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MIcroeconomics (2) > 3.4 Market Structures > Flashcards

3.4 Market Structures Flashcards

1
Q

What is perfect competition?

A

An idealized market condition where sellers compete to offer the best prices and large sellers have no advantage

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2
Q

What are the 5 characteristics of perfect competition?

A

- Price takers: prices determined by interaction of supply/demand (cannot be influenced by firms)
- Many buyers and sellers: no one firm or customer can influence the market
- No barriers to entry/exit: firms can start-up or leave the industry with ease (increases competition)
- Perfect information
- Homogenous products

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3
Q

In the short-run where do firms in perfect competition profit maximise?

A

Where MC=MR

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4
Q

How are firms in perfect competition both productively and allocatively efficient?

A
  • Productively efficient: produce where MC=AC
  • Allocatively efficient: produce where P=MC
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5
Q

What is an advantage and disadvantage of perfect competition?

A

- Lower prices (numerous firms producing similar goods)
- Inefficient allocation (prices determined by supply/demand, excess demand can increase prices and new firms decrease price, leads to instability/uncertainty )

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6
Q

What is a monopoly?

A

A market structure characterised by a single seller which dominates the market

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7
Q

What are 4 characteristics of a monopoly?

A

- One firm
- Non-homogenous goods (each firm selling a unique good)
- Price maker (firm sets its own price)
- High barriers to entry/exit (e.g start-up costs, regulation)

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8
Q

What is productive efficiency?

A

The ability of a firm to produce goods or services at the lowest possible cost (MC=AC)

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9
Q

What is allocative efficiency?

A

When the cost of producing the good is well matched to how much a consumer is willing to pay for it (MC=P)

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10
Q

Where is productive efficiency on a perfect competition diagram and why?

A
  • MC=AC
  • At this point, average costs are minimized and no wastage of resources (lowest point on curve)
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11
Q

Where is allocative efficiency on a perfect competition diagram and why?

A
  • P=MC
  • At this point, consumers and sellers gain the maximum benefit and there is no excess supply/demand (welfare is maximised)
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12
Q

What is the difference between a pure and natural monopoly?

A
  • Pure monopoly: where one firm is the sole seller of a good in a market
  • Natural monopoly: when one large business can supply the entire market at a lower long-run average cost
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13
Q

Why is the MR downward sloping on a monopoly diagram?

A

If a monopoly wants to increase sales, it has to lower the price of its units

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14
Q

What are 2 advantages and disadvantages of monopolies?

A
  • Price/output stability: market under control of one firm stabilises variables + reduces surplus
  • Firms can maximise economies of scale, increasing efficiency
  • Lack of choice for consumers
  • Firms have less incentive to innovate (lack of competition)
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15
Q

Describe whether a monopoly is allocatively and productively efficient

A
  • A monopoly is productively inefficient, since they don’t produce at MC=AC
  • A monopoly is allocatively inefficient as P>MC
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16
Q

What is monopolistic competition?

A

A form of imperfect competition that combines elements of both monopoly and perfect competition

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17
Q

What are the 3 conditions of monopolistic competition?

A

- Many buyers and sellers (no buyer/seller has price making power)
- No barriers to entry/exit (new firms can enter when SNP is made)
- Differentiated goods (products in the industry are close but not perfect substitutes)

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18
Q

What is the effect of no barriers to entry on monopolistic competition?

A
  • In the long-run, as firms are making SNP more firms will be incentivised to enter the market
  • This causes demand for the individual firm to decrease, so AR and MR curves shift to the left
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19
Q

Why is the AR curve for monopolistic competition more elastic?

A
  • If the price for the good sold rises too high, consumers will switch to one of the many close differentiated substitutes
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20
Q

Describe whether monopolistic competition is productively and allocatively efficient

A
  • The firm is allocatively and productively inefficient as as MR does not equal AR
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21
Q

What is an oligopoly?

A

A market structure in which a few large firms dominate the industry

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22
Q

What is a concentration ratio?

A

The percentage of the total market that a particular number of firms have

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23
Q

What is the formula for percentage of market share?

A

total sales of n firms / total size of market x 100

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24
Q

What is collusion?

A

The collaboration between firms in order to gain a competitive advantage in the market

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25
What is the benefits of collusion to firms?
- Reduces uncertainty of firms - Firms can maximise industry profits
26
What are the 4 conditions of an oligopoly?
- Product differentiation - Interdependence - Few sellers/firms - Barriers to entry/exit
27
What is non-collusive behaviour?
When firms compete with each other to gain market share but do not engage in explicit collusion/coordination
28
Describe the kinked demand curve
1. If a firm increases its prices, other firms will not follow as their comparatively lower price makes them more competitive (elastic demand curve: prices of competitors lower so demand is lost) 2. If a firm lowers its price, other firms will do the same as they want to remain competitive (inelastic demand curve: little difference in price of competitors so less change in demand)
29
What is the difference between overt and tacit collusion?
**- Overt collusion:** when firms formally agree to cooperate and set prices or output level e.g cartels **- Tacit collusion:** when firms coordinate their actions without formally communicating/reaching an agreement
30
What is does the kinked demand model (oligopoly) suggest about price?
- Prices tend to be stable - Firms are hesitant to change prices due to the fear of retaliation from competitors - means that rise/fall of costs or demand has no impact on price/output
31
What are 4 favourable conditions for collusion?
- High market concentration (few firms dominate) - Firms produce similar products - Similar costs/production methods - There is a dominant firm (others are happy to follow)
32
What is price leadership?
When one firm has advantages due to its size or costs and becomes the dominant firm (able to influence the price of the whole industry)
33
What is barometric price leadership?
When a particular firm is better at identifying a change in the market conditions/prices and other firms decide to follow their lead
34
What is game theory?
Different strategies a firm may choose depending on how they think their rivals will behave
35
What are the 3 types of price competition?
- Price wars - Limit pricing - Predatory pricing
36
What are price wars?
A type of price competition, which involves firms constantly cutting their prices below their competitors
37
Describe the method of limit pricing
- To prevent new entrants, firms will set prices low - Price set high enough to make normal profit but low enough to discourage other firms from joining
38
Describe the method of predatory pricing
- Existing firm will set a low price to undercut new entrants - Other firms are unable to make a profit, so leave market - Existing firm will then raise their prices back up
39
What is a contestable market?
When there is freedom of entry and exit into a market and the absence of sunk costs (open to actual/potential competition)
40
What are sunk costs?
A cost that has already been incurred and cannot be recovered
41
Why is the long-run outcome in contestable markets only normal profit?
Incumbent firms are disciplined to maintain competitive prices as there is the threat of competition from new entrants
42
What is the difference between maximax and maximin policies?
- Maximax policy: when firms select a strategy with the best possible outcome - Maximin policy: when firms select a strategy where the worst possible outcome is the least bad
43
What is the nash equilibrium?
Where optimal outcome is when there is no incentive for players to deviate from their initial strategy (everyone playing at best possible response)
44
What are 3 characteristics of a contestable market?
- Perfect knowledge (firms aware of abnormal profits) - Freedom of entry and exit - Low product loyalty
45
What is a cartel?
When two or more firms agree to control the supply of goods/services to reduce competition and drive up prices
46
What are 2 features of a cartel?
- Price-fixing (anti-competitive agreement to sell at a fixed price) - Small number of firms (easier to reach/enforce agreements)
47
Describe the effect of price wars on firms?
- Drives prices down to level where firms are making losses - In the short term, firms will continue to produce if their AVC is below AR - in the long run, they will leave the market and prices will rise (as supply falls)
48
What is price discrimination?
When a firm charges different prices to different people for the same good/service (with the same cost of production)
49
What are 2 benefits and costs of price discrimination?
- Firms can increase profits (encourages research/development, efficiency) - Uses spare capacity (e.g last minute tickets sold cheaper, efficiency) - Consumers lose consumer surplus (have to pay higher prices) - Arbitrage opportunity (reselling a good at a different price)
50
What is the aim of price discrimination?
- Monopolist wants to turn consumer surplus into SNP - Different consumers willing/able to pay different prices - Firm makes each consumer pay the maximum amount they are willing
51
What are 3 conditions needed for price discrimination?
- Consumers have different PED's - Market can be separated into clear groups - Ability to control supply
52
What is X-efficiency?
When a firm lacks the incentive to control costs (results in AC being higher than usual)
53
What is dynamic efficiency?
The optimal rate of innovation/investment to improve production processes and reduce average cost
54
Draw: Monopoly diagram
55
Draw: Perfect competition (short-run) diagram
56
Draw: Perfect competition (long-run) diagram
57
Draw: Monopolistic competition (short-run) diagram
Y-axis = Revenue + Costs X-axis = output
58
Draw: Loss on perfect competition diagram
59
What are 3 types of non-price competition?
- Advertising/brand loyalty - After-sales service - Unique selling point (differentiated products)
60
Draw: Third degree price discrimination
61
What are 3 characteristics of a monopsony?
- Price Maker: ability to set the price it's willing to pay for the goods/services it buys - Limited substitute buyers - Barriers to entry e.g start-up costs
62
What is 2 costs and one benefit of monopsonies to consumers?
- Higher Prices due to reduced competition (can suppress the prices they pay suppliers + lower input cost may not be passed onto consumers) - Limited Choices due to reduced competition (suppliers may be forced out the market) - Lower prices for final good (lower input costs = lower prices)
63
What are one cost and benefit of monopsonies to suppliers?
- Reduced negotiating power (lack alternatives so have little leverage to negotiate better prices/conditions) - Benefit from the stability/reliability of a monopsony as a consistent buyer
64
What is a monopsony?
A market condition where there is a single buyer
65
Draw: Monopolistic competition (long-run) diagram
Y-axis = Revenue + Costs X-axis = output AR, MR MC, AC (lowest point touches the AR curve)
66
EVAL for monopoly
- Depends on the objectives - Firm may be looking to maximise social welfare or satisficing (acceptable level of profit) - Because if Pmax = workers feel unfairly compensated + consumers ripped off = reflect badly on the firm’s image/hence future sales
67
What is an example of a contestable market?
- The online retail industry (relatively easy and low-cost)

MIcroeconomics (2) (5 decks)

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