Microeconomics
The Mixed Economy
What is a Mixed Economy?
•An economy where goods and services are provided by both the public and private sector
What is the Public Sector?
•Provision of goods and services by the government
What is the Private Sector
•Provision of goods and services by firms that are owned by individuals.
What are the aims of private sector organisations?
•Survival
•Profit Maximisation
•Growth: Many firms aim to grow because bigger firms enjoy a number of advantages (e.g economies of scale)
•Social Responsibility
What are the aims of public sector organisations?
•Improve the quality of their services (to therefore improve living standards)
•Minimising costs (to minimise waste since government resources are scarce)
How are problems for What, How and For Whom to Produce solved by a Mixed Economy?
•What: A mixed economy recognises that some goods (such as consumer goods) are best provided by the private sector, while others (e.g street lighting and roads) are best provided by the public sector.
•How: Private sector firms maximise quality and minimise costs, public sector goods maximise efficiency*
•Who: Private sector goods are sold to anyone who can afford them - the market system is responsible for their allocation. Public sector goods are provided free to everyone.*
What is Market Failure?
•Where markets lead to inefficiency
Why might governments need to intervene because of market failure?
•Externalities: Firms may impose social costs
•Lack of Competition: A market may fail if there is a lack of competition since dominant firms can exploit consumers
•Missing Markets: Some markets needed by consumers may not be available
•Lack of Information:*
•Factor Immobility*
What are Public Goods?
•Non-rival, non-excludable goods that are not likely to be provided by the private sector
What is a free-rider?
•An individual who enjoys the benefit of a good but allows others to pay for it
Privatisation
What is Privatisation?
•The transfer of a public sector resources to the private sector
Why does privatisation take place?
•To generate government revenue
•Public sector organisations may have lacked incentive to make a profit and may have made losses
•To reduce political interference (so the government could not use organisations for political aims)
What are the effects of privatisation on consumers?
•Privatisation means that firms will be efficient, try to provide good quality goods and charge reasonable prices
•So consumers will typically benefit with:
Better quality goods
Lower prices
What are the effects of privatisation on workers?
•Large numbers of workers are made redundant
•This is because private firms will want to reduce costs
What are the effects of privatisation on firms?
•Upon privatisation, firms now operate for profit maximisation
•Many firms have increased investment
•Many privatised firms will diversify into new areas (e.g British Telecom now shows PL and UCL)
•Many privatised firms may merge or experience takeovers
What are the effects of privatisation on the government?
•Government makes revenue
Externalities
What are external costs?
•Negative spillover effects of consumption or production
What are some examples of external costs?
•Air Pollution
•Water Pollution
•Noise Pollution
•Overcrowding
What are external benefits?
•Positive spillover effects of consumption or production
What are some examples of external benefits?
•Education
•Healthcare
•Vaccinations
What is the formula for social costs?
•Social Costs = Private Costs + External Costs
What is the formula for social benefits?
•Social Benefits = Private Benefits + External Benefits
Production
What are the three sectors of an economy?
•Primary - Involves the extraction of raw materials from the earth
•Secondary - Involves the processing of raw materials into finished goods
•Tertiary - Involves the production of services in the economy
Productivity & Division of Labour
What is Productivity
•Output per unit of input
What is Division of Labour
•The breaking down of the production process into smaller parts, with each worker allocated a specific task
What are the advantages of the division of labour for a worker?
•Workers will become more skilled at a specific task (and therefore will get paid more and be able to find employment more easily)
•Workers may enjoy more job satisfaction if they are highly skilled
What are the disadvantages of the division of labour for a worker?
•Work can become too boring as it is repetitive
•Repetition may lead to health risks, such as joint wear
What are the advantages of the division of labour for a firm?
•Increased efficiency as workers perform tasks more accurately
•A greater use of specialist machinery is possible
•Increased production time as workers waste less time
•Organisation of production becomes easier (since workers fit easier into a structured system)
What are the disadvantages of the division of labour for a firm?
•Worker boredom leads to dissatisfaction and poor motivation, which reduces productivity
•Interdependence: If one stage of production breaks down, all other stages break down
•Loss of flexibility: If a worker is absent, production is disrupted
Firm Costs, Revenues and Profit
What is the definition and formula for total revenue?
•The amount of money a firm receives
•Total Revenue = Price x Quantity
What is the definition for total fixed costs?
•Costs that stay the same whatever the level of output
What is the definition and formula for total variable costs?
•Costs that change whenever the levels of output change
•TVC = VC X Q
What is the definition and formula for total costs?
•Total fixed costs and variable costs added together
•TC = TFC + TVC
What is the definition and formula for average costs?
•The costs of producing a single unit of output
•Average Cost = Total Cost/Quantity produced
What is the definition and formula for profit?
•Difference between revenue and costs
•Profit = Total Revenue - Tital Cists
Economies of Scale
What are economies of scale?
•The cost advantages a firm gains from expanding their scale of production
What are internal economies of scale?
•Cost advantages enjoyed by an individual firm when it expands
What are the types of internal economies of scale?
•Bulk-Buying: Large firms that buy lots of resources get cheaper rates
•Marketing: Large firms experience lower average costs of advertising
•Technical: Large firms are more specialised and invest more in machinery, increasing efficiency
•Financial: Large firms can get access to money more cheaply (e.g they can put pressure on banks to lower interest rates for loans)
•Managerial: Large firms can afford specialist managers
•Risk Bearing: Large firms can sell into a wider variety of markets (reducing risk as if one market fails, another is still available)
What are external economies of scale?
•Cost advantages enjoyed by all the firms in an industry when the industry expands.
What are the types of external economies of scale?
•Skilled Labour Pool: If an industry is concentrated in one area, there may be a build-up of skilled labour in that area
•Infrastructure: If an industry dominates a region, roads, railways etc. will be better
•Access to Suppliers: An established industry in a region will encourage suppliers to set up close by.
•Similar Firms in the area: Firms in the same industry concentrated in one region will be able to cooperate so they can all gain
What are diseconomies of scale?
•The cost disadvantages a firm gains from expanding their scale of production.
What are the types of diseconomies of scale?
•Bureaucracy: Excessively complicated administrative processes (e.g forms taking too long to be filled)
•Communication Problems: Large organisations are likely to be multinational - language barriers can make communication challenging
•Lack of Control: A very large business may be difficult to control and coordinate (e.g thousands of employees working together makes cooperation difficult)
•Distance between Managers and Workers: Relationship between managers and workers may worsen.
What are the stages of the LRAC curve?
Competitive Markets
What is competition?
•The rivalry that exists between firms when trying to sell goods and services
What are the features of a competitive market?
•Large number of buyers and sellers
•Product sold by each firm are close substitutes
•Low barriers to entry
•Firms are price takers
•There’s a free flow of information
What actions do firms take in competitive markets?
•Operating efficiently to keep costs as low as possible
•Providing good quality products
•Charging acceptable prices
•Product differentiation; Being innovative and distinguishing a product from their rival
What is the main disadvantage of a competitive market for firms?
•Profit made is limited; prices are likely to be lower and profit potential is low
What are the advantages of a competitive market for consumers?
•Lower prices; firms cannot overcharge customers
•More choice; many alternatives to choose from
•Better quality: firms want to attract customers to their brand and will therefore try to make the quality of goods as high as possible
What are the disadvantages of competition for consumers?
•Market uncertainty: Unprofitable firms eventually leave the market, this may cause consumer uncertainty
•Potential lack of innovation: Lower profits may mean that firms have less room for iinnovation
What are the advantages of competitive markets for the economy?
What are the disadvantages of competitive markets for the economy?
Large & Small Firms
How is the size of a firm measured?
•Turnover (revenue)
•# of employees
•Balance Sheet total
What are the advantages of small firms
•Flexibility: Small firms can react to changes faster (e.g a small baker will be able to make personalised birthday cakes faster than a large manufacturer)
•Personal Service: Small firms’ owners are far more accessible than larger ones; some people prefer to deal with the owner directly.
•Lower Wage Costs: Many workers in small firms do not belong to trade unions, so their negotiating power is weaker and owners exploit this.
•Better communication: Fewer employees means that communication between workers in small firms is faster, more informal and more efficient. This makes decision making faster and workers will be more motivated
•Innovation: Small firms may face competitive pressure to innovate (e.g in order to not lose their market share) and will come up with new ideas for goods and services.
What are the disadvantages of small firms?
•Higher Costs: Small firms cannot exploit economies of scale and will face higher average costs
•Lack of Finance: Small firms often struggle to raise finance
•Difficulty attracting Quality Staff: Small firms may find it difficult to attract highly qualified workers.
•Vulnerability: When conditions are tough, small firms may not have the resources to survive.
What are the advantages of large firms?
•Economies of Scale: Large firms have lower average costs
•Market domination: Large firms often dominate a market, enabling them to charge higher prices and make higher profits
•Large-Scale contracts: Only large firms can win large-scale, highly profitable contracts since smaller firms don’t have the resources.
What are the disadvantages of large firms?
•Diseconomies of Scale:
(Bureaucracy, Communication problems, lack of coordination and poor relations between managers and workers)
What are the factors influencing the growth of firms?
•Government regulation: Governments monitor business activity to prevent market domination, and this may entail keeping some firms small
•Access to Finance: Businesses need finance to grow. Access to finance influences growth.
•The desire to spread risk*
Why do some firms stay small?
•Size of the market: Some markets are too small to sustain very large firms
•Nature of the market: Some markets (such as niche markets) have very particular needs, which may be neglected by larger firms
•Lack of Finance: Some firms want to grow but lack the funds
•Entrepreneurial aims: Some business owners may not want to grow their business and are happy running a small one
•Diseconomies of scale: Some firms may be discouraged by the cost disadvantages that large firms experience
Monopoly
What is a monopoly?
•Where there is one dominant seller in a market
What are the features of a monopoly?
•One firm dominates
•Unique product (like Google)
•Monopolist firm is the price-maker
•Barriers to entry (to discourage firms from entering)
Legal barriers
Patents
Marketing budgets
Technology
High start-up costs
What are the advantages of a monopoly?
•Efficiency: There are markets where it is more efficient if just one firm supplies all consumers
•Innovation: Large profits mean firms can invest in R&D
•Economies of Scale: Monopolists have lower average costs, and therefore may be able to supply products at a lower price
What are the disadvantages of a monopoly?
•Higher Prices: Monopolists typically exploit consumers and charge high prices
•Restricted Choice: Consumers have a restricted choice of product in a monopolist market
•Lack of Innovation: Monopolists do not need to develop products as they are already dominating the market
•Inefficiency: Monopolists face no competition and may have no incentive to keep costs down
Oligopoly
What is an oligopoly?
•A market dominated by a few large firms
What are the features of an oligopoly?
•Few Firms
•Large firms dominate
•Products are close substitutes
•High barriers to entry
•Collusion
•Non-Price competition
•Price Wars
What are the advantages of an oligopoly?
•Choice: Competition in oligopolistic markets means that consumers can pick from a selection of products
•Quality: Firms in oligopolistic markets tend to differentiate their products to make them the highest quality possible. This benefits consumers
•Economies of Scale: Dominant firms can exploit economies of scale and lower average costs, enabling them to lower prices for consumers.
•Innovation: As large firms dominate the market, they will have the resources to invest in R&D
•Price Wars: When one firm reduces the price, causing the others to do the same, consumers will enjoy lower prices.
What are the disadvantages of an oligopoly?
•Collusion: Firms can agree to price fix and restrict competition, making consumers pay higher prices
•Potential lack of choice: If a market is shared out geographically, only one firm will supply each area, meaning there is a lack of choice
•Cartels: Where a group of firms join together and agree on output levels in the market, thus creating a monopoly.
•Too much spent on advertising: Firms in oligopolistic markets may spend overly large amounts of advertising; this incurs an opportunity cost as funds could’ve been spent on innovation, which would’ve benefitted consumers.
Labour Market
•The labour market works like any other market; there are buyers and sellers.
•The demand for labour comes from the firms - these are the buyers
•The supply of labour comes from the working population - these are the sellers
Draw a the demand curve for labour
The price of labour is the wage rate
•The demand for labour is inversely proportional to the wage rate
What are the factors affecting the demand for labour?
•Demand for the product:
-Labour is a derived demand, meaning that it is derived from the demand for the goods and services.
-If the demand for a product increases, the demand for labour will also increase
-(example 1: As Drake’s music gains popularity and more people listen and demand him to make more music, he will higher more ghost writers to make more songs)
-(example 2: As more foreign students enrol at a school, more english teachers will be needed)
•Availability of Substitutes:
-The demand for labour may be affected by the costs and availability of substitutes, such as machines and automation
-e.g. AI has decreased the demand for labour
•Productivity of Labour
-If every worker is able to produce more output, demand for labour will likely increase
Draw the supply curve for labour
•The quantity of labour supplied is directly proportional to the wage rate
What are the factors affecting the supply of labour?
•Population Size: As the population grows, more people are available to work
•Migration: Many countries welcome immigrant to increase the working population and, therefore, increase the supply of labour
•Age distribution of the population: As the population ages, the dependency ratio increases, thus decreasing the supply of labour
•Retirement Age: The higher the retirement age, the higher the supply of labour
•School leaving age: A higher school leaving age means that children cannot work until a higher age - the supply of labour is decreased
•Female Participation - An increased in female participation leads to an increase in the size of the working population
•Skills and Qualifications - The supply of labour will increase if people become more employable
•Labour Mobility - This is the ease at which workers can geographically and occupationally move between jobs. As workers become more mobile, the supply of labour is boosted.
Trade Unions
What is a trade union?
•An organisation that exists to protect the interest of workers
What are the aims of trade unions?
•Negotiate pay and working conditions with employers
•Provide legal protection for members
•Put pressure on the government to pass legislation that improves worker’s rights