A2 microeconomics course companion

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A2 Economics
Microeconomics
Course Companion
2009

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Introduction to the A2 Microeconomics Study Companion
Welcome to this 2...

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Contents
1. Production in the Short and the Long Run .....................

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1. Production in the Short and the Long Run
We take it for granted that...

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long run could be as short as a few days – enough time to lease a new v...

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Average product rises as long as the marginal product is greater than t...

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Units of
Capital
Units of
Labour
Total
Output
% Change in
Inputs
% Chan...

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2. How can we calculate the costs of a firm?
In this chapter we look at...

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Output
(Q)
Total Fixed
Costs (TFC)
Total Variable
Costs (TVC)
Total Cos...

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Key point: The marginal cost curve must intersect the average curves a...

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An increase in fixed costs has no effect on the variable costs of prod...

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Milk costs hit Stilton producers (BBC news, July 2007)

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3. Long Run Costs: Economies and Diseconomies of Scale
Economies of Sc...

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Increasing Returns to Scale
Much of the new thinking in economics focu...

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There are many different types of economy of scale. Depending on the c...

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2. Monopsony power: A large firm can purchase its factor inputs in bul...

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The container principle at work!
Economies of scale – the effects on p...

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costs for a company working within that industry, thus external econom...

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Capacity utilisation is an important challenge facing a sporting venue...

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3. With a natural monopoly, the long run average cost curve continues ...

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Increased dimensions: Firstly, the company invested in enormous wareho...

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Consoles look to hit their stride (BBC news, July 2008)
Cost headache ...

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4. Business Revenues
Revenue (or turnover) is the income generated fro...

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Total revenue is shown by the area underneath the firm‘s demand curve ...

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Revenue fears hit Vodafone shares (BBC news, July 2008)
Price elastici...

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5. Profits
The Nature of Profit
Profit measures the return to risk whe...

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The table shows data for an owner-managed firm for a particular year.
...

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As long as marginal revenue is greater than marginal cost, total profi...

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unit > or equal to average variable cost (AR = AVC). This is sometimes...

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In the long run, a firm must make a normal profit, so when price = ave...

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Wiseman dairies hit by profits blow
Shares in Robert Wiseman, Scotland...

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Net percentage rate of return on capital employed, seasonally adjusted...

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Many businesses operate in what are called “low growth” markets - wher...

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6. What Objectives Do Firms Have?
In this chapter we consider a range ...

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output decisions may be taken at local level by managers – with shareh...

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Cadbury abandons its profit target
Cadbury Schweppes Plc, the manufact...

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Source: Adapted from news reports, January 2008
See Young, Gifted and ...

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7. Divorce between Ownership and Control
Ownership and control
The own...

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Examples of the principal-agent problem that have hit the headlines re...

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Environmental groups such as Friends of the Earth have also latched on...

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For more reading on this try this link to the Institute for Business E...

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8. Technological Change, Costs and Supply in the Long-run
What is inno...

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Gains in dynamic efficiency:
Dynamic efficiency occurs over time. It f...

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Government policy and innovation
Supply-side strategies are usually li...

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9. The Growth of Firms
Why do firms seek to grow?
The following factor...

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External growth of a business
The fastest route for growth is through ...

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Lateral Integration
This involves subsidiary companies joining togethe...

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sharply - the average price of a one minute international call was 74%...

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The survival of smaller businesses in the economy
Over time there is a...

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2. Severn Trent Water demerged its waste management business Biffa
3. ...

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10. Perfect Competition
Perfect competition – a pure market
Perfect co...

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majority of real-world markets, for example, some suppliers may exert ...

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Private investors and people remitting money earned overseas to their ...

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a local farmers‘ market where there might be a sizeable number of farm...

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For the firm, the profit maximising output is at Q2 where MC=MR. This ...

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We are assuming in the diagram above that there has been no shift in m...

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competitive behaviour, to innovate and to invent to drive markets forw...

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Suggestions for further reading on aspects of competitive markets
Cons...

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11. Monopolistic Competition
Monopolistic competition is a form of imp...

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4. The barriers to entry and exit into and out of the market are low
I...

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Case Study: Competition in the market for nursery education
Recently, ...

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12. The Model of Monopoly
What do we mean by market concentration?
Whe...

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Assuming that the monopolist aims to maximise profits (where MR=MC), w...

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The rise in price from P1 to P2 helps the monopolist to absorb some of...

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13. Barriers to Entry and Exit in Markets
Barriers to entry are design...

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Theory of Early Mover or First Mover Advantage
Sometimes there are siz...

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o The loss of business reputation and goodwill - a decision to leave a...

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14. Price Discrimination
Most businesses charge different prices to di...

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curve and turn it into extra revenue or producer surplus. This is impo...

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Peak and Off-Peak Pricing
Peak and off-peak pricing and is common in t...

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Suppose that a firm has separated a market by time into a peak market ...

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Product line pricing occurs when there are many closely connected comp...

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the overall level of social welfare and the equity with which scarce r...

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Price discrimination on Priceline (The Pricing Blog, May 2008)
Product...

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15. Monopoly and Economic Efficiency
In this section we evaluate the c...

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The lack of genuine competition may give a monopolist less incentive t...

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Potential Benefits from Monopoly
A high market concentration (fewness ...

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Monopoly Profits, Research and Development and Dynamic Efficiency
As f...

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Each of these definitions is linked. The key point is that a natural m...

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Possible conflicts between efficiency and welfare
It is often said tha...

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a. For many of the major utilities, the government introduced industry...

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that the major problem is that UK airport terminals are already runnin...

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16. Collusive and Non-Collusive Oligopoly
What is an oligopoly?
An oli...

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In these markets entry barriers are high although there are usually sm...

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The kinked demand curve model predicts there will be periods of relati...

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o Better quality of service including guaranteed delivery times for co...

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deemed illegal by UK and European competition law. But it is hard to p...

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Collusion in a market or industry is easier to achieve when:
1. There ...

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In recent years a substantial number of price-fixing agreements have b...

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The classic example of game theory is the
Prisoners‘ Dilemma, a situat...

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possible action for themselves given the
action of the other player.
T...

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Applying the Prisoner‟s Dilemma to business decisions
Game theory exam...

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Case Study: Claims of Price Rigging in the Food Industry
There is plen...

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Case Study: Prisoner's Dilemma and Climate Change Negotiations
Can rep...

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Source: Mark Johnston, EconoMax, December 2007
John Maynard Keynes‟ “T...

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18. Contestable Markets
There has been a wealth of research and
intere...

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structure is a given. A new supplier may have the advantage of product...

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monopolist and some of the abnormal profit will be competed away. Nor...

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Open Skies deal comes into effect (BBC news, March 2008)
Transatlanti...

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Thanassoulis presented at the Royal Economic Society‘s 2008 annual co...

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Milk prices report sparks call for fair trade rules in UK (Wales onli...

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Radiohead - Paying the price you are willing to pay
Radiohead's new a...

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Third degree (or multi-market) price discrimination involves charging...

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home markets. There is more consumer surplus to be exploited when dem...

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o The monopolist has the ability to earn supernormal profits in the s...

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Cross price elasticity of demand is linked to this – i.e. the percent...

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and falling (e.g. during a recession). Often a market may be affected...

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 The extent of product differentiation (which affects cross-price el...

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22. Competition Policy and Regulation
Competition policy covers the d...

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4. Regulation acts as a form of surrogate competition – attempting to...

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o Agree prices with your competitors, e.g. you can't agree to work fr...

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monopolists must grant access to companies wishing to compete with th...

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BSkyB told to sell shares in ITV (BBC news, January 2008)

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23. Privatisation and Deregulation
Privatisation became one of the mo...

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Market forces have been introduced in social services, the NHS an...

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private sector. The main justification for the decision was that ...

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encourage competition by easing the entry of new suppliers and ma...

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Yell and price capping
Price capping is still used in the market ...

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Changing Role of the Utility Regulators
Gradually the main utilit...

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Index of prices, January 1987=100
Water and other charges
RPI: ho...

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have not worked, the most obvious example being the failure of ra...

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24. The Labour Market
The labour market is a factor market – it p...

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Labour Capital (K) Output (Q) MPP Price (£) MRP = MPP x P (£)
0 5...

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o
Limitations of MRPL theory of labour demand
Although marginal r...

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An increase in the productivity of labour which makes using labou...

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Car-maker cuts jobs as sales fall
The biggest car-maker in the Un...

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The labour supply refers to the total number of hours that labour...

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6. Non-monetary characteristics of specific jobs – include factor...

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Equilibrium wages
Wage Differentials
There is a wide gulf in pay ...

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4. Differences in labour productivity and revenue creation - work...

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Government policies and the labour supply
The main policies desig...

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The work-leisure trade off
Once somebody has entered the labour f...

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Income and substitution effects
To understand why this might happ...

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Suggestions for further reading on labour demand and labour suppl...

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25. Monopsony in the Labour Market
With increasing frequency thes...

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Examples of monopsony employers
Good examples might be the major ...

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26. Discrimination in the Labour Market
Employers may not treat w...

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Britain's equal pay record is poor when compared to other Europea...

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Indian and Pakistani women work in the retail trade, another low-...

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27. Trade Unions in the Labour Market
Trade Unions
Trade unions a...

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worker, fire fighters and prison officers) unions are still prepa...

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Unions might seek to exercise their collective bargaining power w...

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3. They may prevent the introduction of new, flexible work practi...

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28. The Distribution of Income and Wealth
In this chapter we cons...

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Percentage shares of household income and Gini coefficients, 2005...

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There are numerous explanations both for the existence and persis...

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o Provision of a Minimum Income Guarantee for Pensioners and incr...

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There has been some limited progress in attacking some of the cau...

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o Analysing carefully the effects of changes in indirect taxes su...

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Hard Rock wages below the minimum (BBC news, July 2008)
How the s...

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29. Market Failure - Externalities
In this chapter we look at the...

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of welfare due to output being above the social optimum. At outpu...

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Pollution of waterways - creating other externalities for users o...

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Hierarchy of principles of waste management:
o Prevention of wast...

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(v) Revenue derived from these taxes can be earmarked for lower t...

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international competitiveness. Similarly, higher taxation might l...

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30. Carbon Emissions Trading and the Stern Review
Emission tradin...

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routes to emission reductions. In other words, market forces are ...

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Mini Case Study: Drax feels the heat of rising carbon prices
It i...

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Pollution regulation
Instead of relying on intervention in the ma...

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Global warming is an externality pure and simple. It does not mat...

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investors reaping the full return to new ideas. Businesses need t...

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31. Cost Benefit Analysis
In a world of finite public and private...

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Main Stages in the Cost Benefit Analysis Approach
At the heart of...

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―passionately‖ about something (for example the building of new h...

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The value of decommissioning costs over 100 years away is almost ...

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2. The economy: Heathrow already has the biggest capacity in Euro...

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Some of the stakeholders affected by the smoking ban include the ...

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