves/the total supplied to the market
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Competitive supply
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When a firm can use its factors of production to produce more than one type of product
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Composite supply
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(Rival supply)-when supply of a product comes from more than one source; a product whose demand can be satisfied through various sources e.g. electricity as it can be satisfied through various sources like hydroelectric, geothermal, wind energy, gas etc
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Joint supply
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When a firm can produce more than one type of product with roughly the same factors of production e.g. the supply of beef and leather both using cows
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The market period
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The ultra short-run. Day of the market, and supply is perfectly inelastic with all factors of production fixed
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The short-run period
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At least one factor of production is fixed whilst others can be varied-supply can be increased but only by a small amount
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The long-run period
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All factors of production are fully flexible although the state of technology is fixed. Output can be significantly increased
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Producer surplus
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The difference between the amount that a seller receives for a product, and the price at which they would have been prepared to sell it
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Why is the supply curve upward sloping?
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The profit motive-When the price of a product rises, it becomes more profitable for businesses to increase their output as they can increase potential return
Production and costs/Law of diminishing returns- When a firm increases output, this tends to lead to an increase in their costs, so a higher price is needed to cover these extra costs. As variable f.o.p are added to fixed state of capital, marginal costs of production will rise so a higher price is needed to cover this
New suppliers/entrants into the market- Higher prices can incentivise other suppliers to enter, leading to an increased quantity supplied as more firms are willing and able to provide output
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Determinants of supply
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Productivity and costs of production
Raw material costs
Technology
Subsidies and taxation
Seasons/weather
Prices of related goods
Capacity expansion
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Elasticity
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Measures the responsiveness of the quantity demanded or supplied of a product to a small change in its price or other variables such as incomes.
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Price elasticity of demand
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Measures the responsiveness of quantity demanded relative to a change in the price of a good or service
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PED formula
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If...
PED=0 Perfectly price inelastic demand
0<PED<1 Price inelastic demand
PED=1 Price unitary elastic demand
PED>1 Price elastic demand
PED=infinity Perfectly price elastic
[negate the negative sign]
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PED Conditions
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Quantity demanded of a product is sensitive to a change in price e.g. luxuries, goods with many substitutes, goods that are bought frequently
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Price elastic demand
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Quantity demanded of a product is insensitive to a change in price e.g. addictive goods, few substitutes, necessities, small % of income expenditure
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Price inelastic demand
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Where the percentage change in the quantity demanded of a product is equal to a change in price of the product
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Price unitary elastic demand
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Habit forming goods
Proportion of income expenditure
Time period (SR=inelastic)
Availability and closeness of substitutes
Brand loyalty
Necessities
Durability
A04: Elasticity may change over time
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PED determinants
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A measure of the responsiveness of quantity demanded to a change in incomes
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Income elasticity of demand
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If...
YED<1 Income inelastic demand
YED>1 Income elastic demand
YED=1 Income unitary elastic demand
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YED Formula
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Goods for which a change in income produces a less than proportionate change in quantity demanded (YED<1) eg. necessities
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YED Conditions
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Goods for which a change in income produces a greater than proportionate change in quantity demanded (YED>1) eg. Luxury goods
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Income inelastic demand
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A good where the quantity demanded increases when income rises (YED>0)
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Income elastic demand
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A good where the quantity demanded increases by a proportionately greater amount than a rise in income (YED>1)
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Normal goods
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A good where the quantity demanded increases by a proportionately smaller amount than a rise in income (0<YED<1)
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Luxury good
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A good where the quantity demanded decreases as incomes rise (YED<0)
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Necessity good
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A measure of the responsiveness of quantity demanded for one product relative to a change in price of another product
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Inferior good
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If...
XPED=0 Goods are unrelated
XPED > 0 Substitutes
XPED < 0 Complements
XPED=infinity Perfect substitutes
XPED=neg. inf Perfect complements/must be bought together
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Cross price elasticity of demand
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Products that can be used for similar purposes, such that if the price of one product rises, demand for the other product is likely to rise
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XED Formula
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Products that tend to be consumed jointly, such that the price of one product rises, demand for the other product is likely to fall.
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XED Conditions
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Measures the responsiveness of quantity supplied relative to a change in price
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Substitutes
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If...
PES=0 Perfectly price inelastic supply
0<PES<1 Price inelastic supply
PES=1 Price unitary elastic supply
PES>1 Price elastic supply
PED=inf Perfectly price elastic supply
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Complements
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Where the percentage change in the quantity supplied of a product is insensitive to a change in the price of the product
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Price elasticity of supply
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Where the percentage change in the quantity supplied of a product is sensitive to a change in price of the product.
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PES Formula
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Production lag
Existence of spare capacity
Number of suppliers
Substitutability of the f.o.p
Time period
Availability of stocks of the product
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PES Conditions
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The mechanism by which the market forces of demand and supply determine prices and the economic decisions made by consumers and firms
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Price inelastic supply
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The sum of money that is paid for a given quantity of a particular product
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Price elastic supply
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The method of allocating resources via the free movement of prices
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PES determinants
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When the price is such that the quantity consumers are willing to buy is equal to the quantity that firms are willing to supply
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Free market mechanism
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When internal or external forces prevent market equilibrium from being reached, such that demand and supply are not equal
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Price
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An excess of quantity supplied over quantity demanded
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Price mechanism
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An excess of quantity demanded over supply
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Market equilibrium
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Difficult to measure economic value when it comes to jobs such as teaching etc.
Government intervention means that the government has an influence over the provision/price of some goods
Firms may not be rational/ may have different objectives such that if price is below the equilibrium level, it may not choose to expand but to stay small.
Issues of equity-in several markets, prices are not being determines by market forces, but by considerations of equity and being 'fair'
Volatile prices-some goods are quite volatile in price as supply can vary and demand tends to be inelastic
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Disequilibrium
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When a firm produces at the lowest point on the lowest average cost curve (any point on the ppc) allows for output to be maximised from the given resources
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Surplus
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When resources are used to produce the goods and services that consumers want in such a way that consumer utility or welfare is maximised (P=MC)
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Shortage
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A situation in which both allocative efficiency and productive efficiency have been achieved; a situation in which society is producing the mixture of products that consumers desire at minimum cost
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Demand and supply evaluation
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When no reallocation of resources can make one individual better off without making some other individual worse off.
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Productive efficiency
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Occurs when a lack of effective/real competition in a market or industry means that average costs are higher than they would be with competition
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Allocative efficiency
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The expenses that a business incurs from the production of a good or service. They can be fixed or variable
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Economic efficiency
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Total costs = total variable costs + total fixed costs
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Pareto efficiency
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Costs that fluctuate with the level of output in the short run, usually by the same proportion eg. wages
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X-inefficiency
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Costs that do not fluctuate with the level of output in the short tun and are paid even if output is zero e.g. rent
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Costs of production
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The unit cost/cost per unit of output (AC= total costs / quantity)
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Total costs formula
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The cost of producing an extra unit (Change in costs/change in output)
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Variable costs
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Costs incurred by a firm that cannot be recovered if the firm leaves the market e.g. spending on advertising
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Fixed costs
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Those whose input can only be changed with time and effort. They tend to be durable and long-lasting e.g. factory buildings, capital
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Average costs
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Those whose input can be quickly as easily changed e.g. raw materials, labour
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Marginal costs
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A summary of the known production techniques available to a firm. It shows the relationship between the input of f.o.p and the output of goods and services that can be produced [Q = F(K,L)] where F=function, K= capital, L = labour. This states that output is a function of the inputs of capital and labour.
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Sunk costs
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The cost savings to a firms average total costs resulting from an increase in the scale of production
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Fixed factors
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The lowest level of output at which full advantage can be taken of economies of scale
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Variable factors
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Economies of scale occurring within a firm as a result of its growth
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The production function
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Economies of scale occurring due to the growth of the industry in which a firm is operating
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Average costs diagram
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An increase in a firm's long-run average costs resulting from an increase in the scale of production
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Economies of scale
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D.O.S occurring within a firm as a result of its growth
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Minimum efficient scale
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D.O.S occurring due to the growth of the industry in which a firm is operating
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Internal economies of scale
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Purchasing
Selling
Technical
Financial
Managerial
Risk-bearing
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External economies of scale
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Research and development
Pools of skilled labour
Specialisation
Country reputation
Better infrastructure
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Diseconomies of scale
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Bad communication
Lack of management control
Detachment and lack of workers' morale
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Internal Diseconomies of scale
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Increasing resource costs
Road congestion/overcrowding
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External diseconomies of scale
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When the free market mechanism does not result in an optimal allocation of resources, thus, causing allocative inefficiency
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Economies of scale diagram
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Externalities
Information asymmetries
Monopoly
Immobilities
Public goods
Merit goods
Inequality
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Types of internal economies of scale
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A negative or positive spill over effect to a third party resulting from the consumption or production of a good or service
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Causes of external economies of scale
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The additional benefit that society gains from consuming one more unit of the product
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Causes of internal diseconomies of scale
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The cost to society of producing one more unit of a product
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Causes of external diseconomies of scale
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Costs incurred by an economic agent as part of its production or other economic activities
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Market failure
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Costs that are imposed on a third party due to an economic agent's production or other economic activity
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Causes of market failure
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Benefits experienced by an economic agent as part of its production or other economic activities
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Externality
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Benefits accrued by a third party due to an economic agent's production or other economic activity
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Marginal social benefit
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Economic agents not directly involved in a specific economic decision
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Marginal social cost
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Private costs+external costs
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Private costs
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Private benefits+external benefits
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External costs
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Marginal social costs>Marginal private costs. E.g. Factory creating toxic smog
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Private benefits
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MSC<MPC. Potential welfare gain e.g. Bee keeper
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External benefits
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Marginal social benefits<Marginal private benefits e.g. smoking
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Third party
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Marginal social benefits>Marginal private benefits e.g. education/health care
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Social costs
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A good that must be purchased to be consumed, and whose consumption by one person prevents another person from consuming it; excludable and rivalrous
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Social benefits
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A good that one person can consume without reducing its availability to others- non rivalrous and non excludable
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Negative production externality
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A good that has some, but not all of the characteristics of a public good
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Positive production externality
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Someone who directly benefits from the consumption of a public good, but who does not contribute to its provision
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Negative consumption externality
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When a person cannot be excluded from consuming a good, and thus has no incentive to pay for its provision
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Positive consumption externality
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A good that is under valued and under consumed in the free market. They tend to bring more private benefits than consumers actually realise and also tend to have positive externalities e.g. health and education
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Private good
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A good that is over consumed and overvalued in a free market as consumers tend to overestimate the benefits that consumption brings e.g. fast food
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Public good
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A lack of information resulting in economic agents making decisions that do not maximise welfare
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Quasi-public good
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A situation in which some economic agents in a market have better information about market conditions than others; when information is unequally shared between two parties
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Free rider
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A situation in which those who are at higher risk/more likely to need insurance, are more likely to take out insurance
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Free-rider problem
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A situation in which an individual or firm is more likely to make risky decisions knowing that it is protected against the risk by another party that will incur the cost. It is a type of asymmetric information
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Merit good
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When government intervention to correct a market failure creates inefficiency, does not maximise welfare and leads to a misallocation of scarce resources
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Demerit good
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Measures - based on statute law- used by the government to control a market e.g. information provision, fines for polluting. AO4: Fines have to be sufficiently large, regulations are costly to impose and maintain, regulatory capture, firms may move elsewhere
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Information failure
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A compulsory charge levied on the sale of goods and services
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Asymmetric information
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A tax of a fixed amount for each unit of a good or service sold
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Adverse selection
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An attempt to deal with an externality by implementing an external cost or benefit into the price system
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Moral hazard
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The way in which the burden of paying a sales tax is shared out between buyers and seller
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Government failure
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Good as it can internalise externality, raises tax revenue for the government to spend on alternatives, may be a sufficient deterrent to pollute. A04: depends on price elasticity of demand, useless if demand is inelastic, difficult to measure the size of an externality/know how big a tax should be. Incidence of tax falls disproportionately on consumers, high taxes may encourage tax evasion, taxes tend to be regressive EVAL: Tax revenue should be hypothecated, such a tax needs to be applied internationally to be effective and the government needs to face costs in term of reinforcement
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Regulation
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A sum of money given by the government to producers to encourage production of a good or service.
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Indirect taxation
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Subsidy should shift supply rightwards causing price to fall A04: Hugely costly for the government and may have to raise taxes in order to cover this, there is an opportunity cost of spending on subsidies, if demand is inelastic the subsidy will be ineffective, susidies may encourage inefficiency as firms rely on their subsidy to stay afloat. Government failure may arise if the government has poor information about who to subsidise, may be subsidising very inefficient firms. EVAL: Most effective when combined with other policies e.g. taxation and subsidies
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Per unit tax
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The government can provide public goods and merit goods directly to consumers free of charge in order to overcome market failure
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Internalisation of externalities
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Everyone can access the merit good so provides equality regardless of incomes which can lead to productive potential gains in the long run. A04: Difficult to measure the size of an externality, therefore can be virtually impossible for a government to know how much of a good or service to provide. State provision is very expensive, opportunity cost, taxation would have to be increased in order to justify increased spending. Government provision completely discounts the ability of the private sector to provide any help in the supply of the product. It is likely that the private sector would be much more efficient. EVAL: A mixture of public and private provision should be used, public-private partnerships can be very effective e.g. private sector builds infrastructure and the public sector pays to rent it.
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Incidence of tax
answer
A scheme intended to stabilise the price of a commodity by purchasing excess supply in periods when supply is high, and selling commodity reserves when supply is low.
question
Tax evaluation
answer
Useful for stabilising the price of commodities, this may attract agricultural investment and provides farmers with a more steady income, knowing how to plan for the future. Consumers are less likely to be harmed by prices rising too high for necessities such a wheat A04: Historically haven't been very successful, it is impossible to know the correct price at which to buy; if the price is too high, the government are likely to be buying up the stocks too frequently so it will become a loss-making endeavour.
Many of these goods tend to be perishable, can lead to huge amount of wastage if the price is too high and government has too many stocks
Extremely costly, often costing billions of pounds, opportunity cost. Taxes may increase, disposable incomes fall and demand for wheat falls, creating a vicious circle for the government.
Abuse of the system; issue of moral hazard whereby farmers know they are guaranteed a good price so will do all in their power to exploit the system and get a good harvest- bad for environment.
question
Subsidy
answer
The reward to owners of a business, entrepreneurs or shareholders for taking a financial risk in investment. Profit=Revenue-costs
question
Subsidy evaluation
answer
The opportunity cost of capital and enterprise. The return needed for a firm to stay in a market in the long run
question
State provision
answer
The level of profit made over and above normal profit. Can only be made in the long run by firms with monopoly power
question
State provision evaluation
answer
In the short-run, a firm may choose to remain in a market even if it is not covering its opportunity costs, provided its revenues are covering its variable costs. Since the firm has already incurred fixed costs, if it can cover its variable costs in the short-run, it may be better off remaining in business and paying off part of the fixed costs rather than exiting the market and losing all of its fixed costs. Thus, the level of average variable costs represents the shut down price.
question
Buffer stock scheme
answer
Occurs where MC=MR. Economists generally assume that all firms are aiming to maximise their profits as this is the basis of the traditional theory of the firms
question
Buffer stock evaluation
answer
Revenue is maximised where MR=0, this happens at an output higher than Profit maximisation and a firm will keep increasing output as long as adding more output leads to greater revenue.
question
Profit
answer
A firm aiming to maximise sales will produce where AR=AC, this is the highest level of output the firm can sustain in the long run. This is higher output than profit maximisation and revenue maximisation. Firms may be willing to make a lower level of profit in order to gain market share, enabling increased monopoly power and may enable firms to make more profits in the long run by forcing rivals out of business
question
Normal profit
answer
Firms undertaking the aim of welfare maximisation may be willing to incur extra expenses to chose products and raw materials that don't harm the environment/test on animals e.g. LUSH. This can help the firm to develop a more favourable reputation through demonstrating a commitment to acting in ways that benefit society at large. It is possible that this extra expenditure becomes a necessary part of firm's running costs in order to maximise profit, therefore welfare maximisation may be compatible with profit maximisation in the lr
question
Abnormal profit
answer
Describes a divorce in ownership and control that can arise as directors may have different objectives compared with those of the owners. Owners may want to maximise profits in order to keep stakeholders happy, but managers have less incentive to do this as they do not get the same reward.
question
Shut-down point
answer
Proposes a solution top the principle-agent problem. This objective means managers trying to gain just enough profit to satisfy important stakeholders, but beyond this point they are free to pursue their own objectives such as improving their golf handicap. The principal-agent problem can also be overcome by introducing performance-related pay to align the objectives of owners and managers. Directors could also be encouraged to buy stakes in the company in order to align interests.
question
Profit maximisation
answer
Aims of owners-some may be motivated by the prospect of profit, others may not
Public opinion-adverse publicity can encourage firms to prioritise social welfare
Finance-the financial position of a firm can influence the scope and scale of marketing activities
Human capital- the quality and quantity of the workforce is a key factor in influencing marketing objectives
Business culture - E.g. a marketing-orientated business is constantly looking for ways to meet customer needs and preferences whereas a production-orientate culture may result in management setting unrealistic or irrelevant marketing objectives
External influences include the economic environment, competitor actions, market dynamics, technological change, social&political change
question
Revenue maximisation
answer
Growth, through increasing economies of scale, increasing market share and reducing competition and expanding into new markets.
question
Sales maximisation
answer
A.K.A. Organic growth is growth as a result of a firm expanding its own operations rather than merging with or taking over another firm. This type of growth is much less risky and firms have control over exactly how this growth occurs; however, it is a lengthy process.
question
Corporate social responsibility
answer
A model describing how a market would work if certain conditions were satisfied. Conditions:
Infinite number of suppliers and consumers
Perfect information for both
consumers and producers
Products are homogenous
No barriers to entry/exit
Firms are profit maximisers
question
Principle-agent problem
answer
The conditions ensure that the price mechanism works perfectly, producers are rewarded for the goods and services they provide at the level that reflects the benefits those g+s bring to customers. Will be allocatively efficient. Productively efficient as firms produce on the lowest average cost curve. X-inefficiencies are very low A04: Supernormal profits are competed away in the long run meaning there are no dynamic efficiency gains.
question
Profit satisficing
answer
Any potential difficulty or expense a firm might face if it wants to enter a market. They allow incumbent firms to make supernormal profits before new entrants come and erode the profits away.
Patents
High sunk costs
Strong branding and brand loyalty
Aggressive pricing tactics
Threat of a price war
economies of scale
question
Factors that influence the choice of objectives
answer
Where a single firm is the supplier of a product with no close substitutes i.e. the firm is the industry. A legal monopoly is where the firm has 25% market share.
question
How do firms increase profit?
answer
Economies of scale, r&d, international competition, may have gained monopoly power due to efficiency, avoids wastage, can provide stable employment. A04: Allocative inefficiency, productively inefficient, x-inefficient, less choice for consumers and higher prices, lower quality products, can eliminate all consumer surplus through price discrimination, welfare loss.
question
Internal growth
answer
When the LRAC curve falls continuously over a large range of output. The result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available as duplication would be unnecessary and wasteful.
question
Perfect competition
answer
The process by which a firm can charge different customers different prices for essentially the same product. Three conditions:
Firm must have price making power (monopoly/oligopoly)
Must be able to identify different market segments with different PED's
Must be able to prevent seepage- customers who bought at a low price cannot resell at a higher price to consumers who could've been charged more. Main aim of PD is to increase firm's total revenue and profits by reducing consumer surplus.
question
Evaluation of perfect competition
answer
A market structure in which there are a small number of large firms, each with a significant share of the market:
Interdependence
Barriers to entry
Strategy
question
Barriers to entry
answer
The way firms will be affected by how other firms set their prices and output
question
Monopoly
answer
A marketing strategy in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and service.
question
Evaluation of monopoly
answer
Commercial competition characterised by the repeated cutting of prices below those of competitors
question
Natural monopoly
answer
When an established firm reduces its price to below its rivals' costs of production in order to eliminate competition or to strengthen its position in the market
question
Price discrimination
answer
When the various firms in an oligopoly cooperate with each other, especially over what prices to charge.
question
Oligopoly
answer
An unwritten agreement where firms observe informal rules, such as not undercutting rivals as each firm knows it is in their best interests not to compete
question
Interdependence of firms
answer
a.k.a. explicit collusion which is a formal agreement to control output or set an industry price enabling them to achieve a common objective e.g. OPEC
question
Non-price competition
answer
The market structure that resembles many real-life industries whereby the conditions for perfect competition are relaxed. Conditions:
Some product differentiation
Low or no barriers to entry
Many buyers and sellers
Abnormal profit in SR, not in LR
question
Price warfare
answer
Markets are relatively contestable as there are no barriers to entry, differentiation creates diversity and choice, more efficient than monopoly, less than perfect competition. A04: Differentiation creates unnecessary wastage and the creation of false wants arises. Allocative inefficiency in SR and LR. Firms in mono comp have chosen to restrict output in order to maximise profits so they don't benefit from all of the economies of scale that they could.
question
Predatory pricing
answer
Contestability refers to how open a new market is to competitors. Low barriers to entry/exit, so if excess profits are made by incumbent firms, new firms will enter to erode profits. Supernormal profits can be made in SR. If a market is contestable, incumbent firms may have to accept a lower price level to avoid attracting new entrants or they may try to create higher barriers to entry to keep their market share. In LR, firms in contestable markets will move towards productive and allocative efficiency because supernormal profit is competed away and firms must settle for normal profit.
question
Collusion
answer
Low barriers to entry/exit mean that entrants can enter a market when supernormal profits are made, erode it away and then leave when normal profits are made.
question
Tacit collusion
answer
The stock of skills and expertise that contribute to a worker's productivity.
question
Overt collusion
answer
Wages, salaries and other costs of using labour, divided by output per worker.
question
Monopolistic competition
answer
Organisations of employees that seek to improve the pay and working conditions of their members e.g. RMT
question
Evaluation of Monopolistic competition
answer
The movement of people from one place to another, usually for economic, social or political reasons
question
Contestable markets
answer
Increases supply of labour
Migrants bring skills
Fill unemployment gaps
A04: Push lowest wages down
Substitute native workers
question
Hit and run competition
answer
The unjust or prejudicial treatment of different categories of people on the grounds of factors such as race, gender, age etc.
question
Human capital
answer
The statistical characteristics of humans and populations such as age/gender and the changes seen to these structures.
question
Unit labour costs
answer
Where there is a monopsony (single buyer of labour e.g. the Underground) and a monopoly (single seller of labour e.g. the RMT) in the same market.
question
Trade union
answer
Not working and not looking for work
question
Migration
answer
When barriers to entry/exit prevent the free movement of workers between all of the different jobs that are available
question
Eval of migration
answer
The ability of real wages to change in response to changes in demand for and supply of labour
question
Discrimination
answer
A price floor, below which employers cannot legally employ workers. It sets a legal minimum hourly rate of pay for different age groups introduced into the UK in 1999 to stop exploitation of workers.
question
Demographic changes
answer
Occurs where the market forces of supply and demand do not result in an efficient allocation of resources
question
Bilateral monopoly
answer
Occur between firms, industries, occupations and regions. In a perfectly competitive labour market, all workers would be paid the same amount as labour in homogenous, but in the real world, wages differ as each worker is a unique factor of production, possessing a unique set of employment characteristics: ability, education+training, age, gender, location etc.
question
Economically inactive
answer
A flow of payments received over a period of time in return for factors of production
question
Segmented labour markets
answer
The accumulated stock of assets that households own at a fixed point in time
question
Wage flexibility
answer
A method used by governments to decide whether a project would be beneficial for society. 1. Identify all costs and benefits including future c+b
2.place a common monetary value on all of these
Advantages: Evaluates the most effective use of scarce resources
Social benefits and costs are evaluated
Allows for a more informed decision to be made
Allows for projects to be prioritised
Not useful:
Hard to place a monetary value on external benefits and costs
Shadow pricing leads to inaccuracy
Data may be skewed by bias
Hidden costs may exist
CBA cannot include the unpredictable e.g. natural disasters
Planning takes a long time and costs can constantly change
Costs of undertaking a CBA may be greater than the usefulness of the information that it provides.
Eval: depends on the accuracy of the information gathered, no other alternatives-best solution would be to find a better way of calculating the costs and benefits
question
National minimum wage
answer
The selling of state assets to the private sector e.g. the sale of the Post office.
question
Labour market failure
answer
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question
Wage differentials
answer
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question
Income
answer
undefined
question
Wealth
answer
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Cost-Benefit analysis
answer
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question
Privatisation
answer
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