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Economics > 3.4 Market Structures > Flashcards

3.4 Market Structures Flashcards

1
Q

What is efficiency

A

Efficiency can be used to judge how well the market allocated resources, and the relationship between scarce inputs and outputs.

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2
Q

Allocative efficiency

A

Achieved when resources are used to produce goods and services which consumers want and value most highly and social welfare is maximised. It will occur when the value to society from consumption is equal to the marginal cost of production, where P=MC

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3
Q

Productive efficiency

A

A firm has productive efficiency when its products are produced at the lowest average cost so the fewest resources are used to produce each product. The minimum resources are used to produce the max output.

This can only exist if firms produce at the bottom of the AC curve where MC=AC.

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4
Q

Dynamic efficiency

A

Achieved when resources are allocated efficiently over time. Concerned with investment, which brings new products and new production techniques.

When SNP is reinvested into RND

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5
Q

X-inefficiency

A

If a firm fails to minimise its AC at a given level of output, it is x-inefficient and there is organisational slack.

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6
Q

Characteristics of perfect competition markets

A

• many buyers and sellers
• freedom of entry and exit from the industry
• perfect knowledge
• homogenous goods

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7
Q

Profits in perfect competition markets

A

In the short run, firms can make normal profit, supernormal profit or a loss

In the long run firms can only make normal profits

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8
Q

Pricing strategy in perfect competition

A

Profit maximisation at MC=MR

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9
Q

Efficiency in perfect competition

A

Productively efficient since they produce where MC=AC

Allocatively efficient as they produce where P=MC

Not dynamic efficient

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10
Q

Characteristics of monopolistic competition

A

• large number of buyers and sellers
• no barriers to entry or exit
• differentiated, non homogenous goods
• firms have some price setting power

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11
Q

Profits in monopolistic comp

A

In the short run, can make supernormal, normal, or losses

In the long run, can only make normal profits

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12
Q

Pricing strategy in monopolistic competition

A

Short run profit maximisers producing at MC=MR

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13
Q

Limitations for firms in monopolistic competition

A

Information may be imperfect so firms will not enter the market as predicted as they are unaware of the abnormal profits

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14
Q

Efficiency in monopolistic competition

A

Since can only make normal profit in the long run, AC=AR and since they profit maximise, MC=MR. Therefore, they will not be allocatively or productively efficiently

Likely to be dynamically efficient as differentiated products.

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15
Q

Characteristics of oligopoly

A

• few firms dominate the market
• differentiated products
• high concentration ratio
• firms interdependent (actions of one directly effects other)
• barriers to entry

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16
Q

Kinked demand curve

A

If a firm raises its price, competitors won’t as they’ll be comparatively lower

If a firm lowers its prices, competitors will lower as they’ll be comparatively more expensive

Therefore, assume price starts at p1 (at the kink)
Above p1 is elastic and below p1 it’s inelastic

Result is a kink in demand.

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17
Q

N firm concentration ratios

A

Measures the percentage of the total market that a particular number of firms have.

3 firm shows the market share held by biggest 3 firms
4 for the biggest 4 firms.

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18
Q

N firm concentration ratio equation

A

Total sales of n firms
—————————— X100
Total size of the market

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19
Q

What is collusion

A

When firms make collective agreements that reduce competition

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20
Q

Benefits for firms to collide and when does it work best

A

They could maximise industry profits by keeping higher prices

Reduce the uncertainty firms face and reduces fear of engaging in competitive price cutting or advertising

Works best when there are a few firms which are all well known to eachother, not secretive about costs and production methods and they are similar

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21
Q

What is overt collusion

A

When there is a formal agreement between firms

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22
Q

What is tacit collusion

A

No formal agreement

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23
Q

What is a cartel

A

A formal collusive agreement is called a cartel, a group of firms which enter into an agreement to mutually set prices.
Rules laid out in a formal document

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24
Q

How could a cartel operate

A

Agree on a price for goods and the compete freely using non-price competition to maximise their market share

Agree to divide up the market according to present market share of each business

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25
Q

What is price leadership

A

Where one firm has advantages due to its size or costs and becomes the dominant firm. Other firms will tend to follow this because they would be fearful of taking on the firm in a price war

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26
Q

What is game theory

A

Explores the reactions of one player to changes in strategy by another player, the aim is to examine the best strategy a firm can adopt for each assumption about its rivals behaviour and it provides insight into interdependent decision making that occurs in competitive markets

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27
Q

What is the maximin game theory policy

A

Where the firm works out the strategy where the worst possible outcome is the least bad

28
Q

What is the minimax policy in game theory

A

Involves the firm working out the policy with the best possible outcome

29
Q

What is dominant strategy

A

If the maximin and minimax strategies end up with the same solution, this is the dominant strategy

However, are not common irl.

30
Q

What is Nash equilibrium

A

Where neither player is able to improve their position and has optimised their outcome based on other players expected decision.

31
Q

What are price wars

Example

A

Occur in markets where non-price competition is weak, where goods have weak brands and consumers are price conscious, also occur when it is difficult to collude

Will drive price down to levels where firms are frequently making losses

Lowers industry profits

Supermarkets with firms desperately trying to lower orices

32
Q

What is predatory pricing

A

Occurs when an established firm is threatened by a new entrant or if one firm feels that another is gaining too much market share

The firm will set such a low price that other firms are unable to make a profit and so will be driven out of the market

The existing firm will then put their prices back up

This is illegal

33
Q

What is limit pricing

A

In order to prevent new entrant, firms will set low prices. They need to be high enough to make at least a normal profit but low enough to discourage any other firm entering market

Mainly used in contestable markets

34
Q

What is cost plus pricing

A

Where firms simply work out their average costs and add a percentage increase, which determines the level of profit they make

35
Q

Market-led pricing

A

Firms can set prices simply by looking at prices charged by competition they price their goods close to other firms.

Problem is that there is no consideration of costs

36
Q

What is price skimming

A

When a product is initially launched, firms set every high prices to cover RND costs and keep demand at manageable lovely.

Mainly used by tech firms

37
Q

What is penetration pricing

A

When product first introduced, firm will set prices low to encourage people lot use it for the first time. When they come back for another, price is higher

38
Q

Types of non-price competition

A

Advertising - creates an awareness of the company and can persuade customer to purchase

Loyalty cards - encourage repeat purchases by rewarding customer for their loyalty

Branding - successful brand can help increase loyalty and repeat purchases for a business

Quality - firm known for good quality can charge higher prices

Customer service
Product development

39
Q

Efficiencies in oligopolies

A

Statically inefficient; not productively or allocatively efficient

Likely to be dynamically efficient

Able to exploit economies of scale.

40
Q

What is a pure monopoly with a close example

A

Where one firm is the sole seller of a product in the market

Google, 88% of the market

41
Q

Legal monopoly threshold
Example

A

25% or more market share is classed as a legal monopoly.

Tesco is a legal monopoly as it has 28% of the market.

42
Q

What is price discrimination

Examples

A

When monopolists charge different prices to different people for the same good or service

Different times of the day, peak vs off peak train times

43
Q

How can a monopoly ensure price discrimination can occur

A

The firm must be able to clearly separate the market into groups of buyers, they must have different elasticities of enemies, must be able to control supply and prevent buyers in the expensive market buying in the cheap

44
Q

Benefits of price discrimination

A

Firms benefit as increase profits

Those in elastic market fins as they can play a lower price

45
Q

Drawback of price discrimination

A

Consumers lose some of their consumer surplus to the producers and some consumers have to pay a higher price

46
Q

Natural monopolies
Examples

A

In these industries, the economies of scale are so large that even a single producer is not able to exploit all of them

An industry where it makes sense to only have one firm

National grid, water, railways

47
Q

Why do natural monopolies exist

A

It would be pointless to encourage competition since it would raise average costs for the industry

Tend to be found in industries with very high fixed costs

48
Q

Benefits of monopolies for firms

A

• Make huge profits
• supernormal profits mean firms will have finance for investments and build reserves to overcome difficulties
• monopoly firms can compete against large overseas corporations
• maximise economies of scale

49
Q

Costs of monopolies on firms

A

Firms may not always choose to profit maximise because of x-inefficiencies, sales or revenue maximisation. Lack of competition may means firms become complacent

50
Q

Costs and benefits of monopolies on employees

A

Will employ fewer workers as produce at lower outputs

However, the inefficiency of monopolies may means employees get paid more etc…

51
Q

Cost/benefit of monopolies on suppliers

A

The impact of a monopolist will depend on the extent to which the monopolist is also a monopsonist.

52
Q

Benefits of monopolies consumers

A

• Natural, consumers tend to be better off than if there was competition
• when firms enjoy economies of scale, more efficient and customers will enjoy higher consumer surplus
• monopolists may produce an increased range of goods or services
• price discrimination benefits some consumers

53
Q

Monopolies efficiencies

A

Productively inefficient as don’t produce at MC=AC

Not allocatively efficient as P>MC

Dynamic efficient

54
Q

Characteristics of monopsony

A

• Only one buyer in the market
• other than one buyer, it has the same characteristics as monopolies

55
Q

Example of a monopsony

A

NHS, who pay less for cancer drugs than a number of other high-income countries

56
Q

Prices in monopsony

A

The firm will pay the supplier the lowest possible price to minimise their costs and make the most of their position as the only buyer. This enables them to maximise their profit

57
Q

Benefits of monopsony for firms

A

Gains higher profits by being able to buy at lower prices

Achieve purchasing economies of scale, lowering costs and profits.

58
Q

Benefits of monopsonies for consumers

A

May Gain from lower prices as reduced costs are passed on.

May act as a counterweight to monopolists

59
Q

Costs of monopsonies for consumers

A

Fall in supply if the firm buys less

Fall in quality as prices are driven down

60
Q

Cost and benefit of monopsonies on employees

A

Benefit: may pay higher wages

Costs: supplier will sell less goods so employ less people

61
Q

Cost of monopsonies for suppliers

A

Will lose out as they will receive lower prices.

62
Q

What is a contestable market

A

A contestable market is one with a high threat of new entrants, which keeps firms producing at a competitive level.

63
Q

Characteristics of contestable markets

A

• Perfect knowledge
• freedom of entry and exit
• relative absence of sunk costs
• firms will have the best technology available.
• low product loyalty

64
Q

Examples of contestable markets

A

Taxi industry with the intro of Uber, hotel market with Airbnb

65
Q

Implications of contestable markets

A

• Limit pricing, reduces incentive for firms to enter the market
• firms will only be able to make normal profits
• likely to be productive and allocatively efficient

66
Q

Barrie’s to entry and exit

A

• legal barriers making it difficult to enter. For example, patents and exclusive rights to production.
• marketing barriers from high amounts of brand loyalty for other firms as a result of great advertising from other firms.
• the pricing decisions of incumbent firms. For example, predatory pricing.
• start up costs and high sunk costs as a result
• economies of scale of others may make it hard to enter
• barriers to exit like costs to write off assets, pay leases and make workers redundant

67
Q

What is a sunk cost

A

A sunk cost is a fixed cost that a business cannot recover if it leaves for industry. It included property.

Economics (21 decks)

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