Micro Economics

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Micro Economics by Mind Map: Micro Economics

1. COSTS & REVENUES

1.1. COSTS

1.1.1. Fixed Costs

1.1.1.1. Costs that are independent of output

1.1.2. Variable Costs

1.1.2.1. Costs that change with output

1.1.3. Total Cost = Fixed Costs + Variable Costs

1.1.4. Law of Diminishing Returns

1.1.4.1. When as more units of a variable factor are added to a fixed factor, marginal product decreases

1.1.4.1.1. (initially marginal product will rise)

1.1.4.1.2. Overcrowding

1.1.4.1.3. Less efficient labour

1.1.4.1.4. Less efficient machinery

1.1.4.1.5. Payment of overtime rates

1.1.5. Total Costs / Output = Average Cost

1.1.6. Economies of scale

1.1.6.1. When an increase in input leads to a more than proportionate increase in output

1.1.6.1.1. i.e. falling long-run average costs

1.1.6.1.2. Technical

1.1.6.1.3. Purchasing

1.1.6.1.4. Financial

1.1.6.1.5. Administrative

1.1.6.1.6. Clusters

1.1.6.2. External economies of scale: LRAC down

1.1.7. Diseconomies of scale

1.1.7.1. Control (principal-agent problem)

1.1.7.2. Co-ordination (information, contracts)

1.1.7.3. Co-operation (internal alienation of staff)

1.1.8. Minimum Efficient Scale

1.1.8.1. Minimum factory size to achieve the most efficient level of production (lowpoint of AC)

1.1.8.1.1. All economies of scale exhausted

1.2. MARGINAL PRODUCT

1.2.1. The addition to total product from the production of one extra unit of labour

1.3. REVENUES

1.3.1. Total Revenue

1.3.1.1. Price x Quantity

1.3.2. Average Revenue

1.3.2.1. Total Revenue / Quantity = AR = Price

1.3.3. Marginal Revenue

1.3.3.1. Addition to total revenue from the sale of 1 extra unit of output

1.3.3.2. When P=0, AR = 2MR

2. PERFECT COMPETITION

2.1. SUNK COSTS

2.1.1. A cost that cannot be recovered

2.1.1.1. e.g. advertising,training

2.2. CHARACTERISTICS

2.2.1. Many buyers and sellers

2.2.2. No barriers to entry or exit

2.2.3. Identical products

2.2.4. Perfect information

2.2.5. No externalities

2.2.6. No economies or diseconomies of scale

2.2.7. Normal profit, but never supernormal profit

2.3. SHUTDOWN CONDITIONS

2.3.1. Long-run

2.3.1.1. P < AC

2.3.2. Short-run

2.3.2.1. P < AVC

2.4. BENEFITS

2.4.1. Lower prices

2.4.2. Low barriers to entry

2.4.3. Lower total profits

2.4.4. Greater entrepreneurial activity

2.4.5. Economic efficiency

3. MONOPOLY

3.1. BARRIERS TO ENTRY

3.1.1. High fixed costs

3.1.2. Economies of scale

3.1.3. Brand loyalty

3.1.4. Legal barriers e.g. patent

3.1.5. Control over resources

3.1.6. Predatory pricing

3.2. STRATEGIC BARRIERS TO ENTRY

3.2.1. Predatory pricing

3.2.2. Hostile takeovers

3.2.3. Product differentiation

3.2.4. Capacity expansion (internal economies of scale)

3.3. COSTS

3.3.1. Supernormal profits at expense of efficiency

3.3.2. Allocatively inefficient as monopoly price > MC

3.3.3. Underconsumption

3.3.4. Misuse of scarce resources

3.3.4.1. Productive inefficiency

3.3.4.2. X inefficiency

3.4. BENEFITS

3.4.1. Better positioned to exploit economies of scale

3.4.2. Potential to reach minimum efficient scale

3.4.3. International competitivity

4. EFFICIENCY

4.1. CONSUMER SURPLUS

4.1.1. The difference between the price that a consumer is prepared to pay and the market price

4.2. PRODUCER SURPLUS

4.2.1. The difference between the market price and the price at which a firm is prepared to supply

4.3. STATIC EFFICIENCY

4.3.1. Productive

4.3.1.1. The lowest point of the average cost curve

4.3.2. Allocative

4.3.2.1. Where P = MC

4.3.3. X

4.3.3.1. When a firm produces on its average cost curve

4.4. DYNAMIC EFFICIENCY

4.4.1. Product

4.4.2. Process

4.4.3. Examples

4.4.3.1. Research and Development

4.4.3.2. Technological Change

4.4.3.3. Increased Physical Capital

4.4.3.4. Increased human capital (education and training)

4.5. DEADWEIGHT LOSS

4.5.1. A welfare loss due to the inefficiency of monopoly

5. CONCENTRATED MARKETS

5.1. CONCENTRATION RATIO

5.1.1. The percentage output of the largest firms in the industry

5.1.1.1. e.g. CR5 measures the output of the top 5 firms in the market / total output of the market

5.2. WHY FIRMS GROW LARGER

5.2.1. Market power motive

5.2.2. Objectives of managers

5.2.3. Profit motive

5.2.4. Economies of scale

5.2.5. Risk motive

5.3. GROWTH

5.3.1. Internal growth

5.3.1.1. Uses retained profits or loans to finance expansion by increasing both fixed and variable factors

5.3.1.1.1. Innovation and creativity vital

5.3.2. External growth

5.3.2.1. Integration or merger

5.3.2.1.1. Horizontal Integration

5.3.2.1.2. Vertical Integration

5.3.2.1.3. Lateral Merger

5.3.2.1.4. Conglomerate Merger

6. PROFIT MAXIMISATION

6.1. NORMAL PROFIT

6.1.1. That level of profit that is just sufficient to keep all factors of production in their present use

6.1.2. AC = AR

6.2. SUPERNORMAL PROFIT

6.2.1. Anything in excess of Normal Profit

6.2.2. AR > AC

6.3. MAXIMISATION

6.3.1. When MC = MR

6.4. THE ROLE OF PROFIT

6.4.1. Allocation of factors of production

6.4.2. Signal for market entry

6.4.3. Promotes innovation

6.4.4. Investment

6.4.5. Rewards bearing of risk

6.4.6. Economic performance indicator

6.5. ALTERNATIVE GOALS

6.5.1. Managerial status

6.5.2. Market share/sales growth

6.5.3. Revenue maximisation

7. OLIGOPOLY

7.1. Characteristics

7.1.1. Few Producers

7.1.2. Barriers to entry

7.1.3. Product branding, heterogeneous products

7.1.4. Non-price competition

7.2. Variations

7.2.1. Competitive

7.2.1.1. Independent strategies

7.2.1.2. No communication between firms

7.2.2. Collusive

7.2.2.1. Strategic interdependence - joint stategies

7.2.2.2. Possibility of communication between firms

7.2.2.3. Tacit Collusion

7.2.2.3.1. Price changes are established by a dominant firm

7.2.2.3.2. Price set so least efficient firm can earn return

7.2.2.4. Explicit Collusion

7.2.2.4.1. Joint profit maximisation

7.2.2.4.2. Price fixing cartel

7.2.2.4.3. Control over supply

7.2.2.5. Achievable when:

7.2.2.5.1. Small number of firms in the industry

7.2.2.5.2. Market demand fairly constant

7.2.2.5.3. Fairly price inelastic demand

7.2.2.5.4. Easily monitored output

7.2.2.6. Problems

7.2.2.6.1. Enforcement

7.2.2.6.2. Falling market demand

7.2.2.6.3. New entrants

7.2.2.6.4. Regulatory exposure

7.2.2.7. Benefits

7.2.2.7.1. Joint R&D

7.2.2.7.2. Common facilities / information

7.2.2.7.3. Adoption of common standards

7.3. Theoretical definitions

7.3.1. Kinked demand curve

7.3.1.1. demand curve based on other firms' likely reactions

7.3.1.2. other firms unlikely to match price increase, likely to match price fall

7.3.1.3. Elastic curve above market price, inelastic curve below market price

7.3.1.4. Price rigidity usually assumed in oligopoly - changing price incurs no advantage or disadvantage in the long run

7.3.1.4.1. Price stability

7.3.1.4.2. Non-price competition

7.3.2. Game theory

7.3.2.1. Reactions to actions and expected actions of competitors

8. PRICE DISCRIMINATION

8.1. Occurs when a producer sells an identical product to different buyers at different prices, for non-cost reasons

8.2. CONDITIONS

8.2.1. Different price elasticity of demand

8.2.2. Barriers to prevent resale

8.2.2.1. e.g. unique service

8.3. TYPES

8.3.1. First Degree

8.3.1.1. Charging every customer the maximum they are prepared to pay

8.3.1.1.1. No consumer surplus

8.3.2. Second Degree

8.3.2.1. Selling batches of products at a lower price than earlier batches

8.3.3. Third Degree

8.3.3.1. Different prices for the same product in different segments of the market

8.3.3.1.1. time

8.3.3.1.2. geography

8.3.3.1.3. age

8.3.3.1.4. status

9. CONTESTABLE MARKETS

9.1. Theory

9.1.1. Structure

9.1.1.1. Perfect competition

9.1.1.2. Oligopoly

9.1.1.3. Monopoly

9.1.2. Conduct

9.1.2.1. Price

9.1.2.2. Output

9.1.2.3. Non-price decisions

9.1.3. Performance

9.1.3.1. Efficiency

9.1.3.1.1. Static

9.1.3.1.2. Dynamic

9.2. Perfectly Contestable Markets

9.2.1. Costs of entry and exit are 0

9.2.2. No sunk costs

9.2.2.1. Capital inputs that cannot be recovered

9.2.2.2. Money spent on advertising, R&D

9.2.2.3. Training

10. MARKET STRUCTURE & TECHNOLOGY

10.1. Monopoly

10.1.1. Number of firms

10.1.1.1. One

10.1.2. Product

10.1.2.1. Unique

10.1.3. Barriers to entry

10.1.3.1. High

10.1.4. Short run supernormal profit

10.1.4.1. Yes

10.1.5. Long run supernormal profit

10.1.5.1. Yes

10.1.6. Pricing

10.1.6.1. Price-maker

10.1.7. Non-price competition

10.1.7.1. Possibly

10.1.8. Profit maximisation

10.1.8.1. Usually

10.1.8.1.1. Sometimes X inefficiency

10.1.9. Innovative behaviour

10.1.9.1. Potentially strong

10.2. Oligopoly

10.2.1. Number of firms

10.2.1.1. Few

10.2.2. Product

10.2.2.1. Differentiated

10.2.3. Barriers to entry

10.2.3.1. Some high

10.2.4. Short run supernormal profit

10.2.4.1. Yes

10.2.5. Long run supernormal profit

10.2.5.1. Yes

10.2.6. Pricing

10.2.6.1. Price-maker / rigidity

10.2.7. Non-price competition

10.2.7.1. Yes

10.2.8. Profit maximisation

10.2.8.1. Yes

10.2.9. Innovative behaviour

10.2.9.1. Very strong

10.3. Perfect Competition

10.3.1. Number of firms

10.3.1.1. Many

10.3.2. Product

10.3.2.1. Homogeneous

10.3.3. Barriers to entry

10.3.3.1. None

10.3.4. Short run supernormal profit

10.3.4.1. Yes

10.3.5. Long run supernormal profit

10.3.5.1. No

10.3.6. Pricing

10.3.6.1. Market price-taker

10.3.7. Non-price competition

10.3.7.1. No

10.3.8. Profit maximisation

10.3.8.1. Yes

10.3.9. Innovative behaviour

10.3.9.1. No