Market Structure Flashcards
Economic efficiency’s (4)
• Allocative
• Productive
• Dynamic
• Pareto
Allocative efficiency graph
Maximises consumer welfare (AR=MC)
The price that consumers are willing to pay is equal to the marginal utility that they get (P=MC)
Productive efficiency graph
When producers minimise the wastage of resources (AC=MC )
Static efficiency is both allocative and productive
Pareto efficiency graph
Occurs when you can’t make someone better off without making someone worse off
Dynamic efficiency graph
• 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
Creative destruction
Economic change that results from the introduction of new technologies or products that render existing ones obsolete
Order of competitiveness in markets (4)
- Perfect competition
- Monopolistic competition
- Oligopoly
- Pure monopoly
Market concentration
Measures the extent to which sales in a market are dominated by one or more firm
Key features of market concentration (6)
• Number of firms
• Price setting power
• BOE/ costs
• Extent of product differentiation
• Buyer and seller knowledge of prices
• Amount of profit
Homogenous goods
• Essentially same physical characteristics
• Associated with perfect competition
Differentiated goods
Varied characteristics
Entry costs into a market (BTE)
• Start up costs vary an industry
• Natural monopoly such as energy and power networks
Natural monopoly
A market structure that is unfeasible for competition because fixed costs are so high
Allocative efficient monopolies
If monopolies are forced to allocative efficiently they will be making a loss that the government will have to subsidise
Dynamically efficient monopolies
They can reinvest this money into product development (better product) or production (lowering costs)
Assumptions of perfect competition (7)
Homogenous products
No BOE
Free mobile FOPs
Perfect knowledge
Normal profits
Many buyers and sellers
Price takers
Assumptions of monopolistic competition (5)
Many buyers and sellers
Low BTE
Slightly differentiated products
Some price setting power
Normal profits in LR
Long run monopolistic competition
• SNP incentivises new entrants
• This increases substitutes available
• Hence making the D more elastic, reducing P
Monopolistic competition and efficiency
In the short run they are dynamically efficient but not AE or PE. In the LR they aren’t efficient at all.
Advantages monopolistic competition (3)
• No significant BTE: competition
• Provide variety of choice
• Dynamically efficient in SR
Disadvantages of monopolistic competition (2)
• Differentiation may create waste (packaging and ads)
• Not efficient in LR or SR
