Econ A2 - Micro

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Econ A2 - Micro by Mind Map: Econ A2 - Micro

1. Costs + Revenues

1.1. MC meets AC at lowest point of AC

1.2. DD = AR, SS = MC

1.3. Short run - one factor (usually capital) is fixed

1.4. Long run, all are variable

1.5. Increased productivity reduces AC (e.g. division of labour)

1.6. Economies of scale

1.6.1. Technical - production process

1.6.2. Financial - lower borrowing interest rates

1.6.3. M.E.S, lowest point on LRAC

2. Perfect competition

2.1. Conditions

2.1.1. No barriers to entry

2.1.2. Identical products

2.1.3. Perfect information

2.1.4. Many buyers / sellers

2.1.5. No EoS or externalities

2.2. e.g. FOREX, sugar, FCOJ etc

2.3. No supernormal profit made in long run

2.4. Imperfectly competitive markets differentiate on brand, quality, design, customer support etc

3. Efficiency, consumer / producer surplus

3.1. CS - difference between what willing to pay and price

3.2. PS - difference what willing to sell for and price

3.3. Types of efficiency

3.3.1. Dynamic Product innovation, e.g. changing to digital downloads Process innovation, e.g. using robots in iPhone production

3.3.2. Static Productive, bottom of AC = acting on PPF boundary Allocative, SS = DD X inefficiency, organisational slack

4. Profit maximisation

4.1. My Cat = My Rat, then area Q*(AR-AC)

4.2. Normal profit = just enough to keep factors in current use

4.3. Supernormal is anything above normal

4.4. Short run go out of business if MR < AVC, Long run go out of business if MR < AC

4.5. Principle agent problem

4.5.1. Owners of business don't run it, specialists do

4.5.2. Can reduce it buy offering workers shares

4.5.3. Asymmetric information

5. Concentrated markets

5.1. Firms are like water - more = less concentrated

5.2. % of market share held by top (e.g. 5) firms

5.3. High suggests monopolistic powers

6. Price discrimination

6.1. Try to minimise consumer surplus

6.2. Do this by targeting people.. (degrees)

6.2.1. (i) by willingness to pay

6.2.2. (ii) by selling batches, increase market share

6.2.3. (iii) by time, geography and status. Segments of market

6.3. People with inelastic demand end up paying more

7. Monopoly

7.1. Good

7.1.1. High R+D investment, can afford it

7.1.2. Benefit from maximum EoS

7.2. Bad

7.2.1. Limit supply to raise prices - deadweight loss

7.2.2. X inefficiency, not productively efficient

7.2.3. No incentive to innovate or push boundaries

7.2.4. Limited choice for consumers as smaller firms either get priced out or bought

8. Oligopoly

8.1. Features

8.1.1. Interdependence and/or uncertainty (leads to kinked demand curve)

8.1.2. Barriers to entry

8.1.3. Product discrimination - non price competition

8.2. Collusive (act as monopoly)

8.2.1. Achieve joint profit maximisation

8.2.2. Must exert control over supply

8.2.3. Fewer firms is better, and each firm must be monitored

8.3. Competitive (tacit collusion)

8.3.1. Act as if colluding - kinked demand curve

8.3.2. Price leader sets price and the rest follow

8.3.3. Game Theory Comes from imperfect information Actions based on likely behaviour of competitors

9. Contestable Markets

9.1. Low barriers to entry

9.2. All firms have same cost curves

9.3. Threat of a new firm ensures supernormal profit is non existent

9.4. Zero sunk costs (fixed costs)

9.5. Encouraged by..

9.5.1. Deregulation

9.5.2. Competition policy

9.5.3. New technology

9.5.4. EU single market

10. Market Structure & Technology

10.1. Innovation

10.1.1. UK goods become more competitive

10.1.2. Compete with emerging economies - China

10.1.3. More jobs as more training needed + different industries - technology

10.1.4. New health + better transport. Social reasons

10.2. Price makers - monopoly, leader in oligolpoly

10.3. Price takers - perfect competition

10.4. Technology

10.4.1. LRAC moves down

10.4.2. High fixed costs, but soon pay for themselves

10.4.3. Increase consumption as SS moves out

10.4.4. Reduces barriers to entry - Amazon