3.4 Market Structure Flashcards
Allocative Efficiency
When resources are allocated when consumers and producer get maximum benefit
Where AR=MC
Productive Efficiency definition
When firms produce products at the lowest average cost point where fewest amount of resources are used
MC=AC
Dynamic Efficiency definition
allocatively efficient over time, with investment to improve efficiency
X-inefficiency definition
when a firm fails to minimise their costs at a given level of output
Perfect competition characteristics
infinite buyers and sellers
homogenous products
no barriers to entry/exit
perfect information of market conditions
firms are profit maximisers
Diagram analysis of perfect competition (step by step)
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
Monopolistic Competition characteristics 6
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
Oligopoly characteristics 6
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)
N-firm concentration ratio equation
total sales of N firms/ total market size x100
Collusive behaviour definition
when firms make an agreement to reduce competition
Game Theory definition
reaction of one player after a change in strategy from another player
Types of price competition (3)
Price wars
Predatory pricing
Limit pricing
What is a price war
in markets where non price competition is weak
prices keep driving down till firms are making a loss
lowers industry profits
What is predatory pricing
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
What is limit pricing
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
Types of non price competition (5)
Advertising- creates awareness-> sales
Loyalty cards- encourages repeated purchases
Branding- increases loyalty and PED
Quality- can charge higher prices
Customer service- encourages loyalty
Characteristics of a monopoly
when a firm has over 25% of the market
High barriers to entry
What is third degree price discrimination w an example
when firms charge different prices to different people for the same g/s
peak/off peak train tickets
Monopoly pros and cons to a firm 4,2
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
Monopoly pros and cons to employees 1,1
P- SNP can result in higher wages
C-one supplier limits employee to change job
Monopoly pros and cons to consumers 2,3
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
Monopoly pros and cons to suppliers
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
Characteristics of a monopsony w examples
Only one buyer and seller in the market
NHS, Teachers
Monopsony pros for firms (2)
P- higher profits as they buy at low prices
-economies of scale
