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A Level Economics > 6: Market structures > Flashcards

6: Market structures Flashcards

1
Q

Productive efficiency

A

Lowest point of the ATC curve

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2
Q

Allocative efficiency

A

When a firm produces at a point where economic welfare is maximised (supply meets demand)

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3
Q

Dynamic efficiency

A

When a firm reinvests their profits to become more efficient

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4
Q

X-inefficient/X-efficent

A

Costs are high/lower than they should be

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5
Q

Productive + allocative =

A

Static efficiency

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6
Q

Characterisitcs of a monoply

A

Firm is the industry - whole output by the firm (single seller good)
Barriers to entry
No substitutes for the good
Profit maximise
Price maker

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7
Q

What is the deadweight loss in a monoply?

A

Consumer surplus lost and producer surplus ganied results in an overall loss of economic welfare

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8
Q

Pros of a monoply

A

Supernormal profits -> reinvest -> dyanmic efficiency -> lower ATC -> could lower prices -> increase consumer surplus
Economies of scale

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9
Q

Cons of a monoply

A

No allocative efficiency
High prices/lack of choice
Not productively efficient
X-inefficiency

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10
Q

Price discrimination (draw diagram)

A

When a firm with market power charges a different price to consumers for an identical product i.e. age, time of day, georgraphy

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11
Q

Conditions to price discriminate

A

Market power
No resale
Segregate the market between consumers with different willingess to pay and different PED

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12
Q

Cross-subsidisation

A

Those who pay a higher price, subsidise those who pay a lower price

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13
Q

Price discrimination pros

A

Profitable -> higher total revenue
Larger output
Cross subsidisation -> allows poorer customers access
Manages demand
Reinvest profits -> long-term benefits of increased dynamic efficiency + lower prices

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14
Q

Price discrimination cons

A

Unfair
Predatory pricng
Decline in consumer surplus

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15
Q

Natural monoplies

A

When competition is inefficient as it would increase costs i.e. railways and water companies

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16
Q

Characterisitics of a natural monoply

A

High capital cost to set up
Duplication is unecessary and wasteful
The MES does not occur until an extremely high level of output as the economies of scale do not diminish in the foreseeable future

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17
Q

Perfectly competitive market characterisitcs

A

Large number of buyers and sellers
Produce homogeneous goods (identical products)
No one firm or individual large enough to affect market price (price takers)
Factors of production are perfectly mobile
Customers and firms have perfect knowledge
No barriers to exit and entry
Have dynamic and allocative efficiency
Examples: Foreign exchange markets, agricultural markets, internet related markets

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18
Q

What is the shut down price in a perfectly competitive market?

A

AR < AVC - firms may make a loss but will remian in a market in case another firm leaves

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19
Q

Monopolistic competition characterisitcs

A

A form of imperfect comeptition
Found in many real world markers i.e. clusters of sandwhich shops, fast food and coffee shops in a town centre to pizza deliveries in a city or local haridressers
More realistic than perfect competition as products are differentiated

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20
Q

Does the demand in monopolistic comeptition represent the firm or the market and why?

A

The firm as other firms within the market produce partial but not perfect substitutes. Demand curve likely to be more elastic

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21
Q

Assumptions regarding monopolistic competition

A

Many consumers and producers
Consumers perceive there is non-price differences between products i.e. product differentiation - plenty of consumer switching
Producers price makers but price elasticity of demand is higher than that of a monoply
Low barriers to exit and entry

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22
Q

Efficiencies in monopolistic competition

A

Dynamic efficiency
X - efficiency

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23
Q

Problems with monopolistic competiton

A

Stable equilibrium is never reached
Inefficient outcome
Not allocatively efficient
Unable to fufill economies of scale
Critics of heavy spending on advertising and marketing argue that much of this spending is wasted and an inefficient use of scarce resources

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24
Q

Characteristics of an oligopoly

A

High concentration ratio (handful of large firms)
Differentiated products
High barriers to exit and entry
Mutual interdependence
Non-price competition

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25
Q

What happens if one firm lowers their price in an oligopoly?

A

Other firms follow -> price wars in lower and lower prices -> no firm wins

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26
Q

Collusive oligopoly

A

Firms act like a monoply and want to remove uncertainty by agreeing on price and output

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27
Q

Non-collusive oligopoly

A

Firms act independently and do not form agreements with each other

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28
Q

Overt collusion

A

Firms work openly together to agree on prices or market share

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29
Q

Tacit collusion

A

Unspoken actions between oligopolistic firms that are likely to minimise a competitive response

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30
Q

Price leadership

A

A leading firm in a given industry is able to exert its influence in the sector that it is in and can effectively determine the price of goods or services for the entire market -> leaves rivals little choice but to match price in order to keep market share

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31
Q

Pros of cartels

A

Dynamic efficiency
Industry supernormal profits
Firms + consumers price stability

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32
Q

Cons of cartels

A

Firms may not make supernormal profits -> risk the cartel may break down
Consumer pays higher prices

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33
Q

What does a cartel depend on?

A

Lower or increase price
Incentive? Could be drive out comeptition

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34
Q

Game theory

A

A method of modelling the strategic interaction between firms in an oligopoly

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35
Q

What are the roles when game theory is applied to oligopolies?

A

Players = firm, game played on the market, strategies = price and output decisions, payoff = profits

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36
Q

Dominant strategy

A

a situation in game theory where a player’s best strategy is independent to those chosen by others

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37
Q

Nash equilibrium

A

a situation within a game when each player’s chosen strategy maximises pay-offs given in the other player’s choice so that no player has an incentive to alter behaviour

38
Q

Imperfectly competitive markets

A

Firms face real and potential competition, argues that the number of firms is not important, what matters is the absence of barriers to entry and the level of sunk costs

39
Q

Perfectly conestable markets

A

Free entry to new firms and free exit for incumbent firms

40
Q

Sunk costs

A

Irrecoverable costs to the owners of the firm should it close down or leave the market. Act as a barrier to entry

41
Q

Low contestability

A

Difficult to enter

42
Q

High contestability

A

Easy to enter

43
Q

What is hit and run entry?

A

Short run entry into a market aiming to take some monoply profits and leave the market.
Possible when entry and exit costs are low and when the exisiting firms are charging higher prices compared to costs

44
Q

Where does increasing contestability come from?

A

De-regulation and new technology

45
Q

Competition policy

A

A set of measures designed to promote competition in markets and protect consumers in order to enhance the efficiency of markets. Has 4 strands: monoplies, mergers, restrictive trade practices and promotion of new competiton

46
Q

Structure, Conduct, Performance paradigm

A

Structure: Number of comeptitors, heteroheneity of product, cost of entry and exit
Concduct: Price taking, product differentiation, tacit collusion, exploitation of market power
Performance: Productive efficieny, allocative efficiency, profitable

Argues that market structure determines how firms conduct themselves and that this in turn determines performance of the market

47
Q

Government intervention: Mergers

A

Comeptition and markets authority (CMA) inevstigate mergers that result in a 25%+ market share to prevent uncompetitive outcomes in the market
If merger not in public’s interest will be blocked
CMA want to prevent firm having large market share which could lead to high price, low quantity and quality which exploit customers

48
Q

Government Intervention: Quality standards

A

Legislature to ensure firms meet a min quality standard i.e. gas and electric companies can’tçut off gas/electric for pensioners if they haven’t paid their bill during winter

49
Q

Government Intervention: Performance targets

A

Ensure firms are operating in the consumer’s interest and that competitive outcomes are achieved i.e. rail companies only allowed a certain amount of delays

50
Q

Government enhancing competition between firms through promotion of small business

A

Deregulation -> removes govt controls -> removes barriers to entry
Improvement in access to finance for small businesses
Reduce tax
Provide grant/subsidy

51
Q

Government intervention: deregulation

A

Removal of govt controls i.e. BT’s infrastructure given to competitors in telecoms industry -> promotes comeptition and market contestability by removing artificial barriers to entry

52
Q

Deregulation pros

A

More consumer choice
Lower price
Contestability
More govt revenue through tax

53
Q

Deregulation cons

A

Negative externalities
Less SNP -> less dynamic efficiency
Smaller firms would be less efficient -> fail when market conditions change
Diseconomies of scale

54
Q

What does deregulation depend on?

A

The extent to which other barriers to entry and exit remain and the extent to which it results in greater comeptition in a specific area

55
Q

Comeptitive tendering

A

Governments contract out a provision to a firm offering lowest price and best quality of provision
Saves public sector beauracy and inefficiency
Private sector has incentivve to reduce costs due to comeptitive nature + frees govt of maintenance as private sector has expertise

56
Q

Pros of comeptitive tendering

A

Increased comeptition
Greater efficiency
Transparency
Value for money

57
Q

Cons of comeptitive tendering

A

Limited choice
Reduced quality
Bureaureacy
Privatisation

58
Q

Privatisation

A

Transfer of assets or organisations from state ownership to private ownership i.e. Britsh Airways, British Gas

59
Q

Pros of privatisation

A

Revenue from sales (for govts)
Increased comeptiton -> fall in costs -> X-efficiency, productive efficiency

60
Q

Cons of privatisation

A

Negative externalitites
Public goods not provided as not profitable
Risk of no economies of scale

61
Q

Nationalisation

A

When private sector assets are to sold to the public sector

62
Q

Nationalisation pros

A

Protects jobs
Protects GDP
Systemic risk
Positive externalities
Social welfare

63
Q

Nationalisation cons

A

Tax payers pay -> austerity
Moral hazard

64
Q

What type of demand is the demand for labour?

A

It is derived demand meaning it depends on the demand for the product a worker is producing. i.e. increase demand for coffee -> increased demand for baristas

65
Q

Marginal product =

A

Number of extra units of output a firm gains by employing an extra unit of labour.
Change in total product / Change in number of workers

66
Q

Marginal revenue =

A

Change in total revenue / Change in output

67
Q

Marginal revenue product of labour =

A

The addition to a firms revenue by employing an additional worker
MR x MP

68
Q

Problems with Marginal Revenue Product of Labour (MRPL)

A

Difficulties measuring
Efficiency wage theory -> higher wage increases productivity
Non-monetary benefits of jobs
Public sector wages

69
Q

What causes a shift out right for MRPL?

A

Improved training, better capital and/or management
Increased demand for final product
Increase in productivity
Firms profitability
Changes in number of firms

70
Q

Elasticity of demand for labour =

A

Measures the responsiveness of the quantity demanded of labor to changes in wage rate
% change in quantity of labour demanded / % change in wage rate

71
Q

Factors determining EDL:

A

Propotion of labour cost to total cost - Larger the proportion of labour cost to total cost, the higher the elasticity of demand for labour. Demand = more elastic in labour intensive industries
Availability of substitutes - more elastic when labour and capital are interchangeable, more inelastic with specialised labour
Price elasticity of demand for final product

72
Q

Labour Supply

A

Number of workers willing and able to work in a given occupation or industry at a given wage

73
Q

Factors affecting supply of labour

A

Real wage rate on offer in the industry
Migration of labour
Perks
Barriers to entry
Bonuses/commission/overtime
Mobility of labour
Substitute occupation

74
Q

Elasticity of supply of labour =

A

Measures the responsiveness of the quantity of labour supplied to change in the real wage rate
% change in quantity of labour supplied / % change in wage rate

75
Q

Factors affecting elasticity of labour supply

A

Skills + qualifiations required for the job
Length of training
Sense of vocation (enjoyability of a job)
Time period

76
Q

Geographical immobility

A

Occurs when workers find it difficult or impossible to move to jobs in other parts of the country or other countries for resosn such as higher housing costs in where jobs exist and family problems

77
Q

Occupational immobility of labour, capital and land

A

Occurs when workers find it difficult or impossible to move between jobs because they lack or cannot develop the skills required for new jobs

78
Q

Government policies to combat geographical immobility

A

Improve supply of housing, reducing rent
Offer subsidies
Harmonisation of welfare and tax systems that encourage inward migration of labour within the European economy

79
Q

Firms policies to combat georgraphical immobility

A

Relocation packages -> reduce costs of paying form schools

80
Q

How to combat occupational immobility of labour

A

Training schemes
Increased investment in vocational education and life-time learning opportunities
Flexible working

81
Q

Why does national min wage go up?

A

In line with inflation
More workers -> reduce unemployment
Wage efficiency theory
Prevent exploitation

82
Q

Trade unions

A

An organisation of workers who joing together to further their own interests through process of collective bargaining i.e. Transport and general workers union

83
Q

Monopsony

A

Another influence on wages

84
Q

Monopsanist

A

Single dominant buyer of a good/service or factor of production i.e. government is main employer of soldiers

85
Q

Conditions for a monopsony

A

Price makers -> dictate wages
To employ more workers, wage rate has to increase
Marginal cost of labour will exceed the average cost of labour
If you pay the next worker a higher wage, all other workers need to be on the same wage

86
Q

Reasons why min wage results in unemployment

A

If set too high
If MRPL cannot shift right

87
Q

Reasons why min wage doesn’t result in unemployment

A

Wage efficiency theory (shift in demand for labour)
Imperfect labour market -> inc wages = inc no. employment -> depends on level of min wage
Public vs Private

88
Q

Monopsony pros

A

Job stability
Low cost
Low price
Profit driven -> dynamic efficiency
Guranteed supply

89
Q

Monopsony cons

A

Decline in industry -> structural unemployment
Exploit workers -> drive down wages but depends on perks
Exploitation of suppliers

90
Q

Current labour market issues

A

Public sector workers undervalued and underpayed -> strikes
Gender pay gap
Rise in the economically inacitve
Inflation -> fall in real wages
Hard to fill vacancies i.e. hospitality, public sector

91
Q

National min wage pros

A

Reduce poverty
Reduce inequality
Prevent unemployment trap
Fair wag

92
Q

National min wage cons

A

Job losses
Higher costs = higher prices
Doesn’t take into account regional differences

A Level Economics (15 decks)

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