3.4 Market structures Flashcards
3.4.1 A)
Allocative effciency
When rescourses allocated in a way which maximises consumer satification / welfare P/AC = MC
Form can achieve AE when they have correct info about consumers
when the value to society from consumption is equal to the marginal cost of production
3.4.1 B)
Productive efficiency
When a firm produces at the lowest point of AC curve
This is where Economies of scale are fully explioted anymore and diseconomies will be experienced.
Able to change output through mergers, demegers and expansion.
3.4.1 C)
Dynamic efficiency
When resources are allocated efficenley over time. Its linked to investment which brings new production techniques and products over time.
alternative is static effcicnecy which looks at a set point in time. Ex: Allocative and productive effciency.
Dynamic efficiency will be achieved in markets where competition encourages innovation need profit incentive.
3.4.1 D)
X-inefficiency
If a firm fails to minimise its average costs at a given level of output, it is X-inefficient and there is organisational slack.
they are X-inefficient since they are not producing on the lowest AC curve. It often occurs where there is a lack of competition so firms have little incentive to cut costs.
3.4.2 )
What is perfect competitve market
Where there is a high degree of competiion. however doesnnt max welfare of productive ideal results.
3.4.2 A)
Char of perfect comp
- DD for firms good is perfectly elastic. firms are price takers
- there must be many buyers and selles no 1 or customer can influence market
-must be freedom of entry and exit from the industry important means that when a busniess is making profit anyone can enter that market and produce themselves.
-must be perfect knowledge enables firms to know when other firm are making profit to attract them into marker - product must be homogenous (idenitcal) so its impossible to tell diff between one another making qual not a diff in price
3.4.2 B)
Profit max in SR LR
In SR profit max possible MC=MR possible to make NP SNP and Loss. However in LR can only make NP
3.4.2 C)
Diagrammatic analysis
Redbook
3.4.2 )
Efficency
perfect comp is productive eff since MC=AC also allocative eff p=mc static eff
not dynamic no signle forms has enought for R&D small firms struggle to revice fiance. Perfect info means one firms investment gives no indivdiual benifit. leads to govt to do it.
3.4.3 A)
What is monopolistic competition
Its a form of imnperfect comp in between perf comp and monopoly
3.4.3 A)
What are the char of monopolistic comp
1) Large # of buyers and seller in a market, this mean that no one buyer or seller has price setting power
2) No barrier to entry or exit firms join at profit and leave as loss. meaning in the LR only normal profit possible.
3)These firms produce non-homogenous/ highly differential goods/servies. this mean a firm has some price setting power.
3.4.3 B)
How does the short run differ from long run in monopolisict comp
in the short run it is possible to make snp/np/snl. However in the LR its only possible to make NP.
3.4.3 B)
Why do firms only make normal profit in the long run in monopolisict comp
Firm’s are pm so produce at mc=mr allow for snp in the sr. However. due to no barrier to entry new firms will enter the market causes D/AR for an individual firm to reduce. shifting inwards to make normal profit. Loss is the opposite. Graph in redbook.
3.4.3 B)
what is the limitation of the idea that in LR only NP
may be imperfect info leading to firms not entering the market, firms may be diff sizes allowing to maintain snp.
3.4.3 B)
efficency of mc
Only np and they profit max, not alloactive or productive, likly to be dynamic.
3.4.4 A)
What is oligoply
is where few firms dominate the market and have majority of market share.
3.4.4 A)
Char of oligoply
o high barriers to entry and exit
o high concentration ratio
o interdependence of firms
o product differentiation
3.4.4 B)
Calc for n-firm conc
(total sales for n firms / total sales in industy ) * 100
3.4.4 C)
What is collusion
Is a collective agreement that reduces comp
3.4.4 C)
properties of collusion
Firms lowers prices, other will also so working together allows for maxising profit.
collusion is illegal
works best when few firms similar products
3.4.4 D)
What is overt collusion
there is a formal agreement
3.4.4 D)
What is tactic collusion
Not a formal agreement is called a cartel , could agree a price and allow non price comp to decide market share or agree to divide up market share based on present ms
3.4.4 E)
What is price leadership
Where one firm has adv over others due to size or costs, leads to other firms following. Domiate firms normally decice the prices
3.4.4 E)
How can behavior of non collusive firms be represented
game theory
3.4.4 E)
What is game theory
explores reaction of one player to a change in another, explains why firms in oilgopoly tend to have stable prices.
3.4.4 E)
Nash eq game theory
Where neither player can improve there position no incentive to change,
3.4.4 E)
dominate eq game theory
3.4.4 F)
Types of price competition
price wars
predatory prices
limit prices
3.4.4 F)
Types of price competition
price wars
Where its difficult to collude
drices down prices, v industry profits
3.4.4 F)
Types of price competition
predatory prices
Drives firms out the market by reducing prices then puttting it up when the exit
3.4.4 F)
Types of price competition
limit prices
Make atleast normal profit to push others out.
3.4.4 G)
types of non price comp
Adverts, loyalty cards, branding, quality, customer servies.
3.4.5 A)
Char of monopoly
25 % market share +, high barrier to entry’s profit maximisers.
3.4.5 D)
What is price discrimination
When a monopolist charges different prices to different consumers for the same good or servies when the cost of production is the same.
3.4.5 D)
What are the necessary condition for price discriminations
Firms must be able to clearly seperate the market into 2 sections. An elastic and inelastic section.
Must be price makers
Prevent arbitrage (Consumer buying from elastic and selling to inelastic)
3.4.5 D)
What does the price discrimination graph assume, and what does it show
There is a constant cost.
rather then having a combined market having two seperate markets make more snp.
3.4.5 D)
Adv of PD
Firms inc profit can go into r&d, improving dynamic eff
increase equality due to cross subsidization
3.4.5 D)
DAdv of PD
Conssumers lose some surplus to producers and some have to pay higher price.
3.4.5 F)
what is Natural monopoly
When only one firm in the market. Tend to be in industry with high fixed cost.
3.4.5 F)
Why is having only one firm in the market beneficial
EOS of scale so large that even 1 single producer is not able to fully exploits them.
pointles to encourage comp since it would raise the AC. if new firm enters they will be priced out.
3.4.5 F)
What are the +-ve to firms
large profit through profit maximization.
snp means ability to invest and use reserves at difficult times.
may not profit max bcos x inefff, sales or rev max
lack of comp means they may become complacent and not profit max
3.4.5 F)
What are the +-ve to Employees
Ineff may lead to emplooyes getting higher wages.
3.4.5 F)
What are the +-ve to consumer
^ consumer surplus
^ range of goods
consumer may pay ^, qual my lack
less choices due to 1 firm.
3.4.6 A)
monopsony char
only 1 buyer, same basic char as monopsony profit max,
pay supplier the lowest possible to max profit
3.4.6 B)
monopsony cost / ben for firms
Monsopny gain higher profit by being able to buy at lower prices
eos
3.4.6 B)
monopsony cost / ben for consumers
lower prices fall in ss
act as counters to monopolist
fall in qual
3.4.6 B)
monopsony cost / ben for empolyees
v employment
higher wage if making profit
3.4.6 B)
monopsony cost / ben for suppliers
recvice lower prices
