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Theme 3 Economics > 3.4- market structures > Flashcards

3.4- market structures Flashcards

1
Q

What is allocative efficiency?

A

production is alligned with consumer preferences. Resources are distributed to the goods and services consumers want.

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2
Q

When does allocative efficiency occur?

A

P=MC

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3
Q

In what market does allocative efficiency occur?

A

Free market

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4
Q

Where is productive efficiency shown on the average cost curve?

A

At the lowest point

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5
Q

When does productive efficiency occur?

A

When MC=AC

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6
Q

What are allocative and productive efficiency forms of?

A

static efficiency

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7
Q

What is dynamic efficiency?

A

When resources are allocated efficiently over time. The range of innovation is at the optimum level, which leads to falling long-run average costs.

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8
Q

When is a market dynamically efficient?

A

If consumer needs and wants are met as time goes on.

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9
Q

Evaluation point for dynamic efficiency?

A

The long lag time between making an investment and having falling average costs.

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10
Q

When is a firm x-inefficient?

A

When it is producing within the AC curve

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11
Q

Why might x-inefficency occur?

A
  • organisational slack
    -poor management
    due to a lack of competition
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12
Q

What are costs like in an x- inefficient market?

A

A lot higher than if there was competition

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13
Q

What market does allocative efficiency occur in?

A

Perfectly competitive market

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14
Q

What market does productive efficiency occur in?

A

Perfectly competitive market

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15
Q

What market does dynamic efficiency occur in?

A

Monopolistic competition.

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16
Q

What market is there x- inefficiency?

A

oligopoly and monopoly, monopolistic competition.

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17
Q

What are the characteristics of perfect competition?

A

-many buyers and sellers.
-sellers are price takers.
-no barriers to entry and exit.
-perfect knowledge.
-homogenous goods.
-factors of production are perfectly mobile

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18
Q

What is a homogenous good?

A

When they are perfect substitutes and the products cannot be distinguished from different suppliers

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19
Q

How is price determined in a perfectly competitive market?

A

By the interaction of demand and supply

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20
Q

What profit is made in the long run in a perf competitive market?

A

only normal profits are made

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21
Q

What profit is made in the short run in a perf competitive market?

A

supernormal profit, normal profit or loss

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22
Q

Short run equilibrium diagram perf competitive market (supernormal profit)

A

draw on paper

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23
Q

Long run equilibrium diagram perf competitive market (normal profit only)

A

draw on paper

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24
Q

What are the advantages of a perfectly competitive market?

A

-In the long run, there is a lower price. P=MC, so there is allocative efficiency.
-Firms produce at bottom of AC curve- productive efficiency.
-The supernormal profits produced in the short run might increase dynamic efficiency through investment.

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25
Q

What are the disadvantages of a perfectly competitive market?

A

-In the long run, dynamic efficiency might be limited due to lack of supernormal profits.
-firms are small, no economies of scale.
-The model rarely applies in real life, no market is perfect.

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26
Q

What is monopolistic competition?

A

a type of imperfect competition, that there are many producers against each other however they are selling products that are non-homogenous. Hence, are not perfect substitues

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27
Q

What are characteristics of monopolistically competitive markets?

A
  • firms sell non homogenous products due to branding.
    -Large number of buyers and sellers.
    -Each seller has the same degree of market powers as other sellers, but power is weak.
    -no barriers to entry/exit.
    -buyers and sellers have imperfect competition.
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28
Q

Example of monopolistic competition

A

Hair dressers, coffee shop

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29
Q

In the short run, what point do firms profit maximise?

A

MC=MR

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30
Q

Diagram: short run profit maximising equilibrium- monopolistic competition

A
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31
Q

Diagram: long-run profit maximising equilibrium- monopolistic competition

A
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32
Q

What are the advantages of monopolistically competitive markets?

A

-Firms are allocatively inefficient in the short run and long run (P>MC)
-Consumers get a wide range of choice.
-Supernormal profits in the short run might increase dynamic effiency through investment.

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33
Q

What are disadvantages of monopolistically competitive markets?

A
  • In the long run, dynamic efficiency might be limited due to the lack of supernormal profits.
    -Firms have x-inefficiency, since they have little incentive to minimise costs.
34
Q

What are the characteristics of an oligopoly?

A

-high barriers to entry/exit (makes the market less competitive)
-High concentration ratio (only a few firms supply the majority of the market)
-interdependence of firms
-product differentiation

35
Q

What is the n-firm concentration ratio?

A

The combined market share of the top few firms in a market.
If the 4 firm concentration ratio was calculated, the market share of the 4 largest firms would be added together (must be in percentage)

36
Q

What does the higher the concentration ratio mean?

A

The less competitive the market. Fewer firms are supplying the bulk of the market.

37
Q

When does collusive behaviors occur?

A

When firms agree to work on something together. They might choose to set a price or fix quantity of output.

38
Q

Reasons for collusive behaviour?

A

-Minimises competitive pressure.
-Higher prices and greater profits for firms. However, reduces consumer surplus.

39
Q

Reasons for non collusive behaviour?

A

-It can be illegal and involves risks.
-A strong firm will not want to if they can increase market share or charge higher prices than competitors.

40
Q

When does collusion work best?

A

-When there are a few firms who trust each other.
-They face similar costs.
-high barriers to entry.
-produce similar products.

41
Q

What are the two types of collusion?

A

overt or tacit

42
Q

What is overt collusion?

A

When a formal agreement is made between firms. It is illegal.
-could be price fixing.

43
Q

What is tacit collusion?

A

Unpsoken actions between oligopolistic firms that are likely to minimise a competitive response

44
Q

What are the benefits of collusion?

A

-Excess profits could be used for investment, which might improve efficiency in the long run.
-By increasing their size firms can exploit economies of scale, leading to lower prices.

45
Q

What are the costs of collusion?

A

-There is a loss of consumer welfare.
-The absence of competition means efficiency falls.
-Reinforces the monopoly power of existing firms.

46
Q

What is a cartel?

A

A cartel is a group of two or more firms which have agreed to control prices, limit output, or prevent the entrance of new firms into the market.

47
Q

What is a famous example of a cartel?

A

OPEC, they controlled over 70% of the supply of oil in the world.

48
Q

What is price leadership?

A

When one firm changes their prices, and other firms follow.
Other firms are often forced into changing their prices too, otherwise they risk losing market share.

49
Q

How is game theory related to oligopolis?

A

Related to the interdependence between the firms.

50
Q

What does game theory predict?

A

The outcome of a decision made by one firm, when it has incomplete information about the other firm.

51
Q

What is the dominant strategy?

A

The option which is best, regardless of what the other person chooses. - both to confess

52
Q

What is nash equilibrium?

A

The optimal strategy for all players, whilst taking into account what opponents have chosen.

53
Q

What are the three types of price competition?

A
  • price wars.
    -predatory pricing
    -limit pricing
54
Q

What is a price war?

A

Firms constantly cutting their prices below that of its competitors. The competitors then lower their price to match and so on.

55
Q

What is predatory pricing?

A

It is illegal. Firms setting low prices to drive out firms already in the industry. In the short run, they make losses.

56
Q

What is limit pricing?

A

not neccesarily illegal. Low prices discourage the entry of other firms. Ensures the price of a good is below that which a new firm entering the market would be able to sustain.

56
Q

What are some types of non-price competition?

A

-advertising and banking.
-improve quality of service.
-increase brand loyalty.

57
Q

What is a monopoly?

A

A specific person or enterprise is the only supplier of one thing. Uncompetitive market

58
Q

What are the characteristics of a monopoly?

A

-High barriers to entry.
-price maker.
-price discrimination.
-profit maximisation.
-sole seller in the market.
-One dominating firm with 25%

59
Q

When do monopolists earn supernormal profits?

A

In BOTH the short run and the long run. At the point MC=MR

60
Q

Profit maximising equilibrium- monopoly diagram

A
61
Q

What is third degree price discrimination?

A

When the monopolist decides to charge different groups of consumers different prices, for the same good or service.

62
Q

How does the market split up and allow different prices to be charged?

A

Due to demand curves of different elasticities within each group of consumers.

63
Q

Will firms charge higher or lower prices if a group has inelastic demand?

A

Higher.

64
Q

Diagram showing different price elasticities in the market.

A
65
Q

What is an example of third degree price discrimination?

A

The higher price at peak times on trains.
adults, students and children pay different prices to see the same film at a cinema.

66
Q

What are the neccesary conditions of price discrimination?

A

-firms must have sufficient monopolypower.
-must be able to identify people with different elasticities of demand.

67
Q

What are the benefits of price discrimination?

A

-firms benefit as they increase supernormal profits.
-Those in the elastic market pay a lower price.
-Good for families as children usually pay less.

68
Q

What are the costs of price discrimination?

A

-loss of consumer surplus.
-strengthens monopoly power of firms, resulting in higher prices for consumers.
-Could cost the firm to divide the market.

68
Q

What are the benefits of a monopoly?

A

-monopolies can earn significant supernormal profits- invest in more research and development.
-Natural monopoly- more efficient for only one firm to provide good or service. only one water supplier.
-can generate export revenue.
-monopolies are large, exploit economies of scale.

69
Q

What are the costs of a monopoly?

A

-Higher prices and profits may result in a misallocation of resources.
-can charge consumer higher prices.
-loss of consumer surplus and a gain of producer surplus.
-consumers do not get as much choice in a monopoly as they do in a competitive.

70
Q

What is a natural monopoly?

A

When there are high fixed costs. For example, water and gas pipes.
The costs of infrastructure are a form of sunk costs, makes barriers to entry and exit.

71
Q

What are the characteristics of a monopsony?

A

-A single buyer in the market. For example, network rail.
-supermarkets have monopsony power when buying products from farmers.
-Able to negotiate lower prices, because their suppliers have nowhere else to sell (there is only one buyer)

72
Q

What are the costs of a monopsony?

A

-the monopsony power of supermarkets has led to many farmers losing profits. Because supermarkets negotiate lowr prices.
-Workers might become unproductive if wages are low.
-Employees are likely to lose out with lower wages.

73
Q

What are the benefits of a monopsony?

A

-The NHS has monopsony power when buying drugs from pharmaceutical companies. They can negotiate lower prices. Saves money to be invested elsewhere.
-Consumers might receive lower prices.

74
Q

What are the characteristics of a contestable market?

A

-no significant barriers to entry and exit.
-no customer loyalty.
-no sunk costs.
-free access to production/technology.

75
Q

What does contestable market mean for firms?

A

-firms are more allocatively efficient.
-low barriers to entry, provide easy access to the market, firms are wary of new entrant entering taking profit then leaving.
-highly contestable are similar to perfect competition.

76
Q

Types of barriers to entry and exit:

A

Brand loyalty
limit pricing
predatory pricing
legal barriers such as patents
redundancy costs-discourage firms from leaving

77
Q

What are sunk costs?

A

Costs which cannot be recovered once they have been spent.

78
Q

Example of a sunk cost

A

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Theme 3 Economics (6 decks)

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