3.4 Market Strucutre

Question 1

How can efficiency be used to judge

Answer 1

Can be used to judge how well the market allocates resources and the type of relationship between scarce inputs and outputs

Question 2

Allocative efficiency

Answer 2

This is achieved when recourses are used to produce goods and services which consumers want and value most highly in social welfare is maximised.

Question 3

When will allocative efficiency occur

Answer 3

When the value to society from consumption is equal to the marginal costs of production.

P=MC

Question 4

Productive efficiency

Answer 4

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.

Question 5

When can productive efficiency be possible

Answer 5

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.

Question 6

Dynamic efficiency

Answer 6

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

Question 7

X-efficiency

Answer 7

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.

Question 8

Example of X-inefficiency

Answer 8

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.

Question 9

What is perfect competition

Answer 9

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.

Question 10

What are the four characteristics for a marker to be perfectly competitive

Answer 10

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)

Question 11

What does the characteristic of a perfectly competitive important

Answer 11

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.

Question 12

How do firms in perfect competition differ in profit

Answer 12

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)

Question 13

Efficiency in perfect competition

Answer 13

• perfect comp is productively efficient since they produce where MC=AC. Thus, they are static efficient.
  -comp should keep costs, and therefore prices low.

Question 14

Negatives of perfect competition

Answer 14

• 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

Question 15

Monopolistic comp

Answer 15

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

Question 16

Characteristics of monopolistic com

Answer 16

-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

Question 17

The difference between monopolistic comp and perfect comp

Answer 17

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.

Question 18

Profit maximising equilibrium (monopolistic comp)

Answer 18

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)

Question 19

Efficiency in monopolistic competition using graph

Answer 19

• 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).

Question 20

Why is monopolistic comp likely to be dynamically efficient

Answer 20

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.

Question 21

Monopolistic comp compared to perfect comp

Answer 21

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.

Question 22

What is an oligopoly

Answer 22

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.

Question 23

What are the four characteristics of oligopoly:

Answer 23

• 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)

Question 24

N-firm concentration ratios (oligopoly):

Answer 24

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

Question 25

Formula to measure n-firm ratio

Answer 25

Adding the percentages of marker share for the firms using the formula: (Total sales of n firm / total size of market) x 100

Question 26

What is collusion

Answer 26

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).