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Microeconomics - Coggle Diagram
Microeconomics
Perfect Competiton, imperfectly competitive markets and monopoly
Monoploy and monpoly power
Monopoly power is influenced by factors including barriers to entry, economies of scale, limit pricing, owning a resource, sunk costs,brand loyalty, set up costs, advertising, the degree of product differintiation.
AR>AC, so there are supernormal profits
P>MC in diagram, as a result of profit maximisation in a monopoly (MC=MR), so there is allocative inefficiency. AR>AC shows there are supernormal profits
Advantages of a monopoly:
Monopolies earn supernormal profit, so they can invest this in R&D, showing how monopolies can be dynamically efficient.
Moreover, firms are more likely to innovate to protect their ideas. This is more likely to happen in a market where there are high barriers to entry, such as in a monopoly.
Monopolies can exploit economies of scale (use MES curve to demonstrate)
Generate export revenue (for example microsoft generates a lot of export revenue for America), helps improve balance of payments
High profits could be source of government revenue through taxation
In a natural monopoly, it would be more efficient for only one firm to provide the good or service, since having duplicates of the same infrastructure would be wasteful, e.g having two lots of water suppliers.
Disadvantages of a monopoly
Missalocation of resource compared to the outcome in a competitive market
Allocative ineffiency - means the good is under-consumed, so the consumer needs and wants are not fully met, a form of market failure
Monopolies have no incentive to become more efficient, because they have no competitors, so production costs are high
Consumers have less choice in a monopoly when compared to in a competitive market.
In a monopoly, firm is a price maker
The firm is a profit maximiser
Objectives of firms
Profit
Profit is the difference between total revenue and total cost. It is the reward that entrepeneurs yield when they take risks. Firms break even when TR=TC.
Profits increase when MR>MC.
Some firms choose to profit maximise because it provides greater wages and dividens for entreperuners, retained profits are a cheap source of finance,
Why do firms want profit?
Re-investment
Dividends for shareholders
Lower costs and lower prices for consumers
Reward for entrepurrnership
Other objectives of a firm which aren't linked to profit
Surival
Some firms, particularly new firms entering competitive markets might aim to simply surive in the market. During period of economic decline such as the 2008 financial crisis, when consumer spending plumments, firms might have surival as their objective, until there is economic growth again
Growth
Some firms might aim to icnrease the size of their firm, this could be to take advantage of economies of scale, such as risk bearing or technological, which will lower their average costs in the long run
Sale maximisation
When a firm aims to sell as much of their goods and services as much as possible. This is where AC=AR. An example of sales maximising is amazon's kindle launch. They sold as many kindles as possible to gain market share, so they could earn profits in the long run.
Satisficing principle
A firm is profit satisficing when it is earning just enough profits to keep its shareholders happy. Shareholders want profits because they earn dividends from them. Managers might not aim for high profits, because their personal reward from them is small compared to shareholders. Therefore, managers might choose to earn enough profits to keep shareholders happy, whilst still meeting their other objectives
Williamson - Mangerial Utility Function - subject to a minimum profit constraint. The idea that managers want to maximise their own utility. This is shown in the utility function - U=U(S,M,Id)
"monetary expenditure on staff" - this includes the salary of the manager, and how many staff the employer has, as there is a close positive relationship between the number of staff and the manager's salary
"management slack" - this refers to non-essential management prequistites, such as entaritainment expenses, lavishly furnished offices, luxourous cars, which can retain the managers in the firm
"discrentionary investment" refers to the amount of resources left at a managers disposal, that they are able to spend at their own discretion
Occurs where there is a divorce of ownership and control between managers and owners/shareholders.
Corporate social responsibility
Caring for other stakeholders e.g enviornment
This can have positive effect during marketing. E.g John Lewis wants to be carbon neutral by 2050
Oligopoly
High barriers to entry and exit
Interdepdence of firms
Product differentation
Advantages and disadvantages
If firms collude, loss of consumer welfare as prices are raised and output reduced.
Collusion could reinforce monopoly power of existing firms, making it harder for new firms to enter. Absence of competition means efficiency falls.
Higher profits could be a source of added government revenue
Dyanmically efficient
Because oligpolies are large, they exploit economies of scale.
Prisoners dilemma
Two prisoners - the dominant strategy (best option) is for both prisoners to deny crime. However, they both may work against each other - for what is best for them. This is prisoners dilemma.
Cartel - group of 2 or more firms which have agreed to control prces, limit output or prevent entrance of new firms into the market. Example of a cartel is OPEC
Price war - price competition, where firms constantly cut prices below that of its competitiors. E.g UK supermarket industry
Price leadership - when the dominant firm in the market change price, other firms are forced to do so or they risk losing their market share, explaining why there is price stabiity in a oligpoly
Non price competition - aims to increase loyalty to a brand. E.g customer service, advertisements, making demand more inelastic, which can attract customers and increase market share
Price Discrimination
First Degree PD - different prices charged for different consumers e.g Lawyer charges high income family a higher price
Second Degree PD - When prices are different according to volume ordered. E.g bulk buying
Third Degree PD - Different groups of consumers charged different prices e.g Peak vs Non-Peak travel. Peak travel mainly used by businessmen, adults.
Consumers
Positives
Net welfare gain as a result of cross subsidsation if they recieve a lower price
Some consumers who were previously excluded by high prices can be able to benefit from good/service. Can yield positive externalitiy e.g more consumers being able to afford public transport due to off-peak travel prices
Negatives
Strengthens monopoly power of firms, resulting in higher prices in long run for consumers
Loss in consumer surples. P>MC, so loss of allocative efficiency.
Businesses
Positives
Make better use of spare capacity
Higher supernormal profits can help stimulate investment
Negatives
If predatory pricing used, firm could face investigation by Competition and Markets Authority
Labour Marlets
Labour is a derived demand- this means that demand for labour comes from demand for what it produces. E.g - no demand for cars, no demand for car manufactuers.
If labour can be replaced for cheaper capital, then demand for labour will fall, shifting demand curve to the left
Firms will only hire workers if they are making profit for the company.
When MRP is equal to the market equilbirum wage - the firm has the optimum amount of workers
If iMRP is below market equbilrium, the firm has too few workers, if it is above it has too much workers, which may reduce profits
Supply of labour is determined by
Training
taxes and benefits
trade unions
leisure time
migration
The main determinent of the elasticity of supply of workers is the skills and qualifications needed for the job
Trade Unions
Increase barganing power of workers
Represents the interests of a group fo workers
Aim for better pay, better working conditions, job security. Members of trade unions have increased barganing power compared to individual workers.
Collective barganining - when trade union negotiates with employers. Can be done on a national level, and a plant level
Help prevent workers from recieiving discrimination
Trade union wage negotiation may result in unemployment.
Trade unions cause labour market failure by forcing wages up higher than market equilbirium wage, causing surplus of labour (unemployment). Costs of production increase
However, trade unions in a monopnostic employer may lead to workers getting a higher wage, whilst not reducing employment, becuase employers in a monopostic employer already get paid lower than their MRP
Monopsony
Sole buyer of labour in a market. The firm has the ability to set wages
Trade union power - they can increase job security, they can push for higher wages. Higher wages can be demanded by limiting the supply of labour, by closing firms or threatening strike action. Higher wages could cause unemploment. Trade unions counter-balance explotative monopsony power.
Imperfect information - some qualified workers may not be aware of higher paying jobs in other industries or with other firms. Some workers might not understand the long term benefits of investing in improving their skills and education. This can limit the productivity and potential progression of workers, making the market inefficient.
Beavioural Econonoics
nudges - system of guiding people into making more rational decisions. The use of nudges implies that people and agents do not act rationally all the time.
