market structure Flashcards
efficiency meaning
used to judge how well the market allocates resources
static efficiency meaning
efficiency at one period of time
made of allocative and productive efficiency
allocative efficiency meaning
quantity set at AR=MC
resources are used to produce goods and services which consumers want and value most highly and social welfare is maximised
dynamic efficiency meaning
efficiency over time
causes innovation and research and development
productive efficiency meaning
firm produces at the lowest average cost
x inefficiency meaning
firm fails to minimise its average cost at a given level of output
social efficiency meaning
MSC=MSB so there is no external cost from an economic transaction
characteristics which determine market structure
barriers to entry/ exit
if goods are differentiated or homogenous
how much knowledge a firm shares
interdependence
perfect competition meaning
market structure where there are
many buyers and sellers
no barriers to entry / exit
homogenous goods
perfect information
short run vs long run in perfect competition
super normal profits attracts new firms into market
shifts S to the right until no more incentive to enter
if there are subnormal profits firms will leave the market and S shifts to the left until no more incentive to leave
pro of perfect competition
allocative efficiency, productive efficiency, dynamic efficiency are possible in short run
con of perfect competition
no dynamic efficiency in lonng run as no super normal profits
small firms no economies of scale
model vs reality
perfect info hard to achieve
monopolistic competition meaning
where large number of small firms produce slightly differentiated products with no barriers to entry
assumptions in a monopolistic market
no barriers to entry/ exit
low concentration ratio- many firms operating in market so change in price by one firm has little effect on demand for rival products
differentiated goods
ev for monopolistic market
imperfect information
different firms have different sizes and different cost so not all will work where they make supernormal profits
firms will come and go so unstable market
oligopoly meaning
market dominated by few large firms
assumptions in oligopoly
high barriers to entry/ exit
high concentration ratio- 7 firms with &)% market share
differentiated goods
interdependence
why won’t firms increase prices in an oligopoly
their good will become elastic and other firms will undercut them so they would lose revenue
why won’t firms decrease prices in an oligopoly
there good becomes more inelastic and they get more demand but other firms will undercut them to maintain market share leading to a price war
collusion meaning
when firms make a collective agreement that reduces competition
fix quantity or price
over collusion meaning
formal agreement
legal collusion
tacit collusion meaning
aim to reduce competition
illegal
con of collusion
loss of consumer welfare as increase in P and decrease in Q
lack of competition so inefficiencies and quality decrease
increases barriers to entry
illegal- 10% of turn over
cheating the quota- firms can undercut each other for more profit
pro of collusion
increases profits
invest money into quality
saves on research and development
higher producer surplus
conditions for collusive oligopoly
small number of firms
barriers to entry prevent new firms
monitoring to prevent under cutting
homogenous goods so there is less choice
PED inelastic
game theory meaning
reactions of one firm to a change in strategy of another firm
dominant strategy meaning
optimal move for an firm regardless of how other firms act
nash equilibrium meaning
optimum behaviour of firms where both of them make optimum profits
price wars meaning
firms constantly undercutting prices decreasing profits
predatory pricing meaning
firms setting low prices to drive out firms (illegal)
limit pricing meaning
setting low prices to discourage new entrants
non price competition meaning
aim to increase loyalty and make demand more inelastic
quality of good
quality of customer service
special offers
advertising
innovation
monopoly meaning
when there is one dominant producer in a market
assumptions of a monopoly
sole market supplier
high barriers to entry
no substitutes
imperfect info
high sunk costs
price discrimination meaning
when a supplier charges different groups of people different prices
conditions for price discrimination
separate consumers into groups that have different elasticities
able to control supply
prevent markets from c
legal monopoly meaning
continuous monopoly protected by law
natural monopoly meaning
where economies of scale are so large that there is only room for 1 supplier in market
natural monopoly effect on firms/ workers
pro:
SNP made
compete overseas
maximum EOS so little costs
higher wages
con:
might not profit maximise
lack of competition leads to inefficiencies
low output so less workers
natural monopoly effect on consumers
pro:
net welfare gain due to cross subsidisation- more equality
greater range of goods - more profits - innovation
con:
higher price
lower quantity
less choice as only one producer
monopsony meaning
when there is only one buyer in the market
conditions for a monopsony
one buyer
firm pay lowest possible price to minimise cost
firm sets price
pro of monopsony
lower price = more profits = innovation
lower prices
higher profits
purchasing economies of scale
con of monopsony
suppliers lose out on profits
employees lower wages as only one labour demander
(ev, trade unions and may have higher wages with more profits)
unproductive labour because of low wages
fall in quantity due to lower price
perfectly contestable market meaning
perfect info
freedom of entry and exit
low sunk cost
perfect info - best tech used
low product loyalty
firms maximise profits in short run
types of barriers of entry and exit
legal- laws to make it more difficult to enter
marketing- high ads so consumer loyalty
pricing- limit/ predatory pricing
economies of scale- new firms cannot produce at the same AC as large firms
factors promoting contestability
online markets
deregulation
tougher competition laws
