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
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
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
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?
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
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
7
Q
Features of a Monopoly
A
- 25%+ market share
- High barriers to entry and exit
- Price Makers
- Profit Maximisers