MICRO ECON

• Economic goods


  Goods which benefit society, have the problem of scarcity and have an opportunity cost. Since economic goods are scarce, they have some value, so consumers will pay for them, and they can be traded.
• Factors which may enable/make easier collusion/cartels

  There are only a small number of firms in the industry and there are significant barriers to prevent new firms entering the industry.

  Market demand is not too variable (or cyclical) i.e. it is reasonably predictable and not subject to violent fluctuations which may lead to excess demand or excess supply.

  Demand is fairly inelastic with respect to price so that a higher cartel price increases the total revenue to suppliers - this is easier when the product is viewed as a necessity.

  Each firm's output can be easily monitored (this is important!) - This enables the cartel more easily to control total supply and identify firms who are cheating on output quotas.
• Factors which may cause cartels/collusion to break down/limit the possibility of collusion/cartels


  Enforcement problems: The cartel aims to restrict production to maximize total profits of members. But each individual seller finds it profitable to expand production. It may become difficult for the cartel to enforce its output quotas and there may be disputes about how to share out the profits. Other firms - not members of the cartel - may opt to take a free ride by selling just under the cartel price.

  Falling market demand creates excess capacity in the industry and puts pressure on individual firms to discount prices to maintain their revenue

  The successful entry of non-cartel firms into the industry undermines a cartel's control of the market. Rapid technological change can often undermine a cartel e.g. a new entrant with an innovative and success alternative business model.

  The exposure of illegal price-fixing by market regulators such as the European Union Competition Commission and the UK's Competition and Markets Authority.

  The exposure of price-fixing by whistle-blowing firms - these are firms previously engaged in a cartel that decides to withdraw from it and pass on information to the competition authorities.
• Labour Market Failure


  Occurs when there are:

  Barriers to labour mobility (geographical/occupational immobility of labour).

  Imperfect information among buyers and sellers of labour - such that labour may not be aware of job vacancies and so unemployment and vacancies coexist in the market.

  A single seller or buyer (monopoly or monopsony power in the labour market) is able by their own actions to influence/distort the market price.

  There is a poverty/unemployment trap.

  There is discrimination.

  A skills gap is present.
• Free goods


  Goods which have no opportunity cost, because there is no scarcity of the good. For example, air and water are free goods. These goods are not traded because they are freely available.
• The basic economic problem is

  Scarcity - unlimited wants and finite resources
• Positive statements are


  Objective statements. They can be tested with factual evidence, and can consequently be rejected or accepted.
• Normative statements are


  Statements which are based on value judgements. These are subjective and based on opinion rather than factual evidence.
• Factors of production


  Capital, Enterprise, Labour, Land (CELL)
• Capital


  Physical: goods which can be used in the production process

  Fixed: Machines; buildings Working: finished or semi-finished consumer goods
• Enterprise


  Managerial ability. The entrepreneur is someone who takes risks, innovates, and uses the factors of production. Resources are drawn together into the production process.
• Labour


  Human capital, which is the workforce of the economy.
• Land


  Natural resources such as oil, coal, wheat, water. It can also be the physical space for fixed capital.
• The environment is a

  Scarce resource
• Renewable resources


  Resources which can be replenished
• Renewable resources are


  Sustainable
• Non-renewable resources


  Resources which cannot be replenished and are therefore not sustainable
• Sustainable


  Meets the needs of the present, without compromising the needs of the future - does not deplete the stock of capital over time (including environmental capital).
• Economic agents


  Government, Firms, Households
• Market economies/Free economies


  Economies where governments leave markets to their own devices (no government interventions/public sector). The market forces of supply and demand allocate all (scarce) resources.
• Economic question


  What to produce, who to produce for, how to produce
• In a Market economy: What to produce is determined by?

  Consumer preference
• In a Market economy: Who to produce for is determined by?


  Whoever has the greatest purchasing power in the

  economy, and is therefore able to buy the good/service
• In a Market economy: How to produce is determined by?

  Producer's seeking profit
• Advantages of a Market economy

  Firms are likely to be efficient because they have to provide goods and services demanded by consumers.

  Firms are also likely to lower their average costs and make better use of scarce resources so as to profit maximise (and meet other objectives).

  Therefore, overall output of the economy increases (economic growth).

  The bureaucracy from government intervention is avoided - increasing efficiency.

  Some economists might argue the freedom gained from having a free economy leads to more personal freedom.
• Disadvantages of a Market economy

  The free market ignores inequality, and tends to benefit those who hold most of the wealth.

  There are no social security payments for those on low incomes.

  There could be monopolies, which could exploit the market by charging higher prices.

  There could be the overconsumption of demerit goods, which have large negative externalities, such as tobacco.

  Public goods are not provided in a free market, such as national defence.

  Merit goods, such as education, are under provided.
• Mixed economy


  An economy in which there is some degree of government intervention and therefore the market is controlled by both the government and the forces of supply and demand (there is a public sector and private sector).
• In a Mixed economy: What to produce is determined by?

  both consumer and government preferences
• In a Mixed economy: Who to produce for is determined by?

  Both the purchasing power of private individuals (and firms), and the government
• In a Mixed economy: How to produce is determined by?


  Producers making profits and the government
• Advantages of a Mixed economy


  It might be easier to coordinate resources in times of crises, such as wars.

  The government can compensate for market failure, by reallocating resources. This may ensure everyone can access basic necessities - and thus reduce poverty/absolute poverty.

  Inequality in society could be reduced, and society might maximise welfare rather than profit.

  The abuse of monopoly power could be prevented.
• Disadvantages of a Mixed economy

  Governments fail, as do markets, and they may not be fully informed for what to produce.

  They may not necessarily meet consumer preferences.

  It limits democracy and personal freedom.
• Marginal utility


  The additional utility gained from consuming an extra unit of a good or service.
• Law of diminishing marginal utility

  Is the reason for why the demand curve slopes downwards. It suggests that consumer surplus generally declines with extra units consumed. This is because the extra unit generates less utility than the one already consumed. Therefore, consumers are willing to pay less for extra units.
• Economic agents respond to...

  Incentives.
• Where incentives are not given properly...

  Resources may be misallocated.
• Prices in market economies provide...

  Signals to buyers and sellers, which is an incentive to purchase or sell the good or service.
• Opportunity cost


  The next best alternative foregone when making a choice.
• The scarcity of resource gives rise to...

  Opportunity cost.
• Trade off


  Where one thing is lost to gain something else.