Microeconomics May Exam

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What is PES?
Price elasticity of supply, responsiveness of supply to a change in the price of the good/service
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What is the formula for PES?
%ΔQS / %ΔP
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PES = 1
Unitary elastic
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PES > 1
Relatively elastic
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PES < 1
Relatively inelastic
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PES = infinity
Perfectly elastic
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PES = 0
Perfectly inelastic
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What are the factors affecting PES?
Time - LR and SR
Stocks - stockpiling
Capacity - spare/full capacity
Availability of FOPs - mobility of labour, availability of extra capital
Ease of entry into the market - Δ price incentive for new firms
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What is demand?
The ability and willingness to buy a particular good at a given price and at a given moment in time
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What are the conditions of demand?
Population
Income
Related goods (subsitutes, complements)
Advertising
Tastes/preferences
Expectations
Seasons
Government legislation
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Why is the demand curve downward sloping?
Law of diminishing marginal utility
Extra utility falls as customer consumes more of a good
Willing to pay less for additional units of the good
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What is supply?
Ability and willingness to provide a good/service at a particular price at a given moment in time
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What are the conditions of supply?
COP
Taxes
Subsidies
Technology
Government legislation
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Why is the supply curve upward sloping?
At higher prices there is higher incentive to produce more
Higher prices signals to firms to enter the market
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What is a PPF?
Production possibility frontier, shows the maximum possible combinations of capital and consumer goods that the economy can produce with its current resources and technology
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What is monopolistic competition?
A form of imperfect competition, with a downward sloping demand curve
E.g hairdressers, restaurants
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What are the characteristics of monopolistic comeptition?
Large number of buyers and sellers
No barriers to entry and exit
Imperfect information
Non-homogenous goods
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What can firms make in the short run in monopololistic competition?
Suprnormal profits, normal profits or losses
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What can firms make in the long run in monopololistic competition?
Firms can only make normal profits
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Why can firms only make normal profits in the long run in monopolistic competition?
In the short run firms make supernormal profits
New firms enter the market due to profitability
Demand falls for individual firm
Normal profits made
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Why might firms might be able to continue to make supernormal profits in the long run in monopolistic competition?
There is not perfect information
Firms may not be aware of supernormal profits being made
Therefore will not enter market
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What efficiencies are involved in monopolistic competition?
Not allocatively or productively efficient
Dynamically efficient - Imperfect information, enables supernormal profits in the short run
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What is a demerger?
When a single business is broken down into two or more components, which can operate themselves, be sold or dissolve
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What are the reasons for demergers?
Lack of synergies
Value of the company/share price
Focus of the company
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How do lack of synergies cause a demerger?
Different parts of the company have no impact on each other and fail to make each other more efficient
Managers splitting time between multiple areas can cause managerial diseconomies of scale
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How does the value of the company/share price cause a demerger?
When the separate parts of the company are worth more than the company combined
When some parts of the company are more profitable than others
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How does focus of the company cause a demerger?
Managers have limited time and skills
Managers may be better placed when focussed on individual markets
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What are the impacts of demergers on workers?
May be promoted to manager
May become unemployed as the separate firms become more efficient
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What are the impacts of demergers on businesses?
May lead to higher efficiency + innovation
May lead to loss of economies of scale
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What are the impacts of demergers on consumers?
May lead to cheaper prices + better quality
May lead to increased prices
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What is a subsidy?
Financial aid granted by the government to aid firms' production
Usually granted on goods with positive externalities
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How does the introduction of a subsidy affect the supply and demand diagram?
Supply shifts rightward
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What are the advantages of subsidies?
Social welfare is maximised
Encourages small firms
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What are the disadvantages of subsidies?
High oppurtunity cost
Firms can become reliant, inefficient
Difficult to target, size of externality is unkown
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Where is producer gain shown on a subsidy diagram?
Draw line up from new market clearing
Draw horizontal line to y axis from where vertical line crosses original supply curve
Producer gain = that price to original price
ABOVE P1
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Where is consumer gain shown on a subsidy diagram?
Horizontal line drawn from new market clearing to y axis
Consumer gain = that price to original price
BELOW P1
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What is specialisation?
Production of a limited range of goods
Means trade is essential for other goods/services
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What is the division of labour?
When labour become specialised in a particular part of the production process
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Who stated that this concept can increase labour productivity?
Adam Smith
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What are the advantages of specialisation and the division of labour?
Increased labour productivity
Higher quality of goods and services
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What are the disadvantages of specialisation and the division of labour?
Can lead to boredom and poor quality of work
The workforce may suffer from structural unemployment
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What are the advantages of specialising in the production of goods/services to trade?
Theory of comparative advantage states countries should specialise in producing goods which gives them the lowest opportunity cost
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What are the disadvantages of specialising in the production of good/services to trade?
Countries can become over-dependent on the export of one good
High interdependence between countries
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What is are the characteristics of a free market economy?
Individuals are free to make their own choices and own the factors of production
Resources allocated through price mechanism
Consumers make decisions based on utility
Producers make decisions based on profit
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Which economists believed in the free market?
Adam Smith
Friedrich Hayek
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What did Adam Smith say about the free market economy?
Believed in the laissez-faire
'Invisible hand' which allocates resources to everyone's advantages
He believed competition causes lower prices
He did think that the government should provide laws, property rights, roads
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What are the advantages of a free market?
High motivation
Freedom of choice and politics
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What are the disadvantages of a free market?
There may be inequality
Lack of merit goods and overproduction of demerit goods
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What is a natural monopoly?
A market structure in which there is one seller, who has economies of scale so large that they cannot fully exploit all of them
E.g National grid, national rail
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How do natural monopoles come to exist?
Where there are huge barriers to entry, for example fixed costs
The incumbent firm does not have to overcome the barriers to entry
Entering the market would be pointless since it raises average costs, and the new firm would be easily priced out
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What efficiencies exist in a natural monopoly?
Not allocatively or productively efficient
X-inefficient
Dynamically efficient - may not invest due to lack of competition
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What are the costs and benefits of natural monopolies on firms?
Monopolists have potential for huge profits
Monopolists able to to compete against overseas organisations
Lack of competition causes firms to become complacent - X inefficient
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What are the costs and benefits of natural monopolies on employees?
Monopolists produce at lower outputs - employ fewer workers
Inefficiencies cause employees to be paid higher
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What are the costs and benefits of natural monopolies on consumers?
Lower prices, higher consumer surplus
Increased range of goods
Or with X inefficiencies, higher prices, lower consumer surplus
Decreased range of goods
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What is 3rd Degree Price Discrimination?
When monopolists charge different prices to different people for the same good or service
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How does third degree price discrimination occur?
Firm must separate market into separate demographics of customers
The demographics must have different PEDs
Firm must be able to control supply to prevent customers from the more expensive market purchasing from lower priced market
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What are the costs and benefits of third degree price discrimination?
Firms increase their supernormal profits
Firms have increased scope for dynamic efficiency
Some customers lose consumer surplus
(inelastic market)
Other customers gain consumer surplus
(elastic market)
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Other cards in this set

Card 2

Front

What is the formula for PES?

Back

%ΔQS / %ΔP

Card 3

Front

PES = 1

Back

Preview of the front of card 3

Card 4

Front

PES > 1

Back

Preview of the front of card 4

Card 5

Front

PES < 1

Back

Preview of the front of card 5
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Comments

Nish1803

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absolutely brilliant this

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