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Exam practise economics -Rianna > 3.4 Market structures > Flashcards

3.4 Market structures Flashcards

1
Q

Define economic efficiency

A

A society making optimal use of scarce resources to help satisfy our changing wants and needs

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2
Q

Define productive efficiency

A
  • Level of ouput where MC=AC
  • AC are minimised
  • NO wastage of scarce resources and a high level of factor productivity
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3
Q

Define allocative efficiency

A
  • Maximisation of society surplus- CS+PS (D=S)
  • Maximisation of net social benefit (MSB=MSC)
  • Where resources perfectly folllow conusmer demand (D=S)
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4
Q

Where is allocative efficiency on a graph

A

Level of ouput where AR=MC (P=MC)

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5
Q

Define X-inefficiency

A

Occurs when a firm isnt operating at its lowest average cost as there are no incentives for it to do this

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6
Q

Define static efficiency

A

Occurs when all resources are being used in an efficient manner at a point in time.

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7
Q

Define dynamic efficiency

A

Occurs where firms improve technology and production of a given period of time

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8
Q

Whats the difference between static efficiency and dynamic efficiency

A

Statics efficiency exists at a point in time. (allocative, productive and x efficiency)
Dynamic efficiency is concerned with how resources are allocated over a given period of time.

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9
Q

SNP being made by a perfectly competitive firm in the short run would disappear in the long run because of…

A
  • Freedom of entry into this market
  • In the SR AR>AC= SNP
  • New firms will enter the industry to share SNP
  • Increase in supply leads to a fall in price so SNP disappears
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10
Q

Define an incumbent firm

A

Incumbent firms are businesses already established in each market or industry.
They may have the advantages of having built up a loyal base of customers and also achieved internal economies of scale so that their average costs are lower than those of a rival / challenger supplier or brand.

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11
Q

Define market concentration ratio

A

% of the total market a particular number of firms have

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12
Q

Define sunk costs

A

Sunk costs are expenses that have already been incurred and cant be recovered

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13
Q

P

Perfect competition characteristics

A
  • Infinite buyers and sellers D=AR=MR (perfectly elastic)
  • Homogenous G/S - firms are price takers (increase P= lose D= no customers, decrease price= decrease rev + profit)
  • No barriers to entry/ exit
  • Perefect infomation
  • Firms are profit maximisers (MR=MC)
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14
Q

2 marks

Explain why a perfectly competitive firm is likely to find it difficult to achieve dynamic efficiency in the long run.

A

Dynamic efficiency= Reinvestment of SNP into innovation, R&D and new technology to decrease LRAC
Under conditions of perfect competition, in the long run it is not possible to make supernormal profit and so a firm is less likely to undertake potentially costly research and development activity, which makes the achievement of dynamic efficiency more difficult.

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15
Q

Monopolistic competition characteristics

A
  • Slightly differentiated goods- firms are price makers (substitutes available) - price elastic demand
  • Low barriers to entry/ exit –> relatively low cost and easier
  • Good infomation of market conditions
  • Non- price competition e.g. branding, advertising, quality of G/S
  • Firms are profit maximisers (MC=MR)
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16
Q

Chain of reasoning to explain the movement from SR to LR equilibrium in monopolistic competition

A
  1. When outside firms see firms are making SNP
  2. This encourages the entry of new firms
  3. As barriers to entry/ exit are low, new firms enter market
  4. D curve shifts left as customers opt to buy products offered by new firms
  5. D curve continues to shift left until its tangent to the AC curve
  6. AC=AR as proft max
  7. Firms make normal profits P=C
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17
Q

Evaluation of monopolistic competition

A
  • Spending on advertising is wasted (x-inefficiency)
  • Negative exernality (social costs of packaging)
  • Low barriers to entry–> intense competition–> more choice (positive)
  • Extensive choice is not always a benefit, not everyone can make optimal decisions –> people have bounded rationality
  • P>MC–> allocatively inefficient
  • P falls = increase in CS
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18
Q

Explain why high set up/ sunk costs are a barrier to entry that exist in oligopoly or monopoly markets.

A

High set up costs increase the risk involved in starting a business, which may put off new entrants.
This is especially the case if they are sunk costs ie those that are not recoverable when a firm leaves a market (such as investment in promotion).
High set up costs can make it difficult for new firms to enter a market - as they may struggle to obtain the finance required.

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19
Q

Explain why high R&D costs are a barrier to entry that exist in oligopoly or monopoly markets.

A

R&D costs can be ongoing costs with uncertain outcomes. This can put of potential new entrants due to the risk (uncertain outcomes) involved and / or constrain new entrants due to difficulty in obtaining finance.

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20
Q

Examples of high start up costs

A

Advertising costs, recruitment and training costs associated in the firms workforce

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21
Q

Why is E.O.S for incumbent firms a barrier to entry for new entrants

A

If theres potential for significant E.O.S, which incumbent firms are exploiting, this will deter new entrants. With initially low production volume, entranta may not be able not compete with exisiting cost structure
E.g. financial economies - better credit rating as large firms are seen to be less likely to fail and can borow money at a low I.R. = low A.C.

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22
Q

Examples of non price competition

A
  • Advertising – this will raise awareness, interest, desire and action to increase sales of G/S
  • Branding – investing in the image, logo, slogan of the business – to build trust amongst customers.
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23
Q

Vertical integration and apply to energy market

A
  • Vertical integration means one firm gains control of more of the market, which creates a barrier to entry. It could result in one firm gaining control of important technologies, and they might prevent other firms gaining access to them
  • Structure of largest suppliers is characterized by high degree of vertical integration between generation and supply that could possibly worsen competition
  • The 6 largest suppliers all own energy infrastructure such as power stations and supply businesses. Increase risk involved in starting a business which may deter new entrants (may struggle to obtain finance) Incumbent firms have achieved financial E.O.S
24
Q

Barriers to entry and explain

A
  • Economies of scale -large quantity for G/S mean they are likely to reap marketing, purchasing economies
  • Limit pricing- where producers lower price below profit maximisation to restrict entrance of competitors
  • Branding -significant marketing budgets spent by manufacturers which it would be expensive for new entrants to afford
  • Patents - the technology will be protected meaning competitors cannot replicate
  • Sunk cost- costs a lot to invest in manufacturing units which small firms will not have the resources
    to do.
25
Q

What is the difference between a pure monopoly and a market monopoly?

A

A pure monopoly is when there is only one market in the market. A market monopoly is when a firm has more than 25% in the market

26
Q

What are the 5 main characteristics of a monopoly?

A
  • One firm in the market
  • Profit maximisers
  • Supernormal profits SR/LR
  • High barriers to entry
  • Information gaps
27
Q

Why is supernormal profit made in a monopoly in the short run and long run.

A

In the short-run, firms are profit maximisers and so set prices higher than costs. This allows them to make supernormal profits because they are the only firm in the market. In the LR, due to high barriers to entry, firms cannot enter the market and so they make supernormal profits in the LR too.

28
Q

Define price discrimination

A

When a firm charges more than one price for the same G/S

29
Q

What is third degree price discrimination?

A

This is when a company segments a group of people with similar characteristics and therefore will be charged different prices depending on their elasticities.

30
Q

Using price discrimination, explain why a price in school holidays differs to a price in term term for a plane ticket

A
  1. Price discrimination: When a firm charges more than one price for the same G/S
  2. Demand in school holidays is relatively P inelastic and demand om term time is relatively P elastic
  3. P’s in market school holidays will be higher than term time
  4. Market for holidays is less elastic during school holidays as children will be off school
31
Q

Define nationalisation

A

Process of taking an industry into public ownership

32
Q

Benefits of nationalisation

A
  1. Greater E.O.S –> producitv efficiency gains- lower AC so lower P’s for consumers
  2. More focus on service provision–> maximise social welfare, allocative efficiency, lower P’s so CS maximised
  3. Less likely to be market failure arising from externalities
  4. Public sector can be a great vechile for macroeconomic control
  5. Funded by the government which means there isn’t a small cap
  6. Natural monopoly means no exploitation of monopoly power
  7. Low employee wages as there is no incentive by the government to raise them
  8. Under-funded if government wants to fund elsewhere
33
Q

Costs of nationalisation

A
  1. Dieconomies of scale - problems of coordination, communication, motivation = increase AC, loss of productive efficiency gains - higher P’s for consumers
  2. Lacl of incentive to minimise costs
  3. Complacent and wasteful production –> lack of profit motive so x-ineffiency
  4. Lack of SNP–> dynamic ineffiency: less R&D, innovation and reinvestment
  5. Highly expensive and a burden on taxpayers= opp. costs- use taxpayer money in other areas
  6. Higher P’s due to low competition (monopoly outcomes- less output)= allocative inefficiency
  7. Greater risk of moral hazard - taxpayers bare the burden
  8. Politcial priorities override commercial issues (even if benefits outweigh costs as theres a risk involved which could potentially affect later elections)
34
Q

Evaluate nationalisation

A
  • Funding vs delivering key public services
  • PPPs better (public private partnership)- private sector pays for construction and maintianance of a project, whilst public sector praises private sector and rents and uses it
  • Role of regulation
  • Competition in private sector = lower P’s
  • Size and objective of private sector firms
35
Q

Why is there less likely to be market failure arising from externalities as a result of nationalisation

A
  • Considering full social costs/ benefits when producing
  • Quantity/ output resemble socially optimum level of production
  • Minimising under/ over production = allocative effiency gains
  • Free market only consider private costs/ benefits
36
Q

3 benefits to monopolies?

A
  • Economies of scale can drive down unit costs to be more productively efficient
  • Be more dynamically efficient
  • Process and product innovation
37
Q

4 costs of monopolies?

A
  • Removes competition
  • Allocatively, productively and X-inefficient
  • consumers are exploited
  • Reduces choice and quality in the market
38
Q

What are some disadvantages of price discrimination?

A
  • Problems with ‘reselling’
  • reduction in consumer surplus
  • administrative costs for separating markets
39
Q

What is the difference between process and product innovation?

A

Product = when an existing product or service is adapted
Process = When a process is originally created

40
Q

What are some advantages of price discrimination?

A
  • low income demographic benefit from low prices
  • more revenue generated if higher prices charged to richer consumer
  • Increases output
41
Q

What is a natural monopoly?

A

A single firm that can serve the market at lower prices than any combination of two or more firms

42
Q

4 marks

Explain two of the conditions necessary for a monopolist to successfully undertake a strategy of price discrimination.

A
  • The firm must have the market power to segregate the markets in order to allow it to vary the price between the different markets, in response to the fact that price elasticity of demand is different in each market.
  • In order for price discrimination to work successfully for the firm, it must secure sufficiently detailed information about different market sectors, which must include likely sales volume at different prices.
  • With each market segregated low-price consumers must not be able to sell the product to consumers in another market where consumers are prepared to pay higher prices, thereby undercutting the firm and undermining the firm’s business model.
43
Q

Why are monopolies inefficient

A
  • X-inefficiency –organisational slack due to managerial complacency as a result of lower competition
  • Allocative inefficiency –monopoly power that makes them price makers and allows them to charge higher prices (less welfare max)
  • Productive inefficiency – profit maximising,
  • Dynamic inefficiency might not reinvest but give profits to shareholders in the firm on higher dividends, principal agent problem
  • Degree of monopoly power – ability of consumers to switch to alternatives
44
Q

What is the difference between process and product innovation?

A

Product = when an existing product or service is adapted
Process = When a process is originally created

45
Q

Define monopsony

A

Occurs when there is only one buyer in the market nut many sellers
e.g. Supermarkets in the UK buy majority of the milk supplied by dairy farmers

46
Q

Characteristics of monopsony

A
  1. Wage makers: prevalent in industries where the govt is the majority purchaser of labour (A monopsonist can set the price is pays to its suppliers)
  2. Profit maximiser–> minimise costs and maximise profit by paying suppliers as little as possible
  3. Purchase a large portion of the market supply provided by sellers
47
Q

Pros of contestability

A
  • Allocative efficiency –> lower P’s, increase in quantity and quality in the market= greater choice
  • Productive efficiency –> greater exploitation of E.O.S–> lower costs–> lower P’s for consumers
  • X-efficiency –> minimising waste
  • Job creation –> increased Q- labour is derived demand
48
Q

Explain monopsony power diagrammatically

A
  • Monopsony power might be used to bring down the AC and MC for a firm (MC=AC - constant cost pf supply, supply perfectly elastic)
  • This leads to higher profit maximising output
  • As the monopsonist is the sole buyer, its suppliers can either supply at the price set or not supply at all, lowers costs for monpsonist –> passed onto consumers via lower prices
  • Suppliers focus on cutting costs or be driven out of business as they cannot cover their AVC= dynamic effiency as suppliers look to lower LRAC
49
Q

Define a contestable market

A

A type of market structure that is competitive because of the low barriers to entry

50
Q

Characterstics of contesable markets

A
  • Low barriers to entry
  • Large pool of potentiall entrants
  • Good infomation
  • Incumbent firms subject to ‘hit and run’ competition
51
Q

Define ‘hit and run’ competition

A

Firms enter the market and take advantage of short term SNP then leave

52
Q

Technology and contestability

A
  1. Lower barrier to entry/ exit –> firms dont have to be physical (stores)–> lower startup costs, sunk costs, dont have to hire as many workers–> less regulations need ot be met + easier to achieve technical E.O.S, advertising is easier= brand loyalty
  2. Larger pool of potential entrants –> more innovation, lower CoP methods to disrupt existing firms
    3.Improved infomation –> internet= easier to access costs, technology, communication has improved
53
Q

Explain contestability on a diagram

A

To stop these firms entering the market, the monopolist sets price at P1 where AR = AC with an increased output of Q1. It will operate where MC = AC on the lowest point of the AC curve. (reduces profit margins).
Prepared is threat becomes real via lower prices and increased quantity

54
Q

Cons of contestability

A
  • Lack of dynamic efficiency –> normal profits
  • Cost cutting in dangerous areas e.g. health and safety, wages, environmental standards
  • Creative destruction: new firms enter–> innovation destroys existing firms–> job losses
  • Anti- competitive behaviour - limit pricing, predatory pricing
55
Q

Evaluation of contestability

A
  1. Length of contestability
  2. Role of technology–> patents and regulation + technology can improve infomation for firms aquiring consumer data –> firms practise price discrimination –> reduce static efficiency
  3. Regulation: minmise cost- cutting + anti-competitive behaviour (protects wages, envronmental standards etc)
  4. Dynamic efficiency: might occur as firms innovate production processes in order to lower AC. This is made easier as firms have greater access to industry wide technology

Exam practise economics -Rianna (27 decks)

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