Aqa Economics - Unit 3 - Business Economics

Front 1

Define profit.

Back 1

Where total revenue exceeds total cost.

Front 2

Define dividends.

Back 2

Financial returns from the ownership of shares.

Front 3

What is the point of profit maximisation?

Back 3

Marginal Costs = Marginal Revenue: MC = MR.

Front 4

What 3 things does higher profit for a firm mean?

Back 4

Higher dividends, higher wages and more research and development.

Front 5

Describe profit satisficing.

Back 5

In firms, there is a divorce of ownership and control, owners want to maximise profit whilst managers have less incentive to and look to maximise bonuses whilst satisfying the owners in terms of profit.

Front 6

Define diminishing returns.

Back 6

Short-run concept whereby the level of benefits or profits gained is the less than the money or energy invested. Either MP falls or MC rises.

Front 7

Define short-run.

Back 7

The time in which at least 1 of the factors of production is fixed.

Front 8

What are 4 things that profit is used for?

Back 8

Allocate resources, reward entreprenuers, source of finance for firms and an incentive to reduce inefficiency.

Front 9

Define returns to scale.

Back 9

A long-run concept that details how the output of a business responds to a change in factor inputs.

Front 10

Define long-run.

Back 10

When none of the factors of production are fixed.

Front 11

Define perfect competition.

Back 11

A market structure in which there are a large number of buyers and sellers selling a homogeneous product, in a market with no barriers to entry or exit.

Front 12

What are the 6 conditions of perfect competition?

Back 12

Perfect knowledge of prices, no barriers to entry or exit, homogenous product, independent action by firms doesn't affect market ruling price, firms are price takers, large number of buyers & sellers.

Front 13

What are 4 advantages of perfect competition?

Back 13

Allocative and productive efficiency, good consumer welfare, consumer sovereignty, equitable that consumers pay fair price.

Front 14

What are 3 disadvantages of perfect competition?

Back 14

Firms won't finance R&D due to perfect knowledge (other firms can free-ride), limited / no choice, no economies of scale to exploit.

Front 15

How do you evaluate perfect competition?

Back 15

Apply efficiency concepts (allocative and productive efficiency), and then apply effect on economic welfare (equal consumer and producer surplus so good economic welfare).

Front 16

Are there any forms of competition existing in perfect competition?

Back 16

Yes, cost-cutting competition. Firms have an incentive to reduce costs to make abnormal profits.

Front 17

Define imperfect competition.

Back 17

A common market structure in which firms have many competitors, but each one sells a slightly different product. Each firm possess an element of uniqueness, competing for the same customers.

Front 18

Define oligopoly.

Back 18

Where a few large firms have the majority of the market share.

Front 19

Define interdependence.

Back 19

Where actions by one firm will have an effect on the sales and revenue of other large firms in the market.

Front 20

What are 5 key features of an oligopoly?

Back 20

Few firms selling similar products, branded products, high entry and exit barriers, interdependence, non-price competition.

Front 21

What are the 3 pricing strategies that oligopolies utilise?

Back 21

Predatory Pricing, Cost-Plus Pricing, Price Leadership.

Front 22

Define collusion.

Back 22

Where oligopolistic firms formally or informally agree to match price (and sometimes output) to limit competition between themselves and make more abnormal profits in the long-run.

Front 23

What are 2 advantages of collusion?

Back 23

Joint product development & reduced market uncertainty meaning raised consumer welfare.

Front 24

What are 2 disadvantages of collusion?

Back 24

Reduced consumer choice and higher prices meaning loss of economic welfare.

Front 25

Describe the 3 types of collusion.

Back 25

Overt: Open & public, Covert: Try to hide agreement, Tacit: Firms act together, but no formal / informal agreement.

Front 26

What are 3 forms of non-price competition in an oligopoly?

Back 26

Marketing, Product differentiation and design, competing on quality.

Front 27

Define a monopoly.

Back 27

A single firm produces the whole of the output for a market. The monopoly restricts output and raises prices, generating abnormal profits.

Front 28

What are the 4 sources of monopoly power?

Back 28

Natural Monopoly, Geographical Causes, Government-created Monopoly, Advertising.

Front 29

How do you evaluate a monopoly?

Back 29

Apply efficiency concepts (no allocative & productive efficiency if no EoS), then effect on economic welfare (loss of economic welfare due to producer sovereignty).

Front 30

What are 3 advantages of a monopoly?

Back 30

If EoS exists Monopoly is more productively efficient, dynamically efficient (profits protect barriers to entry), simplified choice.

Front 31

What are 4 disadvantages of a monopoly?

Back 31

Productively and allocatively inefficient, barriers to entry protect monopoly 'easy' life (meaning abnormal profits), restricted output and higher prices, little / no consumer choice.

Front 32

What government intervention could be used to correct the market failure of monopolies?

Back 32

Nationalisation, Regulation and Competition Policy.

Front 33

Define nationalisation.

Back 33

The transferring of assets from the private sector to the public sector. Industry owned and run by the state.

Front 34

What are 2 advantages of nationalisation?

Back 34

Government can make sure the market is efficient, consumers are prevented from exploitation.

Front 35

What is a major disadvantage of nationalisation?

Back 35

Nationalised companies usually make a loss and these losses are paid for by the taxpayer.

Front 36

What are 2 advantages of rate of return regulation?

Back 36

Regulated prices for consumers, incentives for monopolies to cut costs to widen profits.

Front 37

What are 2 disadvantages of rate of return regulation?

Back 37

Regulatory capture, firms may not make enough profit for investment.

Front 38

Define price discrimination.

Back 38

Charging different prices to different consumers based on differences in the customers ability and willingness to pay.

Front 39

Define first degree price discrimination.

Back 39

'Perfect' price discrimination whereby the firm charges a different price for every unit consumed - firm captures all consumer surplus.

Front 40

Define third degree price discrimination.

Back 40

Charging a different price to different consumer groups, e.g. cinema goers.

Front 41

What are the 3 conditions that must be satisfied for a firm to price discriminate?

Back 41

Firm must be a price maker with downward sloping demand, firm must be able to separate markets, and markets must have different elasticies of demand.

Front 42

What are 2 advantages of price discrimination?

Back 42

Some consumers who can only afford the lower price are priced into the market. Positive externalities arise (improved social welfare to those charged lower prices).

Front 43

What are 2 disadvantages of price discrimination?

Back 43

Consumer surplus is mostly reduced, inequitable (those who pay higher prices may not be the poorest in society, e.g. OAPs).

Front 44

Define consumer surplus.

Back 44

Derived whenever the price a consumer actually pays is less than the price they are prepared to pay.

Front 45

Define producer surplus.

Back 45

The additional private benefit to producers, in terms of profit.

Front 46

Define contestable markets.

Back 46

Competitive markets in which firms face real and potential competition.

Front 47

What are 2 important factors for contestable markets?

Back 47

The absence of barriers to entry and exit, and the relative absence of sunk costs.

Front 48

Define sunk costs.

Back 48

Costs incurred when entering a market that are not recoverable should the firm decide to leave the market. They are a barrier to entry.

Front 49

What are the 3 conditions that must be met for market contestability?

Back 49

Ability / legal right to use best available technology, legal freedom to enter a market, relative absence of sunk costs.

Front 50

Define hit and run entry.

Back 50

Short-run entry into a contestable market seeking to take some of the monopoly profits available and then get out quickly.

Front 51

Define efficiency.

Back 51

Concerns the relationship between the inputs of the production process and the output they produce.

Front 52

Define productive efficiency. Also, give the productive efficiency point.

Back 52

Producing goods and services at the lowest possible average cost with given inputs.

Point: MC = AC.

Front 53

Define allocative efficiency. Also, give the allocative efficiency point.

Back 53

Occurs when good sand services are distributed according to consumer preferences.

Point: MC = AR.

Front 54

Define X-Inefficiency.

Back 54

Where there is a lack of effective / real competition meaning average costs are higher than what they would be with competition.

Front 55

Define dynamic efficiency.

Back 55

Introduction of new technology and working practises to reduce costs over time.

Front 56

Define derived demand.

Back 56

Demand for a good / service which is the consequence of the demand for something else.

Front 57

Define Marginal Revenue Product (MRP).

Back 57

Value of the physical addition to output arising from hiring one extra unit of a factor of production. MRP increases = demand for labour increases.

Front 58

What are the 4 factors that shift demand for labour?

Back 58

Price of other factors of production, rise in consumer demand for a product, supplementary labour costs, productivity.

Front 59

What is the marginal productivity theory?

Back 59

States that the demand for workers depends on their marginal revenue product (MRP).

Front 60

Define labour supply.

Back 60

The number of hours that people are willing and able to supply at a given wage rate.

Front 61

Why is the labour supply curve upward sloping?

Back 61

Because, as wages rise, this creates an incentive for more workers to work.

Front 62

What are the 3 monetary factors that attract people to jobs?

Back 62

Wages, commission and bonuses.

Front 63

What are the 5 non-monetary factors that attract people to jobs?

Back 63

Convenience, status, promotion prospects, job security, working conditions.

Front 64

What is the NET Advantage Theory?

Back 64

States that when non-monetary advantages are in place, firms pay less wages and recruit more labour.

Front 65

What are the 5 factors which influence supply to a particular firm?

Back 65

Training, location, unemployment, overtime and wage rate.

Front 66

What does the backward bending labour supply curve show?

Back 66

That up to a certain point, money acts as an incentive. From then onwards, people substitute work time for leisure time as they can work less hours for the same money.

Front 67

What are the 2 effects of a wage increase?

Back 67

Income effect: Work fewer hours for same pay.

Substitution effect: Individuals work more hours as opportunity cost of leisure increases.

Front 68

Define transfer earnings.

Back 68

The minimum payment needed to keep a factor of production in its present use.

Front 69

Define economic rent.

Back 69

Payment received by a factor of production above that needed to keep it in its present occupation.

Front 70

What are the 4 reasons why a labour market might be imperfect?

Back 70

Monopolistic Supply of Labour (Trade Unions)

Monopsonistic Buyer of Labour (Monopsony)

Minimum Wage

Wage Differentials

Front 71

Define a trade union.

Back 71

An organisation of workers who join together to further their own interests. They want to raise wages, and they do this by limiting the supply of labour.

Front 72

Define trade union markup.

Back 72

The addition to wages secured by members of the trade union to what they would earn without the union.

Front 73

Name an advantage and a disadvantage of trade unions.

Back 73

Advantage: Can raise both employment ane wages (only works in expanding goods markets).

Disadvantage: Excess supply creates classical unemployment.

Front 74

Define a monopsony.

Back 74

A dominant buyer of labour - wage makers.

Front 75

What is the impact of the introduction of a trade union into a monopsonistic market?

Back 75

Wage rates and employment both increase.

Front 76

Define minimum wage.

Back 76

A minimum wage rate that must, by law, be paid to all employees.

Front 77

What are 2 advantages of a minimum wage scheme?

Back 77

Poorest people paid more meaning reduced rich poor gap (lower relative poverty), higher productivity.

Front 78

What are 2 disadvantages to a minimum wage scheme?

Back 78

Firms have less funds available to innovate, cost-push inflation.

Front 79

Define wage differentials.

Back 79

Differences in wage arising between individuals, occupations, industries, firms and regions.

Front 80

What are the 3 reasons for wage differentials?

Back 80

Relative Bargaining Power, Government Policy, Esteem.

Front 81

Define wealth and income.

Back 81

Wealth: A stock of valuable assets.
Income: A flow of money to a factor of production.

Front 82

Describe marketable and non-marketable wealth.

Back 82

Marketable: Wealth that can be transferred to others.

Non-Marketable: Wealth specific to a person & cannot be transferred.

Front 83

What are 3 causes of income inequality?

Back 83

Wealth inequality, level of skill, difference in earnings.

Front 84

What are 3 causes of wealth inequality?

Back 84

Inheritance, savings, entrepreneurship.

Front 85

What are the 2 government policies to redistribute income?

Back 85

Progressive Taxation and Wealth Tax.

Front 86

What is the trickle-down effect?

Back 86

The highly wealthy contribute to the good of society.

Front 87

Define market failure.

Back 87

When the free market, if left alone, fails to deliver an efficienct allocation of resources.

Front 88

What are the 8 causes of market failure?

Back 88

Negative Externalities

Positive Externalities

Merit & Demerit Goods

Information Failure

Public Goods

Monopoly

Income Inequality

Immobility of Factors of Production

Front 89

What are property rights?

Back 89

Rights establishing a person's right of ownership to a good.

Front 90

What are the 4 types of environmental market failure?

Back 90

Resource depletion, resource degradation, public good aspects of the environment, negative externalities.

Front 91

What are the 2 interventions used to correct environmental market failure?

Back 91

Tax, Tradeable Pollution Permits.

Front 92

What are the 5 types of government intervention at A2?

Back 92

Competition Policy

Privatisation / Nationalisation

Regulation / Deregulation

Extending Property Rights

Improving Information Provision

Front 93

How can tax be used to correct environmental market failure?

Back 93

Tax the output of industrialised nations and use the revenue to compensate citizens for the revenue loss.

Front 94

What are the 5 types of government failure?

Back 94

Political Self Interest, Policy Myopia, Imperfect Information, Law of Unintended Consequences, Regulatory Capture.

Front 95

Define competition policy.

Back 95

Government policies to prevent and reduce the abuse of monopoly power, intended to make goods markets more competitive.

Front 96

What does the CMA measure?

Back 96

Structure, Conduct & Performance Indicators.

Front 97

What are 6 responses used by the CMA?

Back 97

Monopoly Busting

Price Controls

Tax Monopoly Profits

Rate of Return Regulation

Public Ownership of Monopoly

Deregulation

Front 98

Define privatisation.

Back 98

Transfer of government owned assets to the private sector.

Front 99

What are the 4 types of privatisation?

Back 99

Contractualisation, Marketisation, PPP's and Deregulation.

Front 100

Name 3 advantages of privatisation.

Back 100

Efficiency due to profit motive, selling of assets provides government revenue (short-term), lack of political interference.

Front 101

Name 3 disadvantages of privatisation.

Back 101

Potential for Monopoly Abuse, Closure of loss making services in private sector, businesses only aim to profit maximise.

Front 102

Name 2 advantages of nationalisation.

Back 102

Some industries are natural monopolies, government focus is on increased welfare.

Front 103

Name 2 disadvantages of privatisation.

Back 103

Inefficiency due to no profit motives, limited scope to raise capital due to other government owned assets.

Front 104

Define regulation.

Back 104

Government legislation and laws in a particular market designed to correct market failure.

Front 105

Define deregulation.

Back 105

Removal of government legislation and laws in a particular market, designed to improve competitive element.

Front 106

Name 3 advantages of deregulation.

Back 106

Increased competition, less government spending on regulating, reduced costs to businesses.

Front 107

Name 3 disadvantages of deregulation.

Back 107

Possibility of unintended consequences, may not work (technical entry barriers cannot be removed), cost of monitoring market may be high.

Front 108

Define equity.

Back 108

Fairness, fair distribution of goods and services, concerned with quality.

Front 109

Define equality.

Back 109

Goods and services are distributed the same, equally, concerned with quantity.

Front 110

What are the 2 types of equity?

Back 110

Horizontal Equity: Fair treatment of people whose circumstances are the same.

Vertical Equity: Fair treatment of people whose circumstances differ.

Front 111

What is the equity-efficiency trade off?

Back 111

Reduced inequality may enhance equity but blunt economic incentive. Inequality can be used to create incentives, thus efficiency.

Front 112

What's the difference between absolute and relative poverty?

Back 112

Absolute is poverty below a set level, below $1 a day, whilst relative is poverty set by comparing income to below a specified proportion of average income.

Front 113

What is the poverty trap?

Back 113

When individuals are no better off following a pay increase due to increasing tax paid and withdrawing benefits.

Front 114

What are the 3 main causes of poverty in the UK?

Back 114

Old age, unemployment and low wages.

Front 115

What is CBA?

Back 115

An investment appraisal technique taking into account all private and external costs and benefits of an economic decision.

Front 116

Detail the framework of CBA.

Back 116

1. Identify all costs / benefits in project.

2. Attach monetary value to each cost & benefit.

3. Find social costs & benefits of whole project.

4. Use forecasting techniques to estimate costs and benefits over many years.

5. Find NET MSB.

6. Use principle of opportunity cost to look at alternative uses of resources, if no better use, project should go ahead.

Front 117

Name 3 advantages of CBA.

Back 117

Detailed research means all aspects thoroughly researched, allows for public contribution by society, prevents unintended consequences to an extent.

Front 118

Name 3 disadvantages of CBA.

Back 118

Distributional impacts, high administrative cost, valuation difficulties and inaccuracies.

Front 119

Name 3 evaluative points for CBA.

Back 119

Value of info increases if: Conducted under independent body, states where monetary values cannot be attached, states where assumptions have been made.

Front 120

2 Solutions to Negative Externalities / Public Goods.

Back 120

Taxation & Regulation.

Front 121

2 Solutions to Positive Externalities / Merit Goods.

Back 121

Subsidies & Regulation.

Front 122

2 Solutions to Public Goods.

Back 122

Government Provision & Privatisation (Contractualisation).

Front 123

4 Solutions to Income Inequality & Poverty.

Back 123

Progressive Taxation, Transfers to the Poor, Minimum Wage, Training & Education Schemes.

Front 124

3 Solutions to Monopolies / Oligopolies.

Back 124

Nationalisation, Deregulation, Competition Policy.