5.9 the dynamics of competition and competitive market processes Flashcards
pros of competitive markets
allocative efficiency, where firms charge a price equal to marginal costs so lower prices and higher consumer surplus and resources follow consumer demand (shown by monopoly diagram)
productive efficiency, minimise average costs and exploiting economies of scale so can pass on lower costs to consumers by lower prices
x efficiency, minimising waste and producing on average costs curve
jobs, if quantity is high labour is a derived demand so more jobs created
disadvantages with competitive markets.
lack of dynamic efficiency left with normal profit in long run so little to no progress over time compared to concentrated market
lack of economies of scale due to size
cost cutting in dangerous areas e.g. lower wages, health and safety , environmental standards which is anti society interests
creative destruction, movement in by being more creative e.g. lower costs new products can destroy existing firms which causes unemployment and destabilising the market
evaluation of the pros and cons of competitive markets
still can be dynamically efficient, just enough profit to reinvest
level of economies of scale, natural monopoly
where is cost cutting taking place?
role for regulation in cost cutting
static vs dynamic what does society want more, depends on type of good or service necessity market would rather have static efficiency but luxury good (electronics) markets would prefer dynamic efficiency
