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Economics Theme 3 > 3.4 Market structures > Flashcards

3.4 Market structures Flashcards

1
Q

Name the 6 characteristics of perfect competition

A

Large numbers of buyers and sellers

Homogenous products

No/low barriers to entry

Perfect knowledge among buyers and sellers

No externalities

Profit maximising

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2
Q

Name 3 examples of barriers to entry for firms

A

Patents

High sunk costs

High economies of scale

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3
Q

Which of the following is the closest to a model of perfect competition: car manufacturing, foreign exchange market, supermarkets?

A

Foreign exchange market

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4
Q

Name the point of allocative efficiency and define it

A

P = MC

Whether resources are used to maximise consumer welfare

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5
Q

Define productive efficiency

A

When firms produce at lowest average total cost

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6
Q

Define dynamic efficiencyp

A

When efficiency increases over time due to innovation

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7
Q

Define X-inefficiency

A

when a firm is not producing on its lowest ATC curve possibly due to organisational slack

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8
Q

In what type of efficiency are firms in oligopoly and monopoly efficient?

A

Dynamic efficiency - can reinvest supernormal profit

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9
Q

Under what market structures are firms X-efficient, and in what time frame

A

Perfect and monopolistic- both long run only

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10
Q

Which market structure is allocatively efficient in the short run and long run?

A

Perfect competition

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11
Q

Which market structure is productively efficient in the long run?

A

Perfect competition

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12
Q

When is a firm under monopolistic competition efficient?

A

X-efficiency in the long run

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13
Q

Name 4 characteristic of firms in monopolistic competition

A

Lots of sellers

Differentiated product

No barriers to entry

Near perfect knowledge

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14
Q

Name 2 industries that could be seen as monopolistic

A

Bars

Hairdressers

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15
Q

Name 2 advantages and disadvantages of monopolistic

A

Adv: Choice for consumers, producers don’t exploit consumers

Disadv: Branding is inefficient, allocatively and productively inefficient in SR and LR

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16
Q

Name 4 characteristics of oligopoly

A

High barriers to entry

High concentration ratio

Interdependence of firms

Product differentiation

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17
Q

Define oligopoly

A

where a few large firms dominate a market

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18
Q

Define interdependence

A

when the action of one firm have an impact on all the firms in the market.

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19
Q

What market structure to use kinked demand curve

A

Oligopoly

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20
Q

Why do firms use non-price competition in Oligopoly?

A

Interdependent so prices are ‘sticky’, firms don’t compete on this

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21
Q

Define price leadership

A

Setting of price in market by a dominant company that others then follow

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22
Q

Define marginal cost pricing

A

Firms set price equal to the extra cost of producing an extra unit of output

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23
Q

Define predatory pricing

A

Anti-competitive strategy where firms set prices below AVC in attempt to force rivals out the market. It is illegal

24
Q

Define price wars

A

Where competing firms keep cutting prices in short run

25
Q

Define limit pricing

A

Less extreme strategy using highest price firm can set without enabling a new firm to enter the market and make profit.

26
Q

Define cost plus/ mark up pricing

A

Policy where firms set their price by adding a mark-up to average costs.

27
Q

Name 3 non-price strategies

A
  1. Buy one get one free (BOGOF) and other ‘offers’
  2. Advertising
  3. Loyalty card
28
Q

Define tacit collusion

A

when firms behave as if they have an agreement on price, but in fact they don’t

29
Q

Define overt collusion

A

when firms actually get together to agree prices

30
Q

Name a reason why firms may collude

A

Increase joint prices

31
Q

Name 3 conditions favouring collusion

A

Small number of firms

Produce similar goods

Some secrecy about market conditions

32
Q

Name 2 reasons cartels break down

A

Exposure by authorities

Free riders

33
Q

define cartel

A

an agreement between firms on price and output with the intentin of maximising their joint profits

34
Q

define game theory

A

the study of strategies used to make decisions

35
Q

Name 2 criticisms on the kinked demand curve

A

How to determine equilibrium price

Prices not always sticky in reality

36
Q

Name 5 characteristics of monopoly

A

One seller

High barrier to entry

Unique products

Imperfect information

Super normal profit in LR

37
Q

Name an advantages and 2 disadvantages of monopoly

A

For: dynamic efficiency

Against: Lower consumer surplus, deadweight loss

38
Q

Define dynamic efficiency

A

Increase in efficiency over time

39
Q

Define creative destruction

A

The process whereby established monopoly businesses see their profits destroyed by new entrants into the market attracted by abnormal profits

40
Q

Define natural monopoly and give an example

A

Where economies of scale are so great that no single firm can fully exploit them - e.g London Underground

41
Q

Define price discrimination

A

When a producer charges different prices to different markets for the same product

42
Q

Name 4 conditions necessary for price discrimination

A
  • Different elasticities in each market
  • Can distinguish between consumers
  • Can’t buy in cheap market and sell in expensive (arbitrage)
  • Firm must have market power
43
Q

What is the difference between third degree and first degree price discrimination?

A

First: different price for each customer (very rare)

Third: different price for different groups of consumer

44
Q

Name 2 benefits to producers and 2 benefits to consumers from price discrimination

A

Producers: more profit, turn consumer surplus into producer surplus

Consumers: pay lower price in elastic market, can provide loss making service e.g off peak trains

45
Q

Name a drawback of price discrimination

A

Loss of consumer surplus, those in inelastic market pay higher price

46
Q

Define monopsony

A

A single buyer

47
Q

Name 2 advantages and 2 disadvantages to monopsony

A

Adv: Consumers may benefit in terms of lower prices, Monopsonist benefits in terms of higher profits

Disadv: Quality reduced, suppliers go out of business

48
Q

How can suppliers combat monopsonist power? (2 ways)

A

Merge to compete

Make themselves indispensable to supplier

49
Q

Name 2 ways governments can intervene to reduce monopsony power

A

Encourage fair trade

Regulate monopsony profit

Regulation

50
Q

Name 5 characteristics of a contestable market

A

• Absence of sunk costs
• Freedom of entry to the industry
• Costs of exit are low
• Low consumer loyalty
• Perfect knowledge

51
Q

Are the number of firms relevant in assessing whether a market is contestable?

A

No

52
Q

Name 3 ways to make a market less contestable

A

Integration

Marketing

Legal barriers/patents

53
Q

Name 3 ways to make a market more contestable

A

• Monitor price behaviour
• Monitor mergers and acquisitions
• Deregulation (lower barriers to entry)

54
Q

If an industry has supernormal profit what does that mean for its contestability?

A

Low as firms are not entering the market to benefit from it

55
Q

Define contestability

A

Low/no barriers to entry and low/no sunk costs

Economics Theme 3 (6 decks)

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