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Microeconomics (Market Failure (Government Intervention (Tax (Direct,…
Microeconomics
Market Failure
Production Externalities
Negative
Positive
Consumption Externalities
Public Goods
Non-excludable
Non-rival
Non-depletable
Free-rider problem
MC=0
Equity and Effiiency
MSB doesn't equal MSC
Government Intervention
Tax
Direct
Indirect
Subsidy
Income support
Regulations
Direct provision
Kiwisaver
Coase Theorem
Allocative Efficiency
Government Intervention
Tax
Subsidy
Price controls
Maximum Price
Minimum Price
International Trade
Tariff
Quota
One country (price taker) trade model
Two country trade model
Labour Market
Supply by consumers
Demand by firms
Allocative Efficient
Producer surplus
Consumer surplus
Deadweight loss
Before Intervention
Impacts of Intervention
Positive
Business confidence so investment
Provides necessities
Increase in employment
Negative
Deadweight loss
Shortage of necessities
Less investment by firms unable to profit
Market Structures
Costs for firm
MC (Marginal cost)
MR (Marginal revenue)
AR (Average revenue)
AC (Average revenue)
AVC (Average variable cost)
Structures
Perfect Competition
Large number of small firms
Price taker
Homogeneous product
No barriers to entry or exit
Perfect knowledge
Normal profits in long run
Monopoly
Natural monopoly
Can supply good or service at lower price than if there were more firms
Economies of scale
Downwards sloping AC curve
1 firm dominating market
Dictate price or quantity
No advertising
Strong barriers to entry or exit
No close substitues
Oligopoly
Few large firms
Potential for price war
Kinked demand curve
Product differentiation
Strong barriers to entry or exit
Duopoly
Two firms
Same characteristics as oligopoly
Monopolistic competition
Many small firms
Each firm has weak control over price
Differentiated product
Similar characteristics to perfect competition
Competition
Price competition
Promoting price reduction
Hard in oligopoly or duopoly
Risk of price war in oligopoly or duopoly
Non-Price competition
Product differentiation
Product variation
Product modification
Vertical product variation
Ancillary services
Creation of goodwill
Profit maximising rule: MC=MR
Break-even and shut down
Breakeven: MC = AC
Shutdown: MC=AVC
Elasticity
Price Elasticity of Demand
Substitutes
Time frame
Durability
Necessity or luxury
PED>1 = Elastic
PED<1 Inelastic
Price elasticity of Supply
Stocks of finished products and components
Mobility of resources
Spare production capacity
Time period
Momentary
Short term
Long term
PES>1 = Elastic
PES<1 = Inelastic
Income elasticity of demand
Normal good
Income increase leads to Qd increase
YED>0
YED>1 = Necessity good
0<YED<1 = Luxury good
Inferior goods
YED<0
Income increase leads to Qd decrease
Cross price elasticity of demand
P change of one good to Qd change of another
CED>0 = Substitutes
CED<0 = Compliments