3.4 Market Strucutre Flashcards
How can efficiency be used to judge
Can be used to judge how well the market allocates resources and the type of relationship between scarce inputs and outputs
Allocative efficiency
This is achieved when recourses are used to produce goods and services which consumers want and value most highly in social welfare is maximised.
When will allocative efficiency occur
When the value to society from consumption is equal to the marginal costs of production.
P=MC
Productive efficiency
A firm had productive efficiency when its products are produced at the lowest average cost so the fewest recourses are used to produce each product. The minimum resources are used to produce the maximum output. This can only exist if firms produce at the bottom of the AC curve, in the short run thus is where MC=AC.
When can productive efficiency be possible
Only possible if there is technical efficiency where a given output is produced with minimum inputs - but not all technically efficient firms are productively efficient.
Dynamic efficiency
This is achieved when resources are allocated efficiently over time, it is concerned with investment which brings new products and new production techniques. The alternative is static efficiency will be achieved in markers where competition encourages innovation but wheee there are differences in products and copyright/patent laws. Supernormal profit is required to provide firms with the incentive to invest and the ability to do so
X-efficiency
If a firm fail to minimise its average costs at a given level of output, it is X-inefficient and there is organisational slack. This is a specific time of productive inefficiency as it occurs when they fail to minimise their cost for therapy specific output.
Example of X-inefficiency
The minimum point on the AX curve mat be are 100 goods arna cost of £5 each. The firm is producing 125 goods and so is not productively efficient. It costs them £8 to produce each food but they could produce 125 goods at £7. Therefore they are x-inefficient since they are not producing on the lowest AC curve. It often occurs where there is a lack of competition so firms jace little incentive to cut costs.
What is perfect competition
A market where there is a high degree of competition, but the word ‘perfect’ does not mean it maximises welfare or produces ideal results please there are few industries which fit this type of market structure (one example may be agriculture). In real Rut the assumptions made rarely hold and no marker is completely competitive.
What are the four characteristics for a marker to be perfectly competitive
There must be buyers and sellers
There must be freedom of entry and exit from the industry
There must be perfect knowledge
The product must be homogenous (where they are identical)
What does the characteristic of a perfectly competitive important
These mean that demand for the firm’s goods is perfectly elastic and prices are solely determined by interaction of demand and supply; the firms are price takers.
How do firms in perfect competition differ in profit
Firms are assumed to short run profit maximise and so the firm will produce MC=MR. In the short run, it is possible for the firm to make a no ramp profit, a supernormal profit or a loss. However, firms in perfect comp can only make normal profit in the long run. (Look at graph page 3-4)
Efficiency in perfect competition
- perfect comp is productively efficient since they produce where MC=AC. Thus, they are static efficient.
-comp should keep costs, and therefore prices low.
Negatives of perfect competition
- However, they are not dynamic efficient (no single firm will have enough for r&d and small firms struggle to receive finance.
- the existence of perfect information also means one firm’s invention will be adopted by another firm and so the investment will give the firm to competitive benefit. Governments tend to have to do all the research.
- firms will be unable to benefit form economies of scale and this may mean costs see higher than they otherwise could be
Monopolistic comp
A form of imperfect comp, with a downward sloping demand curve. It lies between the two extreme of perfect comp and monopoly. An example include hairdressers, estate agents and restaurants
Characteristics of monopolistic com
-there use be a large number of buyers and sellers in the markers, each of whom are relatively small and act independently. This means that no one buyer or seller has a price setting power.
-there are no barriers to entry or exit (new firms enter when supernormal profits are being made). As a result only normal profit can be made in the long run
The difference between monopolistic comp and perfect comp
Mono comp firms produce differentiated, non-homogenous goods or services. This means that individual firms do have somos price setting power, and so the curve is downward sloping.
Profit maximising equilibrium (monopolistic comp)
In the short run, firms can make supernormal profits, losses or normal profit. However due to the lack of barriers of entry/exit, firms can only make normal profit in the long run. (Look at graph page 5)
Efficiency in monopolistic competition using graph
- since they can only make normal profit in the long run, AC=AR and since they profit maximise, MR=MC. Therefore the firm will not be allocatively or productively efficient as MR does not equal AR so AC cannot equal MC and AC cannot equal MR (graph on page 5).
Why is monopolistic comp likely to be dynamically efficient
Since there are differentiated producers and so know that innovative products will give them an edge over their competitors and enable them to make supernormal profit in the short run. However since the firms are small they may struggle to receive finance or have the retained profits necessary to invest.
Monopolistic comp compared to perfect comp
In a mono comp Less is sold at a higher price and firms may not necessarily be producing at the lowest cost. However, there market will offer greater variety and may be able to enjoy some degree of economies of scale.
What is an oligopoly
Where there are a few firms that dominate the market and have the majority of market share, although this does not mean there won’t be other firms in the market.
What are the four characteristics of oligopoly:
- Products are generally differentiated
- Supply in the industry must be concentrated in the hands of relatively small numbers of firms meaning there is a high concentration ratio
-firms must be interdependent
-there are barrier to entry (check graph on page 7)
N-firm concentration ratios (oligopoly):
The concentration of supply in the industry can be indicted by the concentration ratio which measures the percentage of the total market that a particular number of firms have. The 3 firm concentration ratio show the percentage of the total market held by the three biggest firms
Formula to measure n-firm ratio
Adding the percentages of marker share for the firms using the formula: (Total sales of n firm / total size of market) x 100
What is collusion
When firms make collective agreements that reduce comp. When firms don’t collude, this is a competitive oligopoly (the UK energy market is an oligopoly suspected of collusion).
