Econ 3

Mind map Chapters 1 - 7

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Econ 3 by Mind Map: Econ 3

1. 1. Costs and Revenues

1.1. short run

1.1.1. That period of time where at least one factor of production is fixed

1.2. Types of Costs

1.2.1. total cost = total fixed cost + total varaible cost (TC = TFC + TVC) New node

1.2.2. Fixed costs are the costs of employing in the fixed factors of production in the short run eg. rent of land. / maintenance of buildings

1.2.3. Variable costs are the costs of employing the variable factors of production in the short run eg. wages of labour force / costs raw materials if labour is the only variable factor of production, variable costs are simply wage costs

1.2.4. Average costs ATC is obtained from the addition of the AFC and AVC curves.

1.3. The Law of Diminishing Returns

1.3.1. Occurs when as more units of a variable factor are added to a fixed factor marginal product decreases.

1.4. Economies of Scale

1.4.1. An increase in inputs leads to a more than proportionate increase in output

1.4.2. falling LRAC

2. 2. Profit Maximisation

2.1. Profit

2.1.1. Normal Profit profit sufficient to keep all factors of production in present use AC=AR

2.1.2. Supernormal Profit anything >NP

2.2. The role of profit in the economy

2.2.1. Allocationof factors of production

2.2.2. Signal for market entry

2.2.3. Promotes innovation

2.2.4. Investment

2.2.5. Rewards entrepreneurs for bearing risk

2.2.6. Economic performance indicator

2.3. Alternative goals

2.3.1. Managerial Theories Managerial Status Market Share or sales growth Revenue Maximisation

3. 3. Perfect Competition

3.1. The Shutdown Condition

3.1.1. P<AVC (short run)

3.1.2. P<AVC (long run)

3.2. Basic Assumptions are

3.2.1. Many Buyers and Seller

3.2.2. No Barriers to entry or exit

3.2.3. Identical Products

3.2.4. Perfect Information

3.2.5. No Externalities

3.2.6. No Economies of Scale

3.3. The Competitive Process

3.3.1. New node

3.4. Sunk Costs

3.4.1. A cost which cannot be recovered. Eg advertising

3.5. Factors upon which firms compete in imperfectly competitive markets

3.5.1. Brand/Advertising

3.5.2. Quality

3.5.3. R&D

3.5.4. Loyalty

3.5.5. Location

3.5.6. Range

3.5.7. Customer Service

4. 4. Efficiency

4.1. Surplus

4.1.1. Consumer Surplus difference between the price a consumer is prepared to pay and the market price.

4.1.2. Producer Surplus Difference between the market price and the price at which a firm is prepared to supply.

4.2. Static vs dynamic efficiency

4.2.1. Static is at a given moment in time productive, allocative, X

4.2.2. Dynamic occurs over a period of time product, process

4.3. Types

4.3.1. Allocative Efficiency Occurs where output is made in line with consumer preferences. P=MC

4.3.2. Productive occurs at the lowest point of the average costs curve

4.3.3. X inefficiency Occurs where a firm fails to produce on its average cost curve due to organisational slack

4.4. Deadweight loss

4.4.1. welfare loss associated with monopoly power

5. 5. Concentrated Markets

5.1. Concentration ratio

5.1.1. example C.R 5 = value of output from the 5 largest firms in the industry/value of output for the industry

5.2. Why do firms grow larger?

5.2.1. Market Power

5.2.2. Objectives as managers

5.2.3. Profit motive

5.2.4. Economies of Scale

5.2.5. Risk Motive (economies of scope)

5.3. External Growth

5.3.1. Horizontal integration

5.3.2. Vertical Integration

5.3.3. Lateral Merger

5.3.4. Conglomerate merger

6. 6. Price Discrimination

6.1. Definition

6.1.1. Occurs when a producer sells an identical product to different buyers at different prices for reasons unrelated to costs

6.2. Conditions Necessary

6.2.1. Differences in price elasticity of demand

6.2.2. Barriers to prevent "market seepage"

6.3. Types

6.3.1. First Degree Charging each individual consumer the maximum they are prepared to pay Possible to remove all consumer surplus

6.3.2. Second Degree Selling batches of products at lower prices than previous batches always some supplementary profit to be made Helps in securing a larger market share, may lose some profit but will give an advantage over rival firms

6.3.3. Third Degree Most frequently found Charing different prices for the same product in different segments of the market Ways of separating market Gives larger profit than charging the same price eg peak/off-peak times for telecommunications/ leisure

7. 7. Monopoly

7.1. Definition

7.1.1. Theorectical Monopoly exists where there is one firm in the industry ie. the firm is the industry

7.1.2. In Practice where a firm has >25% of market share

7.2. Ways to assess monopoly power

7.2.1. The number and closeness of substitutes avaliable to consumers

7.2.2. The level of barriers to entry

7.2.3. The degree of product differentiation

7.3. demand will be relatively price inelastic due to the lack of close substitutes

7.3.1. This means that the monopoly can be a price maker instead of having to accept the market price

7.4. Assuming the monopolist aims to maximise profits (where MR=MC)

7.5. Barriers to Entry (protecting monopoly power in long run

7.5.1. High fixed costs

7.5.2. Economies of Scale

7.5.3. Brand Loyalty

7.5.4. Legal Barriers

7.5.5. Control over the factors of production

7.5.6. Control over retail outlets

7.5.7. Predatory Pricing

7.6. Strategic Entrance Deterrance

7.6.1. Hostile takeover

7.6.2. Product Differentiation

7.6.3. Capacity expansion

7.6.4. Predatory Pricing

7.7. Costs and Benefits of Monopoly

7.7.1. Costs Higher Prices and lower output Allocative inefficiency (underconsumption) Reduced consumer surplus X inefficiency

7.7.2. Benefits Economies of Scale leading to lower prices Potential to reach M.E.S with natural monopoly Dynamic efficiency from supernormal profits Scope to be internationally competitive

8. 8. Oligopoly

8.1. Definition

8.1.1. A market dominated by a few producers, each of which have a degree of control in the market so the industry is likely to have a high level of market concentration CR5 greater than 60%

8.2. Oligopolists need to take into account the actions of competitors

8.2.1. Strategic Interdependance

8.3. High levels of non price competition

8.3.1. Advertising

8.3.2. Loyalty cards

8.3.3. Opening hours

8.4. 2 Options

8.4.1. Compete

8.4.2. Collude Monopoly Tacit Act/React Explicit (illegal)

8.5. Kinked Demand Curve

8.5.1. Elasticity for demand changes as price inceases

8.5.2. Due to competitors prices

9. 9. Contestable Markets

9.1. Structure

9.1.1. Perf. Comp./oligopoly/monopoly

9.2. Conduct

9.2.1. Price

9.2.2. Output

9.2.3. Non-price decisions

9.3. Perforamce

9.3.1. Efficiency (static/dynamic)

9.4. Said to be contestable when

9.4.1. No barriers to entry/exit

9.4.2. Firms have the same access to technology Ie. same cost curves

9.5. As long as there are no barriers to entry, the benefits of perfect competition could be met without the conditions being met

9.5.1. hit-and run entry Outside firms are able to enter a market, set lower prices and take demand away from other firms earning profits, and then exit the market when supernormal profits disappear due to this firms are forced to set competitive prices on a permanent basis to stop hit and run entry. As lons as entry and exit is costless, firms will produce at minimum cost and earn no excess profits

9.6. Downward pressure on prices

9.6.1. Lower supernormal profits Less incentive for firms to enter

10. Market Structure

10.1. Definition

10.1.1. The organisational and other characteristics of a market.

10.2. The most important features are

10.2.1. Number of firms (inc foreign competition

10.2.2. Market share of foreign firms

10.2.3. Nature of costs

10.2.4. Degree of vertical integration

10.2.5. the extent of product differentiation

10.2.6. Structure of buyers in the industry

10.2.7. Turnover of customers

10.3. Mkt Structure & innovation

10.3.1. What environment best suits innovation?

10.3.2. Innovation is seen as mandatory to establish a costs advantage or better quality of product Supernormal profits increase

10.3.3. Increasing improves Competitiveness of UK producers in home and overseas markets Protect and Develop comparative advantages Long term trend rate of growth creates jobs - employment Social welfare - social benefits

10.4. Price Makers vs Takers

10.4.1. 2 main driving forces for pricing Market Structure Perfect competition Monopoly Oligopoly Contestable Markets Firms objectives

10.5. Price and cost elasticity of demand

10.5.1. Affects a firms pricing power

10.5.2. Consumer/producers surplus affected

10.5.3. When demand is price inelastic, a business can raise price without losing a disproportionate level of sales

10.5.4. When price elastic, potential to raise price and extract surplus, turning it into higher producer surplus/profit is reduced

10.6. Product differentiation

10.6.1. Moving away from homogenous products

10.7. Regulatory System

10.7.1. Regulating prices (direct/indirect) Gas electricity railways etc.

10.8. International environment

10.8.1. Prices affected by overseas suppliers (not just domestic)

10.8.2. Globalisation

10.9. Technology and Prouction

10.9.1. Ability to transform a production process so more output with same inputs Productivity increases Reduces AC

10.9.2. BUT initial costs of using new technology may be higher due to training/installation etc

10.10. Technology and Consumption

10.10.1. Industry supply curve shift to the right Fall in market price Consumer benefit in lower prices due to new technology

10.10.2. Quality of product increases

10.10.3. increases consumption

10.11. Tech & Efficiency

10.11.1. Dynamic (product and process increase)

10.12. Technology and Competition

10.12.1. Greater competition or intensify monopoly power Nature of product Number of buyers Number of firms Level of barriers to entry Decrease with tech Amount of information available increases with tech

10.12.2. Could promote monopolies