Micro Upper 6 Flashcards

Question

Calculation for profits

Answer 1

Total Revenue - costs

Answer 2

price per unit x quantity OR average revenue x output (AR x Q)

Answer 3

change in revenue/change in quantity

Answer 4

Profit = Total revenue - costs This is accounting profit - it is total revenue minus the explicit / stated costs e.g raw materials/ labour/ rent etc.

Answer 5

Economises are concerned with the level of profit that means an entrepreneur won’t transfer the resources they use to a different market. Economists therefore consider the opportunity cost of the entrepreneur keeping their resources in the production of goods they’re currently making. Opp cost is measured by looking at profits that could be made in the next best option of the entrepreneur. Therefore this opportunity cost is the minimum rate of return the entrepreneur would need to make to stay in a particular market. Opp cost is included in economists fixed cost calculations Economic profit is what’s left after considering every cost including opportunity cost. It is both explicit and implicit costs

Answer 6

P=AC This is the minimum profit needed to keep factor inputs in their current use in the long run Because we treat normal profits as an opportunity cost of investing financial capital in a business, we include an estimate for normal profit in the average total cost curve Thus if price at least covers AC then a firm is making normal profits in a market.

Answer 7

SNP- profit achieved in excess of normal profits. Also known as abnormal profit. Supernormal profits are made when price is greater than average costs or P/AR>AC When firms are making supernormal profits, there’s incentive for other producers to enter the market to acquire some of this profit. (Depends upon the barriers to entry)

Answer 8

When the firms are selling the product for less than the average total cost then they are making a loss. Loss = P

Answer 9

Profit maximisation occurs where marginal revenue is equal to marginal costs MR=MC To maximise profits the firm will therefore choose the output level where MR=MC Marginal profit is the increase in profit when one more unit is sold. We assume that the main objective of the vast majority of businesses is to maximise profits. Entrepreneurs take the risk of a business venture failing and ultimately losing money if they think that the reward, profits, will outweigh this risk.

Answer 10

1) when a business performs well its share price will rise, causing the shareholder to make a profit if they sell their shares on the stock exchange. 2) a profitable business may also issue shareholders with a dividend (income) which would encourage people to purchase shares.

Answer 11

They appoint managers to run businesses day to day. If a business is performing poorly, for example making inadequate amount of profit or indeed a loss, shareholders may fire the managers. Therefore it is assumed that the objective of larger firms is also to maximise profits to satisfy the shareholders

Answer 12

Apple - aims to maximise profits to fund future investments like research and development

Answer 13

Managers seek to maximise utility by making as much sales revenue as possible as managers are often paid a salary that’s linked to the size of the firm. To maximise sales revenue, a firm would continue to produce more as long as extra output would increase revenue. A revenue maximising firm will produce more output than a profit maximising one and will need to charge a lower price in order to sell their shares extra output. In doing so the firm is reducing profit but increasing its sales revenue.

Answer 14

In some cases managers may focus more on the volume of sales than the revenues. There may wish to operate at a point where they target the highest possible quantity of sales to be the biggest that they can be. They will operate at the point where AC=AR. Here they will be making normal profit. But this means that there’s no dynamic efficiency as there’s no supernormal profit. If output rises then prices tend to fall which makes consumers happy/satisfied But then shareholders are dissatisfied. Managers are satisfied as the bigger the firm the increase in salary.

Answer 15

Firms may wish to increase their market size in order to gain market power within the industry they’re operating. This power may enable them to set prices and control the market to their advantage. Some firms grow simply by being successful and grow organically (increased demand) - using their own resources. Other firms may grow by merging with another firm or takeover. Growth has advantages in that it may result in economies of scale and a reduction in costs due to rationalisation of the workforce. However, some mergers and acquisitions have failed due to a clash in corporate cultures - diseconomies of scale

Answer 16

Oliver Williamson argued that managers would set out to maximise their utility. For example, they may enjoy the status of having a large team of people working for the then or discretion over how profits are used in the firm, such as using it for a large office space and company car. This would take the firm away from its profit maximisation point and may result in x-inefficiency

Answer 17

This is where the management of the firm attempt to achieve a level of profits in order to satisfy the shareholders but also keep other stakeholder groups happy. Satisficing helps resolve the conflict between managers and shareholders objectives. Managers maximise their own regards, subject to the constraint of delivering a satisfactory level of profit for shareholders. This means they’re likely to give an outcome somewhere between profit maximisation and sales maximisation. Satisficing is particularly for monopolies and firms in imperfectly competitive markets protected by barriers to entry. In these circumstances, in seeking an easy life a firms manager may content themselves with satisfactory profit, combined with a degree of x-inefficiency.

Answer 18

Behaviour under which the managers of firms aim to produce satisfactory results for the firm so aim for satisfactory rather than maximum profits.

Answer 19

Customers Managers Community Employees Suppliers Shareholders Ownership - sole trader + partnership Government Competition Regulators; CMA, OFWAT (water) , OFGEM (Gas/electricity) , OFCOM (TV/media)

Answer 20

Not all firms aim to make profit and enterprises such as charities & social enterprises (registered VAT exemptions) are non-profit making bodies that set out to improve social welfare in their economy or elsewhere in the world.

Answer 21

Aravind Indian organisation for eye care where people pay what they can. Aurat collective where Muslim women in Pakistan have a safe space to learn and can leave to get higher education or work. Social supermarket at apostles in miles platting where members pay a £4 weekly fee and can do food and clothes shopping. Anyone can sign up just helps with cost of living crisis.

Answer 22

The aim for CSR isn’t to make a profit. Firms may also have charitable or environmental objectives, which require funding at the cost of profit. Firms may wish to develop a favourable reputation by demonstrating a commitment to acting in ways that benefit society at large or improve the welfare of their employees and the community in which they’re located. Examples today is that firms encourage their employees to engage in volunteering activities - BuPA

Answer 23

Free market view - the job of business is to create wealth + income for shareholders. The efficient use of resources will be reduced if businesses are restricted in how they act. Businesses cannot decide what’s insociety’s interest. Extra costs will be incurred which must be passed on to consumers. CSR stifles innovation. Corporate social responsibility view - business should be concerned with social issues. Businesses don’t have an unquestioned right to operate in society and those managing business should recognise that they depend on society. Business relies on inputs from society and on socially created institutions (police, families, education). There is a social contract between business and society involving mutual obligations that society and business recognise that they have to each other.

Answer 24

An issue for many large firms - especially plc - is that the owners may not be directly involved in running the business. This gives rise to the principal-agent problem. The shareholders are the principals and the managers are the agents who run things for them. Problems arise when there’s conflict between the aims of the owners and those of the managers. The principal-agent problem arises primarily from an information asymmetry. The agents have better information about the effect of their decision than the owners, who are not involved in the day to day running of the business.

Answer 25

X inefficiency occurs when firms produce at higher average costs than necessary due to a lack of competition, weak management or organisational slack this results in wastage

Answer 26

This exists in a market where there is a very high degree of competition and allocative and productive efficiency are achieved inn the long run. This doesn’t exist but it’s aimed for. Expect price to fall and so consumer surplus rises and therefore consumer welfare increases.

Answer 27

Perfect competition - has a large number of suppliers in the market. Therefore the price is determined by the market because the individual firm is too small to influence price and is a price taker. The horizontal demand curve (elastic) is also the firms average and marginal revenue curves. D=AR=MR.

Answer 28

Homogenous products (exactly the same / perfect substitutes) All firms have access to factors of production Large number of buyers and sellers — There are many buyers and sellers, none of whom is large enough to influence prices (small firms and buyers) Free entry and exit to and from the market Perfect elastic demand curve ( so D=MR=AR ) Price taker Perfect knowledge of market conditions Profit maximisation objective

Answer 29

The firm operates in a competitive market The firm’s a price taker as it isn’t large enough to influence market supply so cannot influence market price. The firm can sell all it wants at this price (P1) The firm makes just enough to stay in business in the long run (normal profit/ AC=AR) The D curve facing the firm is its AR curve As the D curve is PED perfectly elastic then the firm sells all units at P1 - it doesn’t have to drop price to sell more, therefore AR=MR

Answer 30

Other firms have the incentive to enter the market and could do so easily and at zero start-up cost owing to no barriers to entry in perfect competition. The entry of new firms stimulate an increase in supply for the industry, which decreased the market price. The firm is a price taker so takes this new price and this decreases profits from SNP to normal profit.

Answer 31

Firms in a perfectly competitive market make neither SNP nor losses. They make normal profit

Answer 32

Agricultural products Foreign exchange market

Answer 33

✅Allocative efficiency achieved as P=MC ✅Productive efficiency achieved as they produce at lowest AC ❌Dynamic efficiency is not achieved ❌No scope for economies of scale

Answer 34

Market with a single seller. (Pure monopoly) In reality we look at firms with monopoly power -this means they have a large enough market share in the market to influence prices IE the monopolist is a price maker. E.g google has monopoly power - 84% share in the search engine market

Answer 35

The monopolist aims to maximise profits so chooses the output level where MC=MR. There is a single seller (pure monopoly). There are high barriers to entry into the market. The monopolist is a price maker. There a no substitutes for the good.

Answer 36

Economies of scale - high fixed costs Other cost advantages Government legislation High switching costs Strategic actions Limit pricing Brand loyalty High sunk costs Network Effects

Answer 37

Refers to money that has already been spent and cannot be recovered if the business is sold such as marketing and advertising costs.

Answer 38

Higher prices and lower output SNP in the short and long run A fall in consumer welfare as consumer surplus is decreased Limited choice for consumers Allocative and Productive efficiency is NOT achieved

Answer 39

X - inefficiency as there is little incentive to control costs Possibility of dynamic efficiency being achieved Possibility of price discrimination

Answer 40

Increased fixed costs = AC curve shifts upwards, so SNP falls Increased demand = AR and MR shifts outwards, creating a new PMO, price and SNP also increases Increased variable costs = MC & AC shifts upwards, price and costs and SNP falls

Answer 41

This means charging diff prices to different customers with the prices based on diff willingness to pay (PED) The motive of price discrimination is to reduce consumer surplus and so increase profits. Price discrimination is part of monopoly theory in that you cannot charge some customers higher prices than others if a competitor is willing to supply the good for less. Price discrimination therefore does NOT occur in perfectly competitive markets

Answer 42

1st degree - this is where the monopolist charges each individual customer the maximum price they are willing to pay. Tech allows you to get closer to 1st degree PD e.g uber, dynamic pricing. 2nd degree - this is when a firm sells off any excess capacity that it has at a price that is lower than the normal published price. Hotel has very high fixed costs. Variable costs such as cleaning/utility . 3rd degree - this is the MOST frequently found form of price discrimination and involves charging diff prices for the SAME product to different groups of consumers who are separated into different parts of the same market known as segments - not for reasons of cost. The market is usually separated in 3 ways; time, geography, demographic factors such as age, income or gender.

Answer 43

Airlines Movie theatres Healthcare Location based pricing Oasis Gender based pricing

Answer 44

Monopoly that arises in an industry in which there are such substantial economies of scale that the more productively efficient market structure is for there to only be one firm.

Answer 45

Encourage competition Encourage investment or expansion into the market Stabilise the market Reduce the exploitation of consumers

Answer 46

Insist the parties attend mediation in disputes around pricing Set maximum prices Find the monopoly Limit mergers or acquisitions that would create a monopoly

Answer 47

*SNP means: finance for investment to maintain competitive edge reserves to overcome short term difficulties and provide R+D *Monopoly power means power to match global companies. *Cross subsidisation may lead to an increased range of goods or services available to the consumer. *Price discrimination may raise total revenue to a point that allows survival of a product or service. it is often said that economy-class flights are funded by those flying business and first class *Monopolists can take advantage of economies of scale, which means that average costs may still be lower than the most efficient average of a small competitive firm *Monopolists avoid undesirable duplication of services and therefore a misallocation of resources.

Answer 48

*SNP means: less incentive to be efficient and to develop new products efforts are directed to protect market dominance. *Monopoly power means higher prices and lower output for domestic consumers. *Monopolies may waste resources by undertaking cross subsidisation, using profits from 1 sector to finance losses in another sector. *Monopolists may undertake price discrimination to raise producer surplus and reduce consumer surplus. *Monopolists don't produce at the most efficient point of output (i.e at the lowest point of the average cost curve) *There are few permanent monopolies. SNP act as an incentive to break down the monopoly through a process of creative destruction i.e undermining the monopoly through product development and innovation monopolists can be complacent and develop inefficiencies.

Answer 49

Downward sloping demand (AR) curve - a firm in monopolistic competition has some control over price - it doesn't have to accept the market price . A fall in price would increase demand and an increase in price would increase demand. Differentiated (but similar) products Freedom of entry - no or low barriers to entry means firms can join the market if they see existing firms making SNP. New firms will try and differentiate their product from that of existing firms Many (small) firms - there are many small firms operating in the market and so a price change by one firm will have little effect on the demand for its rivals products. This is different from an oligopoly where if a firm changes its price this will affect demand for its rivals products. No dominant firm - no individual firm has significantly more power than other firms in the market.

Answer 50

In the long run super normal profits will be eroded because new firms will enter the market owing to lack of barriers to entry. New entrants see the super normal profit made by existing firms and can enter the market. These firms produce differentiated products and so the existing firms lose some of its customers this shifts the demand curve for the existing firm to the left. It may also become more shallow as there are now more substitute and so the AR curve becomes more PED. The entry of new phones will therefore shift the average revenue curve of the existing firm left to the point where AR = AC, where normal profit is made as in the diagram. When this point is reached then there is no longer an incentive for new firm to enter the market. This is then the long run position and the equilibrium price is P1 and the output for this is Q1.

Answer 51

🔹 1. Price-making power • Firms have some price-making power (products are differentiated) • Face a downward-sloping demand curve • BUT demand is elastic (close substitutes available) • ⇒ Small price rise → large fall in demand • Market power is limited/weak 🔹 2. Profits (Short run vs Long run) Short run: • Firms can earn supernormal (abnormal) profit Long run: • New firms enter (low barriers) • Demand for existing firms shifts left • Price falls until: • Normal profit only (AR = AC) 🔹 3. Inefficiency ❌ Productive inefficiency • Firms do NOT produce at minimum LRAC • Output restricted → unused economies of scale ❌ Allocative inefficiency • Price > Marginal Cost (P > MC) ➡ Overall: Not fully efficient ✔ BUT: • More efficient than a monopoly • Lower prices • Less misallocation of resources 🔹 4. Dynamic efficiency (Innovation) • Likely weak incentives to innovate: • Low entry barriers reduce long-term profits • Firms may lack investment funds Advertising issues: • Used to differentiate products • Can be: • Wasteful • Increase average costs ✔ Counterpoint: • Competition may → less X-inefficiency (firms forced to stay efficient) 🔹 5. Consumer effects ✔ Advantages: • Increased choice • Greater consumer sovereignty • Consumers value brand differences ❌ Disadvantages: • Higher prices than perfect competition • ⇒ Lower consumer surplus 🧠 One-line summary: Monopolistic competition = some market power + high competition → normal profit long run, inefficiency, but more choice

Answer 52

There are no significant barriers to entry so markets are relatively contestable. —A contestable markets behaves competitively regardless of the number of firms, benefiting consumers and promoting efficiency. Differentiation creates diversity, choice and utility. — the uniqueness and variety improves welfare,encourages innovation and enables consumer sovereignty. The market is more efficient than monopoly but less efficient than perfect competition — because firms face competition from close substitutes which keeps prices lower and reduces abnormal profits in the long run. — however it’s less efficient than perfect competition as firm still have some prices in power meaning allocative & productive inefficiency remains

Answer 53

Allocative efficiency is not achieved in the short run or the long run — if monopolistic competition firms have price setting power due to product differentiation so they set P>MC. This means allocative efficiency isn’t achieved in either the long or short run creating a dead weight loss. Product differentiation may lead to wastage —product differentiation can cause wastage as firm spend heavily on advertising (USP) and branding rather than improving production increasing costs and leading to productive inefficiency Put a differentiation leads to higher prices — product differentiation gives firms some price setting power allowing them to charge prices above marginal cost. As a result, consumers pay higher prices compared to more competitive markets.

Answer 54

Unique Selling point

Answer 55

A market dominated by a few sellers each of whom has some control over the market and in which each firm must take account of the current behaviour and likely behaviour of rival firms in the market. Most industries are said to be imperfectly competitive A few are monopolistically competitive, some monopolies, but the majority are oligopolistic, where the industry is dominated by a few large suppliers Because firms have to consider decision-making of competitors we say that firms in an oligopoly interdependent. Each firm has to act strategically and that they need to take into account the actions of rival firms. The most common source of growth for oligopolies are economics of scales Firms in an oligopoly market may choose to behave competitively (price war) with each other or choose to cooperate (collusion)with each other

Answer 56

Perfect competition has no economies of scale Oligopoly have modest economies of scales Monopoly have significant economies of scales Natural monopoly have many economies of scales

Answer 57

A few large firms dominate the market Firms are Interdependence Super normal profit Economies of scale Collusion High market concentration ratio Each firm has Branding and differentiated products There are significant Barriers to entry and exit into the market Non-price competition We assume their profit maxers (MC=MR) Examples : Supermarkets Broadcasting e.g. Netflix Apple Disney Soft drinks Banking Petrol retail Cinemas

Answer 58

Predatory pricing = the firm sets a price below the average variable cost to try and force a rival out of the market. —In the short run the consumer faces lower prices but in the long run , if successful, the market becomes less competitive and prices may rise and choices fall. —This is illegal in the UK but can be hard to prove. Case study- In 1990s British airline tried to predator price against virgin. Virgin took them to court but settled it out of court. In the 1970s Lakers airlines market leader and British airlines used price predatory and drove Lakers airlines out of business Limit pricing = this is pricing by the incumbent (exciting) firms to deter the entry of new firms or the expansion of fringe (niche) firms. —This is legal. — Limit pricing is a pricing strategy designed as a barrier to entry in order to protect a firms monopoly power and supernormal profit. The limit price is below the normal profit maximising price but above the competitive level so below MC = MR but the incumbent firm does not price below its own average variable cost curve, so MC = MR leads to AC = AR

Answer 59

Innovation Branding Sales promotion Free upgrades to products Quality of service, including after sales Exclusivity/loyalty schemes Firms in an oligopolistic market have to consider how competitors will react to changes such as price changes. Reducing price can be risky as in the short term it can increase demand for the firms products but if the competitor then follows suit and lowers their price then both firms may sell the same amount just at lower prices, reducing sales revenue. Firms will want to avoid this price war. They do this by concentrating on non-right price competition to increase sales revenue. For example a firm could spend money on advertising to raise the profile of their products and try to increase brand loyalty. If they are able to differentiate their products from those of competitors they increase customer loyalty and repeat sales, this enables the firm to change prices as they’re producing better quality in the eyes of customers.

Answer 60

…the market share of the largest firms in an industry and is used to detect an oligopoly. There is no precise upper limit to the number of firms in oligopoly but the number it must be low enough that the actions of one significantly influence the others.

Answer 61

Interdependence means that firms must consider the likely reaction of their arrivals to their own strategies and that the best strategy for anyone for them to follow all depend on the actions of its rivals Interdependence leads to much uncertainty within the market.

Answer 62

This model suggests there is no incentive to raise or lower price because (PED and MC explanation )

Answer 63

1. Often the objectives of firms are not to maximise profits for example they may want to increase the size of the their firm and maximise sales so willing to take part in a price war even if it leads to lower profits. — for example Aldi when it entered the UK market didn’t care about competitors and focused solely on sales volume to build loyalty 2. The model does not explain how P1 is reached in the first place 3. The model ignores possible collusion —With collusion all firms may agree on lowering output to increase prices if good is PED inelastic (such as oil) it will equal to increase in total revenue which implies increase in profits

Answer 64

This is a non-competitive and sometimes illegal agreement between rivals which attempts to disrupt the markets equilibrium. The act of collusion involves people or companies which would typically compete against one another, but who conspire to work together to gain and unfair market advantage This could be through increasing prices, producer surplus, total revenue, profits. It’s all about exploiting consumers

Answer 65

Cartel : overt collusion: Cartel = an agreement between firms on price/and or output with the intention of maximising their joint profits firms agreed to restrict supply and this increases the price of the product. The collusion is overt this means there is an open agreement. However there is always a temptation for other firms to cheat on the agreement by lowering price to try to sneak some additional market share at the expense of other firms in the cartel. Thus, there is a strong chance at the agreement will collapse and the more firms in the cartel the more likely the agreement will collapse. It is illegal in most countries but many firms realise that it’s hard to prove that a group of firms have deliberately joined together to raise prices and so I willing to take the risk of engaging in collusion. Over collusion - a situation in which firms openly works together to agree on prices or market shares Tacit collusion - situation occur when firms refrain from competing on price but without communication or formal agreement between them come to charge higher prices Tacit collusion usually takes a form of price leadership. This involves firms following the price strategy of one firm normally the one with the majority market share. Price leadership occurs when firms with lower market shares follow the pricing changes prompted by the firm with the dominant position in the market. Tacit collusion is more common than overt collusion. Examples of tacit collusion are building societies and petrol retailers where most suppliers simply follow the pricing strategies of leading firms. An alternative is barometric price leadership in which one firm tries out a price increase and then waits to see whether the others follow if they do a new higher price has been reached without the need for overt discussions between the firms. On the other hand if the other firms do not feel that the time is right for the change, they will keep their prices steady and the first firm will drop back into line or else lose market share

Answer 66

The most famous example of overt collusion is not between firms but between nations in the form of the Organisation of the Petroleum Exporting Countries ,OPEC , which over a long period of time has operated a cartel to control the price of oil. However OPEC members have a long history of cheating on agreements

Answer 67

Cheating can be easily detected Cheating can be punished by other firms Entry bars are high so that the raised prices do not spark new entry The cartel includes all the major firms in the industry Firms have similar cost, so there is no incentive to spark a price war Firms produce similar or goods and firms do not have excess capacity

Answer 68

If firms are colluding : Firms make SNP which can be used to innovate and so increase dynamic efficiency & quality which may increase consumer satisfaction. If firms use non price competition such as product differentiation the consumer may perceive differences in quality and wider choice which increases consumer satisfaction. Collusion may mean firms face greater price stability which helps firms plan and reduce the risk of failure — Employees in firms could get an increase in wage due to SNP — There’s an increase in job security If firms are behaving competitively: Lower prices, perhaps due to a price war, increase consumer surplus and so consumer welfare. Inefficient firms will fail, releasing scarce resources for more efficient firms. (This is market efficiency)

Answer 69

If firms are colluding : Firms will have little incentive to use SNP to innovate and improve quality and may just take the profits and distribute shareholders. Collusion creates barriers to entry which prevents new firms from entering the market and so increases concentration in the market and thus reduces choice so reduces consumer welfare. Oligopolistic are not productively or allocatively efficient

Answer 70

A market in which the existing firm makes only normal profit in the long run as there are no barriers to entry. The incumbent (existing) firm therefore has to charge a low price ( cannot be higher than average cost without attracting new entrants) to deter entrants into the market - so the firm cannot make SNP. The firm cannot make SNP as this will attract new entrants into the market and increase competition. Due to the absence of barriers to entry and absence of sunk costs Example : if firms lower barriers to entry monopolies may lower prices and increase output to lower SNP to deter potential new entrants.

Answer 71

Face no barriers to entry or exit Insure no sunk costs in entering a market Have no competitive disadvantage compared with incumbent firms Have access to the same technology as the incumbent firms Are able to enter and exit rapidly

Answer 72

Prices should be lower due to actual or perceived competition so increase consumer surplus so increased consumer welfare Allocatively efficiency achieved in the long run as scarce resources are being used to make the products consumers want - market forces are coming into play. — AR=MC, D=S, P=MC (Pareto efficiency) Productive efficiency should be achieved in the long run so the firm operates at the bottom of the AC curve —incentivised to get closer to the bottom of AC. So will try and lower costs to still make a profit. No X-inefficiency so there is no wastage — this lowers AC, creates a barrier to enter, new firms cost rise as they have no economise of scale

Answer 73

Perfectly contestable markets are rare in the real world — there’s always barriers to enter It’s is unlikely that there can be no sunk costs e.g firms may use advertising to attract customers —barrier to exit, non recoverable cost How long is the long run? Do firms set price above AC in short run then cut prices when new entrants come into the market

Answer 74

As with the demand for all the factors of production, demand for labour is a derived demand. Factors of production are not wanted for their own sake but for what they can produce and what the output can be sold for. So the number of workers a firm wishes to employ depends principally on the revenue that can be earned from what is produced. If demand rises or the prices of the products made increases, a firm will usually seek to employ more workers.

Answer 75

Marginal revenue product (MRP) = the change in a firms revenue resulting from employing one more worker Marginal product of labour (MPL) = the change in output that results from employing one more worker. Once a certain level of employment is reached, however, MPL may fall as diminishing returns set in. MRP of labour is the change in a firms revenue resulting from employing 1 more worker. MRPL = MPL x MR Marginal productivity theory suggest that the demand for any factor of production depends on its marginal revenue productivity. According to this theory, the quantity of any factor of production employed will be determined where the marginal cost of employing one more unit equals the MRP of that factor

Answer 76

watch econ plus dal

Answer 77

The demand curve will shift whenever there are changes in the MRP. For this to happen there could be changes in either the MR or MP or both. Changes in the marginal revenue - for example if there was an increase in demand for the product that the labour was making then the price it sells would rise. This would mean that the MR for each product made received more money for the firm and marginal revenue product of labour rises and the demand curve for labour would shift to the right. Changes in the marginal product of labour - for example, the marginal product per labourer could rise due to better capital equipment and technology used in the production process, better skills of the workers and more efficient division of labour. All of these would mean that the marginal product would rise and therefore the demand for labour would shift to the right

Answer 78

Elasticity of labour demand measures the responsiveness of demand for labour following a change in the wage rate. It depends on : Labour costs as a % of total costs Ease and cost of factor substitution Price elasticity of demand for the final product Time period

Answer 79

This is a measure of output per hour worked. The main influences in labour productivity are: *The skills and training of the workforce *The availability of complementary factor in outs such as capital and technology *The organisation of the production process Labour productivity is important for a firm as it affects the ability of the firm to compete with rival firms. For a country as a whole, it also affects international competitiveness.

Answer 80

ULC = cost of labour / total output If output rises then the ULC falls and if output falls ULC rises. If cost of labour falls the ULC falls and if cost of labour rises so does ULC

Answer 81

The labour of supply is the number of hours that people are willing and able to supply at a given wage rate. The labour supply curve for any industry or occupation will be upward sloping. This is because we assume that the wage rate the more people for themselves for work as the reward for work is greater. Income effect = as wages rise, income rise and people can afford to work less and consume more leisure. Substitution effect = as wages rise - the opportunity cost of leisure time is higher (more wages are sacrificed for leisure time).

Answer 82

There are various factors that will cause a shift in the supply of labour: The wage in other industries or occupation The skills needed for the job and the cost of acquiring them The number of people with the appropriate qualifications The non-pecuniary (non-financial) benefits offered by firms in the industry The demographic structure (age, gender, ethnicity) of the population and the availability of immigrant workers

Answer 83

Job risk Career opportunities Antisocial hours Occupational pensions Strength of vocation Working conditions - terms of contract Quality of in work training Living and working overseas

Answer 84

Elasticity of labour supply measures the extent to which labour supply responds to change in the wage rate in a given time period. Nature of skills and qualifications Vocational nature of work Time period

Answer 85

Transfer earnings = the minimum payment required to keep a factor of reduction in its present use. In a labour market, the transfer earnings can be thought of as the minimum payment that will keep the marginal worker in the prison employment. — this payment will vary from workers to worker. In a market whether the workers receive the same pay for the same job, they’ll be some workers who receive a weed in excess of their transfer earnings. This excess payment to a factor over and above what is required to keep it in its presence uses known as economic rent. Economic rent a payment received by a factor of production over and above that which would be needed to keep it in its present use. In a labour market economic rent is the wage of work receipts over and above that which is needed to keep them in there.

Answer 86

In a highly competitive market wages determined by the demand and supply for labour Some occupations will be paid more than others due to differences in the MRP of labour (demand for labour)and the difference is in the supply of labour. Factors will alter the demanded supply labour and cause changes in the wage rate

Answer 87

Wage elasticity supply labour & WEDL Decrease in labour and mobility — occupational and geographical Discrimination Monopsony Supply and demand Trade union power Barriers to entry — license, doctors need to be part of GMC, teachers need DMS Risk of the job and unsociable hours Qualification and skills — cost, time, level Labour market structure (e.g. competitiveness) Marginal revenue, marginal product, marginal revenue products of labour

Answer 88

The market may be able to bring about the most desirable results for society. There is not an efficient allocation of resources. This could be because of demand or supply side issues

Answer 89

A monopsony is a market in which there is a single buyer of a good service or factors of production. Pure monopsony is where one firm is a sole user/buyer of a particular type of labour. In the UK the state is close to being a monopsonist employer of teachers and nurses. The state would have the power in the market and could set wages below where S=D. — MC=MRP of labour and exploit workers. Monopsony power is likely to come in degrees of power. The greater the proportion of the employees in a market employed by a particular firm the greater the power that firm will have. A monopsony producer has buying power in the labour market when seeking to employ extra workers and may use that buying power to drive down wage rates.

Answer 90

1) workers will receiver lower wages that they would in perfect competition (exploited) 2) fewer workers will be employed There relative size of these impacts will depend on the wage elasticity if demand for and supply of labour. When demand for labour is wage inelastic the extent to which employment can be forced down will be less than where demand is wage elastic. The elasticity of labour supply is also important. If workers can find employment elsewhere, then the supply of labour will be relatively wage elastic and the monopsony employer will have less power to pay lower wages. However, trade unions may seek to counter balance the monopsony power of an employer by controlling aspects of the labour supply and by using whatever collective bargaining power they possess to negotiate wages higher without being at the expense of employment levels.

Answer 91

A trade union is an organisation of workers that negotiate with employers on behalf of its members 1) wage bargaining 2) the improvement of working conditions 3) security of employment for their members

Answer 92

Unions might seek to excercise their collective bargaining power with employers to achieve a mark up on wages compared to those on offer to non union members. For this to happen, a union must have some control over the labour supply available to an industry. A union may bid for better pay through bilateral negotiations with employers to wvhieve an increase in wages ahead of the rate of inflation so that real wages rise and other improvements to working hours and conditions.

Answer 93

This means employees are involved in the drawing up of company policies but not in the management of the business. This avoids conflict and may increase morale and motivation therefore increasing productivity.

Answer 94

Workers become less likely to lose their jobs with the union there to protect their interests. There’s also positive aspects for the firm too. As if workers feel secure in their jobs, they may be more productive, or more prepared to accept changes in working practices that enable an improvement in productivity. Therefore the existence of trade unions can be argued to be bemeficisl for a firms efficiency

Answer 95

This is a situation in which a monopoly seller of labour (trade union) faces a monopsony buyer of labour

Answer 96

Labour mobility (geographical and occupational mobility) Wage mobility Flexible working patterns (e.g part time, variable hour contracts, shift work and temporary contracts) A flexible labour market is one in which the supply of labour is responsive to changes in the demand for labour.

Micro Upper 6 Flashcards

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