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WorksheetsMicro 25- Economics
Total questions: 55
Worksheet time: 37mins
What key term is this the definition of?
achieving allocative and productive efficiency together
(a)
What key term is this the definition of?
the minimum amount of profit required to remain competitive
(a)
What key term is this the definition of?
the extra profit achieved above normal profit
(a)
Which point is productive efficiency?
MC=AC
MC=AR
AC=AR
MR=MC
Which point is allocative efficiency?
MC=AC
MC=AR
AC=AR
MR=MC
Which point is normal profit ?
MC=AC
MC=AR
AC=AR
MR=MC
Which point is profit maximisation?
MC=AC
MC=AR
AC=AR
MR=MC
What key term is this the definition of?
A firms ability to innovate and invest leading to improved products, processes and falling LRAC
(a)
What key term is this the definition of?
Where a lack of effective/real competition in a market or industry means that average costs are higher than they would be with competition
(a)
What market structure is being described?
25% + market share
Price makers
Profit maximising
Supernormal profits
High barriers to entry
Lack of competition= inefficiency
monopoly
oligopoly
monopolistic competition
perfect competition
contestable market
What market structure is being described?
Few firms control majority of the market share
High barriers to entry
Firms are interdependent
Sticky/rigid prices
Possible existence of cartels
Non-price competition/product differentiation
monopoly
oligopoly
monopolistic competition
perfect competition
contestable market
What market structure is being described?
Large number of small buyers and sellers
No barriers to entry
Perfect information
Homogenous goods
Price takers
Normal profit
monopoly
oligopoly
monopolistic competition
perfect competition
contestable market
What market structure is being described?
Large number of small buyers and sellers
No or few barriers to entry
Perfect information
Non-Homogenous goods (brand loyal)
monopoly
oligopoly
monopolistic competition
perfect competition
contestable market
What market structure is being described?
No barriers to entry or exit
No sunk costs
POTENTIAL for competition
Normal profits no matter what level of competition there is
Perfect information
monopoly
oligopoly
monopolistic competition
perfect competition
contestable market
What are the Outcomes of perfect competition?
in the SR abnormal profits attract new entrants
only normal profit is made in the long run
productive efficiency
allocative efficiency
dynamic efficiency
What does the deadweight loss on the monopoly diagram represent?
the loss of the potential benefit to society of monopoly firms operating at productive and allocative efficiency, leading to consumers paying higher prices for less choice
the gain of the benefit to society of monopoly firms operating at productive and allocative efficiency, leading to consumers paying lower prices for more choice
the loss of the potential benefit to society of monopoly firms operating at dynamic efficiency, leading to consumers paying higher prices for more choice
the loss of the potential benefit to society of monopoly firms operating at productive and allocative efficiency, leading to consumers paying lower prices for more choice
the loss of the potential benefit to society of monopoly firms operating at dynamic efficiency, leading to consumers paying lower prices for less choice
True or false?
It can be argued that monopolies are more efficient as there is potential for economies of scale and dynamic efficiency meaning these costs savings could be passed onto consumers as lower prices
true
false
What are the DETERMINANTS of monopoly POWER?
Barriers to entry
Number of competitors
Advertising and product differentiation (degree of brand loyalty)
point of allocative efficiency
What are examples of barriers to entry?
legal barriers (patents, health & safety regulations, environmental regulations etc)
Absolute cost barriers (large amounts of capital required, high sunk costs deter entrants)
Relative cost barriers (large & established firms benefit from economies of scale so have lower AC than new entrants)
Behavioural barriers (restrictive practices eg alliances and collusion)
What key term is this the definition of?
When the benefits of economies of scale in an industry are so large that it is uneconomic for more than one firm to supply in that industry. This leads to falling LRAC through the whole range of output, the LRMC curve will also continue to fall below the AC curve. It is argued that introducing competition into this market would cause an increase in AC and therefore price as a large number of small firms would not be able to take advantage of the economies of scale that exist
(a)
What are the outcome of a natural monopoly?
A privately owned natural monopoly would produce at the profit maximising point MC=MR, leading to abnormal profits
A publicly owned natural monopoly will produce at allocative efficiency MC=AR (welfare maximisation) , leading to a loss
Publicly owned natural monopoly needs to be subsidised (with the size of the loss) in order to make normal profit and keep operating
Prices will be too low for a public natural monopoly so no one will want to buy any of the goods/services and this will create a missing market
What are the Outcomes of monopolistic competition?
in the SR abnormal profits attract new entrants
in the LR new entrants decrease the overall % of the market that existing firms can enjoy, shifting the AR and the MR curves downwards
differentiated product cause productive inefficiency
(AC is not minimised)
differentiated product cause allocative inefficiency
(P is greater than MC)
normal profits in the LR
In an Oligopoly there is a kinked demand curve. Does this describe the elastic portion or the inelastic portion of the demand curve?
Raising the prices any more causes a big fall in demand, this is because customers will go to the other large competitors who keep their prices lower, leading to a loss of revenue
elastic
inelastic
In an Oligopoly there is a kinked demand curve. Does this describe the elastic portion or the inelastic portion of the demand curve?
Lowering the prices any more causes a small rise in demand, this is because the other large competitors will match this lower price, leading to a loss of/no change in revenue
elastic
inelastic
True or false?
In an Oligopoly there is a kinked demand curve, the first portion elastic and the second portion in inelastic and therefore any change in price leads to a loss of revenue, leading to sticky prices at the point where the demand curve kinks, even if MCs increase
false
true
What are the outcomes of an Oligopoly?
dynamic efficiency
abnormal profit
incentive to collude and essentially operate as a monopoly and charge the same high price
allocatively and productively inefficient
profit maximisation
What are the outcomes of a Contestable Market?
charge a low price
normal profits
the govt may deregulate or privatise to increase levels of contestability in a market
firms operate in a more efficient manner but are dynamically, allocatively, productively inefficient
Firms act like this to deter the entry of other firms, especially 'hit and run' firms who are in the market for the short term supernormal profits and leave when it is all competed away
What key term is this the definition of?
It measures the % of market share enjoyed by the largest firms in the industry, highly concentrated markets tend to have low levels of competition, the level of concentration can be measured via sales revenue, units of output etc
EXAMPLE: C4=60% means that the 4 largest firms hold 60% of market share
(a)
What key term is this the definition of?
It measures market concentration. The index is calculated by squaring the % of market share of each firm in the market and adding these numbers, the higher the value the more concentrated the market.
EXAMPLE: 4 firms with 30%, 30%, 20%, 20% would have an index of 2600 (900+900+400+400).
A pure monopoly (100% market share) would have an index of 10000
(a)
What key term is this the definition of?
The action of selling the same product at different prices to different buyers in order to maximise sales and profits
(a)
What are the conditions necessary for price discrimination?
different markets have different PED's
Firms have price making power
Markets must be able to be seperate eg by time,place, etc and must be kept seperate so no cross selling can occur
the costs of separating the market must not be greater than the potential gain from price discrimination
producer surplus must be low and consumer surplus must be high
What key term is this the definition of?
The difference between the price consumers are willing to pay and the price they actually pay
(a)
What key term is this the definition of?
The difference between the price firms are willing to charge and the price they actually charge
(a)
What type of price discrimination?
Where a firm with price making power charges each individual consumers the maximum price that they are willing to pay, turning all consumer surplus into producer surplus
First Degree price discrimination
Third Degree Price Discrimination
What type of price discrimination?
Where a firm splits the market according to their different elasticities of demand. Different market will face different prices in order to maximise profit from each market, which leads to larger profits being made than if the sub markets were combined,
eg peak and off peak trains
First Degree price discrimination
Third Degree Price Discrimination
true or false?
For Third Degree Price Discrimination firms make more abnormal profit from elastic markets than inelastic markets
true
false
What are the advantages of price discrimination?
for the consumer:
Higher profits cause dynamic efficiency which lowers AC and lowers prices
for the consumer:
Cross subsidisation- using excess profits to subsides a loss making market allowing services to continue
for the producer:
increasing prices can turn a loss making market into a profitable one
for the consumer: increased consumer surplus
for the producer:
abnormal profits attract new entrants
What are the disadvantages of price discrimination?
for the consumer:
anti-competitive pricing
for the consumer:
allocative inefficiency
for the producer:
possibility for government intervention if the firm is perceived to be not acting in the public's interest
for the consumer:
decreased consumer surplus
for the producer:
abnormal profits attract new entrants and therefore abnormal profits only persist in the SR
What key term is this the definition of?
The process of how capitalism leads to constantly changing structure of the economy, where old industries and firms which are no longer profitable close down and enable those resources such as capital and labour to be moved into a more productive and innovative process
eg. Vinyl taken down by Cassettes, Cassettes being taken down by CDs, and CDs being taken down by music downloads such as Spotify
(a)
What is this the definition of?
In the long-run, increasing multiple factor inputs (factors of production) will lead to decreasing unit costs. So, a firm benefits from reduced average costs when it has increased its capacity. This occurs because of increasing returns to scale
(a)
Short-run or long-run?
When a firm is approaching its capacity, it is suffering from diminishing marginal returns. So, each additional unit of one factor of production (labour) increases output by less than the last.
short-run
long-run
Short-run or long-run?
Economies of scale occur because of increasing returns to scale. Increasing returns to scale occur when a firm can increase all factors of production, each successive increase in labour and capital leads to a greater input than the last, so average costs will fall.
short-run
long-run
true or false?
When a firm continues to grow and increase capacity after achieving economies of scale it will reach a point where returns to scale are constant. Meaning each successive increase in all factors of production leads to the same increase in output.
true
false
Does this describe economies or diseconomies of scale?
When a firm becomes so large eventually each successive factor input yields a diminishing output (diminishing returns to scale) , causing long-run average costs to rise.
economies of scale
diseconomies of scale
What cause of economies of scale does this explanation match up to?
A business gets larger so that it can spread its risk over a larger output
risk bearing
financial
managerial
technical
marketing
increasing or decreasing returns to scale?
when the output increases by a larger proportion than the increase in input.
increasing
decreasing
what is this the definition of?
the rate at which output changes due to some change in input.
(a)
What cause of diseconomies of scale does this explanation match up to?
A large business has many employees so employees may feel less valued and may feel as if they can be easily replaced
control
communication
coordination
motivation
What cause of diseconomies of scale does this explanation match up to?
A large business may struggle to get all its departments to work together as they are in isolation from each other
control
communication
coordination
motivation
What cause of diseconomies of scale does this explanation match up to?
A large business means it is harder to send a quick and clear message across the company
control
communication
coordination
motivation
What cause of diseconomies of scale does this explanation match up to?
A large business gives its managers too large a span of control so it is difficult to manage
control
communication
coordination
motivation
What cause of economies of scale does this explanation match up to?
A business gets larger so they can buy in bulk (can buy in bulk as they are large thus giving them a good reputation amongst suppliers) so they can have lower costs
risk bearing
financial
managerial
technical
purchasing
What cause of economies of scale does this explanation match up to?
A business brings in specialist machinery to increase productivity
risk bearing
financial
managerial
technical
marketing
What cause of economies of scale does this explanation match up to?
A business employs specialists to do one specific job so that productivity rises
risk bearing
financial
managerial
technical
marketing
What cause of economies of scale does this explanation match up to?
A business gets larger so that it can make supernormal profit
risk bearing
financial
managerial
technical
marketing
