econplusdal notes

• Allocative efficiency

  Resources perfectly follow consumer demand
• Low prices

  High consumer surplus, high quality
• Firms get ahead of rivals

  Firms gain market share
• Productive and x efficiency

  Cost minimisation - firms minimise waste
• Low prices

  High surplus
• Widen profit margin


  Ahead of rivals
• Dynamic efficiency

  Long run supernormal profit reinvested into business e.g technology, r+d and innovations
• New better quality

  Lower prices, greater choice
• Perfect competition

  • Many buyers and sellers
  • Perfect info
  • Homogeneous products
  • No barriers
  • Profit max
• Firms leave if they are performing at shutdown point


  ac>ar
• Pros of perfect competition

  • Jobs
  • Allocative
  • Productive
  • X efficiency
• Cons of perfect competition

  • Dynamic inefficiency
  • Low economies of scale
  • Cost cutting in undesirable areas
  • Creative destruction
• Monopoly

  • 1 seller
  • Imperfect info
  • Differentiated goods
  • High barriers
  • Profit max
• Pure monopoly 40% level e.g google/amazon/apple
• Durex has 85% market share
• Most important factor public interest

  Allocative efficiency, meaning everytime there is risk of allocative inefficiency government is useful for the public interest
• Intentions of government interventions

  • Inc public interest
  • Inc cons surplus
  • Inc quantity
  • Improve quality
  • Promote reinvestment>higher quality
  • Lower prices
• Approaches to government interventions

  • Interventionist approach: monopoly regulation (gov based)
  • Market based approach: privatisation and deregulation
• Monopoly regulation types

  • Price caps>limit on revenue >so may cut costs>may still have profit to reinvest left
  • Quality standards
  • Profit cap>takeaway incentive to be abusive
  • Mergers(block it if it goes against consumer interest) or allow it with certain conditions e.g sell of stores
• Evaluation of regulation (competition policy)

  • Regulators don't have enough information to regulate (asymmetric)>firms to lie about their revenue (misinformation) leading to the regulations being closer to their goals
  • Risk of regulatory capture which is when regulators are captured by the interest of firms and ceos in an industry rather than following public industry (manipulation and corruption) it is also a pure gov failure
  • Cost and admin reinforcement
  • Unintended consequences e.g market failure, firms leaving country, loss of dynamic efficiency, regulation acting as barrier to entry for competition
• Balance of payments

  Financial records between international transactions between one country and rest of the world
• Components of balance of payments

  • Capital account (financial, direct investment, portfolio investment, reserves)
  • Current account (secondary, primary, import, export)
• Current account deficit

  Negative x-m > lower ad > lower growth and high unemployment (ad shifting left )
• Having to borrow

  Investors losing confidence>pound falls>currency crisis>economic crisis
• Exchange rate weakening

  s>d for currency > self rectify deficit. This is good for net exports However for net importers