3.4 Market Structures Flashcards
What are the 4 types of efficiency
- allocative efficiency
- productive efficiency
- dynamic efficiency
- x-inefficiency
what is allocative efficiency
- occurs at the level of output where AR=MC
- resources are allocated in a way that consumers and producers get maximum possible benefits
- no one can be made better off without making someone else worse off
- no excess demand or supply
What is productive efficiency?
- occurs at the level of output where MC = AC
- at this point AC is minimised
- no wastage of scarce resources and a high level of factor productivity
What is dynamic efficiency?
- long term efficiency is a result of innovation as a firm reinvests its profits
- it results in improvement to manufacturing methods
- this lowers both the short run and long run ATC
What is X - inefficiency?
- occurs when a firm lacks the incentive to control production costs
- ATC is higher than it should be
- often occurs due o a lack of competition in industry or ni a firm that has no consequences for making a loss
What are market structures
the characteristics of the market in which a firm or industry operates
what are some different characteristics of market structures? 7
- number of buyers
- number and size of firms
- types of product in the marker
- homogenous
- differentiated
- barriers to entry and exit
- degrees of competition
how can market structures be separated
as perfect or imperfect competition
What are some od the imperfect competition market structures
- monopolistic
- oligopoly
- monopoly
what are the characteristics of perfect competition?
- there are many buyers and sellers
- there are no barriers to entry and exit from the industry
- buyers and sellers possess perfect knowledge of prices
- the products are homogenous
traits of profit maximising equilibrium in the short and long run in perfect competition
- firms produce up to the level of output where mc=mr
- price taker due to large number of sellers
What profit can firms make in the short run in perfect competition?
- supernormal profit
- losses
What profit can firms make in the long run in perfect competition?
normal profit
How does short run profit maximisation reflect graphically in perfect competition?
- the firm produces at the profit maximisation level of output where mc=mr
- AR>AC
- firm makes supernormal profit
how does short run profit reflect diagrammatically in perfect competition
AR<AC
Why does perfect competition move from short run profits to long run equilibrium?
- making supernormal profit in the short run attracts new entrants into the industry
- incentivised by the opportunity to make supernormal profit, no barriers to entry thus easy to join the industry
how does perfect competition move from short run profits to long run equilibrium on a diagram?
- firm initially produces profit max level of output where MC=Mr
- incentivised by profit new entrants join industry and supply increases causing price to fall
- firm now has to sell at the reduced price
- the firm is now producing at the point where AR=AC, making normal profit
What happens to firms in perfect competition in the long run
- firms making a less leave the industrty
- firms making supernormal profit lose profit as new firms join the industry
What are the characterises of monopolistic markets?
- large number of small firms
- low barriers to entry and exit
- products are slightly differentiated
- low degree if market power
What model is used in monopolistic competition and why?
price maker model
- has some market power, able to influence the price&quantity
- due to the fact they have a differentiated product that is desirable certain consumers
in monopolistic competition, how does a form return to long run equilibrium position?
- inhability to defend against new competitors who enter the market, copying the product of existing sellers increases the supply
- firms attempt to find new ways to deffrentitate their product to prolong the period of supernormal profit
How does short run profit maximisation reflect graphically in monopolistic competition?
- able to make supernormal profit in the short run
- AR curve is demand curve
- firm has some market power due to the level of product differentiation
= to sell an additional unit of output, the firm will have to decrease its price
How is short run profit maximisation in monopolistic competition show diagrammaticaly
- point where MC =. MR
on a price maker level
How is short run losses in monopolistic competition show diagrammaticaly
- the point of profit maximisation when AR>AC
How do firms move from supernormal to normal profit in monopolistic competition?
- new entrants are attracted to the industry and the number of sellers increase
- they’re incentivised by the opportunity to make supernormal profit
- low barriers to entry make it easier to join the industry
- supernormal profit will be eroded and the firm will return to the long run equilibrium making normal profit
How do firms move from losses to normal profit in monopolistic competition?
- if monopolistic competition makes losses in the short run, some will shut down
- the shut down rule determines which firms shut down
- low barriers to exit make it easier to leave the industry
- for remaining firms losses will be eliminated and the firm will return the long run equilibrium position of making normal profit
- thus making a normal profit as firms making a loss leave the industry
What is an Oligopoly?
A market structure where a few large firms dominate the market
What are the characteristics of an Oligopoly?
- most markets are imperfectly competitive
- high barriers to entry and exit
- high concentration ratio
- interdependence of firms
- product differentiation
What are high barriers to entry and exit in an oligopoly?
- difficult to enter industry due to existing dominance
- high start up costs make it inaccessible for new firms
- leaving is difficult due to sunk costs
What are sunk costs?
An investment made that cannot be recovered
- e.g. advertisement
What is the concentration ratio?
reveals what percentage of the the total market share a specific number of firms have
What is the concentration ratio in an oligopoly?
high concentration means a higher value of shares and a lower number of firms
- the more concentrated the market power in the industry
What is the interdependence of firms in an oligopoly?- products are highly differentiated
- with few competitors firms study each others behaviour to determine the effects they will have on the firm
- uses game theory
What is product differentiation in oligopoly?
- [roducts tend to be highly differentiated
- the brand around the product is very different causing consumers to perceive it as different creating brand loyalty
What is collusive behaviour?
when firms cooperate to fix prices and restrict output
what is non collusive behaviour?
when firms actively compete to maintain andor increase market share