Microeconomics

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Microeconomics by Mind Map: Microeconomics

1. Law of diminishing returns

1.1. Marginal product will start to fall after a certain point

1.1.1. Necessary conditions

1.1.1.1. All other factors of production are fixed

1.1.1.2. Assume labour is identical

1.1.2. Marginal Product: the extra output that can be produced by using one more unit of the input (for instance, the difference in output when a firm's labor usage is increased from five to six units), assuming that the quantities of no other inputs to production change.

1.2. Short run: immediate future, with 1 factor fixed

1.3. Marginal returns: returns when one unit of labour is added

1.4. Increasing returns to scale example

1.4.1. double labour and get triple output

1.5. decreasing returns to scale example

1.5.1. double labour and get same output

1.6. A decrease in marginal cost per unit output as one factor of production is increased while other factors remain fixed

2. External economies of scale (clusters)

2.1. benefits

2.1.1. overlaps between clusters means that skills and technology are shared between clusters

2.1.2. All skilled workers are close together

2.1.3. Low unemployment in certain areas means wages are higher

2.1.4. Clusters act as a centre for production

2.2. Definition: Benefits that arise in an industry due to clusters and are experienced by numerous firms.

2.3. disadvantages

2.3.1. High land values

2.3.2. Lack of space

2.3.3. Congestion

3. Profit maximisation

3.1. Normal profit

3.1.1. That level of profit which is just sufficient to keep all factors of production in their present use. "Breaking even"

3.1.2. AC=AR

3.2. Supernormal profit

3.2.1. Anything above normal profit

3.3. The role of profit in the economy

3.3.1. Allocation of factors of production

3.3.1.1. Scarce factor resources tend to flow where the expected rate of return or profit is highest

3.3.2. Signal for market entry

3.3.3. Promotes innovation

3.3.3.1. If companies earn supernormal profit it allows them to undertake investment to promote dynamic efficiency

3.3.4. Investment

3.3.4.1. Retained profits remain the most important source of finance for companies undertaking capital investment projects

3.3.5. Rewards entrepreneurs for bearing risk

3.3.5.1. In return for bearing risk entrepreneures need the potential to earn profits

3.3.6. Economic performance indicator

3.3.6.1. profits made by businesses throughout the economy provide important signals about the general health of the macroeconomy

4. Efficiency

4.1. Consumer surplus

4.1.1. The difference between the price the consumer is willing to pay and the market price

4.2. Producer surplus

4.2.1. The difference between which a producer is prepared to supply a good and the market price

4.3. Static efficiency (occurs at a given point in time)

4.3.1. Allocative efficiency

4.3.1.1. Exists when goods are produced in line with consumer preferences (P=MC)

4.3.2. Productive efficiency

4.3.2.1. Occurs at the lowest point on the average cost curve

4.3.3. X efficiency

4.3.3.1. Occurs when a firm is not producing on its average cost curve. Perhaps due to organisational slack. This is usually associated with a monopoly.

4.4. Dynamic efficiency (occurs over time)

4.5. Deadweight loss

4.5.1. Net loss of economic welfare from price being raised above marginal cost.

5. Perfect competition

5.1. Sunk costs

5.1.1. Costs that cannot be recovered eg: advertising, training of staff, highly specialised equipment

5.2. The basic assumptions required for conditions of pure competition to exist are

5.2.1. Many buyers and sellers

5.2.2. No barriers to entry or exit

5.2.3. Identical products

5.2.4. Perfect information

5.2.5. No externalities from production or consumption

5.2.6. No economies of scale

5.3. The shutdown condition

5.3.1. Short run: Price is less than average variable cost

5.3.2. Long run: Price is less than average cost

5.4. Benefits of competitive markets

5.4.1. Lower prices

5.4.2. Low barriers to entry

5.4.3. Lower total profits

5.4.4. Greater entrepreneurial activity

5.4.5. Economic efficiency

6. Concentrated markets

6.1. Concentration ratio

6.1.1. C.R.5 = value of output of 5 largest firms/ value of output for the industry

6.2. Reasons for firms growth

6.2.1. Market power

6.2.1.1. increase market dominance giving themincreased pricing power in specific markets

6.2.2. Objectives of managers

6.2.2.1. Managerial status is increased through managing a larger firm

6.2.3. Profit motive

6.2.3.1. Larger scale enterprises grow to expand output and achive higher profits.

6.2.4. Economies of scale

6.2.4.1. Have the effect of increasing productive capacity of a business and help to raise profit margins. This is by becoming more productively efficient and allows the business to become more comptitive in domestic and international markets

6.2.5. Risk motive

6.2.5.1. The expansion of a business might be motivated by a desire to diversify production so that falling sales in one market might be compensated by stronger demand and output in another market

6.3. Internal growth

6.3.1. Retained profits or loans finance expansion by increasing fixed and variable factors. Innovation and creativity are vital to increasing the customer base for organic growth

6.4. External growth

6.4.1. Expansion that occurs through acquisitions or mergers

6.4.1.1. Horizontal intergration: two businesses at the same stage of production in an industry become one

6.4.1.2. Vertical intergration: acquiring a business in the same industry but at different stages of the supply chain

6.4.1.3. Lateral merger: A merger between companies that are related but not identical eg newspapers and magazines.

6.4.1.4. Conglomerate merger: A merger between two firms in unrelated business

6.5. Outsourcing

6.5.1. Producing a good overseas but keeping research and design operations domestic

7. Price discrimination

7.1. Definition: Occurs when a producer sells a product to different buyers at different prices for reasons unrelated to costs.

7.2. conditions required for discriminatory pricing

7.2.1. Differneces in the price elasticity of demand

7.2.2. Barriers to prevent market seepage

7.3. First degree price discrimination

7.3.1. This is charging an individual customer the maximum price they are prepared to pay

7.4. Second degree price discrimination

7.4.1. Businesses selling batches of product at lower prices than previous batches

7.5. Third degree price descrimination

7.5.1. Charging different prices for the same product in different segments of the market.

8. Monoploly

8.1. When a firm owns greater than 25% of market share.

8.2. Barriers to entry

8.2.1. High fixed costs

8.2.2. Economies of scale

8.2.3. Brand loyalty

8.2.4. Legal barriers

8.2.5. Control over the factors of production

8.2.6. Control over retail outlets

8.2.7. Predatory pricing

9. Costs and Revenues

9.1. Fixed costs: costs that a business has irrespective of output

9.2. Variable costs: change with respect to the level of output

9.3. Total cost (TC) = Fixed cost (FC) + Variable cost (VC)

9.4. Average cost

9.4.1. AC = TC/Quantity

9.5. Average fixed costs

9.5.1. AVC falls rapidly as production increase as fixed cost are diluted as production increase

10. Oligopoly

10.1. Interdependance

10.1.1. Firms must take into account the likely reactions of rivals to any change in price, output or forms of non price competition.

10.2. Barriers to entry

10.2.1. Entry barriers maintain supernormal profits for the dominant firms to operate on the periphery of an oligopolistic market. no one firm is large enough to have a significant effect on prices and output.

10.3. Product branding

10.3.1. each firm is selling a branded product with scope for product differentiation

10.4. Non price competition

10.4.1. advertising, loyalty cards, increased range of services, home delivery or longer opening hours are competitive strategies or oligopolistic firms.

10.5. Kinked demand curve

10.5.1. Other firms match decrease in price

10.5.2. Other firms don't match raise in price

10.5.3. Creates price rigidity

10.6. Collusion

10.6.1. Tacit collusion: one dominant firm sets a price and other follow

10.6.2. Price fixing

10.6.2.1. Cartels collectively raise the price to gain bigger supernormal profits at the consumers expense.

11. Privatisation

11.1. Definition:Transfer of assets from the public sector to the private sector.

11.2. Benefits: Promotes efficiency, reduces costs, raises incentives, provides stock market discipline, promotes competition, promotes an enterprise culture, sale raises gov revenue, reduces the size of the public sector

11.3. Drawbacks: nationalized company price P=MC, private firms may ignore externalities, private firms may close loss making services, quality of provision may fall, safety standards may be compromised in pursuit of profit.

11.4. Use of regulators

11.4.1. Price capping to control monopolies power

11.4.1.1. cuts in real price levels are good for household and industrial consumers, Provides incentives for increased productive efficiency.

11.4.1.2. Price caps can lead to job losses in the industry and distorts the working price mechansm

12. Competition policy

12.1. Ways in which the competition authorities of national governments and EU seek to make markets work better and achieve higher economic efficiency and welfare.

12.2. effective price competition between suppliers

12.3. wider consumer choice

12.4. Technological innovation

12.5. Investigate anti-competitive

12.6. SLAM

12.6.1. State aid control

12.6.2. Liberalization of markets

12.6.3. Antitrust and cartel policy

12.6.4. Merger control

12.7. Anti competitive practices

12.7.1. Predatory pricing

12.7.2. vertical restraint

12.7.2.1. exclusive dealing

12.7.2.2. territorial exclusivity

12.7.2.3. quantity discounts

12.7.2.4. refusal of supply

12.7.3. Creation of artificial barriers to entry

12.7.4. Collusive practices

13. Market Structure and Technology

13.1. Gains from technological improvements

13.1.1. Improves UK competitiveness with overseas markets

13.1.2. Innovation helps protect comparative advantage

13.1.3. Source of long term growth

13.1.4. Creates jobs

13.1.5. Social benefits and positive externalities from safety, new health treatments and "greener" products

13.2. Advances in technology can improve

13.2.1. Nature of the product

13.2.2. The number of buyers for the product

13.2.3. Number of firms in an industry which improves competitiveness

13.2.4. Reduces barriers to entry

13.2.5. Increases amount and transparency of information