Imperfect Markets + Market Power Flashcards
When does market failure occur
when resources are not allocated efficiently
total economic surplus is not being maximised and therefore requires gov intervention
what are the 4 main types of market failure
market power, externalities, public goods, common property resources
What are the 4 characteristics of an imperfect or non competitive market
- small number of firms
- market power
- product differentiation (products are made to look different
- barriers to entry
CHARACTERISTIC 1: Small Number of FIrms
describe the 2 types of markets that are imperfect
Monopoly - market with 1 firm only (aus post = gov regulation)
Oligopoly - market with few firms (coles and woolworths)
CHARACTERISTIC 3: Product Differentiation
what is product differentiation
products are made to look different because businesses with market power can afford to do so
CHARACTERISTIC 4: Barriers to Entry
what does this mean? AND what are 5 examples of barriers
anything that restricts entry of new firms into the market gov regulation (aus post), control of scarce resource (only 1 diamond mine in Aus - Rio Tinto), high start up cost)
CHARACTERISTIC 2: Market Power
when do businesses have market power
a firm has market power if it can affect the market by varying output and setting high prices therefore - exploiting the market
Why do firms want market power
so that they can profit maximise = higher prices, reduced output (decreases economic welfare for society)
On a graph where do perfect/competitive markets produce
at equilibrium
what does consumer and producer surplus do on the graph
consumer surplus - decrease
producer surplus - increase
Is there a deadweight loss? and why
yes - total surplus decreases due to market restriction
draw a competitive market graph vs a non competitive market graph
qunatity decreases and price increases on non
