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How households and firms make decisions and how they interact in specific markets.
The study of economy-wide phenomena such as inflation, unemployment and economic growth.
State of a society having limited resources and therefore being unable to produce every good or service desired by its citizens.
Study of how a society manages its scarce resources.
What is the assumption of Rational Economic Man, Homo Economicus? (REM, HE)
He must choose between competing end in a world of scarcity and therefore chooses the ends that optimise his value. He acts in his own best interest when allocating his scarce resources.
What are the three important lessons in economics?
- Lesson 1 - people face trade-offs.
- Lesson 2 - opportunity cost.
- Lesson 3 - people respond to incentives.
Trade-offs: What are Equity and Efficiency?
Efficiency means that society extracts maximum potential value from scarce resources.
Equity means that the value is distributed fairly among the members of the society.
Opportunity cost: Definition
What you give up to obtain a good or service.
Opportunity cost: Description
REM/HE recognises that nearly every optimising decision involves an opportunity foregone. The Opportunity Cost is the value of the next best alternative foregone.
Policy makers must provide an incentive to make a new policy serve REMHE's interests. Penalties and rewards motivate people to respond.
Incentives: Marginal Cost / Benefit
Marginal changes to cost benefit
Imperfect Competition - Lecture 8
- - Monopoly (SA 2, Essay 4)
- - Monopolistic Competition (SA 2, Essay 3)
- - Oligopolistic Competition (SA 2)
What are the characteristics of a monopoly market?
- 1. There is only one firm in the market;
- 2. There are no close substitutes for the commodity produced;
- 3. There are barriers to entry (legal or technical);
- 4. The firm is a profit maximiser (assumption).
What are the 3 factors which can bar firms from entering a monopoly market?
- 1. A key resource is owned by a single firm;
- 2. The government gives a single firm exclusive rights to produce a good/service;
- 3. Costs of production make a certain producer more efficient than a large number of others.
How does a monopoly increase its profit?
It reduces Q and increases P and is able to do so to whatever extent it chooses.
Where does a monopoly's Marginal Revenue (MR) curve sit relative to the demand curve? Why is this so?
The MR curve lies just below the demand curve, sloping away to a more vertical gradient. This is because as the price falls, the monopoly is selling each previous good at a lower price, and thus gradually losing revenue.
In perfect competition (perfcomp), P = MR. What is the situation for a monopoly?
P > MR
Where does the profit-maximising quantity occur on a monopoly's profit graph?
What is the profit-maximising price?
- The profit maximising quantity can be found directly below where MR = MC.
- The profit-maximising price can be found by 'bouncing the line off' the demand curve.
According to the monopoly's graph, what is its profit?
Its profit is a rectangle with the following corners:
- - Point of Pmax;
- - Point on demand curve where Qmax meets Pmax;
- - Point of P where average total cost is minimum;
- - Minimum average total cost.
How does a monopoly maximise profits? What is the result of this pricing?
- It produces where MR = MC but charges the highest P that consumers are willing to pay for that Q.
- The artificially high P causes a deadweight loss - the Q sold falls short of the social optimum.
How do the P and Q of a monopoly compare to those of a perfcomp market?
The monopoly will charge a higher P and produce a lower Q in its attempts to maximise profit.
How does deadweight loss (DWL) arise in a monopoly?
- The monopoly sets P above the marginal cost, placing a 'wedge', the DWL, between the consumer's willingness to pay (demand curve) and the producer's cost (MC curve).
- This is an inefficient allocation of resources.
What is Price Discrimination? What enables a business to discriminate in this way?
- Price Discrimination is the business practice of selling the same good at different prices to different customers, even though the production cost for the two is the same.
- A business must hold an amount of market power - this practice is not possible in a perfcomp market because the discriminated party will simply buy the good for the same P at a different firm.
What are some compensating gains from a monopoly market?
- Economies of scale;
- Economies of scope;
- Greater innovation by creative destruction, for example downsizing to increase efficiency and R&D produces high profits and better products; (Schumpeterian argument)
- Contestability theory (monopolists lower prices to prevent competitors entering the market).
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