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Economics topic by topic theme 1 - 4 > 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 4 market structures in the Spectrum of Competition in the correct order?

A

Perfect Competition
Imperfect Competition
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

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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 Imperfect Market Structure?

A

Where competition exists but is not as strong as it might be

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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
High Price
Follow each other

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25
Q

What kind of pricing strategy could be deployed in a Monopoly?

A

Predatory

Cost-Plus

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26
Q

What is another name for a market with Imperfect Competition?

A

Monopolistic Market

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27
Q

Give 5 methods of non-price competition

A 
Innovation
Loyalty Scheme
Customer Service
Branding
Promotions
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28
Q

Define ‘Barrier to Entry’

A

Obstacles that might make it harder for new firms to enter a market

29
Q

Define ‘Contestable Market’

A

A market in which firms can easily enter and leave (low sunk costs)

30
Q

Define ‘Sunk Cost’

A

Costs that cannot be recovered once incurred

31
Q

How can product differentiation affect the barriers to entry?

A

A new product would have to be different or have a price advantage to have success

32
Q

How can branding affect the barriers to entry?

A

People’s choices can be hard to change as they stick with well known, trusted brands

33
Q

How can start-up costs affect the barriers to entry?

A

Equipment for production can require financial backing and are a form of sunk-costs

34
Q

How can Intellectual Property Rights affect the barriers to entry?

A

It is a legal barrier that protects originators from competitors

35
Q

Define Cartel

A

Where several businesses make agreements amongst themselves which benefit them at the expense of rivals or consumers

36
Q

Define Tacit Collusion

A

An understanding between competing businesses with no personal contact or formal agreement to keep prices the same

37
Q

Define Concentration Ratio

A

An indicator of the percentage of the market share accounted for by a given number of businesses

38
Q

Why are firms very interdependent of each other in terms of pricing in an Oligopoly?

A

Because they compete on non-price competition

39
Q

Define Price Discrimination

A

Charging different prices to different groups of consumers for the same product

40
Q

Give 3 reasons that Price Discrimination happens

A
  • Elasticity of Demand
  • Having clear different groups of consumers with no leakage
  • Barriers to entry being high to avoid undercutting
41
Q

What’s the formula for Average Cost?

A

Quantity Sold

42
Q

What’s the formula for Average Revenue?

A

Quantity Sold

43
Q

What’s the formula for Profit Per Unit?

A

Average Revenue - Average Cost

44
Q

Define Marginal Cost

A

The change in total cost resulting from increasing output by 1 unit

45
Q

What is the formula for Marginal Cost?

A

Change in Quantity

46
Q

Define Marginal Revenue

A

The extra revenue resulting from increasing output by 1 unit

47
Q

What is the formula for Marginal Revenue?

A

Change in Quantity

48
Q

Where is profit maximised in terms of Marginal Costs and Marginal Revenue?

A

MR = MC

49
Q

Is it worthwhile if MR > MC?

A

Yes

50
Q

Is it worthwhile if MC > MR?

A

No

51
Q

Define contribution

A

The revenue from each extra unit sold minus its variable costs

52
Q

How may a firm adapt its pricing strategy if they are looking to achieve brand loyalty?

A

Have a low initial price to gain repeat purchase

53
Q

Define productivity

A

Output per worker

54
Q

Define Allocative Efficiency

A

The extent to which resources are allocated to best meet consumer preference

55
Q

Define Productive Efficiency

A

The extent to which resources are allocated to obtain the best possible living standards

56
Q

How can a business become allocatively efficient?

A

Responding effectively to changes in demand (e.g. discontinuing product ranges with poor sales)

57
Q

Why would there be allocative and productive efficiency when left to the free market?

A

Because firms want to maximise profits and so don’t want to sell products with low demand

58
Q

Why might the free market not create allocative and productive efficiency?

A

It won’t do in a Monopoly where there is little competition

59
Q

What is the opportunity cost of increasing productive or allocative efficiency?

A

Takes time and money as well as significant risk

60
Q

Why are resources likely to be wasted on products for which there is low demand?

A

There is no profit signalling mechanism to flag up customer preferences

61
Q

How can technology increase efficiency?

A

More capital intensive labour sometimes increases efficiency

62
Q

How can human capital increase efficiency in the long term??

A

Can adapt well to a dynamic market

63
Q

How can the quality of management increase efficiency?

A

A more organised labour force improves efficiency

64
Q

Define Market Orientation

A

The way a business reacts to what customers want through market research

65
Q

What is Market Orientation a method of?

A

Allocative Efficiency

66
Q

Give 2 disadvantages of Market Orientation

A
  • The cost of market research

- The cost of changi production methods

67
Q

What does the value of a business adopting a Market Orientated Approach depend on?

A

The type of Market Structure they are in

A Monopoly might not have to because they already dominate the market

68
Q

How do businesses interact with each other in the supply chain?

A

Businesses buy intermediate goods and depend on their suppliers arriving on time

69
Q

How do businesses in the service sector interact?

A

May turn to a competitor if demand is too high or work with other firms

Economics topic by topic theme 1 - 4 (12 decks)

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