Micro 3

• Benefits of High Market Contestability (Easy to Enter) (2)


  - incumbent firms may lower prices to fend off competitors, benefiting consumers

  - increased R&D to innovate products and create competitive advantage
• Consumer Competition


  when consumers compete with other consumers by offering higher prices for scarce goods and services
• Vertical Integration


  the combination of two or more companies at different stages of the production process
• Limit Pricing


  the strategy of reducing the price to deter entry
• Patents


  exclusive rights to make or sell inventions
• Conditions Needed for Price Discrimination (3)


  - varying PED between groups

  - methods of preventing arbitrage in place

  - price-setting powers
• Arbitrage


  the purchase of securities in one market for immediate resale in another to profit from a price discrepancy
• First Degree Price Discrimination


  charging each individual customer a different price based on their willingness to pay

  
• Second Degree Price Discrimination


  practice of charging different prices per unit for different quantities of the same product

  
• Third Degree Price Discrimination

  occurs when price varies based on a customer's attributes, as different demographics will have varying price elasticities of demand

  
• Advantages of Price Discrimination (3)


  - increased revenue for firms

  - supernormal profits result in dynamic efficiency

  - those with higher incomes often pay more, cross-subsiding the good for poorer people
• Disadvantages of Price Discrimination (2)


  - not allocatively efficient price exceeds marginal cost

  - arguably unethical
• Cross Subsidise


  a situation in which one group of customers is charged a higher price for a product to subsidise a lower price for another group
• Consumer Surplus


  the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

  
• Producer Surplus


  the amount a seller is paid for a good minus the seller's cost of providing it

  
• Total Surplus

  the sum of consumer surplus and producer surplus (total benefit to economic agents from a transaction)

  
• X Inefficiency

  when monopolies do not feel the need to reinvest profits to improve their efficiency

  
• Condition Required for Productive Efficiency

  firms are operating at the MES, so MC = AC
• Condition Required for Dynamic Efficiency

  supernormal profits
• Conditions Required for Allocative Efficiency (2)

  - when MC = Price

  - when an economy is producing at a point on its PPF
• Market Structure with the Weakest Threat of Competition


  Natural Monopoly
• Main Causes of X Inefficiency (2)

  - inefficient use of factors of production

  - overpaying for factors of production
• The demand for labour is derived from...


  the demand for the product it produces
• The supply of labour is derived from...


  the economically active population
• Marginal Productivity of Labour (MRPL)

  the additional revenue gained from hiring one more worker
• Marginal productivity of labour is maximised when...

  it is equal to the marginal cost of hiring a new employee
• Marginal Revenue Product (MRP)


  the change in total revenue associated with one additional unit of input

  
• Marginal Productivity of Labour Formula

  MRPL = marginal physical product of labour (MPP) x marginal revenue (MR)
• Marginal Physical Product of Labour (MPP)


  the additional quantity of output produced by an additional unit of labour input
• Elasticity of Demand for Labour

  measures the responsiveness of quantity demanded of labour to a change in the price of labour

  
• Elasticity of Demand for Labour Formula

  % change in quantity of labour demanded / % change in wage rate
• Marginal Cost of Labour


  the addition to a firm's total cost of production resulting from employing one more worker

  
• Factors which Increase Elasticity of Demand for Labour (3)


  - when workers are easily replaceable with machinery

  - high PED for the product

  - if wages make up a large proportion of total costs
• Increase in Labour Productivity Displayed on the MRPL Curve


  the MRPL curve will shift rightwards

  
• Rising Labour Costs Displayed on the MRPL Curve


  the equilibrium moves along the MRPL curve, resulting in the quantity demanded for labour falling

  
• Individual Labour Supply

  the number of working hours labour are willing to work at a particular wage rate for a job
• Occupational Labour Supply

  the number of employees who will work at their wage rate
• Net Advantage

  the sum of the monetary and non-monetary benefits of working to employee welfare
• Monetary Factors

  the financial rewards for working e.g. wage, commission
• Non Monetary Factors

  the non-financial rewards for working e.g. healthcare, job satisfaction