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A-Level Economics Edexcel > 3.4 Market Structures > Flashcards

3.4 Market Structures Flashcards

1
Q

What are the 4 types of efficiency

A
  • allocative efficiency
  • productive efficiency
  • dynamic efficiency
  • x-inefficiency
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2
Q

what is allocative efficiency

A
  • 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
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3
Q

What is productive efficiency?

A
  • 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
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4
Q

What is dynamic efficiency?

A
  • 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
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5
Q

What is X - inefficiency?

A
  • 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
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6
Q

What are market structures

A

the characteristics of the market in which a firm or industry operates

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7
Q

what are some different characteristics of market structures? 7

A
  • number of buyers
  • number and size of firms
  • types of product in the marker
  • homogenous
  • differentiated
  • barriers to entry and exit
  • degrees of competition
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8
Q

how can market structures be separated

A

as perfect or imperfect competition

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9
Q

What are some od the imperfect competition market structures

A
  • monopolistic
  • oligopoly
  • monopoly
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10
Q

what are the characteristics of perfect competition?

A
  • 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
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11
Q

traits of profit maximising equilibrium in the short and long run in perfect competition

A
  • firms produce up to the level of output where mc=mr
  • price taker due to large number of sellers
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12
Q

What profit can firms make in the short run in perfect competition?

A
  • supernormal profit
  • losses
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13
Q

What profit can firms make in the long run in perfect competition?

A

normal profit

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14
Q

How does short run profit maximisation reflect graphically in perfect competition?

A
  • the firm produces at the profit maximisation level of output where mc=mr
  • AR>AC
  • firm makes supernormal profit
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15
Q

how does short run profit reflect diagrammatically in perfect competition

A

AR<AC

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16
Q

Why does perfect competition move from short run profits to long run equilibrium?

A
  • 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
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17
Q

how does perfect competition move from short run profits to long run equilibrium on a diagram?

A
  • 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
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18
Q

What happens to firms in perfect competition in the long run

A
  • firms making a less leave the industrty
  • firms making supernormal profit lose profit as new firms join the industry
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19
Q

What are the characterises of monopolistic markets?

A
  • large number of small firms
  • low barriers to entry and exit
  • products are slightly differentiated
  • low degree if market power
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20
Q

What model is used in monopolistic competition and why?

A

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

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21
Q

in monopolistic competition, how does a form return to long run equilibrium position?

A
  • 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
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22
Q

How does short run profit maximisation reflect graphically in monopolistic competition?

A
  • 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
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23
Q

How is short run profit maximisation in monopolistic competition show diagrammaticaly

A
  • point where MC =. MR
    on a price maker level
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24
Q

How is short run losses in monopolistic competition show diagrammaticaly

A
  • the point of profit maximisation when AR>AC
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25
Q

How do firms move from supernormal to normal profit in monopolistic competition?

A
  • 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
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26
Q

How do firms move from losses to normal profit in monopolistic competition?

A
  • 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
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27
Q

What is an Oligopoly?

A

A market structure where a few large firms dominate the market

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28
Q

What are the characteristics of an Oligopoly?

A
  • most markets are imperfectly competitive
  • high barriers to entry and exit
  • high concentration ratio
  • interdependence of firms
  • product differentiation
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29
Q

What are high barriers to entry and exit in an oligopoly?

A
  • 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
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30
Q

What are sunk costs?

A

An investment made that cannot be recovered
- e.g. advertisement

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31
Q

What is the concentration ratio?

A

reveals what percentage of the the total market share a specific number of firms have

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32
Q

What is the concentration ratio in an oligopoly?

A

high concentration means a higher value of shares and a lower number of firms
- the more concentrated the market power in the industry

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33
Q

What is the interdependence of firms in an oligopoly?- products are highly differentiated

A
  • with few competitors firms study each others behaviour to determine the effects they will have on the firm
  • uses game theory
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34
Q

What is product differentiation in oligopoly?

A
  • [roducts tend to be highly differentiated
  • the brand around the product is very different causing consumers to perceive it as different creating brand loyalty
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35
Q

What is collusive behaviour?

A

when firms cooperate to fix prices and restrict output

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36
Q

what is non collusive behaviour?

A

when firms actively compete to maintain andor increase market share

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37
Q

When does non-collusive behaviour occur in an oligopoly

A

usually when one firm believes they have a cost advantage and tries to drive out another firm from the market leaving the remaining firm more dominant.
- aiming to achieve a monopoly power

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38
Q

how do non collusive firms compete in non-price ways?

A
  • engaging in advertisement
    -to strengthen then brand
    -diffferentiate products from competitiors
  • makes demand for the product more price elastic as brand loyalty is encouraged
  • allowing oligopolists to raise price to increase revenue and profit as demand falls by a smaller proportion
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39
Q

What is wrong with non collusive oligopolists using advertisement to increase competitioon

A
  • can be expensive
    -adds to firms sunk costs
    -easier to accommodate if the firm is large and benefits from marketing economies of scale
40
Q

What are reasons for collusion?

A
  • few competitions/firms
  • similar costs
  • similar revenue
  • high barriers to entry
  • ineffective regulation
  • brand loyalty
41
Q

How is a few firms/competitiors a reason for collusion?

A

Makes it easy for each firm:
- to understand other competitors actions & responses
- or to collaborate of prices/ output

42
Q

How are similar costs a reason for collusion?

A

firms face almost identical costs as any remaining competition have experienced economies of scale

43
Q

How is similar revenue a reason for collusion?

A

competition sell for similar prices due to little incentive to lower them
- cuz other firms would respond by keeping their market share the same but decreasing the profit

44
Q

How does high barriers to entry a reason for collusion?

A

make it unlikely that new entrants will emerge to disrupt the status quo

45
Q

How does ineffective rergulation a reason for collusion?

A
  • lack of regulation empowers firms to collude was there is little consequence for their actions
46
Q

How is brand loyalty a reason for collusion?

A

high brand loyalty due to established market share
- decreases benefits of competition as consumers are unlikely to change brands

47
Q

What are the types of collusion

A
  • Overt
  • Tacit
48
Q

What is Overt collusion

A

occur when firms agree to limit competition or raise prices
- a cartel is the most restrictive form and is illegal in most countries

49
Q

What is a cartel?

A

when a group of firms join together to limit output and increase prices

50
Q

What are the consequences of overt collusion?

A
  • higher prices for consumers
  • less output in the market
  • for quality products+/ customer serves
  • less investment innovation
51
Q

How can Overt collusion occur?

A
  • price fixing
  • setting output quotas that limit supply and naturally result in price increases
  • agreement to block new firms from entering the industry
  • agreements to pay suppliers the same price thereby driving prices down in the supply chain
52
Q

What is price fixing?

A

competitions agree a fixed price for all there competitions products
- the price would normally be higher than the market equilibrium price

53
Q

When does tacit collusion occur?

A

when firms avoid formal agreements but closely monitors each others behaviour usually following the lead of the largest firm in the industry

54
Q

What is the most common form of tacit collusion?

A

price leadership

55
Q

What is price leadership?

A
  • when firms monitor the price of the largest firm in the industry& adjust their prices to match
  • difficult;t for regulators to prove it has occured
  • similar benefits to firms as overt collusion
  • similar consequences for consumers as overt collusio
56
Q

What is game thoery

A

mathematical framework used by firms to ensure optimal decisions are made in a strategic setting where there is a high level of interdependence

57
Q

What are the elements of game theory

A
  • players; firms
  • strategies available to the players
  • the payoffs that each player receives for each combination of strategies
58
Q

What is the prisoners dilemma

A

2 criminals are caught after a train robbery
- the prosecutor does not have much evidence
- the criminals are guilty but have agreed with each other that they will deny all involvement
- the prosecutor wants one or both to confess
- the strategies and payoffs available to the prisoners are presented in a payoff matrix

59
Q

What are methods firm uses game theory?

A

when making decisions about
- raising or lowering prices
- new advertisement and branding initiatives
- investment in product innovation
- product bundling; combing phone and broadband packages

60
Q

What are the 3 types of price competition

A
  • price wars
  • predatory pricing
  • limit pricing
61
Q

What are price wars

A
  • occur when competitors repeatedly lower prices to undercut each other in an attempt to gain or increase market share
  • often occurs when there are lower levels of non price competition where firms find it difficult to collude
62
Q

What is predatory pricing

A
  • lowering prices when a new competitor joins industry to drive them out
  • lowered below cost of production
  • once they leave prices are raised again
  • normally illegal as it is anticompetitive
63
Q

What is limit pricing

A

occurs when firms set a limit on how high the price will go in the industry
- a lower price reduces the profit disincentivising new firms from joining industry
- the greater barriers to entry the higher the limit price is likely to be as firms are already disincentivised.

64
Q

What is non price competition

A

competition on branding/ advertisement etc

65
Q

What is the aim of non price competition

A
  • to increase product differentiation,
  • develop or increase brand loyalty
  • increase market share
66
Q

What are some strategies of non-price competition

A
  • loyalty cards and rewards
  • corporate sponsorship
  • branding
  • packaging
  • after sakes service
  • endorsements
  • delivery policies
  • product warranties
67
Q

Characteristics of a Monopoly

A
  • single seller
  • no substitutes
  • complete market power, allowing maximisation of supernormal profit in short run
  • high barriers to entry exit
  • defined as having more than 25% market share in the UK
68
Q

profit max equilibrium characteristics of a monopoly

A
  • single seller of goods/services, the firm in a monopoly market is also the entire market
  • no differentiation between the firm and industry
  • price maker model
69
Q

What is price discrimination

A

when a firm charges a different price for the same good/service to maximise its revenue

70
Q

What is 3rd degree price discrimination

A

when a firm charges different prices to different consumers for the same good or service

71
Q

What conditions must be met for third degree price discrimination to occur

A
  • market power
  • varying consumer PED
  • ability to precent resale
72
Q

Why is market power a condition for price discrimination

A

firm must have the ability to change prices
- works best when there are low or no substitutes

73
Q

Why is varying consumer PED a condition for price discrimination

A

some consumers must be willing to pay more
- the firm must be able to indentifiy these consumer groups to allocate different prices to them

74
Q

Why is prevention of resale tickets a condition for price discrimination

A

must be able to prevent consumers buyng in the low price submarket and reselling in high ones

75
Q

How is price discrimination shown diagrammatically

A

combination of submarkets
- one market inelastic with a larger profit
- one elastic with less profit
combined through a kinked demand curve on price maker model

76
Q

benefits of price discrimination to consumers

A
  • will be able to take advantage of lower prices
  • higher orchid decreases the demand causing an increase in consumer utility
77
Q

costs of price discrimination to consumers

A

many will lose out as they pay higher prices

78
Q

benefits of price discrimination to producers

A
  • TR increases leading to greater profits
  • increase producer surplus at the expense of decreased consumer surplus
79
Q

costs of price discrimination to producers

A

enforcing price discrimination can increase average costs

80
Q

What are the advantages of monopoly for the firm

A
  • supernormal profit generates money for continued investment in technology and product innovation
  • market power enables an increase in global competitiovienes
  • economies of scale benefits
    producer surplus increases
  • price discrimination can increase revenue
81
Q

What are the disadvantages of monopoly for the firm

A
  • lack of competition causing reduced incentive to be efficient
  • cross subsidisation can create inefficiences
  • monopolies lead to misallocation of resource; the price above the OC of providing goods
  • innovation can lack due to less competition
82
Q

What are the advantages of monopoly for employees

A

supernormal profits result in higher wages

83
Q

What are the disadvantages of monopoly for employees

A

having only one suppler in the industry limits the opportunity to change employers

84
Q

What are the advantages of monopoly for consumers

A
  • product innovation may result in better product quality; due to supernormal profit
  • cross sub can lower prices on profucts
  • prices may fall if firms pass other cost savings, due to ec of scale, as lower product prices
85
Q

What are the disadvantages of monopoly for consumers

A
  • higher prices as no subs due to less competition
  • no product innovation from less competition; can get worse quality over time
  • may experience worse customer service; incentive to improve is limited
  • cross subsidisation can increase prices on some products offered by firm
  • consumer surplus decreases
86
Q

What are the advantages of monopoly for suppliers

A

increased sales volume for some
- they’re able to supply products distributed nationally/internationally

87
Q

What are the disadvantages of monopoly for suppliers

A
  • less competition for their products and a monopoly has the power to dictate what price they will pay to suppliers
  • this may not be profitable in the long run
88
Q

What is a natural monopoloy

A

when the most efficient umber of firms in the industry is one

89
Q

Why do natural monopolies occur

A
  • associated infrastructure issues; easier to have all the pipes in a city to be the same brand
  • significant cost generated when entering industries; excessive sunk costs
  • economies of scales lowering prices for consumers
90
Q

Where do natural monopolies occur normally

A

in utility industries, regulated by the government to ensure that consumers are not charged higher monopoly prices
- often as maximum price

91
Q

What is Monopsony power

A
  • a market dominated by a single buyer
  • has buying or bargaining power in their market
  • this power means that a monoposonist can exploit their bargaining power with a supplier to negotiate lower prices
  • reduced cost of purchasing inputs increases their profit margins
  • monopsony exists in both product and labour markets
92
Q

What are examples of monopsony power

A
  • electricity generators
  • food retailers/supermarkets
  • car rental firms
  • low cost airlines
  • british sugar
  • Amazon
  • government
  • NHS
93
Q

What are the benefits of monopsony power for firms

A
  • allows bigger firms to achieve purchasing economies of scale. leading to low long run average costs
  • lower purchase costs bring about higher profits and increased returns for shareholders
  • the extra profit might be used to find capital investment or research and development
94
Q

What are the disadvantages of monopsony power

A
  • firms use buying power to squeeze lower prices out of suppliers
    -reducing the profit. of firms in the supply chain and causes lower incomes
  • Krugman is critical of the monopsony power of amazon in the book industry
95
Q

benefits of monotony fro consumers

A
  • may gain from lower prices
    -supermarkets negotiate better prices from manufacturers that are then passed on to consumers
  • improved value for money
  • a monopsonist is a counter-weight to the market power of a monopolist helping to protect the interests of consumers
96
Q
A

A-Level Economics Edexcel (20 decks)

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