EVALUATION OF MARKET STRUCTURES Flashcards

1
Q

Advantages of a Monopoly

A
  • Greater Opportunities for Economies of Scale which could bring down costs of production; could be passed onto consumers for lower prices
  • High supernormal profits can used for Innovation and R&D to find new cost-efficient production methods OR to create higher quality and new products; Dynamic Efficiency
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2
Q

Disadvantages of Monopoly

A
  • Firms have price-setting power and will operate at the point of profit-max (MR = MC); quantity will be below point of Allocative Efficiency (AR=MC)
  • Firms will not operate with price at minimum AC; Productive Inefficiency
  • X-inefficiencies can rise due to lack of competition in market
  • Monopoly outcomes can cause inequality due to high prices making goods harder to afford for low-income earners; especially bad in necessity markets
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3
Q

Advantages of Perfect Competition

A
  • Allocatively efficient as firms as resources are directly following consumer demand (P=MC)
    — Lower Prices for consumer, Better quality goods, More choice for consumers
  • Less chance of consumer exploitation due to lack of supernormal profit
  • X efficient
  • Productively efficient in LR
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4
Q

Evaluation of Monopoly

A
  • Dynamic efficiency level will depend on how supernormal profits are used
  • Potential DISeconomies of scale from increased production
  • Depends on level of regulation from industry regulators
  • Depends on the type of good/service; necessity? If not necessity, monopoly may be desirable for more innovation and R&D expenditure to improve quality (e.g. Technology)
  • Competition/Threat of Competition?
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5
Q

Disadvantages of Perfect Competition

A
  • Lack of dynamic efficiency
  • Inability to benefit from large economies of scale
  • Potential for cost-cutting in dangerous in order to remain competitive in the market
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6
Q

Evaluation of Perfect Competition

A
  • Unrealistic assumptions; IRL firms have at least SOME price setting power, brand loyalty, information gaps, entry and exit barriers, Patents, control of intellectual property and key inputs)
  • Depends where cost cutting is taking place
  • Depends on the type of market; good for necessity markets but consumers may prefer the benefits of dynamic efficiency in other markets
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7
Q

Features of a Monopoly

A
  • 25%+ market share
  • High barriers to entry and exit
  • Price Makers
  • Profit Maximisers
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