Microeconomics Year 2

Flashcards covering key concepts in microeconomics, including market structures, business strategies, and economic principles.

labour supply curve shift

Caused by an increase in non-pecuniary benefits, trade unions, entry barriers, taxes and benefits, education and training, and migration.

firms growth reasons

Firms may want to grow to diversify assets, increase market power, maximize shareholder returns, and benefit from economies of scale.

economies of scale disadvantages

May suffer from diminishing returns to scale (DoS) and depends on the shape of the long-run average cost (LRAC) curve.

constraints on growth

Factors include size of the market, access to finance, owner objectives, and regulation.

organic growth

Growth achieved through the expansion of current business activities, such as reinvesting profits or obtaining bank loans.

pros of organic growth

Maintains ownership and control; considered low-risk.

cons of organic growth

Can result in slower growth; may lose ownership and control.

inorganic growth

Growth achieved by merging with or taking over another business.

types of inorganic growth

1) Backward vertical integration, 2) Forward vertical integration, 3) Horizontal integration, 4) Conglomerate integration.

principal-agent problem

Occurs when the interests of the principal (shareholders) conflict with those of the agent (managers).

moral hazard

A situation where risks are taken because the consequences are borne by another party.

private limited company

A company with limited liability, owned by shareholders, where shares are not publicly traded.

public limited company

A company that can sell shares to the public and is governed by a board of directors.

sole trader

A business owned and operated by one individual.

collusion

An agreement among firms to limit competition, often to set prices or output levels.

price fixing

An arrangement among competing firms to set prices at a predetermined level, typically above market rate.

oligopoly characteristics

Few, mutual interdependent firms; high barriers to entry; good information; differentiated products; dominated by a few firms.

advantages of oligopoly

Economies of scale, price stability, product choice, and potential for dynamic efficiency.

disadvantages of oligopoly

No guarantee of low prices, potential for collusion, and lack of dynamic efficiency.

perfect competition characteristics

Unlimited buyers and sellers, low barriers to entry, homogenous products, normal profit in the long run, perfect information.

example of perfect competition

An industry with a large number of identical firms, such as the hairdressing sector in the UK.

benefits of perfect competition

Low prices for consumers, productive efficiency, prevention of market failure.

drawback of perfect competition

Lack of innovation and consumer choice, potential for market failure.

monopolistic competition characteristics

Many small buyers and sellers, low barriers to entry, slightly differentiated products, firms are price makers.

perfectly competitive firms' strategy

Price takers due to perfectly elastic demand.

examples of monopolistic competition

Cafes and hotels.

high barriers to entry overview

A characteristic of oligopolies and monopolies, preventing new firms from easily entering the market.

natural monopoly definition

A market efficiently served by a single firm due to high fixed costs and large scale.

benefits of a natural monopoly

Productive efficiency gains, regulated price can reach allocative efficiency, and avoids resource duplication.

pure monopoly definition

A market with only one seller holding 100% market share.

dynamic efficiency impact on monopolies

Enables monopolies to innovate while controlling prices and limiting new entrants.

supernormal profits advantages

Investment in R&D and innovation, potential for lower prices in the long run.

disadvantages of monopolies

High prices, loss of allocative efficiency, limited consumer choice, and potential for x-inefficiency.

price maker definition

A firm that can influence the market price due to lack of competition.

advantage of monopolies for consumers

Potential for innovation and high-quality goods due to high profits.

disadvantage of monopolies for consumers

Price makers leading to higher costs and exploitation of consumer needs.

advantage for firms in monopoly

Supernormal profits enabling reinvestment into the business.

disadvantage for firms in monopoly

X-inefficiency leading to higher long-term costs.

evaluation points for monopoly

Depends on product type, competition level, economies of scale effects, and regulatory environment.

sunk costs definition

Costs incurred that cannot be recovered, deterring new market entrants.

cross-subsidization example

Using profits from one product to subsidize lower prices for another.

brand proliferation definition

Creating multiple product brands by the same parent company.

legal monopoly characteristic

A company holding a patent and controlling a significant market share.

connection between monopolies and dynamic efficiency

Monopolies can reinvest large profits to drive innovation continuously.

short-run average cost curve impact

Shifts with varying output levels and fixed versus variable costs.

labour demand curve impact

Changes based on wage rates and productivity adjustments.

marginal cost formula

Change in total cost over change in quantity.

average total cost definition

Total cost divided by the quantity produced.

marginal revenue product of labor

Additional revenue generated by hiring one more worker.

fixed costs examples

Rent, taxes, and insurance that do not vary with output.

examples of variable costs

Salaries, energy utilities, raw materials.

total variable cost formula

Variable costs per unit multiplied by total quantity.

why average fixed cost decreases as output increases

The fixed cost is spread over larger output.

long-run versus short-run cost considerations

In the long-run, all costs become variable, whereas some are fixed in the short-run.

minimum efficiency scale definition

The lowest output level where long-run average cost is minimized.

price discrimination conditions

Necessary factors include the ability to segment markets and prevent resale.

perfect competition outcomes on efficiency

Leads to both allocative and productive efficiency.

static efficiency definition

Occurs when both productive and allocative efficiencies are achieved simultaneously.

dynamic efficiency definition

Improvements over time in processes or products due to innovation.

zombie firm definition

A company that can pay its interest but not its debts without shareholder support.

risk-bearing economies of scale

Ability to spread uncertainty costs over various products.

financial economies of scale

Larger firms securing better borrowing terms than smaller firms.

technical economies of scale

Investment in specialized capital to reduce long-run average costs.

diseconomies of scale definition

Increasing average costs as output expands.

marginal cost curve behavior

Typically slopes upwards due to diminishing marginal returns.

elasticity of labor supply influences

Factors include skill requirements, unemployment level, and time.

why trade unions can raise wages

They negotiate higher wages and benefits for workers.

monopsony power effects on wages

Slow wage growth due to lack of competitive alternatives for workers.

collective bargaining definition

Negotiation between employers and unions regarding workers' rights.

elasticity of labor demand influences

Relates to substitutes, wage percentage of total costs, and time frame.

maximum wage definition

Legal cap on wages paid to workers.

minimum wage impacts

Sets a legal floor for wages affecting employment levels.

youth unemployment in the UK

High rates due to skill mismatches and increased casual labor.

zero-hour contract advantages

Provides flexibility for employers and retains minimal labor costs.

disadvantages of zero-hour contracts

Creates income instability and reduced benefits for workers.

impact of increased retirement age

Increased labor supply and reduced pension costs for the government.

how unions impact hourly wages

Higher wages can lead to a decrease in profit margins for employers.

trends in labor productivity

Impacts wages, employment levels, and firm competitiveness.

what influences wage differentials

Experience, productivity, hours worked, and qualifications.

hypothecated tax definition

Tax revenue allocated for specific government projects or goals.

market rigging examples

Collusion among firms to fix prices, impacting market competition.

anti-competitive practices definition

Actions taken by entities to restrict competition.

deregulation in markets

Reduction of regulation to lower barriers and foster competition.

external economies of scale

Cost advantages that all firms in an industry can reap as it grows.

forward vertical integration example

A manufacturer purchasing a distribution company.

backward vertical integration example

A retailer acquiring its supplier.

conglomerate integration definition

Merger of firms involved in unrelated business activities.

horizontal integration effects

Combines similar businesses to streamline operations and reduce competition.

impact of nationalisation

Can improve efficiency and service in industries where market failures exist.

how to combat monopsony power

Through the strengthening of trade unions and government regulations.

regulatory capture implications

Bureaucrats favoring the industries they regulate over public interest.

benefits of privatisation

Competition can lead to improved services and reduced costs.

cons of nationalising water industry

Claims of inefficiencies and lack of innovation.

CMA role in mergers

To investigate potentially anti-competitive mergers.

time elasticity of labor supply

Adjustment ability over short versus long run in response to wage changes.

trade union membership decline effect

Increased monopsony power leading to lower wages.

impact of youth unemployment measures

Policies addressing skills mismatches and increasing job accessibility.

skills-based labor market adjustments

Impact of education and training programs on labor supply.

economic inactivity of older workers

Addressed through retraining and flexible work policies.

labour productivity impacts on firm performance

Reflects operational efficiency and potential profitability.