3.4 Flashcards
Explain allocative efficiency
Where P=MC
Consumer welfare is maximised.
At the extreme the costs to produce is what it is sold at\
Explain productive efficiency
Where firm is operating at the lowest of their AC curve
Producing the most they can with the resources
Explain dynamic efficiency
Technology improvements over time, increases productive potential
Explain X-inefficiency
Lack of competition causes an increase in costs
Often from complacency and laziness
What are the characteristics of perfect competition
Lots of small firms
Homogenous goods
Price takers
Low barriers to entry/ exit
In the SR what efficiencies does perfect competition have
AE
In the long run what efficiencies does perfect competition have
PE
AE
Explain the characteristics of monopolistic competition.
Differentiated products
Profit max
low barriers to entry/ exit
lots of small firms
What are the efficiencies of monopolistic competition in the SR
Non
What are the efficiencies of monopolistic competition in the LR
Non
Explain the characteristics of an oligopoly market
Few firms in the market
High barriers to entry/ exit
Profit maximisation
Firms are independent upon each other
What is a concentration ratio
Measures the proportion of the market dominated by the larger firms
What is common oligopoly criteria
Where five or fewer firms control 50% of the market
What is the difference between tacit and overt collusion
Tacit -> Quiet/ Unspoken implicit understanding between business -> no evidence, so hard to prove -> illegal
Overt -> Open collusion -> Firms send messages to anot
her firm about its prices etc -> it is illegal
Why do firms collude
Leads to a lower consumer surplus-> higher prices -> higher profit
Avoid price competition -> avoids marketing costs
Why do firms break collusive agreements
Whistle blowers -> avoid fines etc
What does a kinked demand curve show
Draw it
If firms raise prices above p, then consumers will switch away, as rivals will keep prices at the same level
If firms drop prices below p, then rivals will have to follow causing a price war
Overall they should just stay at p
What is the outcome of a price war
Both firms make less profit
Explain predatory pricing
Drop price below your AC , to kill of existing competition
Make a SR loss -> but pushes firms out of the market
Can then increase increase price as there’s no competition
Whats an evaluation of predatory pricing
illegal
Fines , criminal prosecution
What is limit pricing
Prevent new firms entering, set P below there potential AC
Creates a barrier to entry
What is an evaluation of limit pricing
Wouldn’t work against conglomerates, already have EofS.
So would need to know there AC
Explain the characteristics of a monopoly
1 dominant firm in the market
High barriers to entry / exit
Profit maximisation
How does monopoly market affect efficiencies
neither AE or PE
Suffer from X- inefficiency
Define price discrimination
When a firm sells the same product in different markets with differing elasticities at different prices
What are the advantages of monopoly power
- Economies of scale
- > risk bearing
- > managerial
- > financial
- > advertising
- > technical - Greater funds for R&D and investment
What are the disadvantages of having monopoly power
- Diseconomies of scale -> x-inefficinecy
- Productive / Allocative efficiency
- Can exploit consumers
- No DE
What is a natural monopoly
Exists when it only makes sense for 1 firm to dominate the market
Typical of a market with high sunk costs/ requires large output to exploit economies of scale
-> examples include BT
What is a monopsony
When there is 1 sole buyer in the market
Example of monopsonies
Gov is a sole buyer of defence equipment in the UK
How do monopsonies exploit their power
Have a massive buying power -> can reduce producer surplus -> can drive down prices
Benefits that come from a monopsony power
- Lower prices passed on to consumers in SR
2. Can balance out monopoly power
Drawbacks of monopsony power
- Producers can be exploited
- Cheaper price for consumer at the expense of producer
- LR suppliers leave the market , price increases
How can producers protect themselves from consumers
- Form a union, collective bargaining against monopsony
- Fairtrade schemes
- Leave the market
- Diversify
What is a contestable market
Where there are low sunk costs and therefore low barriers to entry.
Allows for ‘hit and run’ profits when the market is attractive
What makes markets not contestable
Non price competition
Monopolies controlling the price e
High brand image / patents
High fixed costs
