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Micro economics > 3.4 Market structure > Flashcards

3.4 Market structure Flashcards

1
Q

what is economic efficiency?

A

efficiency = making optimal use of scarce resources

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2
Q

what is allocative efficiency?

A

the value customers give a product (the price they’re willing to pay) is equal to the cost of production
also where AR=MC

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3
Q

what is productive efficiency?

A

when a firm is operating at the lowest point on its average cost curve (unit costs have been minimised)
- lowest AC occurs when AC=MC

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4
Q

what is dynamic efficiency?

A

when a business meets the change in demands over time

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5
Q

definition of innovation?

A

the commercially successful exploitation of ideas

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6
Q

what is X inefficiency?

A

a lack of real competition may give a monopolist a weak incentive to invest in new ideas

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7
Q

characteristics of perfect competition?

A
  • many sellers
  • homogenous goods + costs (firms are price takers)
  • no barriers to entry/exist
  • perfect knowledge for all participants
  • firms are profit maximises ➡️ normal profit in the long run (ST losses/supernormal profits possible)
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8
Q

what does it mean to be a price taking firm?

A

if there are many firms selling identical products and consumers can easily switch from one firm to another they will have to accept the prevailing price

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9
Q

how can you work out the economic profit from a perfectly competitive market?

A

area of a rectangle created from the length of quantity on X axis and then the gap from the ATC curve to the AR,D, and MR curve

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10
Q

what does a perfectly competitive market graph look like?

A

x axis; price/cost
y axis; output
perfectly elastic AR=MR=PE curve
straight supply curve
curved MC curve

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11
Q

characteristics of monopolistically competitive markets?

A
  • many buyers and sellers
  • perfect information
  • very low barriers to entry/exit
  • slightly differentiated products
  • firms aim to maximise profits and consumers aim to maximise utility
  • firms have little price-making ability
    ➡️ imperfect competition
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12
Q

does monopolistic competition lead to economically efficient?

A
  • not allocative efficient as prices are above marginal costs
  • saturation of market ➡️ cant fully exploit economies of scale
  • associated with extensive consumer choice + innovation (good for dynamic efficiency)
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13
Q

what are the characteristics of an oligopoly?

A
  • high level of market concentration
  • when the top five firms of a market control 60% of market sales
  • price rigidity
  • non-price competition
    ➡️imperfect competition
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14
Q

what does it mean for a market to have imperfect competition?

A
  • a market dominated by few large firms with a significant share
  • high market concentration ratio
  • each firm supplies branded products (may be differentiated)
  • high barriers to entry and exit
  • interdependent strategic decisions by firms
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15
Q

what does strategic interpendence?

A
  • that one firm’s output and price decisions are influenced by the behaviour of competitors
  • because there are few sellers each firm is likely to be aware of the actions of others
  • causes to be at risk of tacit or explicit collusion which can lead to allegations of anti-competitive behaviour
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16
Q

what is non-collusive behaviour in an oligopoly?

A

firms do not work together and instead they compete with each others, either in terms of price competition and/or non-price competition

17
Q

reasons for collusive behaviour in an oligopoly?

A

collusion is a form of anti-competitive behaviour
➡️ act together to maximise joint profits, lowers the cost of competition + reduces uncertainty

18
Q

what are price fixing cartels?

A

they maintain or fix a minimum pricing strategy where members cannot sell products or services below the floor price

19
Q

why do cartels in oligopolies often break down?

A
  • unable to enforce
  • falling market demands
  • non-cartel firms entry into the industry
20
Q

pros and cons of collusive behaviour?

A

cons
- damages consumer welfare
- absence of competition hits efficiency
- reinforces the cartel’s monopoly power
pros
- general industry benefits can bring social benefits
- fairer prices
- profits have value

21
Q

characteristics of monopoly?

A
  • pure monopolist = when a single supplier dominates the market
  • price making firms
  • high entry/exit barriers
  • firms in a monopoly aim to maximise profits where MR = MC
  • if the AR is falling the MR will be falling twice as AR
22
Q

what is price discrimination?

A

when a business charges different consumers different prices eg parcels over a longer distance

23
Q

aims of price discrimination?

A
  • increase total revenue
  • increase total profits
  • generate cash flow, especially in a recession
  • increase market share
  • build customer loyalty
24
Q

advantages of price discimination?

A
  • lower prices for some consumers
  • more profits for the business
  • more profits for investment
  • businesses can make better use of spare capacity
25
Q

disadvantages of price discimination?

A
  • higher prices for consumers
  • can increase regional inequality
  • may be an increase in transactional costs
  • grouping of consumers is not perfect
26
Q

it depends on for price discrimination?

A

➡️
- the extent to which price discrimination is used
- how businesses choose to use profits
- very difficult in practice to agree on a ‘fair price’ – it is a matter of perspective

27
Q

characteristics of a monopsony?

A
  • an industry with a single dominant buyer
  • significant buying power ➡️ could abuse
  • significant bargaining power
  • profit maximise where MCL=MRP
  • tends to be bad for workers and suppliers
  • tends to be good for consumers
28
Q

examples of monopsonys?

A
  • NHS
  • Education
  • Amazon
  • Food maufacturers
  • increasingly supermarkets
29
Q

how do monopsonys have so much power in the market?

A
  • monopsony has buying/bargaining power
    ➡️ exploit this with suppliers to negotiate lower prices as they are purchasing in bulk
    ➡️ the reduced cost of purchasing inputs increases their profit margins
30
Q

advantages of monopsony power?

A
  • improved value for money eg NHS can drive down the price of routine drugs
  • producer surplus has a value as well as consumer surplus, lower input costs ➡️increased investment
  • useful counter-weight to the selling power of a monopolist
  • in most supply chain relationships it is better if both benefit
  • growth of fair trade label is evidence of how pressure from consumers cna lead to improved contracts
    ➡️ it is often difficult to assess the strength on a monopsony power
31
Q

disadvantages of monopsony power?

A
  • may squeeze lower prices out of suppliers
  • suppliers become reliant on buyers, can make very little profit
  • consumers may be face with less choice
32
Q
A

Micro economics (11 decks)

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