3.4 Market Structure

Question 1

Allocative Efficiency

Answer 1

When resources are allocated when consumers and producer get maximum benefit
Where AR=MC

Question 2

Productive Efficiency definition

Answer 2

When firms produce products at the lowest average cost point where fewest amount of resources are used
MC=AC

Question 3

Dynamic Efficiency definition

Answer 3

allocatively efficient over time, with investment to improve efficiency

Question 4

X-inefficiency definition

Answer 4

when a firm fails to minimise their costs at a given level of output

Question 5

Perfect competition characteristics

Answer 5

infinite buyers and sellers
homogenous products
no barriers to entry/exit
perfect information of market conditions
firms are profit maximisers

Question 6

Diagram analysis of perfect competition (step by step)

Answer 6

Firms make SNP in the short run
New firms see this as a signal and enter the market
Firms enter, reducing the price as supply increases
SNP is squeezed and firms can only make normal profit

Question 7

Monopolistic Competition characteristics 6

Answer 7

Many buyers and sellers
Slightly differentiated goods meaning firms are price makers
Low barriers to entry
good information of market conditions
non price competition
firms are profit maximisers

Question 8

Oligopoly characteristics 6

Answer 8

A few firms that dominate the market
(High concentration ratio)
Differentiated products
High barriers to entry
non-price competition (brand etc)
Prof max not sole objective
INTERDEPENDANT (show on kinked demand diagram)

Question 9

N-firm concentration ratio equation

Answer 9

total sales of N firms/ total market size x100

Question 10

Collusive behaviour definition

Answer 10

when firms make an agreement to reduce competition

Question 11

Game Theory definition

Answer 11

reaction of one player after a change in strategy from another player

Question 12

Types of price competition (3)

Answer 12

Price wars
Predatory pricing
Limit pricing

Question 13

What is a price war

Answer 13

in markets where non price competition is weak
prices keep driving down till firms are making a loss
lowers industry profits

Question 14

What is predatory pricing

Answer 14

when a firm sets a price so low that it drives competitors out of the market.
They then raise price once firm is out
Illegal strategy

Question 15

What is limit pricing

Answer 15

to prevent new entrants, firms set a low price but high enough for them to make normal profit but low enough to discourage firms entering

Question 16

Types of non price competition (5)

Answer 16

Advertising- creates awareness-> sales
Loyalty cards- encourages repeated purchases
Branding- increases loyalty and PED
Quality- can charge higher prices
Customer service- encourages loyalty

Question 17

Characteristics of a monopoly

Answer 17

when a firm has over 25% of the market
High barriers to entry

Question 18

What is third degree price discrimination w an example

Answer 18

when firms charge different prices to different people for the same g/s
peak/off peak train tickets

Question 19

Monopoly pros and cons to a firm 4,2

Answer 19

P- can generate SNP for continued investment
-increases global competitiveness
- can achieve economies of scale
-producer surplus increases

C-low incentive to be efficient as competition is low
-can lead to a misallocation of resources

Question 20

Monopoly pros and cons to employees 1,1

Answer 20

P- SNP can result in higher wages
C-one supplier limits employee to change job

Question 21

Monopoly pros and cons to consumers 2,3

Answer 21

P-prices may fall if firm passes on economies of scale benefits to consumers
-product innovation due to SNP may result in better quality of g/s

C-lack of competition can result in high prices as no substitute goods are available
-lack of competition means no product innovation
-customer service may be limited

Question 22

Monopoly pros and cons to suppliers

Answer 22

P- increased sales volume as monopolies operate on a large scale
C- monopoly has power over price of supplies as they are the only buyer

Question 23

Characteristics of a monopsony w examples

Answer 23

Only one buyer and seller in the market

NHS, Teachers

Question 24

Monopsony pros for firms (2)

Answer 24

P- higher profits as they buy at low prices
-economies of scale

Question 25

Monopsony pros and cons for consumers (1,1)

Answer 25

P- may gain lower prices if costs are passed on

C-may be a fall in quality as prices are driven down

Question 26

Monopsony pros and cons for employees 1,1

Answer 26

P-may pay higher wages as they make higher profits

C- sell less goods so less employment needed

Question 27

Monopsony cons for suppliers 1

Answer 27

C- lose out as they receive lower profits

Question 28

Contestable market meaning

Answer 28

market with a threat of competition