Microeconomics Chapters 1-7

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Microeconomics Chapters 1-7 by Mind Map: Microeconomics Chapters 1-7

1. 1. Costs and Revenues

1.1. Fixed Costs

1.2. Variable Costs

1.3. Law of Diminishing returns

1.4. Economies of Scale

1.4.1. External

1.4.2. Internal

1.4.3. Purchasing

1.4.4. Administrative

1.4.5. Financial

1.4.6. Technical

1.5. LRAC

1.6. Dis-economies of Scale

1.6.1. Control

1.6.2. Cooperation

1.6.3. Coordination


1.8. MES

1.9. TR=PxQ AR=TR/Q AR=p

2. 2. Profit Maximisation

2.1. Normal Profit AC=AR

2.2. Supernormal Profit MC=MR

2.3. Role of Profit

2.3.1. Allocation of factors of Production

2.3.2. Investment

2.3.3. Economic performance indicator

2.3.4. Signal for market entry

2.4. Managerial Theories

2.4.1. Principle Agent Problem Profit Satisficing

2.5. Behavioral Therories

2.6. New Ideas

2.6.1. Social goals

3. 3. Prefect competition

3.1. Characteristics

3.1.1. Many buyers and sellers

3.1.2. No barriers to entry/exit

3.1.3. Identical products

3.1.4. Perfect information

3.1.5. No economies of scale

3.1.6. No externalities

3.2. D=AR=MR

3.2.1. AC above D - loss below D - profit

3.3. Shutdown Condition

3.3.1. SR P<AVC LR P<AC

3.4. Benefits of competition

3.4.1. Lower prices

3.4.2. Low barriers to entry

3.4.3. Economic efficieny firms move towards productive and allocative efficiency

3.5. Evaluation

3.5.1. Not all products are identical Existence of advertising, brands, labels

3.5.2. Imperfect information Asymmetric Information

3.5.3. Nearly always barriers to entry and economies of scale

3.5.4. Negative and Positive externalities exist

4. 5. Concentrated Markets

4.1. Concentration Ratio

4.2. Firms want to grow larger

4.2.1. Market power increase

4.2.2. Manager's objectives

4.2.3. Profit increase

4.2.4. Decrease in Risk

4.2.5. Increase competitiveness

4.2.6. Economies of scale

4.3. How do firms grow?

4.3.1. Internal growth use retained profits/loans Increase fixed and variable factors e.g.new products

4.3.2. External growth rapid route through merging Horizontal integration Forward and Backward Vertical integration Lateral Merger Conglomerate Merger

4.3.3. Outsourcing Technological Change Increased competition Pressure from financial markets Cut in costs Long term: can concentrate on R+D

5. 4. Efficiency

5.1. Consumer surplus

5.2. Producer surplus

5.3. Static efficiency

5.3.1. Allocative P=MC

5.3.2. Productive Lowest point of AC curve

5.3.3. X efficiency Not on AC curve due to organisational slack

5.3.4. given period of time

5.4. Dynamic efficiency

5.4.1. Product Innovation creates new markets sustaining innovation disruptive innovation

5.4.2. Process Innovation Changing ways of production cost structure change shift in MC and SRAC outwards lower prices and bigger supernormal profit

5.4.3. over a period of time

5.4.4. Technical change Movement of MC and SRAC

5.4.5. R+D

5.4.6. increase in human capital through education and training

5.5. Government policy to increase innovation

5.5.1. Tax credits

5.5.2. Policies to encourage small firm creation

5.5.3. Lower corporation taxes

5.5.4. Increase research fundings

5.6. Under prefect competition

5.6.1. (Allocative) Pareto optimum allocation

5.6.2. (Productive) Only in long run

5.6.3. (X) little scope

5.6.4. Not good fro R+D thus not resulting in dynamic efficiency

6. 6.Price Discrimintion

6.1. difference in price but identical products

6.2. Conditions

6.2.1. Difference in price elasticity of demand Higher for inelastic lower for elastic

6.2.2. Preventing resales unique service

6.3. First Degree

6.3.1. Unique prices Unlikely unless you know consumer's preferences

6.4. Second Degree

6.4.1. Batches securing additional market share

6.5. Third Degree

6.5.1. Status/Location/Time difference in elasticity change supernormal profit

6.6. Results

6.6.1. Consumer welfare reduction of consumer surplus Price is charged above marginal cost of production benefit if consumer can buy at lower price

6.6.2. Producer surplus Turning consumer surplus into supernormal profit

6.6.3. Profit improve dynamic efficiency

7. 7. Monopoly

7.1. Barriers to entry

7.1.1. High fixed costs

7.1.2. Economies of scale Natural monopoly

7.1.3. Brand loyalty

7.1.4. Legal Barriers Patents

7.1.5. New node Control over factors of production

8. 8. Oligopoly

8.1. market dominated by few firms

8.2. strategic interdependance

8.3. non price competition

8.3.1. services home delivery etc

8.3.2. advertising

8.4. kinked demand curve

8.4.1. above certain price level firms might not match price and therefore there will be more than proportionate fall in quantity

8.4.2. assuming reaction by rivals

8.4.3. if strongest firm - then price war would mean that other firms will be forced out

8.5. collusion

8.5.1. price leadership price changes established by dominant firm tacit collusion

8.5.2. explicit collusion price fixing illegal joint profit maximisation

8.5.3. easier to achieve when only small no. of firms in industry and barriers to entry market demand not too variable demand is fairly price inelastic output is easily monitored

8.5.4. failures falling demand enforcement problems firms may not want to meet output level - produce under cartel price entry of non cartel firms

8.5.5. benefits joint research and development economies of scale easier to achieve shared use of facilities costs down increase in networking

8.6. game theory

8.6.1. prisoners dilemma uncertainty of other firms behaviour incentive to cheat

9. 9. Contestable Markets

9.1. Structure - Conduct - Performance

9.1.1. Structure - Perfect competition, Oligopoly, Monopoly

9.1.2. Conduct - Price, Output and non price decisions

9.1.3. Performance - efficiency static and dynamic

9.2. not no. of firms that influences conduct and performance

9.3. level of barriers to entry affects conduct and performance

9.4. when there are no barriers to entry and firms have access to same technology

9.5. hit and run entry

9.5.1. enter market and attract customers by undercutting price - leave when supernormal profit disappears

9.5.2. therefore firms always set their price at competitive level

9.6. perfectly contestable market

9.6.1. costs of entry and exit by rivals are zero

9.7. less contestable

9.7.1. when sunk costs are high barriers to entry

9.8. profit margins are low

9.8.1. consumer surplus increases

9.8.2. prices kept low

9.9. evaluation

9.9.1. no market is perfectly contestable existence of sunk costs should measure the degree of contestablility

9.9.2. can ignore hit and run - continue supernormal profit and use it when firms enter by lowering prices

9.9.3. existing firms may create barriers to entry - patents or other strategic barriers

9.9.4. knowledge needed to enter industry and this may not be widely available

9.10. increasing contestablility

9.10.1. de-regulation liberalisation opening up markets for competition

9.10.2. competition plicy laws against predatory behaviour against price fixing

9.10.3. technological change impact of new thecnology cutting costs

10. 10. Market Structure & tecnology

10.1. important features

10.1.1. number of firms

10.1.2. market share of largest firm

10.1.3. mature of costs sunk costs?

10.1.4. degree of vertical intergration process divided and put under different ownership

10.1.5. extent of product differenetiation

10.1.6. structure of buyers in industry monopsony?

10.1.7. turnover of customers market churn - how many costumers are prepared to switch when market conditions change

10.2. innovation

10.2.1. supernormal profit last in long term

10.2.2. government policies competitiveness increase protect and develop comparative advantage potential source of long term growth social benefits? positive externalities

10.3. price

10.3.1. market structure Perfect competition price taking firms no influence over setting price free entry of firms elastic demand curve Pure Monopoly Supernormal profits in long and short run barriers to entry potential for price discrimination Oligopoly competition among few some market power interdependent nature of pricing each firm - consider strategic behaviour of other firms in market objective - protect market share rather than profit maximisation Contestable markets barriers to entry low hit and run behaviour of existing firm affected by threat of new firm barriers to contestablilty

10.3.2. elasticity of demand demand price inelastic firm can raise price without losing much sales demand price elastic increase in price --> lower producer surplus and profit

10.3.3. product differentiation some consumers willing to pay premium prices more elastic demand when products are close to end of life-cycle marketing and advaertising brand loyalty

10.3.4. regulatory system government intervention directly or indirectly in price setting process

10.3.5. International environment competition from all over the world globalisation

10.3.6. economic cycle pricing power affected by macro economics costs competitors customers business objecives

10.4. firms and markets

10.4.1. production new technology pushes down AC cuvre short term costs influence poptimal methods of production job losses? remain competitive

10.4.2. consumption Supply curve to the right lower price levels quality of products rise increase in demand?

10.4.3. efficiency dynamic efficiency increase new product - boost sales - profits rise produce at lowest point on AC curve? (productive efficiency) allocativeefficiency

10.4.4. competition nature of product no. of buyers and firms in industry level of barriers to entry amount of information available promote competition reduce barriers to entry reduce concentration increase degree of contestablilty intensify competition challenge monopolies reinforce monopoly power firms patent innovations