Market Structure

Question 1

Economic efficiency’s (4)

Answer 1

• Allocative
• Productive
• Dynamic
• Pareto

Question 2

Allocative efficiency graph

Answer 2

Maximises consumer welfare (AR=MC)

The price that consumers are willing to pay is equal to the marginal utility that they get (P=MC)

Question 3

Productive efficiency graph

Answer 3

When producers minimise the wastage of resources (AC=MC )

Static efficiency is both allocative and productive

Question 4

Pareto efficiency graph

Answer 4

Occurs when you can’t make someone better off without making someone worse off

Question 5

Dynamic efficiency graph

Answer 5

• At the current turn the firm isn’t statically efficient but are making SNP
• There may however be gaining for consumers in the LR if the firm reinvests the SNP into either the product or production
• In doing so consumers may benefit from lower prices better quality in the LR

Question 6

Creative destruction

Answer 6

Economic change that results from the introduction of new technologies or products that render existing ones obsolete

Question 7

Order of competitiveness in markets (4)

Answer 7

1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Pure monopoly

Question 8

Market concentration

Answer 8

Measures the extent to which sales in a market are dominated by one or more firm

Question 9

Key features of market concentration (6)

Answer 9

• Number of firms
• Price setting power
• BOE/ costs
• Extent of product differentiation
• Buyer and seller knowledge of prices
• Amount of profit

Question 10

Homogenous goods

Answer 10

• Essentially same physical characteristics
• Associated with perfect competition

Question 11

Differentiated goods

Answer 11

Varied characteristics

Question 12

Entry costs into a market (BTE)

Answer 12

• Start up costs vary an industry
• Natural monopoly such as energy and power networks

Question 13

Natural monopoly

Answer 13

A market structure that is unfeasible for competition because fixed costs are so high

Question 14

Allocative efficient monopolies

Answer 14

If monopolies are forced to allocative efficiently they will be making a loss that the government will have to subsidise

Question 15

Dynamically efficient monopolies

Answer 15

They can reinvest this money into product development (better product) or production (lowering costs)

Question 16

Assumptions of perfect competition (7)

Answer 16

Homogenous products
No BOE
Free mobile FOPs
Perfect knowledge
Normal profits
Many buyers and sellers
Price takers

Question 17

Assumptions of monopolistic competition (5)

Answer 17

Many buyers and sellers
Low BTE
Slightly differentiated products
Some price setting power
Normal profits in LR

Question 18

Long run monopolistic competition

Answer 18

• SNP incentivises new entrants
• This increases substitutes available
• Hence making the D more elastic, reducing P

Question 19

Monopolistic competition and efficiency

Answer 19

In the short run they are dynamically efficient but not AE or PE. In the LR they aren’t efficient at all.

Question 20

Advantages monopolistic competition (3)

Answer 20

• No significant BTE: competition
• Provide variety of choice
• Dynamically efficient in SR

Question 21

Disadvantages of monopolistic competition (2)

Answer 21

• Differentiation may create waste (packaging and ads)
• Not efficient in LR or SR