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Economics Theme 1 > 3.4 Market Structures > Flashcards

3.4 Market Structures Flashcards

1
Q

What is allocative efficiency? Where does it occur.

A
  • When firms allocate resources to goods that maximize consumer social welfare
  • When P = MC
    (When price they pay equals the marginal utility they receive, i.e., they get what they pay for)
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2
Q

What is Productive Efficiency? Where does it occur?

A
  • When firms produce at the lowest average cost
    (Producing maximum output with minimum input)
  • When MC = AC
    (at lowest point of AC curve)
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3
Q

What is Dynamic Efficiency? Where does it occur?

A
  • In the long-run, efficiency increases with productivity from new technology and innovation
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4
Q

What is X-inefficiency?

A
  • When firms fail to minimise average costs at a given output
    (i.e., producing 125 goods, instead of 100, which would be productively efficient)
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5
Q

What is perfect competition?

A
  • A market where firms produce homogenous goods
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6
Q

What are the 4 features of perfect competition?

A
  • Many buyers and sellers
    (therefore, not one firm can influence prices)
  • Freedom of entry and exit
    (everyone can make a profit and leave if they make a loss)
  • Perfect Information
    (everyone has the same production techniques)
  • Homogenous goods
    (everyone produces the same type of good)

*e.g., Agriculture

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7
Q

What kind of profits do firms in perfect competition make and why?

A
  • Normal profits in the Long-Run
  • Firms that join in the short-run looking to make supernormal profit will cause supply to shift right, therefore lowering price back down to AR2= MR2
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8
Q

What kind of efficiency is perfect competition? What efficiency are they not?

A
  • Productively and allocatively efficient
  • Not dynamically efficient
    (everyone produces the same good and makes the same profit)
    (unable to benefit from economies of scale)
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9
Q

What is Monopolistic Competition?

A
  • A market combining monopolies and perfect competition

*e.g., restaurants, barber shops

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10
Q

What are the 3 features of Monopolistic Competition?

A
  • Non-homogenous goods
    (some price-setting power short-run)
  • Many buyers and sellers
    (no price setting power long-run)
  • Freedom of Entry and Exit
    (normal profit Long-Run)
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11
Q

What kind of efficiency is monopolistic competition?

A
  • Dynamically efficient
    (Firms can use retained profits for investments in research and technology)
  • Not allocative or productively (price is set higher than MC and firms not producing at lowest point of AC curve)
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12
Q

What are 2 limitations of monopolistic competition?

A
  • Some firms retain supernormal profits whilst others do not
    (different production styles and methods)
  • Harder to enter the market
    (imperfect information)
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13
Q

What is an Oligopoly?

A
  • A market dominated by a few large firms

*e.g., coffee industry (Starbucks, costa, Caffe Nero)

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14
Q

What are the 3 features of an oligopoly?

A
  • Interdependence of firms
    (actions of one firm affect another)
  • Homogenous goods
    (price-setting power)
  • Barriers to entry (e.g., economies of scale, brand loyalty)
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15
Q

Why are prices fairly stable in an oligopoly?

A
  • If firms cut costs, other will follow, if they increase prices, they become less competitive

(therefore, they resort to non-price competition)

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16
Q

What is collusion? What are the 2 effects of it?

A
  • When firms come to an agreement to reduce competition?
  • Firms collude on a price to keep making supernormal profits
  • Firms collude to prevent price cutting from other firms (which would reduce profit)
17
Q

What are the 3 types of Price competition? (Oligopolies)

A
  • Price Wars
    (When firms continuously cut costs until one is constantly making a loss and has to leave)
  • Predatory Pricing
    (When firms lower prices to prevent new entrees into the market and then raise prices again) (low then high)
  • Limit Pricing
    (When firms set prices so low to prevent new entrees) (constant - making normal profit)
18
Q

What are 6 types of non-price competition? What is the drawback?

A
  • Advertisement
  • Brand
  • Loyalty
  • Quality
  • Customer service
  • Product development
  • Drawback: can be expensive and may not work
19
Q

What kind of efficiency is an oligopoly?

A
  • Dynamically efficient
    (Retained profits to invest and benefit from economies of scale)
  • Statically efficient (not productively or allocatively)
20
Q

What is a monopoly?

A
  • Single Seller in a market
21
Q

What kind of profit do monopolies make? Why?

A
  • Only supernormal profit or normal profit in the long-run
    (No freedom to entry or exit)
22
Q

What is third degree price discrimination?

A
  • When a monopoly charges different amounts to different groups for the same good
23
Q

What are the 2 benefits and 1 cost of third degree price discrimination?

A

Benefits:
- Lower costs for certain groups
- Higher profits

Cons:
- Some people have to pay more

24
Q

What is a Natural monopoly?

A
  • When the number of efficient firms is only one
    (therefore, pointless to encourage competition as new firms will be easily outpriced)
25
Q

What is the kind of efficiency for a monopoly?

A
  • Dynamically efficient
  • Static Efficient
26
Q

What is a monopsony?

A
  • Only one buyer
27
Q

What is a contestable Market?

A
  • Market with threat of new entrees, causing incumbent firms to be efficient
28
Q

What are the 4 features of a contestable market?

A
  • Perfect Information
  • Freedom of entry or Exit
  • Low brand loyalty
  • No collusion
29
Q

What are the 5 barriers to entry?

A
  • Legal Barriers (e.g., patents, copyright)
  • Marketing barriers (e.g., apple)
  • Pricing decisions from existing firms (e.g., predatory pricing)
  • Higher start-up and sunk costs
  • Economies of scale from existing firms
30
Q

What is the degree of contestability?

A
  • The extent to which the gains from entering a market exceed the costs

Economics Theme 1 (9 decks)

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