P3 economics

Cost Plus Pricing

Setting a price by adding the cost and profit to production

Revenue

TR = Q x P — Total amount of money received from sales

Revenue Maximisation

Selling at the point where MR equals 0

Profit Satisficing

Making sufficient profits to satisfy the shareholders

Divorce of Ownership

When shareholders own a firm but managers control day to day desicions

TR

Q x P — total amount of money received from sales

AR

Average amount received per unit sold

MR

Additional revenue received from selling one extra unit of output

Total Product

Quantity of output produced as a result of inputs used

Average Product

Quantity of output per unit of input

Marginal Product

How much output increases when one more unit of input is added

Returns to Scale

How output changes when all inputs are increased

Economic Cost

Total value of all resources used to produce a product

X-Inefficiency

When firms is not producing at lowest possible cost for a given level of output

Market Structure

Characteristics of a market including how firms behave

Perfect Knowledge

Allows action on information a firm can use to impact on others — basis on which largest output of goods is produced

Uncertainty

If all buyers and sellers in a market can fully inform and are aware of prices and effects

Perfect Competition

Market structure where many firms sell identical products and have no market power — new firms can freely enter

Short Run Supernormal Profit

Where price is above AC — excess profit above normal profit

Short Run Loss

When price falls below AC at the profit maximising output

Types of Imperfect Competition

1) Monopolistic — firms sell differentiated products but can still enter/exit 2) Oligopoly — few dominant firms 3) Duopoly — two firms only 4) Monopoly — single firm

TVC

Total cost that varies with the level of output

TFC

Cost that remains constant whatever the level of output — has 2 components TVC and TFC

AVC

Total variable cost divided by the level of output

AFC

Total fixed cost divided by the level of output

Marginal Cost

Cost of producing one extra unit of output

Diseconomies of Scale

When average costs rise as output increases — firm sees long run LRAC rise as it gets larger

Internal EOS

1) Purchasing 2) Risk bearing 3) Skilled labour pool 4) Financial 5) Technical

Minimum Efficient Scale

Minimum output level at which LRAC is minimised

Supernormal Profit

Excess profit above normal profit — achievable when firm is long run profitable

Natural Monopoly

LRAC curve falls continuously — one firm supplies at lower cost due to large economies of scale

Price Discrimination

Charging different prices to different consumers for the same product

First Degree Price Discrimination

Charging each consumer the maximum they are willing to pay

Second Degree Price Discrimination

Charging different prices based on quantity purchased

Third Degree Price Discrimination

Charging different prices to different groups (students, elderly, etc.)

Oligopoly

Few firms dominating a market and interdependent of each other — new firms will face high barriers to entry

Assumptions of Oligopoly

1) Few firms 2) High barriers to entry 3) Interdependent 4) Other barriers: EOS, high capital, predatory pricing, branding

Game Theory

Analysis of situations where firms are interdependent

Collusion

Collective agreements between firms that limit output and restrict competition

Concentrated Market

Market where most output is produced by a small number of firms

Price Follower

Firm sets price by reference to price set by competitors

Prisoners Dilemma

Multiple firms may lower prices to undercut rivals — each individually benefits but collectively all lose

Tacit Collusion

Firms collude without any formal agreement

Monopsony

Single buyer — has power over suppliers — assumptions: 1) Single buyer 2) Price setter — profit maximise 3) Product differentiation

Geographical Immobility

Inability/unwillingness of workers to move between regions

Structural Unemployment

Long run mismatch between skills labour has and skills demanded by employers

Occupational Immobility

Inability of workers to move between different jobs/industries

Deadweight Welfare Loss

Loss of economic efficiency that occurs when equilibrium outcome is not achieved

Measures to Control Monopolies

Price regulation, profit regulation, quality standards

Derived Demand

Demand for labour derived from demand for the product

Marginal Physical Product

Physical addition to output from one extra unit available in production

Marginal Revenue Product

Value of the physical addition to output of one extra unit in production

Total Physical Product

Total output of a given quantity of a firm in production

Contracting Out

Hiring private firms to produce goods/services that the state then provides to citizens

Competitive Tendering

Public sector contracts opened for bids from private firms — focusing competition on price and quality

allocatively efficient

Whether reasources are allocated to g/s demanded by consumers

productive efficient

achieved when production is achieved at lowest average cost

dynamic efficiency

Firms abillity to improve productivity and reduce long term costs

monopolistic competition

A market where many firms sell differentiated products and have low barriers to entry