Micro economics

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Micro economics by Mind Map: Micro economics

1. Effciency

1.1. Statically ineffcient Dynamic efficient due to supernormal profits Reach MES

2. Chapter 2: Profit Maximisation

2.1. Normal Profit - The level of profit which is just sufficient to keep all the factors of production in their present use.

2.2. Supernormal profit - Anything above normal profit

2.3. KEY Concept: Profits are all maximised at the point MC=MR. In the graph, profit means Supernormal profit.

2.3.1. Top of TR curve = Revenue maximisation.

2.4. Role of profit 1) Allocation of factors of production 2) Signal for market entry 3) Promotes innovation 4) Investment 5) Rewards entrepreneurs 6) Economic performance indicator

2.5. 3 theories:

2.5.1. 1) Traditional - Assumes profit maximisation, all owners are managers

2.5.2. 2) Managerial - Retains maximising assumption of sales, revenue or market share, RATHER than profit. Divorce between ownership and control Principal Agent problem

2.5.3. 3) Behavioral - Assumes that forms are complex and there are coalition of goals and satisficing.

3. Chapter 1: Cost and Revenues

3.1. Fixed Cost and Variable Cost: 1. Fixed Cost - Costs hat dont change with out put. 2. Variable Costs - Costs that changes directly with output.

3.2. Average Costs - Total cost/quantity *an important curve.

3.3. The short run means that only SOME factors are fixed The long run means that ALL factors are variable, it is known as the law of diminishing returns.

3.4. Economies of Scale: The increased in efficiency of production as the number of goods being produced increases. Lower average cost as there s an increased number of goods.

3.4.1. 1) Technical economies of scale.

3.4.2. 2) Purchasing economies

3.4.3. 3) Financial economies

3.4.4. 4) Administrative economies

3.5. Minimum efficient scale (MES) - MES occurs at the level of production where the LRAC curve first reaches its lowest point. All economies of scale are exhausted at the MES

3.6. KEY Concept: TR = P x Q meaning AR = TR/Q meaning AR = P

3.7. Marginal Revenue - MR is the addition to the total revenue from the sale of one extra unit of output.

4. Chapter 5: Concentrated markets

4.1. Concentration Ratio - % of total market sales accounted for by a given number of leading firms.

4.2. Things that make firms grow larger 1. Market power motive 2. Objectives of managers 3. Profit motive 4. Economies of Scale

4.3. Internal growth: Uses the retained profits or loans of a company to expand - by using fixed and variable factors.

4.4. External growth: A route for expansion through mergers

4.4.1. Horizontal integration Vertical integration Lateral merger Conglomerate merger

4.5. Monopoly power: 1. From owning patents and copyright protection 2. Exclusive ownership of productive assets.

4.6. Outsouring: 1. Technological change 2. Increased competition 3. Pressure from the financial markets.

5. Chapter 7: Monopoly

5.1. Conditions:

5.1.1. 1 firm in the industry (25% market share)

5.1.2. Barrier to entry High fixed cost E of S Brand loyalty Legal barriers Control over factors of production Predatory pricing

5.1.3. Price Maker.

5.2. Consumer benefits: 1. Economies of scale - lower price 2. Reach MES with natural monopoly 3. Internationally copetitve

5.3. Costs

5.3.1. High Price and low output Statically ineffciency reduced consumer surplus

6. Chapter 9: Contestable markets

6.1. Perfectly contestable when the costs of entry and exit potential rivals are zero

6.2. The lesser the sunk cost, the more contestable the market is because high sunk cost = high barriers of entry

6.3. Evaluate

6.3.1. No market is perfectly contestable

6.3.2. Existing firms may protect themselves through patents strategic entry barriers

6.3.3. The level of knowledge needed to enter an industry may be high - therefore, not like perfect competition.

6.4. Increase Contestablity of markets

6.4.1. Enterpreeneurial zeal

6.4.2. deregulation of markets 1. open up markets to competition 2. reducing barriers of entry

6.4.3. Competition Policy 1. Predatory pricing 2. Against fixed cartels

6.4.4. New node

7. Chapter 6: Price discrimination

7.1. Price discrimination - when a producer sells an identical product to different buyers at different prices for reasons unrelated costs.

7.2. The conditions are - PED and Barriers the same.

7.3. Types of price discrimintation

7.3.1. 1st degree - charging each individual consumer the maximum they are prepared to pay.

7.3.2. 2nd degree - businesses selling batches of a product at lower price than previous batches

7.3.3. 3rd degree - charge prices according to time, geography, status of consumers

7.4. Consequences: Consumer surplus reduced, producer surplus is maximised.

8. Chapter 4: Efficiency

8.1. Consumer surplus - The difference between the price that the consumer is prepared to pay and the market price Producer surplus - The difference between the price that the producer is prepared to supply and the market price

8.2. Key Concept: Static V.S. Dynamic

8.2.1. Static efficiency - Allocative and Productive - occurs at a given point in time Allocative - Exists where goods are produced in line with consumer preferences. Technically, this occurs where P=MC (Demand = Supply) Productive - Happens in the lowest point of average cost curve

8.2.2. Dynamic efficiency - X, Product, Process - occurs over time. X - Occurs where a firm is not producing on its average cost curve. Perhaps too organisational slack. (usually associated with monopolies) Product Innovation - creates new market and create radical different products for consumers. e.g: The emergence of low-cost airline, online music download... Process Innovation - Changes to the way in which production takes place. - enjoy outward shift in market supply - then, enjoying higher profit margins - and, more efficiency use of resources. - finally, it will lower the prices of the product and consumers will increase their real income.

8.3. Imperfect competition

8.3.1. In case of an imperfect competition, there will be an exisitance of a dead weight loss, taken from either or both the consumer and producer surplus.

9. Chapter 3: Perfect Competition

9.1. The conditions making it calling a perfect competition 1) Many buyers and sellers 2) No barriers to entry or exit 3) Identical products 4) Perfect information 5) No externalities 6) No economies of scale

9.2. How to compete?

9.2.1. Scarce resources so that no one has unlimited supply >>> Formation of prices via forces of demand and supply >>> Profit or losses emerges leading to firms enter or leave the industry.

9.3. The shut down condition: - In the short run, P < AVC - in the long run, P < AC

9.4. Some factors will still form competition in perfect competition:

9.4.1. 1) Brand, Ethics, Advertising 2) Quality, customer services 3) Location, Price discrimination

9.5. Benefits of competition

9.5.1. 1) Lower prices 2) Low barriers to entry 3) Lower total profits 4) Greater entrepreneural activity 5) Economic effciency

10. Chapter 8: Oligopoly

10.1. Market Dominated by a few producers (CR5>60% of total market sales)

10.2. Strategic interdependence

10.2.1. Actions and reactions of rival firms when they make their decisions

10.3. Conduct and behavior to increase market share

10.3.1. Entry barriers maintain supernormal profits

10.3.2. Interdepence

10.3.3. Branding of products

10.3.4. Non-price competition: 1. advertising 2. Loyalty cards

10.4. Kinked demand curve

10.4.1. Price rigidity

10.4.2. Likely reactions of other firms

10.4.3. Two elasticities

10.5. Collude: to remove uncertainy

10.5.1. Tacit: Prices and price changes are established by a large firm

10.5.2. Price fixing cartels to achieve joint-profit maximisation Control over market supply

10.6. Benefits:

10.6.1. Joint research and development project

10.6.2. Share facilities and exchange information

10.6.3. Adoption of common standards