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IB ECONOMICS: Unit 2 - Microeconomics > 2.11 Market Failure - Market Power > Flashcards

2.11 Market Failure - Market Power Flashcards

1
Q

Fixed costs

A

expenses that do not change with the level of output

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2
Q

variable costs

A

expenses linked directly to the level of output

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3
Q

marginal cost

A

additional cost of producing an extra unit of output

change of TC/ Change in Q

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4
Q

marginal revenue

A

additional revenue received from the sale of an extra unit of output
change in TR / change in Q

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5
Q

profit maximised when

A

-marginal cost = marginal revenue

-

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6
Q

economic costs

A

explicit and implicit costs of all resources, including the opportunity cost of foregoing the next best alternative

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7
Q

explicit costs

A

identifiable and accountable costs

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8
Q

abnormal profits

A

profit of a firm that is over or above the point where total revenue exceeds total economic costs, profit is greater than that of its next best alternative
AR> AC
finances R&D and innovation

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9
Q

normal profit

A

the amount of profit needed to cover explicit and implicit costs, therefore normal profit is the amount needed to generate production
AR = AC

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10
Q

loss

A
  • production costs exceed total revenue
  • AR < AC
  • loss-making firm is operational in the short run but not long-term sustainable
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11
Q

economies of scale

A

cost saving benefits from lower average cost of production brought about by an increase in the volume of production

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12
Q

factors giving rise to internal economies of scale

A

specialization, efficiency, marketing, purchasing,

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13
Q

internal economies of scale

A

lower average costs fur to increase in the size of a firm itself

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14
Q

specialization and internal economies of scale

A
  • specialised labour is highly productive

- reduces average cost of production

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15
Q

efficiency and economies of scale

A
  • specialized machinery is more efficient
  • technical economies of scale
  • raise output, reduce average costs
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16
Q

marketing and economies of scale

A

reduce marketing cost per unit of sales

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17
Q

purchasing and economies of scale

A

large plants or factories can only function efficiently if large volumes of output are generated

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18
Q

external economies of scale

A

cost saving benefits from lower average costs of production brought about by an increase in the size of an industry

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19
Q

benefits of external economies of scale

A

lower recruitment costs, ancillary services

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20
Q

ancillary costs

A

services provided by other firms that support an industry

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21
Q

diseconomies of scale

A

inefficiencies caused by an increase in the scale of production leading to increasing long run average costs of production

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22
Q

internal diseconomies of scale

A

caused by problems with coordination, control and communication

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23
Q

external diseconomies of scale

A

eg traffic congestion, higher rental costs, labour shortages

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24
Q

revenue

A

money received from the sale of a firms output of goods or services

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25
Q

marginal product

A

-change in total product that occurs when the usage of a particular resource increases by one unit and all other resources remain constant

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26
Q

fungible goods

A

perfectly interchangeable with goods from other producers

27
Q

monopoly

A
  • single firm operating in the entire market

- strong barriers to entry and exit

28
Q

Oligopoly

A
  • market structure where only a few firms operate
  • fierce competition between firms even though the whole market is not very competitive
  • difficult to compete on price, so there is strong non-price competition
29
Q

monopolistic competition

A
  • most common market structure
  • many firms, each with relatively small market shares compared with the size of the market
  • similar but not identical goods
  • branding sets firms apart
30
Q

marginal cost and marginal price per unit in perfect competition

A
  • marginal revenue and price per unit are constant and equal
  • profit maximised when MC curve intersects flat MR curve
31
Q

market power

A

ability of a firm to manipulate the price of a good or service by manipulating the level of demand or level of supply
degree of market power a firm has determines the market structure in which it operates

32
Q

perfect competition - profit maximisation in the short run

A
  • in the short run, perfectly competitive firms can earn abnormal, negative or normal profit
  • price > short run average cost when producing at the MC=MR point = abnormal profit
  • firms in perfect competition eventually compete away their profits
33
Q

Marginal cost and average costs

A
  • marginal cost intersects average costs at the minimum point
  • left of the optimum quantity, MC> AC so AC is declining with output (economies of scale)
  • to the right of Q* MC>AC so AC rises (diseconomies of scale)
34
Q

criteria of perfect competition

A
  1. all firms sell identical products
  2. all firms are price takers
  3. all firms have a small market share
  4. there is perfect information
  5. there is freedom of entry and exit
35
Q

market structure

A

categorization of firms based on their level of market power

36
Q

perfect competition

A

market structure characterized by an intense degree of competition where no individual firm is large enough to influence the price or quantity traded, in theory it is ideal

37
Q

Barriers to entry and exit and perfect competition

A

firms increase their prices = signal for new firms to join the market = increases supply = increases competition= decreases prices=competes away profits = firms leave = supply decreases = firms charge higher prices, repeat

38
Q

allocative efficiency

A

best use of an economy’s resources thereby maximising the possible ratio of total national output to total factor inputs
occurs when P=MC or MSB= MSC

39
Q

conditions held in perfect competition

A
  1. profit maximisation (MC = MR)
  2. allocative efficiency (D=MC)
  3. cost minimisation (MC = MES)
  4. firms compete away their abnormal profit and cut costs to operate at bottom of LRAC curve
  5. MC = AC means no wastage
40
Q

assumptions of monopoly

A
  • single seller
  • no close substitutes
  • significant barriers to entry
41
Q

barriers to market entry

A
  • economies of scale making small firms non competitive
  • branding and brand loyalty
  • legal barriers and patents
  • control of essential resources
42
Q

Monopolist, cost and price

A
  • produces where MC = MR
  • set the price higher than marginal cost ( P = AR>MC)
  • AR curve = Demand curve
  • AR gradient is double MR
43
Q

monopolist and profit

A
  • monopolist can make abnormal profit in the long run

- possible to make a loss, suggests that costs are too high or demand is too low, firm should leave market

44
Q

monopolist and allocative inefficiency

A
  • will not achieve productive efficiency
  • lacks incentive to operate at bottom of cost curve
  • consumers pay more for a lower amount of output
45
Q

natural monopoly

A

market structure that occurs when the market can only sustain one firm in a profitable way. The industry can only tolerate one supplier to avoid wasteful competition and achieve economies of scale to operate efficiently

46
Q

characteristics that lead to natural monopolies

A
  • extremely high set up costs
  • high fixed costs
  • costs that cant be recovered after exit (sunk costs)
  • one provider needs value of all sales to survive
47
Q

advantages of large market power

A
  • economies of scale can reduce waste
  • abnormal profits can lead to innovation
  • oligopolistic firms allow for more choice
48
Q

risks associated with large market power

A
  • output as the lack of competition means monopolistic firms are unlikely to supply the socially optimum output level
  • price risk: enables a dominant firm to extract consumer surplus
  • consumer choice and quality: lack of competition means less incentive to improve and innovate
49
Q

government responses to market power

A
  • legislation and regulation: prohibits anti-competitive acts and abuse of monopoly power (prevent mergers, promote competition, forced pricing, forced asset sale)
  • government ownership/ nationalization
  • fines and punitive measures
50
Q

characteristics of monopolistic competition

A
  • many firms with small market power
  • low barriers to entry
  • product differentiation
51
Q

market concentration

A

measures the extent to which sales revenue is dominated by one or more of the largest firms

52
Q

concentration ratio

A

measures the degree of market power in an industry by adding the combined market shares of the largest firms in the industry
- higher concentration ratio = more oligopolistic

53
Q

herfindahl-hirschman index

A

-gives a larger weighting to the market share of larger firms by squaring the value of their market share
- highest value = 10,000= monopoly
- higher the HHI, the more concentrated the industry
-Eg: firm a = 30%, firm b= 25%, firm c = 20%
industry HHI= 30^2 + 25^2 + 20^2 = 1,625

54
Q

monopolistic competition profit in the short run

A
  • firm operates where MC = MR
  • P > ATC so firm earns economic profit
  • long run absence of barriers reduces market price so that AR=P=AC and reverts firms to normal profit (reverse for loss)
55
Q

monopolistic competition and allocative efficiency

A
  • not allocatively efficient
  • gains consumer surplus
  • does not operate at lowest point on cost curve bc limited economies of scale
  • ## choice can cause inefficiency and market failure
56
Q

oligopoly

A

market structure in which a few large firms, each with a high degree of market power dominate the industry
- can be collusive or non-collusive

57
Q

collusive oligopoly

A

agreement between two or more oligopolistic firms to limit competition by using restrictive trade practices such as price fixing or collectively limiting output to manipulate market price

58
Q

aim of forming a cartel

A

reduce competition in the industry and increase profits of oligopolistic firms by acting as a group of monopolists
- difficult to identify and break up as may be tacit or open

59
Q

non collusive oligopoly

A
  • in direct competition with mutual interdependence
  • consider actions and reactions/ strategies of competitors when pricing
  • one firm lowers prices, others follow
60
Q

price wars

A

potential under competitive oligarchy, fitms continually reduce prices in attempt to undercut rival firms, not beneficial to firms especially with inelastic demand

61
Q

allocative inefficiency in a monopoly

A
  • P + AR> MR
  • earns supernormal profit
  • less competitive in a collusive oligarchy
  • suboptimal output and anti-competitive behaviour
62
Q

game theory

A

economic model that attempts to explain the nature of strategic interdependence in oligopolistic markets

63
Q

Nash equilibrium

A
  • circumstances where firms acting in their best interests can make themselves and the market worse off
  • suboptimal situation that arises due to oligopolistic firms competing

IB ECONOMICS: Unit 2 - Microeconomics (12 decks)

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