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Sutherland > 3.4 market structures > Flashcards

3.4 market structures Flashcards

1
Q

What is economic efficiency?

A
  • Efficiency is about a society making optimal use of scarce resources to help satisfy changing wants & needs
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2
Q

Allocative efficiency

A
  • Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the factor resources used up in production
    -The main condition required for allocative efficiency in a market is that market price = marginal cost of supply
    -This can also be expressed as AR = MC

( P(AR)=MC )

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3
Q

Productive efficiency

A
  • A firm is productively efficient when it is operating at the lowest point on its average cost curve i.e. unit costs
    have been minimised (lowest AC occurs when AC = MC)
  • Productive efficiency exists when producers minimize the wastage of resources
  • Productive efficiency relates to when an economy is on their production possibility frontier
  • An economy is productively efficient if it can produce more of one good only by producing less of another.

(lowest point on ATC)

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4
Q

Social efficiency

A

-The socially efficient level of output and/or consumption occurs when marginal social benefit (MSB) = marginal social cost (MSC) – this is the same as allocative efficiency

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5
Q

Dynamic efficiency

A

-Dynamic efficiency occurs when businesses supplying a market successfully meets our changing needs and wants over time. Crucial to dynamic efficiency is whether the market

(requires economic profit)

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6
Q

Product innovation

Process innovation

A

Product innovation
- Small-scale and subtle changes to the characteristics and performance of a good or a service

Process innovation
- Changes to the way in which production takes place or is organised
- Changes in business models and pricing strategies

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7
Q

Creative destruction

A

First introduced by economist Joseph Schumpeter, creative destruction refers to the dynamic effects of innovation –
with new products or business models, some jobs are lost but new ones are created.

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8
Q

Deadweight loss of welfare

A

A deadweight loss is the loss in producer and consumer surplus due to an inefficient level of production perhaps
resulting from one or more market failures or government failure.

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9
Q

Features of Perfect competition

A

-Many sellers
-Identical costs
-Identical / homogeneous products
-No entry or exit barriers
-Perfect knowledge of the market for all participants – all firms can access same information, no trade secrets etc
-All firms are price takers
-Normal profit for all firms in the long run (but short run losses or
supernormal profits are possible.
-Productively & allocatively efficient in long run.

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10
Q

Profit maximisation in the short run – diagrammatic analysis

A
  • When drawing perfect competition diagrams, remember to make a clear distinction between the market and a representative individual firm i.e. you must draw two diagrams
  • The market price is set by the interaction of market supply and demand
  • Each individual firm is a price taker in a perfectly competitive market
  • The ruling market price becomes the AR and MR curve for the firm
  • Average revenue equals marginal revenue at every level of output
  • We assume that the aim of each firm is to find a profit-maximising output
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11
Q

Profit maximisation in the long run – diagrammatic analysis

A

-If most firms are making abnormal (supernormal) profits in the short run, this encourages the entry of new
firms into the industry driven into the market by the profit motive
- This will cause an outward shift in market supply forcing down the ruling market price
- The increase in market supply will eventually reduce the ruling market price until price = long run average cost
- At this point, each firm in the industry is making normal profit where price (AR) = average cost
- Other things remaining the same, there is no further incentive for movement of firms in and out of the industry and a long-run equilibrium is established where price = average cost at output where MR=MC

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12
Q

where is Long run equilibrium in perfect competition

A

-In long run equilibrium, all firms are making normal profits (P=AC)
-Normal profits where AR=AC – i.e. just enough profits to keep resources in their current use

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13
Q

Economic efficiency in perfect competition

Allocative efficiency:

Productive efficiency:

Dynamic efficiency:

A

Allocative efficiency:
Yes
achieved in short and the long run, price is equal to marginal cost (P=MC)

Productive efficiency:
Yes
Productive efficiency occurs when the equilibrium profit maximising output Is supplied at minimum average cost. This is attained in the long run for a competitive market.

Dynamic efficiency:
No
Little scope for innovation designed to make products differentiated from each other and allow one or more suppliers to establish

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14
Q

Evaluating Assumptions of the Perfect Competition Model

A
  1. Most firms have some amount of price-setting power – they are price makers not price takers!
  2. Dominance in real world markets of differentiated / branded products
  3. Highly complex products, there always information gaps facing consumers
  4. Impossible to avoid search costs even with the spread of digital/web technology
  5. Patents, control of intellectual property, control of key inputs are all ignored by the perfect competition model
  6. Rare for entry and exit in an industry to be costless
  7. The model of perfect competition also assumes that there are no externalities (positive or negative); in reality, there are often 3rd party effects of every market
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15
Q

Monoplistic comp features

A

-imperfect comp
-large numbers of sellers
-selling similar/differentiated products
-firms have price making power
-low barriers to enter/exit
-economics profit/ loss in short run
-normal profit in long run
-productivity and allocatively inefficient
e.g. restaurants

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16
Q

monoplistic comp long run

A

-new firms are attracted by the economic profit and enter the markets
-this reduces demand for the original firm
-demand falls, price falls, and the curve becomes slightly more elastic
-only normal profits can be made

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17
Q

Oligopoly features

A

-an industry which is dominated by a few firms
-high barriers to enter/exit
-high concentration ratio
-interdependence of firms, firms will be affected by how other firms set price and output
-differentiated products
-dominant firms can enjoy supernormal profits
-prices tend to be quite stable
-use non-price comp
-changes in ATC doesn’t necessarily change output

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18
Q

concentration ratio

A

-measure the combined markets share of the top ‘N’ firms in the industry
-its is as a %
-if you dont have the value of their market share you work it out by, value of “N” firms / value of all firms x 100

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19
Q

non-price comp

A

-better quality of customer service
-long opening hours
-discounts on product upgrades
-developing brand loyalty through additional advertising and promotions
-brand loyalty reduced XED and allows firms to charge higher prices
-variation and design, style, service, quality
-contractual relationships with suppliers
-exclusive distribution agreement

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20
Q

Oligopoly compete or collude

A

Compete:
-when you have a comp advantage
-if you can predict your competitors actions
-if you have a lot of customer loyalty
-if market is unstable
-if there are vulnerabilities
-when there’s a large number of big firms
-when entry barriers are low

collude:
-when the businesses are similar size
-if you can’t predict their actions
if there could be many new businesses entering the industry
-if market is stables
-firms have similar costs
-lots of brand loyalties with all firms
-if entry barriers are high

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21
Q

why are oligopolys not that bad

A

-they gain economies of scale so lower prices for consumers
-stability/reliability e.g. bank loans
-they employ a lot go staff
-tax collectors happy

22
Q

types of price comp

A

-price wars- firms repeatedly cut their prices over time
-predatory pricing- occurs when a firm deliberately tries to push prices low enough to force rivals out of the market
-limit pricing- means the incumbent firm sets a lower price, and high output, so that entrants cannot make a profit at that price.

23
Q

barriers to entry

A

-economies of scale (bus grows so big they can lower the prices which other bus can’t match)
-natural/geographical barriers (a physical feature hindering business, e.g. natural resources oil)
-brand loyalty
-pricing
-legal patents (exclusive rights generated for an invention)
-knowledge and expertise (many years in the bus means a lot of knowledge e.g. Microsoft, google)
-technology and capital requirements (newer up to date tech allows lower waste)
-first mover and network effects (the success of a firm relies on the mass users using their products, which adds value of a good/service)

24
Q

barriers to exit

A

-costly equipment/specialist facilities. Not easy to sell. Might need to sell at a loss or at rock bottom prices
-redundancy costs for the workforce
-penalty fines/exit fees e.g. from rental agreements
-lost goodwill with customers
-clean up costs. Firms may face expensive clean up costs if they are closing a factory that used or produced materials that used environmental hazard at the site

25
Q

price discrimination

A

-when a bus charges different prices for different groups of customers
e.g.
-age discrimination
-student nights
-gym membership

26
Q

aims of price discrimination

A
  1. to increase total revenue by extracting customers surplus and turning it into producer surplus
  2. to increase total profits providing the marginal profit from selling to customers is positive
  3. to generate cash flow especially during a recession
  4. to increase market share and build customer loyalty
  5. to make more efficient use of a firms spare capacity
  6. to reduce amount of waste and cut the costs of keeping products in stock/storage
27
Q

3rd degree price discriminations

A

-charging different prices to groups of consumer segment by price elasticity of demand, income, age, sex

28
Q

Hurdle model of price discrimination

A

-the hurdle model is associated with thee US economist professor Robert frank
-the hurdle method separate buyer with low willingness to pay from those happy to pay a premium price-often to be first to use it

29
Q

conditions requires for a firm to use third degree price discrimination

A
  1. firms have sufficient monopoly power -monopolys always have pricing power
    2.identifying different market segments-i.e. groups of consumers with different price elasticities of demand
  2. Ability to separate different groups- Requires information / sufficient market intelligence on the purchasing behaviour of consumers
  3. Ability to prevent re-sale (arbitrage)- No secondary markets where arbitrage can take place at intermediate prices e.g. limiting sales, age- restrictions, compulsory use of ID cards
30
Q

disadvantages of price discrimination

A

-Higher prices for some consumers, leading to a loss of consumer surplus and a reduction in allocative efficiency, if P>MC; the consumer surplus is reallocated into producer surplus (i.e. profit)
-Can increase regional inequality if some consumers can only access goods/services at higher prices
-There may be an increase in transaction costs or administration costs for businesses, as they have to ensure that the market is sub-divided and consumers in each group are kept separate e.g. checking ID documents for age / status etc. This can possibly reduce profit.
-Groupings of consumers is not perfect e.g. relatively well-off adults taking night-school courses may have a student card and be able to access student discounts, despite being able to pay the normal adult price
-Additional profits earned as a result of price discrimination may allow incumbent firms to adopt anti- competitive practices e.g. predatory pricing, higher entry barriers through more spending on advertising etc. This can entrench the firm’s dominant market position and cause even higher prices in the future.

31
Q

advantages of price discrimination

A

-Lower prices for some groups of consumers, who might not otherwise be able to afford the good/service in question, therefore widening market access
-More profits for the business can result in higher dividends for shareholders and a positive wealth effect
-More profits can lead to reinvestment / business growth as well as R&D
-Businesses can make better use of spare capacity, increasing demand in quieter times and reducing overcrowding / excess demand at leak times

32
Q

Economic efficiency in monopoly

A

The standard case against monopoly is that it is leads to a loss of economic efficiency which can then cause reductions in the welfare of consumers affected. But this view can be challenged as part of your evaluation. It is important to judge the exercising of market / monopoly power on a case-by-case basis based on how businesses with such power actually conduct themselves.

33
Q

the welfare case against price targeting

A
  1. exploitation of consumers
    2.extraction of consumer surplus turned into higher producer surplus/supernormal profits
    3.possible use of discrimination as a limit pricing tactic/and a barrier to entry to rival firms
  2. ultimately, if successful it reinforces the monopoly power/dominance of existing firms
34
Q

arguments in support of price targeting

A

1.potential for cross subsidy of activities that brings social benefits
2. making better use of spare capacity
3. it brings new customers into market
4. use of monopoly profit for research

35
Q

a monopoly is

A

-when there is only one firm in the industry
-dominant monopoly has 40% market share
-legal monopoly has 25%

36
Q

features of a monopoly

A

-one large firm dominating the market
-single seller or very low levels of competition
-price maker
-high barriers to entry/exit
-advertising and product differentiation
-economic profit can be made in short/long run
-allocatively and productively inefficient
-level of comp is low

37
Q

monopoly benefits

A

-large size allows them to gain economies of scale
-potentially dynamically efficient
-when the market is dominated by a few large firms they might still compete fiercely with each other on price, quality, service
-intellectual property rights
-monopolies may choose to be efficient
-international comp

38
Q

a contestable markets is

A

A market structure where there is a freedom of entry and exit

contestability within a market is determined by factors the than just sunk costs
e.g.
-customer loyalty
-regulations
-info for supplier

39
Q

features of a contestable market

A

-no sig to the number of firms In the market
-susceptible to hit and run tactics
-no/low sunk costs
-not brand loyalty
-no/low barriers to enter/exit
-little regulation
-easy access to raw materials and skilled labour
-a pool of new businesses willing to enter the market
-no long run abnormal profits/supernormal profits
-good knowledge and access to existing tech
-long run economic efficiency
-allocative and productively efficient

40
Q

Monopsony is

A

one large buyer with many small sellers

41
Q

features of a monopsony

A

-single buyer
-can be a single buyer of labour or product
-sig buyer power
-profit maximisation MCL=MRP
-assumes many sellers of the product or labour
-price/wage maker
-tends to be bad for workers and suppliers
-tends to be good for consumers
-e.g., NHS, Education, Defence, Amazon, Food manufactures, Increasingly supermarkets

42
Q

monopsony in the product market

A

-monopsony has buying or bargaining power in their market
-thus buyer power means that a monopsony can exploit their bargaining power with a supplier to negotiate lower prices
-the reduced costs of purchasing inputs increases their profit margins

43
Q

economic welfare effects of monopsony power in markets

A

-improving value for money
-producer surplus
-a monopsony can act as a useful counter weight to the selling power of a monoplist
-one monopsony impacts the prices of other businesses

44
Q

monopsony in the labour market

A

-if there is only one main employer of labour, then they have market power in setting wages and choosing how many workers to employ
examples of monopsony in labour markets:
-coal mine owner in town where coal mining is the primary source of employment
-gov in employment of civil servsnts, teachers, nurses, police etc

45
Q

problems of monopsony in labour markets

A

-monopsony can lead to lower wage for workers. this increases inequality in society
-workers are paid less than their marginal revenue product
-firms with monopsony power often have a degree of monoply selling power. This enables them to make high profits at the expense of consumers and workers
-firms with monopsony power may also care less about working conditions becsause workers dont have many alternatives to the main firm

46
Q

Monopsony impact on supplier

A

-asumes monopsony always exploits
-asumes giv may not step in
-how dominant is the monopsony

47
Q

Monopsony impact on customer

A

-cheaper prices as barganing power was used to drive down prices
-monopsony may not pass on benifit from lower prices
-less choice
-poorer quality needing to suppliers need to save money
-lower prices are better for consumer surplus, more money to spend elsewhere

48
Q

Monopsony impact on employees of the monopsonist

A

-only one main employer so they have the power to set wages, and choose how many workers to employ
-potentially bad working conditions as theres no alternatiuves
-lower wages
-less workers employed means more work
-less choice of employers and alternative job opportunities

49
Q

Monopsony impact on employees of the supplier

A

-low wages for the workers
-potential way cuts
-potential job losses
-potential poorer working conditons due to less moeny being recieved

50
Q

why don’t ban monopsony

A

-taxes
-gov monopsony
-povides a lot of jobs
-they wont necessarily exploit
-may buy a large amount of goods from suppliers so even if they reduce the price suppliers may stil make profit
-may be a monoploy on the other side of the monopony

51
Q

how could the gov intervene with monopsony

A
  1. fines from the regulator (up to 1% of revenue)
  2. laws and regulations e.g. ensure certain quality standard
  3. price regulation
  4. wage regulation
  5. black markets that may lead to increased monopsony power
  6. encourage greater competition
  7. promote new entrants into market
  8. reduces barriers to entry for new firms e.g. grants, subsidies
52
Q

problems with gov intervention in monopsony

A

-expensive to regulate
-monopsony could just put prcies up by 1%
-regulator may take years to investugate
-laws take time to pass
-what specific laws need to be passed
-opportunity cost for grants
-how do you decide min wage

Sutherland (9 decks)

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