3.4 Market Structures Flashcards
What is allocative efficiency? Where does it occur.
- 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)
What is Productive Efficiency? Where does it occur?
- When firms produce at the lowest average cost
(Producing maximum output with minimum input) - When MC = AC
(at lowest point of AC curve)
What is Dynamic Efficiency? Where does it occur?
- In the long-run, efficiency increases with productivity from new technology and innovation
What is X-inefficiency?
- When firms fail to minimise average costs at a given output
(i.e., producing 125 goods, instead of 100, which would be productively efficient)
What is perfect competition?
- A market where firms produce homogenous goods
What are the 4 features of perfect competition?
- 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
What kind of profits do firms in perfect competition make and why?
- 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
What kind of efficiency is perfect competition? What efficiency are they not?
- Productively and allocatively efficient
- Not dynamically efficient
(everyone produces the same good and makes the same profit)
(unable to benefit from economies of scale)
What is Monopolistic Competition?
- A market combining monopolies and perfect competition
*e.g., restaurants, barber shops
What are the 3 features of Monopolistic Competition?
- 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)
What kind of efficiency is monopolistic competition?
- 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)
What are 2 limitations of monopolistic competition?
- Some firms retain supernormal profits whilst others do not
(different production styles and methods) - Harder to enter the market
(imperfect information)
What is an Oligopoly?
- A market dominated by a few large firms
*e.g., coffee industry (Starbucks, costa, Caffe Nero)
What are the 3 features of an oligopoly?
- Interdependence of firms
(actions of one firm affect another) - Homogenous goods
(price-setting power) - Barriers to entry (e.g., economies of scale, brand loyalty)
Why are prices fairly stable in an oligopoly?
- If firms cut costs, other will follow, if they increase prices, they become less competitive
(therefore, they resort to non-price competition)
What is collusion? What are the 2 effects of it?
- 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)
What are the 3 types of Price competition? (Oligopolies)
- 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)
What are 6 types of non-price competition? What is the drawback?
- Advertisement
- Brand
- Loyalty
- Quality
- Customer service
- Product development
- Drawback: can be expensive and may not work
What kind of efficiency is an oligopoly?
- Dynamically efficient
(Retained profits to invest and benefit from economies of scale) - Statically efficient (not productively or allocatively)
What is a monopoly?
- Single Seller in a market
What kind of profit do monopolies make? Why?
- Only supernormal profit or normal profit in the long-run
(No freedom to entry or exit)
What is third degree price discrimination?
- When a monopoly charges different amounts to different groups for the same good
What are the 2 benefits and 1 cost of third degree price discrimination?
Benefits:
- Lower costs for certain groups
- Higher profits
Cons:
- Some people have to pay more
What is a Natural monopoly?
- When the number of efficient firms is only one
(therefore, pointless to encourage competition as new firms will be easily outpriced)
What is the kind of efficiency for a monopoly?
- Dynamically efficient
- Static Efficient
What is a monopsony?
- Only one buyer
What is a contestable Market?
- Market with threat of new entrees, causing incumbent firms to be efficient
What are the 4 features of a contestable market?
- Perfect Information
- Freedom of entry or Exit
- Low brand loyalty
- No collusion
What are the 5 barriers to entry?
- 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
What is the degree of contestability?
- The extent to which the gains from entering a market exceed the costs
