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EDEXCEL Economics B Paper 1 > 4.1 Competition and Market Power > Flashcards

4.1 Competition and Market Power Flashcards

1
Q

What is the the Spectrum of Competition?

A

A way of defining the differences between the main market structure

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2
Q

Define market structure

A

How many businesses there are competing in the market and how they behave in relation to each other

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3
Q

What is ‘Perfect Competition’?

A

A hypothetical concept where there is the maximum amount of competition

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4
Q

What are the 5 market structures in the Spectrum of Competition in the correct order?

A

Perfect Competition
monopolistic Competition
Duopoly
Oligopoly
Monopoly

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5
Q

Define ‘Normal Proift’

A

The amount of profit required for a firm to stay in business

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6
Q

What type of product is sold when ‘Perfect Competition’ is in place?

A

Homogenous (exactly the same as all suppliers)

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7
Q

What is the pricing like in ‘Perfect Competition’?

A

All firms are price takers (cannot choose the price they set)

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8
Q

What is knowledge like in ‘Perfect Competition’?

A

Perfect knowledge

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9
Q

What kind of profits are made in ‘Perfect Competition’?

A

Normal Profit (only the profit required to keep the firm in business)

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10
Q

Why is ‘Perfect Competition’ used if it’s only a theoretical concept?

A

Useful as a comparison tool to evaluate other markets

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11
Q

What is a Monopoly Market Structure?

A

There is one dominant business operating in the market (Has over 25% of market share)

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12
Q

How easy is it to enter a Monopoly Market Structure?

A

Very difficult because there’s such a dominant firm to compete with

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13
Q

What are the profit levels like in a Monopoly Market Structure?

A

Very high because prices can be set very high because there’s little competition

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14
Q

Why may a Monopoly Market Structure be inefficient?

A

A lack of competition can cause inefficiency

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15
Q

What is consumer choice like in a Monopoly Market Structure?

A

Very little choice

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16
Q

Give an example of a Monopoly Market Structure

A

Rail Network or Water Supplier

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17
Q

What is an Oligopoly Market Structure?

A

Where several large firms dominate the market (concentration ratio for the top five firms is over 60%)

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18
Q

What are the barriers to entry like in a Oligopoly Market Structure?

A

High

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19
Q

What is the main competing factor in a Oligopoly Market Structure?

A

Non-Price competition

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20
Q

Give an example of an Oligopoly Market Structure?

A

Supermarket
Petrol Company
High Street Bank

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21
Q

What is an Monopolistic Market Structure?

A

Where competition exists but is not as strong as a perfect market

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22
Q

What kind of pricing strategy could be deployed in a Perfect Competition Market?

A

Competitive

  • Price takers
  • Have no control over pricing
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23
Q

What kind of pricing strategy could be deployed in a Monopolistic (Imperfect Competition) Market?

A

Competitive
Premium
Predatory

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24
Q

What kind of pricing strategy could be deployed in an Oligopoly?

A

Price-Skimming
premium
Follow each other

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25
What kind of pricing strategy could be deployed in a Monopoly?
Predatory | Cost-Plus
26
What is another name for a market with Imperfect Competition?
Monopolistic Market
27
Give 5 methods of non-price competition
``` Innovation Loyalty Scheme Customer Service Branding Promotions ```
28
Define 'Barrier to Entry'
Obstacles that might make it harder for new firms to enter a market
29
Define 'Contestable Market'
A market in which firms can easily enter and leave (low sunk costs)
30
Define 'Sunk Cost'
Costs that cannot be recovered once incurred
31
How can product differentiation affect the barriers to entry?
A new product would have to be different or have a price advantage to have success
32
How can branding affect the barriers to entry?
People's choices can be hard to change as they stick with well known, trusted brands
33
How can start-up costs affect the barriers to entry?
Equipment for production can require financial backing and are a form of sunk-costs
34
How can Intellectual Property Rights affect the barriers to entry?
It is a legal barrier that protects originators from competitors
35
Define Cartel
Where several businesses make agreements amongst themselves which benefit them at the expense of rivals or consumers
36
Define Tacit Collusion
An understanding between competing businesses with no personal contact or formal agreement to keep prices the same
37
Define Concentration Ratio
An indicator of the percentage of the market share accounted for by a given number of businesses
38
Why are firms very interdependent of each other in terms of pricing in an Oligopoly?
Because they compete on non-price competition
39
Define Price Discrimination
Charging different prices to different groups of consumers for the same product
40
Give 3 reasons that Price Discrimination happens
- Elasticity of Demand - Having clear different groups of consumers with no leakage - Barriers to entry being high to avoid undercutting
41
What's the formula for Average Cost?
Total Cost/ Quantity Sold
42
What's the formula for Average Revenue?
Total Revenue/ Quantity Sold
43
What's the formula for Profit Per Unit?
Average Revenue - Average Cost
44
Define Marginal Cost
The change in total cost resulting from increasing output by 1 unit
45
What is the formula for Marginal Cost?
Change in Total Cost/ Change in Quantity
46
Define Marginal Revenue
The extra revenue resulting from increasing output by 1 unit
47
What is the formula for Marginal Revenue?
Change in Total Revenue/ Change in Quantity
48
Where is profit maximised in terms of Marginal Costs and Marginal Revenue?
MR = MC
49
Is it worthwhile if MR > MC?
Yes
50
Is it worthwhile if MC > MR?
No
51
Define contribution
The revenue from each extra unit sold minus its variable costs
52
How may a firm adapt its pricing strategy if they are looking to achieve brand loyalty?
Have a low initial price to gain repeat purchase
53
Define productivity
Output per worker
54
Define Allocative Efficiency
The extent to which resources are allocated to best meet consumer preference
55
Define Productive Efficiency
The extent to which resources are allocated to obtainthe lowest possible cost, given the level of output and the available technology
56
How can a business become allocatively efficient?
Responding effectively to changes in demand (e.g. discontinuing product ranges with poor sales)
57
Why would there be allocative and productive efficiency when left to the free market?
Because firms want to maximise profits and so don't want to sell products with low demand
58
Why might the free market not create allocative and productive efficiency?
It won't do in a Monopoly where there is little competition
59
What is the opportunity cost of increasing productive or allocative efficiency?
Takes time and money as well as significant risk
60
Why are resources likely to be wasted on products for which there is low demand?
There is no profit signalling mechanism to flag up customer preferences
61
How can technology increase efficiency?
More capital intensive labour sometimes increases efficiency
62
How can human capital increase efficiency in the long term??
Can adapt well to a dynamic market
63
How can the quality of management increase efficiency?
A more organised labour force improves efficiency
64
Define Market Orientation
The way a business reacts to what customers want through market research
65
What is Market Orientation a method of?
Allocative Efficiency
66
Give 2 disadvantages of Market Orientation
- The cost of market research | - The cost of changing production methods
67
What does the value of a business adopting a Market Orientated Approach depend on?
The type of Market Structure they are in | A Monopoly might not have to because they already dominate the market
68
How do businesses interact with each other in the supply chain?
Businesses buy intermediate goods and depend on their suppliers arriving on time
69
How do businesses in the service sector interact?
May turn to a competitor if demand is too high or work with other firms

EDEXCEL Economics B Paper 1 (11 decks)

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