ECON3 Revision Notes


List examples of market failure.

- Externalities.

 - Monopoly.

 - Imperfect information.

 - Immobility of factors of production.

 - Demerit goods.

 - Equality issues.

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How can the government intervene in markets to cor

 - Direct provision of public and merit goods.

 - Subsidise the market/ business.

 - Provide perfect information.

 - Taxation.

 - Min/Max pricing (Graph)

 - Deregulation/ regulation.

 - Legislation and laws.

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Causes of government failure.

 - Imperfect information.

 - Political interests.

 - Unintended consequences.

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Problems with environmental taxation.

 - Costs and benefits can be geographically diverse, so some people suffer more than others.

 - Difficulty in accurately assigning monetary values on costs and benefits.

 - Can have a regressive effect on consumers.

 - Inelastic demand may prevent tax reducing consumption. (Smoking)

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Ways to intervene to solve environmental market fa

(MSC, MSB, MPC and MPB graph)

 - Taxation.

 - Pollution permits.

 - What are the benefits and costs of both these points for evaluation.

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Define the tragedy of the commons.

 - When producers costs are lower than the costs to the environment and hence do not pay for the damage done.

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What is cost benefit analysis?

 - There are four main stages to costs benefits analysis.

 - 1st: identify all benefits and drawbacks to a proposal.

 - 2nd: assign a monetary value to them.

 - 3rd: forecast over a long period of time.

 - Calculate net benefits/ drawback.

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What are the limitations of cost benefits analysis

 - Have regional effects.

 - Difficulty in assigning monetary value to costs and benefits of the proposal.

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What are the two forms of wealth.

 - Non-marketable.

 - Marketable.

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What are sources of wealth.

 - Inheritance.

 - Savings. (inc. pension)

 - Business.

 - Chance. (e.g. lottery)

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How to measure income inequality.

Lorenz Curve

Gini Coefficient

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Types of poverty.

 - Absolute - the minimum level of income deemed necessary to achieve an adequate standard of living.

 - Relative - a standard which is defined in terms of the society in which an individual lives.

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Causes of poverty.

 - Unemployment.

 - Disability.

 - Old age.

 - Lack of skills and qualifications.

 - Imperfect information of state benefits.

 - Poverty trap.

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How can the government intervene to tackle poverty

 - Tackle unemployment (Supply and demand side policies e.g. improving physical capital)

 - Progressive taxation.

 - Benefits, and child tax credits

 - Direct provision of public and merit goods.

 - National Minimum wage.

 - Exploiting trickle down effects.

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What are the determinants of wage rates.

 - Power of trade Unions.

 - Level of skill and qualifications.

 - Supply side and demand side factors (analysed more later on)

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Graph of a monopsonist market.


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Graph of a monopsonist market with trade union int


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What are the types of wage differentials.

- Level of skill.

 - Qualifications.

 - Gender.

 - Race.

 - Trade union power.

 - Level of esteem.

 - Part time, full time.

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What are the factors that affect demand in the lab

 - Productivity.

 - Marginal revenue product. (this is important for you to know and understand the graph)

 - Wage rate.

 - Expectations and confidence.

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Draw and explain marginal revenue product.


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What determines elasticity of demand for labour.

 - Availability of substitutes.

 - Time period, in the long run the firm can reorganise hierarchal structure.

 - Proportion of labour costs to total costs.

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Factors that affect supply of labour.

 - Monetary factors, perks, bonuses, wage rate, share equity, other financial incentives.

 - Non-monetary factors, esteem, job enrichment etc etc.

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Factors that affect elasticity of supply of labour

 - The level of skills required, think about how long it would take to be a doctor.

 - Sense of vocation.

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What is the backward bending labour supply curve.

 - Backward bending, looking at the relationship between number of hours worked and wage rate.

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What are imperfect markets.

 - Barriers to entry.

 - Dominant firms that dictate price level and output.

 - Lack of price transparency.

 - Monopoly/ Oligopoly.

 - Price setters.

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How to monitor monopoly powers.

 - Relationship between advertising costs to total costs.

 - Concentration ratios (how concentrated the market is)

 - Profits compared to market size.

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Which organisations are responsible for monitoring

 - Competition commission.

 - Office for fair trading.

 - Department of trade and industry.

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How to intervene in monopoly markets.

 - Compulsory breaking up.

 - Deregulation.

 - Nationalisation.

 - Taxation on excess profits.

 - Price controls, min max pricing.

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Why do mergers occur.

 - To increase market power and dominance.

 - To increase profits and sales.

 - Possible mergers of charities for ethical reasons.

 - Increase value of the company.

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Types of restrictive trade practices.

 - Limit pricing.

 - Cartels and collusion.

 - Discriminatory pricing.

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What are the benefits and drawbacks of nationalisa

 - Benefits: Increase control of economy, Provision of public and merit goods, prevents inefficient monopoly powers forming, prevents disasters such as the collapse of northern rock.

 - Drawbacks: Higher burden on tax payers, public sector less efficient, government failure, crowding out, public debt, higher leakages out of economy in interest, think about greece and its problems.

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Benefits and drawbacks of privatisation.

 - Benefits: Efficient, profit incentive drives efficiency and innovation, promoting business culture, reduces the size of the public sector, raises finance for governments.

 Drawbacks: Can cause monopoly, worsen allocation of resources.

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What are public private partnerships.

 - Part public, part private ownership. (e.g. PFI)

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What is a private finance initiative.

 - When the government use private sector businesses to undertake public sector activities.

   (e.g. schools & hospitals)

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Explain characteristics of contestable markets.

 - Low barriers.

 - Homogeneous products.

 - Price setters.

 - MC=MR.

 - No dominant firm that can influence price level or output.

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What are the types of barriers to entry in markets

 - Strategic barriers, made by the incumbent firms.

 - Innocent barriers, that are natural i.e. level of knowledge.

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How can incumbent firms in a market form barriers

 - Through high set up costs and sunk costs.

 - Limit pricing.

 - Collusion.

 - Product differentiation.

 - R&D.

 - Non-price competition.

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What are competitive oligopolies.

 - When firms are interdependent from each other and there is no collusion.

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Kinked demand curve.

(Add) -- Different elasticities & different price levels

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What are the forms of non price competition.

 - Brand loyalty.

 - Advertising.

 - Loyalty cards.

 - Product differentiation.

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Explain game theory and the Prisoner's dilemma.

 - How the reactive behaviour of each firm tries to reach a price level which is the best possible scenario. Nash Equilibrium. This is difficult to explain with using the diagram.

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What are the types of collusion.

 - Formal

 - Informal.

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Monopoly diagram.


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Sources of monopoly powers.

 - Patents.

 - MES.

 - High fixed costs.

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What are the range of pricing techniques and draw

(Label on diagram)

 - Sales maximisation.

 - Profit maximisation.

 - Average cost pricing.

 - Marginal cost price.

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Define natural monopoly.

 - When competition would make the market inefficient. Usually operating at MES, and economies of scale have been exhausted.

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Explain minimum efficient scale.

 - Lowest point on the LRAC curve.

 - Economies of scale are exhausted.

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Benefits and drawbacks of monopoly powers.

 - Benefits: Tech innovation, MES, Can lower prices, international competitiveness, Dynamic efficiency.

 - Drawbacks: X-inefficient, DWL, loss in consumer surplus, high barriers to entry, higher prices, price setter, allocative and productive inefficient.

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Explain price discrimination.

 - The different prices are charge to different consumer irrelevant of costs associated.

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What are the conditions of price discrimination.

 - Have to be able to control output.

 - Different elasticities.

 - No arbitrage.

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Methods of price discrimination.

 - Age (Bus fares)

 - Location (regional costs of products--e.g. Starbucks)

 - Time (train fares)

- Gender (car insurance)

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Types of price discrimination.

 - First degree - the firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay.

 - Second degree - This type of price discrimination involves businesses selling off packages of a product deemed to be surplus capacity at lower prices than the previously published/advertised price.

 - Third degree - price varies by attributes such as location or by customer segment, or in the most extreme case, by the individual customer's identity.

- Fourth degree - prices are the same for different customers, however costs to the organization may vary. For example, one may buy a plane ticket, but call ahead to order a vegetarian meal, possibly costing the company more to provide, but your ticket has no greater cost to you.

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What are the benefits and drawbacks of price discr

 - Consumers benefits: More people can access the product or service, can lead to long term investment and hence better service in the long run.

 - Consumer Drawbacks: Loss in consumer surplus, inequality issues, higher prices.

 - Producer benefits: Higher profits, sales, market share, power.etc

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What are the characteristics of a perfectly compet

 - Homogeneous products.

 - Price takers.

 - Low barriers to entry.

 - Perfect information on prices for consumers.

 - No firm with power over price level or output.

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Define allocative efficiency.

 - Allocating scarce resource to meet the needs and wants of consumers, without waste.

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Define productive efficiency.

 - Where MC=ATC. (Average Total Costs)

 - There point where production is maximised and the lowest possible costs.

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Explain how a firm can make supernormal profits in

 - Short run: Supernormal profits are enjoyed because supply is fixed in the market. Use the graph for market and the firms cost graph with the horizontal D, MR, AR curve to explain this further.

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Define static efficiency.

 - Allocatively, and productive efficiency.

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What is dynamic efficiency.

 - The development of new technology and innovation that increase performance of economy in the long run.

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Imperfect Market Graph


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Define sales maximisation and draw it on a graph.

- Point where MR=0.  (Graph)

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What are the problems with profit maximisation.

 - Divorce of ownership.

 - Principle agent problem.

 - Size of the company.

 - Difficulty in monitoring exact marginal values.

 - Other objectives.

 - Corporate citizenship.

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Explain the theory of divorce of ownership, and th

 - The differences in objectives between shareholders and managers, and how managers would want to maximise their personal benefits and perks, so suggest to the theory of Saticificing.

 - Shareholder are the principle and managers are the agents.

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What are the ways in which a firm can grow.

 - Organic growth through innovation and invention.

 - External growth through mergers and acquisitions.

 - Types of mergers: Horizontal, vertical, A-lateral, Conglomerate.

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What are the things to consider when planning to g

 - Time.

 - Budget.

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Define innovation and invention.

 - Innovation making invention commercial.

 - Invention creating and making a new idea or concept.

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Define the law of diminishing returns.

 - Short run production has at least one fixed factor of production, so there comes a point where each additional variable factor of production maximises the fixed factor and has less effect on total product, causing marginal product to fall. This also causes marginal cost to increase, as the costs of the variable factor becomes more significant.

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What are the main costs of production.

 - Marginal cost.

 - Average cost.

 - Fixed costs.

 - Variable costs.

 - Average, marginal, and total of all costs above.

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Explain marginal product using a graph.

 - Marginal product looks at the difference an additional unit of a variable factor of production has on total product.

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Marginal cost graph.


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