# MicroEconomics A2

• Created by: Soph
• Created on: 15-04-17 02:03
What is PED?
This measures the responsiveness of a change in QD relative to a change in price
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What is YED?
This measures the responsiveness of a change in QD relative to a change in income
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What are the elasticities when YED is 11, 0
Income elastic, income inelastic, inferior good
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What is XED?
This measures the responsiveness of a change in QD of good A relative to a change in price of good B
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What are the elasticities when XED is + or -
Substitute good, complementary good
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What is PES?
This measures the responsiveness of a change in quantity supplied relative to a change in price
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What is productivity?
Output per unit of input
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What is labour productivity?
Output per worker
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What is capital productivity
Output per unit of capital
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What is the sum of AFC?
TFC divided by output
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What is AFC?
These are costs that fall as output increases
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What is AVC?
These are costs that change as output changes
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What is the sum of AVC
TVC divided by ouput
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Increasing returns to scale
This is when in the long run, output more than doubles
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Constant returns to scale
This is when in the long run, output doubles
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Decreasing returns to scale
This is when in the long run, output less than doubles
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Why is the MC curve curved? (lol good wording)
At first output rises faster than input resulting in lower marginal costs, however, the law of diminishing returns results in MC rising due to less productive labour
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If the marginal is below average, the average will...
fall
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Marginal revenue
This is the revenue gained from producing one extra unit of output
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Why is the AR curve the demand curve?
This is because AR represents the price
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Why is the MR downward sloping?
This is because the revenue gained from each unit sold decreases resulting in average price decreasing as well as TR increasing slowly
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What is invention?
This is when an entirely new concept is made
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What is innovation?
This is when an existing concept is improved
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What are the benefits of technological change?
Mechanisation, Automation, Improved static and dynamic efficiency
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What is disruptive innovation
This is when innovation results in a previous industry being destroyed
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What is sustaining innovation
This is when innovation and invention helps to further an existing industry
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What is creative destruction
This is when firms have an increased incentive to enter a market, resulting in competition and innovation and so previous firms in the market may lose out
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Give two natural barriers to entry
Sunk costs + Economies of scale
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Define these barriers
Sunk costs are irrecoverable costs which occur when a new firm enters an industry, Economies of scale; as output increases LRAC decreases
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Give examples of Artificial barriers to entry
Patents, Product Differentiation, First Mover Advantage, Limit Pricing, Predator Pricing
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What does RELI stand for?
Regulation making it illegal for competition to occur, Exclusivity, Lack of available inputs, Incumbent dominance
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When does Profit Maximising occur?
When MR=MC
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What is normal profit
This is when TC= TR
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What is supernormal profit
This is when TR>TC
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What is a loss
This is when TC>TR
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What are the benefits of profit?
Allows firms to complete projects, encourages entrance of new firms, results in lower AC, increases supply, acts as a reward for innovation, results in effective resource allocation
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What are factors affecting profit maximisation
Other business objectives, satisficing, sales maximisation
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Give examples of non-price competition strategies (MPQ)
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Give examples of price competition strategies
Predatory pricing, colluding prices, cross subsidisation
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What is cross subsidisation?
This is when prices of another good are increased in order to make up for the loss of reducing prices due to predatory pricing in a different good.
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What are the conditions needed for price discrimination?
It should be possible to separate the different groups, different elasticities of demand, no seepage between markets
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What is 1st degree PD?
This is when consumers are charged the highest price they are willing to pay
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What is 2nd degree PD?
Consumers are charged different prices for the different quantities they buy
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What is 3rd degree PD?
Different consumers are charged different prices due to their elasticities
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What is a contestable market?
This is one where there are no barriers to entry and exit and low sunk costs
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What does this encourage?
Hit and run competition
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How does this result in competition?
Firms are encouraged to keep costs low by improving efficiency in order to prevent hit and run competition
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What is static efficiency?
This is efficiency in a fixed point in time
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What is productive efficiency?
This is when a firm is producing at the lowest point on the AC curve/ when MC=AC
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What is allocative efficiency?
This is when P=MC/ the cost that is paid is equal to the utility
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What is dynamic efficiency?
This is when efficiency occurs due to new technology + increased productivity
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What is the marginal revenue product?
This is the money value in addition to total output that is gained from employing one more worker
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What are factors affecting demand for labour?
Labour productivity, technology, technological progress
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Why would demand for labour be inelastic?
Due to labour and its proportion of total costs, if the demand for the service is elastic
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What are factors affecting supply of labour?
Income, net advantage, population size, leisure time
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What are the assumptions of a PC labour market?
Homogenous worker + skillset, perfect knowledge of wage movement, firms offer identical jobs
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Why does the MRP fall?
This is due to the law of diminishing returns
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What is a monopsony?
This is when there is one buyer of labour but many sellers
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List benefits of a PC labour market
Higher wages, results in growth, specialisation
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List benefits + costs of a monopsony
Can attract all workers at its low wage, workers earn less than their MRP, may have poor working conditions
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Protect + increase wages, protect working standards, protect pensions
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Why is a TU unbeneficial in a PC market?
Can result in unemployment due to too high wages HWVR can encourage efficiency in order to pay for these workers
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TU's and monopsony?
Can result in higher wages with no difference in quantity of labour employed
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List benefits of a NMW
Higher productivity, counterbalances monopoly power, increased tax revenue, increased disposable income, lower income inequality
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List costs of a NMW
Does not help the poorest due to the poverty + unemployment trap
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What is wage discrimination?
This si when workers are paid differently for doing the same job
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List types of wage discriminations
Gender, education + skill
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What is income?
This is the measure of flow of money into a household
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What is wealth
This is a measure of everything of value in a household
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List factors affecting distribution of income
Differences in wage, globalisation, unemployment, earned + unearned icnome
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List factors affecting distribution of wealth
Inheritance + gifts, capital gains (property), private pensions
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List factors affecting distribution of wealth
Inheritance + gifts, capital gains (property), private pensions
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What are some benefits of inequality?
Inequality acts as an INCENTIVE for workers to improve themselves... It can also result in GROWTH due to lower income earner's high MPC
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What are some costs of inequality?
Negative Externalities, Increased Gx, Relative poverty, Inequality of opportunity, lack of motivation
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How does fiscal drag, progressive tax, mean tested benefit, increased NMW and benefits in kind reduce poverty?
Gonna have to just say it
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What are the functions of price? SARI
Signalling, Allocative, Rationing, Incentive
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List and explain methods used by the government to intervene with market failure
Taxation, Subsidies, State Provision, Regulation, Maximum and Minimum Price, Encouragement thru information
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What is a public good?
This is a good that is non-excludable and non-rivalled. This results in the free rider effect.
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How does market failure arise?
This is because a socially optimum point cannot be determined, UNDER provision of the good, good is not provided by the private sector as not profitable, allocative inefficiency can occur
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What is a private good/ quasi-public good/ pure public good?
A private good is one which is excludable and rivalled/ a quasi-public good is one which is semi non rival+ excludable/ a pure public good is one which provision for one results in the immediate provision for another
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What is the tragedy of commons?
This is the idea that individuals prioritise personal gain over well-being of society
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What are merit goods?
These are goods for which the social benefits of consumption will exceed the private benefits.
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What are demerit goods?
These are goods for which the private costs are under-estimated whilst the private benefits are over-estimated
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Characteristics of merit goods
These goods have positive externalities but also are provided in the wrong quantities
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Characteristics of demerit goods
These are goods with negative externalities and are harmful to the individuals
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Why do demerit goods lead to market failure?
The free market does not take into account the negative externalities on society
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Why do merit goods lead to market failure?
There is a case of asymmetric information and so people are not aware of the benefits
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What is a private cost?
These are the costs that the price mechanism takes into account
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External costs
These are the costs that the price mechanism does not take into account
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What is a social cost?
This is the total of the private and external costs
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What is a private benefit?
These are the benefits that the price mechanism takes into account
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External benefits
These are the external benefits that the price mechanisms takes into account
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What is a social benefit?
This is the total of private and external benefits
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Negative Production Externalities
This is when Marginal Social Costs is greater than Marginal Private Costs
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Positive Production Externalities
This is when Marginal Social Costs is less than the Marginal Private Costs
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Positive Consumption Externalities
This is when Marginal Social Benefits exceed Marginal Private Benefits
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Negative Consumption Externalities
This is when Marginal Private Benefits exceed Marginal Social Benefits
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What is asymmetric information?
This is when one party in a transaction has more or better information than onother
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How does this cause market failure?
It may result in poor choices as people are not aware of the information needed to make decisions
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This is when buyers have better information than sellers which will result in high costs to the seller when the good is consumed
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What is a moral hazard?
This is when a party is more likely to be involved in a risky event knowing they are protected against the risks as the other party will incur the costs
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What is monopoly power?
This is when a firm has more than 25% of market share
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How does this result in market failure?
This market is able to restrict supply and increase prices leading to both allocative and productive efficiency. There is also a loss in consumer surplus
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What is occupational immobility?
This is when workers are unable to move between jobs as they do not have the skills required
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What is geographical immobility?
This is when labour is unwilling to move location to find work.
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What type of unemployment can occur?
Structural unemployment
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How does this result in market failure?
The supply of labour becomesinelastic and workers are not available where they are needed.
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What is equity
This focuses on fairness
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What is equality
This focuses on equal treatment
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How does an unequal distribution of wealth and income result in market fa
This is because resources are allocated to the needs of the rich which increases prices and reduces supply of goods for poorer people
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How does maximum prices, minimum prices help to reduce market failure
These set a price ceiling/ floor as the the prices of goods. For example, maximum prices help to increase consumption as the price whilst minimum prices decrease consumption
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What is a tradeable pollution permit?
Clue is in name
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Encourages firms to use environmentally friendly methods of production, increases government revenue from the permits
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This may be difficult to police, firms may move to other areas where the pollution limits are higher, higher costs may be passed on to consumers, may act as a sunk cost and will reduce competition
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Name 4 issues with government failure
Distorts price signals, may result in information gaps, unintended consequences, excessive administrative costs
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Why are these issues?
1- Subsidies may distort how the free market operates, 2- government may not have the best info to act in the interest of consumers 3- consumers are unpredictable so intervention may not work 4- may be expensive to run and so the benefits are costly
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Why is competition policy needed?
This is so as to promote competition by reducing monopoly power
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What two behaviours are investigated by the OFT?
Collusive behaviour= in which firms enter agreements to fix prices or restrict output, Abuse of Monopoly Power= by using predatory pricing
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What are ways of enhancing competition
Reduce Red Tape, Reduce Barriers to Entry, Privatisation+Deregulation, Creative Destruction through Technological Change
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What is a positive statement?
These are statements that are confined to analysis. They can be tested even if untrue
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What is a normative statement?
These consider value judgements and are subjective
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What is a need
This is something that is necessary for human survival
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What is a want
This is something that is desired
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What is the idea of scarcity?
This is the idea that there are finite resources to meet society's wants
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What is an opportunity cost?
This is the next best alternative forgone
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What is utility?
This refers to the satisfaction that is gained from consuming a good
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What is utility maximisation
This is the idea that economic agents act in their own best interests
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What is marginal utility?
This is the addition to total utility gained by consuming a good
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What is bounded rationality
This is the idea that individual's decisions are made based on the limited information they have as well as the limit of their minds
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What is bounded self control?
This is the idea that individuals have limited self control to act in their best interests
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What is anchoring?
Anchoring refers to people making choices based on the first piece of information they have received.
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What is availability bias?
This is when judgements are made based on the likelihood of events happening again as it has already happened
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What is social norms in terms of bias?
This is when decisions are made based on what is considered acceptable in society
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Other types of bias?
Memory, positive expectation, bandwagon
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What is altruism?
This is the idea that people care for the welfare of others
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What is fairness?
This refers to the quality of being impartial
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What is a default choice?
This is when people are automatically given a choice unless they specify they would like another
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What is framing?
This is how information is presented in order to influence decisions
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What is a mandated choice?
This refers to choices people are required to make by law
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What is a nudge?
This is when consumers are encouraged to make a certain decision without taking away their choice
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What is a restricted choice
This is when there is a limited number of choices available
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What is loss aversion?
This is the idea that people prefer to avoid losses than to acquire an equivalent gain
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Factors affecting changes in demand? PASIFIC
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Factors affecting changes in supply?
Government policy (Taxes), Technology, Production costs
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What is a complementary good?
This is a good that is sold in joint demand
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What is a substitute good?
This is when an increase in supply of one good results in a decrease in demand of another good
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What is derived demand?
This refers to a product that is demanded not for itself but for the product in produces
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What is composite demand?
This is a good that has two or more uses
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What is joint supply?
This is when the increased supply of one good automatically leads to an increase in supply of another
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## Other cards in this set

### Card 2

What is YED?

#### Back

This measures the responsiveness of a change in QD relative to a change in income

### Card 3

#### Front

What are the elasticities when YED is 11, 0

What is XED?

### Card 5

#### Front

What are the elasticities when XED is + or -

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