3.4 market structures

Question 1

allocative efficiency

Answer 1

producing at a point where the price of a good is equal to the marginal cost of production

Question 2

productive efficiency

Answer 2

occurs at the lowest point on the average cost curve this is where marginal cost equates with average costs

Question 3

dynamic efficiency

Answer 3

a firm achieves a higher productive potential over time due to investment in technology and/or productive methods

Question 4

X-inefficiency

Answer 4

occurs when average costs are higher than the lowest possible average costs a firm is operating above their potential average cost curve

Question 5

perfect competition

Answer 5

A market where a large number of firms sell homogenous products
Normal profits exist in the long run due to no barriers to entry to protect the market share of firms that make supernormal profits in the short run

Question 6

homogenous product

Answer 6

products are exactly the same in all aspects

Question 7

price taker

Answer 7

firms in perfect competition have to set their prices in line with the prices set in the market to price above this level would result in no sales

Question 8

monopoly

Answer 8

a market structure where one firm dominates the market in a pure market the firm has 100% market share
more typical is a legal monopoly that has 25% or more of the market share

Question 9

Third degree price discrimination

Answer 9

When different prices are charged for the same product due to differing elasticities of demand
A higher price is charged in the inelastic market and a lower price is charged in the elastic market

Question 10

Natural monopoly

Answer 10

a firm that benefits from continuous economies of scale therefore it is only rational to have one firm in the market
such firms have high sunk costs (costs that cannot be recovered should the firm close)