Making Markets Work (4)

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  • Created by: kkwaters
  • Created on: 24-01-17 14:31
Duopoly
exists in a market with two suppliers
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Monopolistic competition
Involves product differentiation but otherwise keeps the assumptions of perfect competition
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Price Discrimination
Involves separating groups of consumers with different price elasticities of demand and charging higher prices to groups with lower PED
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A contestable market
one that firms can enter and leave easily, sunk costs are likely to be low.
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Sunk costs
cannot be recovered once incurred. e.g. machinery can be resold but marketing costs cannot be recovered by a firm leaving the market. They are a type of barriers to entry as the are irretrieveable and risky.
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Barriers to entry
Obstacles making it harder for new firms to enter a market - they reduce competition and can allow existing firms to exploit monopoly power. Can be legal(patents), natural or artificial.
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Patents
Give inventors the right to be the only producer of their new product for a period of years.
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Intellectual property rights
protect the creations of people's minds. This is an umbrella term including copyright for writers etc, patents for inventors and trade secrets for firms.
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Natural Monopoly
An industry where costs will be higher with multi-firm supply than with a sole supplier, usually occurs from heavy infrastructure costs/distribution costs
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X-inefficiency
A waster of resources which occurs when a firm has little incentive to control costs. This is due to a lack of competition, low PED ( as higher costs can be passed on through higher prices)
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Concentration ratio
Measures the market share ratio of large firms. Small number of firms covering 50% of market share is an oligopoly.
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Interdependence
Way oligopolies will each take a decision in the light of the action or expected reactions of competing businesses in the industry.
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Price Wars
Involves a series of competing price cuts which are like to lead to losses for some firms in the industry. Usually started by a dominant firm with a predatory pricing strategy.
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Tactic collusion
Firms separately coming to understand tat it is in their joint interests not to compete vigorously , without any contact between them.
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Price leadership
forms as part of tactic collusion with one firm making price changes that others quickly follow.
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Overt collusion
Firms openly agreeing to action which is in their joint interest. this is anticompetitive and illegal.
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Minimum efficient scale
lowest level of output at which average costs are minimised
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Marginal revenue +cost
R= change in total revenue from selling one more unit of output. C= change in total costs from making one more unit of output.
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Allocative efficiency
Producing G+S that maximises satisfaction and match the preferences of customers.
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Productive efficiency
Involves minimising cost to produce as much as possible from the available resources.
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Abnormal profit
Profit in excess of normal profit (to keep the firm in business) . Result of market power.
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Collusion
collaborating to take joint action. In markets, collusion generally reduces competition.
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Restrictive Practice
Anti competitive abuse of market power ( artificial barriers to entry, fixing prices, market rigging, bundling)
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Cartel
Secret agreement between a number of producers, usually involving restrictive practices like manipulation of prices.
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Covert/overt
when a cartel becomes secret/ becomes open
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Tactic collusion
No agreement involved - firms independently work out that anti-competitive behaviour is in their best interest.
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Monopsony power
Where a major purchaser has market mower over smaller suppliers which can be dominated by the buyer.
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Public goods
Will not be adequately provided by a free market because benefits are for all. So must be provided by society as a whole.
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Merit goods
Under-consumed in a free market either because people underestimate the benefits on consuming them or they cannot afford them
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Demerit goods
Over consumed by buyers who overestimate the benefits due to information gaps or human irrationality
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Geographical mobility
Ability of workers to move to where jobs are available.
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Occupational mobility
Being able to move from one type of work to another
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Imperfect information
Buyers/sellers who don't know everything about a transaction
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Asymmetric information
Buyer/seller know more than another
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Information Failure
Distort resource allocation
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External benefits
Benefits affecting anyone other than the third party (buyer/seller)
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External costs
Costs impacts third parties
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Private costs
Paid by the seller
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Private benefits
Buyer's gain from consumption
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Social costs
total of private and external costs from any activity
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Social benefits
total of private and external gains from any activity
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AD
Consumption + Investment + Government spending + (eXports - iMports)
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Skills shortages
Shortages of people who are available to work and have the skills required.
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Supply constraints
Skill shortages + overloaded infrastructure. Capital investment cannot keep up with demand.
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Full capacity outputs
Max level in which AS can grow
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Accelerating inflation
When the economy is nearing fill capacity output. Increased D labour means that employers start to raise pay so that they can get the employers they need. This pushes costs and prices so a wage price spiral ( real wages decrease ) .
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The multiplier
Represents the size of the change in the level of economic activity in original change in the level of expenditure.
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Unsustainable economic growth
Occurs when rising AD leads to accelerating inflation
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Fiscal Policy
Use of taxation to provide public services, also used to stimulate the economy /slow growth. Allowance must be made for time lags.
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Bonds
Issued by the central bank to raise funds for the government, or by big businesses, to fund investment and expansion. bonds are bought by banks, pension funds and insurance companies because they are safe investments.
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Quantitative easing
Unconventional monetary policy aiming to stimulate bank lending by paying the banks in cash for bonds which are less liquid.
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Supply side policies
All measures that can increase the total productive capacity of the economy, they work to increase output using existing resources.
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Market based policies
Work on the principle that free markets can deliver both productive and allocative efficiency. They are intended to remove impediments to economic growth.
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Interventionist policies
Influence and control market forces in order to correct for market failure and imperfect competition
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The poverty trap
becomes a problem when disposable income in lower than the benefit rate.
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Tax credits
Create an incentive to work by ensuring that everyone is better off in work.
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Automatic stabilisers
Reduce the fluctuations of the economic cycle without requiring a change in fiscal policy. They reduce AD in a boom and increase in a recession.
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Keynesian policy
Increasing public spending, financed by borrowing that would stimulate economic growth and jobs in a recession.
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Shocks
unexpected events that have a major effect on the national economy. Some affect the global economy too.
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Uncertainty
Any possible change that is not predictable. There is no way to calculate its likelihood.
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Risks
Arise when changes are expected; probability of their happening can be calculated with some degree of accuracy.
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Forward markets
Make it possible to buy foreign currencies at a price agreed today, for silvery on a special date. Can be seen as insurance against unfavourable change in the exchange rate that might affect probability.
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Credit creation
Process by which banks expand their lending by a multiple of deposits they receive. Risks are involved so it is important that banks assess the risks associated with their lending and do not expand their lending activity beyond safe limits.
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Financial intermediaries
All organisations that take savers' finds and lend to investors ( banks, building societies, pension funds ,insurance ).
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Liquid assets
Assets that can easily be sold for cash
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Light touch regulation
Fewer rules and more reliance on banks and businesses to control their own actions in prudent ways.
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Bank failure
When the bank does not have enough cash to allow all depositors who want to retrieve their money to do so. It occurs when there is complete loss of confidence in the bank.
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Lender of last resort
Important function of central banks. they guarantee to lend banks that are temporarily unable to meet their consumers' requests to withdraw money. this helps to keep the banking system stable but may not go so far as to rescue a large failing bank.
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Sub-prime mortgages
are loans for house purchase to people who have low credit ratings i.e. they have a higher risk of being unable to make the regular interest and repayment charges.
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Bank failure
Refers to situations in which the bank can no longer borrow enough to cover all of its debts
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Moral Hazard
`occurs when individuals can act in their own interests knowing that the people will have to deal with the problems if they arise. They have no incentive to act prudentl
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Monopoly
Single firm which is the sole supplier to a market
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Perfect competition
Uses strict assumptions to guarantee intense competition which can be linked to efficient markets
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normal profit
just enough profit to keep firms in the industry - key feature of the perfect competition model.
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Other cards in this set

Card 2

Front

Involves product differentiation but otherwise keeps the assumptions of perfect competition

Back

Monopolistic competition

Card 3

Front

Involves separating groups of consumers with different price elasticities of demand and charging higher prices to groups with lower PED

Back

Preview of the back of card 3

Card 4

Front

one that firms can enter and leave easily, sunk costs are likely to be low.

Back

Preview of the back of card 4

Card 5

Front

cannot be recovered once incurred. e.g. machinery can be resold but marketing costs cannot be recovered by a firm leaving the market. They are a type of barriers to entry as the are irretrieveable and risky.

Back

Preview of the back of card 5
View more cards

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