Economic 3 course

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Economic 3 course by Mind Map: Economic 3 course

1. Costs

1.1. Fixed costs; a cost that does not change

1.2. Variable costs; a cost that changes with output

1.3. Total costs=fixed costs+variable costs

1.4. Average costs=total costs/quantity

1.4.1. Fixed costs are diluted by increased output

1.5. Average total costs=average fixed costs+average variable costs

1.6. Short run; the period of time when at least one of the factors of production is fixed, usually capital

1.7. Diminishing returns; when as more units of a variable factor are added to a fixed factor marginal product decreases (average costs usually fall initially)

1.8. Marginal product; the addition of total product of one extra unit of output

1.9. If productivity increased variable costs per unit will fall and so average costs will fall

1.10. Economies of scale; when an increase in imputs leads to a more than proportionate increase in output (falling long run average cost curve)

1.10.1. Technical economies of scale capital specialisation Increased dimensions

1.10.2. Purchasing economies of scale bulk buying monopsony power

1.10.3. Financial economies of scale lower interest on loans

1.10.4. Administrative economies of scale

1.10.5. External economies of scale; when the growth of the whole industries leads to falling LRAC. Clusters

1.11. Diseconomies of scale; when long run average costs rise as output increases

1.11.1. Control

1.11.2. Co-ordination

1.11.3. Co-operation

1.12. Minimum efficient scale; the point where the bottom of the LRAC curve is first reached (all economies of scale have been exausted

1.12.1. If a firm has large fixed costs it takes a long time to reach the MES

2. Revenue

2.1. Total revenue=price×quantity

2.2. Average revenue=total revenue/quantity=price

2.3. Marginal revenue; the additition to total revenue from the sale of one more unit of output

2.4. The revenue maximising point is when MR=0

3. Profit

3.1. Normal profit; the level of profit which is just sufficient to keep all factors of production in thier present use (AC=AR)

3.2. Supernormal profit; anything is excess of normal profit

3.3. Profits are maximised when MC=MR

3.4. Role of profit

3.4.1. Allocation of factors of production scarce resources follow high profit areas

3.4.2. Signals for market entry

3.4.3. Promotes innovation invest supernormal profits on new products and new techniques (dynamic efficiency)

3.4.4. Investment increasing capital stock to increase productivity Purchase firms to exploit economies of scale

3.4.5. Reward risks from entrpreneurs

3.4.6. Economic performance indicator

3.5. Principle agent problem

3.5.1. When the principle (shareholders) delegate the control of the company to agents (managers) and they don't work in the best interests of the principle

3.5.2. Managers Managerial Status Increase market share or sales growth Revenue maximisation

3.5.3. Shareholders Increased profits

3.5.4. Solutions Independant experts Share ownership schemes Shareholders have a vote Stock market if the profits get too low and the share price gets to low the firm may be taken over my another firm

4. Perfect competition

4.1. Conditions

4.1.1. Many buyers and sellers

4.1.2. No barriers to entry or exit

4.1.3. Identical products

4.1.4. Perfect information

4.1.5. No externalities

4.1.6. No economies of scale

4.1.7. Each firm has no power over the price

4.1.8. Each firm will produce the output at which MC=MR, to maximise profits

4.2. If there are supernormal profits then new firms will enter the market and so the prices will fall and so the supernormal profit will reduce to normal profit

4.3. If there are losses in the industry then firms will leave the industry and the price will rise until normal profit is reached

5. Efficiency

5.1. Consumer surplus; the difference between the price a consumer is willing ot pay and the market price

5.2. Producer surplus; the difference between the market price and the price the producer is willing to supply at

5.3. Static efficiency is at a given time

5.3.1. Productive The lowest point on the average costs curve

5.3.2. Allocative When output is made in line with consumer preferences (P=MC)

5.3.3. X When a firm fails to produce on their average cost curves due to organisational slack, often in a monopoly

5.4. Dynamic effeciency is over time

5.4.1. Product New innovative products being introduced to the market

5.4.2. Process New innovative methods of producing a product which will reduce the firms costs or change the balence of factor inputs

5.5. Economic efficiency occurs when there is both allocative and productive efficiency

6. Concentrated markets

6.1. Concentration ratio; the percentage of total market sales accounted for by a given number of firms (eg; C.R.4 is the value of output from the 4 largest firms in the industry/value of the output from the industry

6.2. Why firms grow

6.2.1. Market power

6.2.2. Objectives of managers

6.2.3. Profit

6.2.4. Economies of scale

6.2.5. Risk diversifing production so if sales in one area fall another might rise

6.3. Internal/organic growth

6.3.1. Using retained profits or loans to increase fixed or variable factors

6.4. External growth (mergers)

6.4.1. Horizontal integration When 2 buisnesses in the same industry at the same stage of production merge

6.4.2. Vertical integration When 2 buisnesses in the same industry but in different stages of the supply chain merge

6.4.3. Lateral merger A merger between related but not identical firms

6.4.4. Conglomerate merger A merger between unrelated firms

7. Price discrimination

7.1. When a producer sells an identical product to different buyers at different prices for reasons unrelated to costs

7.2. Maximises profits

7.3. Conditions

7.3.1. 2 markets with differences is price elasticity of demand

7.3.2. Barriers between the markets to prevent re-sale of the good

7.4. 1st degree

7.4.1. Unique price for each person

7.4.2. Selling at the maximum price that the consumer is willing to pay

7.5. 2nd degree

7.5.1. Batches of a product

7.5.2. A lower price if you buy it in a batch rather than on its own

7.6. 3rd degree

7.6.1. Different segments of the market

7.6.2. Time

7.6.3. Geography

7.6.4. Status eg; children and adults get different ticket prices

7.7. Consumer Surplus is normally reduced as much as possible

8. Monopoly

8.1. In theory it is when there is only one firm in the industry but in practise it is when a firm has more than 25% of the market share

8.2. Ways to asses monopoly power

8.2.1. number and closeness of substitutes

8.2.2. barriers to entry protects monopoly power in the long run high fixed costs economies of scale reduced costs brand loyalty legal barriers (patents) control over the factors of production control over retail predatory pricing

8.2.3. product differentiation

8.3. With a monopoly the firm can choose the price it sells at as there is no competition

8.3.1. Normally when MC=MR (profit maximisation)

8.4. Strategic entry deterrence

8.4.1. Hostile takeovers

8.4.2. Product differentiation

8.4.3. Capacity expansion

8.4.4. Predatory pricing

8.5. Efficiency

8.5.1. Allocative inefficiency price>MC

8.5.2. Productive inefficiency not at the bottom of AC

8.5.3. X inefficiency lack of competition means that they become lazy

8.5.4. Overall welfare loss

8.5.5. Dynamically efficient supernormal profits can be reinvested

8.6. Benefits

8.6.1. Economies of scale MC will fall and can lead a lower price for consumers

8.6.2. Reach MES with natural monopoly productive efficiency

8.6.3. Dynamic efficiency from supernormal profits

8.6.4. Can be internationally competative

8.7. Costs

8.7.1. Higher prices

8.7.2. Lower output

8.7.3. Reduced consumer surplus

8.7.4. Allocative inefficiency

8.7.5. Productive inefficiency

8.7.6. X inefficiency

9. Oligopoly

9.1. Competative

9.2. Collusve

9.2.1. Acts like a monopoly

9.2.2. Tacit legal When all firms in a market move in line with each other

9.2.3. Explicit Cartels Illegal When firms get together and fix a high price Ideal conditions Few firms in the industry Market demand isn't very variable Demand is relatively inelastic Each firms output can be easily monitored Causes of a breakdown Enforcement problems Falling market demand Entry of firms outside the cartel Market regulators finding out

9.2.4. Benifits Joint research projects Shared use of facilities Adoption of common standards

9.3. A market dominated by a few producers, which all have a degree of control in the market

9.4. High level of market concentration

9.5. When the top five firms in the market account for 60% of the total market demand and sales

9.6. Strategic interdependance

9.6.1. Depend on not only on its actions but the action of its rivals too

9.6.2. Uncertainty

9.7. Barriers to entry

9.7.1. Maintain super normal profit

9.7.2. Low enough for smaller firms to exist but they cant get as big

9.8. Product branding

9.8.1. Scope for differentiating

9.9. Non-price competition

9.9.1. Eg; advertising, loyalty cards, range of services, opening hours

9.10. Kinked demand curve

9.10.1. A firm is unlikely to follow a price rise of a competitor but may follow a price fall

9.10.2. Price rigidity

9.11. Game theory

9.11.1. How a firm reacts given how they think the other will react

10. Contestable markets

10.1. Low sunk costs

10.2. A market has no barriers to entry and exit

10.3. All firms have access to the same technology

10.4. The treat of new firms entering keeps prices low

10.4.1. Supernormal profit will encourage firms to enter

10.5. Firms may try and reduce their supernormal profits so that they don't encourage new firms to enter and reduce them

10.6. Evaluation

10.6.1. No market is fully contestable

10.6.2. The threat of new firms may not be enough to change the firm's behaviour

10.6.3. Existing firms may protect themselves Patents

10.7. Increasing contestability of markets

10.7.1. De-regulation of markets Reduces barriers to entry

10.7.2. Tougher competition laws against predatory pricing

10.7.3. Single markets

10.7.4. New technology

11. Market structure and technology

11.1. Most important features

11.1.1. Number of firms

11.1.2. Market share of the largest firms

11.1.3. Nature of costs

11.1.4. Degree to which the industry is vertically intergrated

11.1.5. Product differentiation

11.1.6. Structure of buyers

11.1.7. The number of consumers which are prepared to switch supplier

11.2. Perfect competition

11.3. Monopoly

11.4. Oligopoly

11.5. Factors affecting a firms pricing power

11.5.1. Costs

11.5.2. Competitors

11.5.3. Customers

11.5.4. Business objectives

11.6. Technology

11.6.1. Reuces AC

11.6.2. Increases both consumption and production possibilities

11.6.3. Improve productivity

11.6.4. Improve efficiency