economics paper 1

• Oligopolistic markets

  Markets can be very different in relation to the number of firms, the degree of product differentiation and ease of entry
• Oligopoly

  Can be defined in terms of market structure or in terms of market conduct (behaviour)
• Concentration ratios

  Measures market share of the biggest firms in the market
• How to calculate a concentration ratio

  Add up percentage market shares of the leading firms
• Collusive oligopoly

  Firms actively cooperate with each other to restrict competition
• Non-collusive oligopoly

  Firms act interdependently since they do not form agreement with each other
• Cooperation

  Industry collaboration or overt collusion (open agreements)
• Collusion

  Occurs when rivals agree to work together to influence production or price levels to prevent fair competition
• Kinked demand curve model

  Shows how a competitive oligopolist may be affected by rivals' reaction to its price and output decisions
• If firm increases price

  Demand falls as consumers buy rivals' products
• If firm decreases price

  Demand increases in short run but other firms will match the decreased price, so revenue falls
• The kinked demand curve model ignores product differentiation, non-price competition, collusion, dynamics of reaching a stable price, and how firms will be willing to accept lower revenues if it increases their market share
• Reasons for non-price competition in oligopolies

  • Product differentiation
  • Innovation
  • Advertising
• Reasons for cartels in oligopolies


  • Maximise profits
  • Avoid price wars
  • Reduce uncertainty
  • Resource sharing
• Barriers to entry in oligopolies

  • Economies of scale
  • Technological barriers
  • Brand and product differentiation
  • Capital
• Price leadership


  Occurs when 1 firm becomes the market leader and other firms follow its pricing example
• Price agreements


  Agreements made between firms and suppliers and between firms and customers regarding the pricing of a good or service
• Price wars


  Price cutting to force rivals out of business
• Factors which influence expenditure on research and advertising in oligopolies

  • Product differentiation
  • Elasticity of demand
  • Market share
• Factors which influence investment in oligopolies


  • Technological advancements
  • Market concentration
  • Barriers to entry
• Factors which influence output in oligopolies


  • Collusion and output quotas
  • Strategic interdependence
  • Market share
• Factors which influence price in oligopolies


  • Price rigidity
  • Collusion and cartels
  • Cost structures
  • Demand elasticity
• Advantages of oligopolies


  • Benefit from economies of scale
  • Easy for consumers to compare and choose
  • Degree of competition
• Disadvantages of oligopolies


  • Restrict output and raise prices
  • Cartels are anti-competitive
  • Small firms may find it difficult to enter
  • Producer sovereignty rules the market
• Short-Termism


  the tendency for government to focus excessively on short-term performance objectives at the expense of longer-term strategic objectives e.g. lowering income tax
• Scarcity


  a situation in which unlimited wants exceed the finite resources available to fulfill those wants
• Ceteris Paribus


  'all other things being equal
• Positive Statement


  objective statements that can be proved e.g. homelessness is currently at 5% in Cambridge
• Normative Statements


  opinions that contain value judgments
• Value Judgments


  judgments about society that cannot be quantified and tested e.g. homelessness is too high in Cambridge
• Main Purpose of Economic Activity


  to produce goods and services to satisfy consumers' wants and needs
• The Economic Problem


  involves working out how to allocate limited resources as effectively as possible to satisfy people's unlimited wants and needs
• Factors of Production - Land


  all natural resources that are used to produce goods and services e.g. materials, water
• Factors of Production - Labour

  a combination of human capital (the value of workers' labour) and the labour force (the working population)
• Factors of Production - Enterprise

  entrepreneurial actions (e.g. establishing businesses and taking risks) that individuals take to try and make a profit
• Factors of Production - Capital


  equipment used to generate goods and services within the production process e.g. machinery
• Three Main Economic Agents


  - individuals : people/firms that produce goods or supply services

  - consumers : people/firms who purchase the goods/services

  - governments : establishes rules for economies
• Opportunity Cost (Tradeoffs)


  the benefit lost by not choosing next best alternative to a decision
• Issues with Opportunity Cost (2)


  - imperfect information may prevent consumers from picking the alternative

  - barriers between switching to alternative
• Production Possibility Frontier


  illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of the other