Chapter 3 - Market structures

Question 1

Efficiency

Answer 1

Allocative: P = MC -> are resources allocated to produce goods and services consumers demand?
- P > MC: under produced good
- P < MC: over produced good

Productive: MC = AC -> low AC

Dynamic: resources are allocated efficiently over time
- R and D and innovation

X-inefficiency: high AVC

Question 2

Concentration ratio

Answer 2

Measures the % of total market a number of firms has

Total sales of N firms / Total size of market x100

Oligopoly: 50% of conc ratio

Question 3

Perfect competition - mercadillo

Answer 3

Characteristics
- Large number of buyers and sellers
- No barriers to entry
- Homogenous goods
- Perfect information
- Price takers

Question 4

Monopolistic competition

Answer 4

Characteristics
- Lots of buyers and sellers
- No barriers to entry
- Price setters
- Imperfect information
- Differentiated products - physical, marketing, distribution

Question 5

Oligopoly

Answer 5

Characteristics
- Interdependence
- High concentration ratio
- High barriers to entry
- Product differentiation
Kinked demand curve
- Elastic: Changes in P lead to a big change in D
- Inelastic: Changes in P lead to a small change in D

Question 6

Collusions

Answer 6

When firms make collective agreements to reduce competition
- Tacit: unspoken/informal agreement
- Formal: official agreement

Question 7

Cartel

Answer 7

When firms agree on pricing or output levals
- Illegal

Question 8

Game theory (advantages and disadvantages)

Answer 8

Advantages
- EOS
- Source of government revenue
Disadvantages
- Monopoly power
- Higher prices

Question 9

Price competition

Answer 9

Price wars: competing firms lower their prices
Price leadership: when one firm changes price and another follows
Predatory pricing: an established firm is threatened by a new one
Limit pricing: firms set prices low to prevent new firms from entering the market
- need to make at least normal profit

Question 10

Non-price competition

Answer 10

Advertising
Loyalty cards
Branding
Quality
Endorsement
After sale services
Product placement

Question 11

Costs and benefits of collusion

Answer 11

Advantages
- SNP
- innovation
- industry standards improve
Disadvantages
- loss of consumer welfare
- inefficiency
- if caught: illegal - prison

Question 12

Monopoly

Characteristics, Advantages and Disadvantages

Answer 12

One sole seller
Characteristics
- Barriers to entry and exit
- Price setters
- No substitutes
- One firm dominates
Advantages
- High profits
- EOS
- International competition
Disadvantages
- High prices
- Restricted choice
- Lack of innovation
- Inefficiency

Question 13

Price discrimination

Answer 13

When different prices are charged to different customers
Advantages
- some groups benefit from lower prices
- increased profits
Disadvantages
- some groups pay higher prices
- Decreased consumer surplus
- Unfair
- Administration costs are high

Question 14

Natural monopoly

Answer 14

When the most efficient number of firm is 1
Characteristics
- HIgh fixed costs
- EOS
- Competition is inefficient

Question 15

Monopsony

Answer 15

A single buyer in the market - profit maximisation
- Bilateral monopoly: when a dominant buyer faces a dominant seller
- Monopsonists benefit from lower input prices which lead to increased prices
- Suppliers suffer lower profits
- Employees suffer a loss of jobs
- Customers benefit from lower prices, which increases consumer suprlus