Market structure 3.4 Flashcards
Allocative efficiency
-When resources are allocated in a way that maximises overall societal welfare and utilty
-P=MC
-maximises producer and consumer surplus
Productive efficiency
-When a firm produces at the lowest possible cost
-Resources used efficiently to minimise COP
-AC=MC
-Bottom of AC curve
Dynamic efficiency
-Ability to innovate and adapt over time with changing circumstances
-Long-term competitiveness and growth potential
-Innovation/ technological progress
X-inefficiency
-Not operating at lowest possible cost even in absence of competitive pressures
-Poor management/ lack of motivation/ absence of competition - little incentive to cut costs
Efficiency/inefficiency in different market structures
PERFECT COMPETITION:
-AE and PE often achieved
-Firms are price takers/ have no market power
-Not DE - not enough money
-Don’t benefit from economies of scale
MONOPOLY:
-AE not reached - prices set above marginal cost - deadweight loss
-PE if operating at lowest point on AC curve
-
MONOPOLISTIC COMPETITON:
-Not AE or PE - they profit maximise
-DE - differentiated products
OLIGOPOLY
-AE - some price competition
-DE - can invest
-PE is possible - industry dependent
MIXED:
-gov can intervene to promote
Characteristics of Perfect Competition
MANY SELLERS ANY BUYERS:
-Firms too small to influence market price through individual actions
HOMOGENOUS PRODUCTS:
-Products are perfect substitutes for each other
-Only compete on price
NO BARRIERS TO ENTRY/EXIT:
-No significant obstacles like high entry costs or gov regulations
PRICE TAKERS:
-Must accept prevailinng market price
-Adjust production accordingly
PERFECT INFO:
-Perfect and complete information - price/quality
-Prevents information asymmetry
-Ensures transparency
Perfect Competition: Profit maximising equilibrium in short run
1.) MC<P increase output - more revenue than cost
2.)MC>P decrease output - more cost than revenue
3.)MC=P maximising profits at current output level
-Firm will produce if P covers AVC
Perfect Competition: Profit maximising equilibrium in long run
-Adjust to reach state of zero SNP
1.) If firms are making SNP in SR, new firms will enter market - increase supply - lower prices - lower profits
2.)If firms are incurring losses in SR- some firms will exit market - reduce supply, raise prices, remaining firms cover costs
-Continues until all firms only earn Normal Profit / no losses
-Resources efficiently allocated
Characteristics of monopolistic competition
MANY SELLERS/BUYERS:
-Each firm relatively small
PRODUCT DIFFERENTIATION:
-Similar but not identical products
-Branding/quality/design
EASY ENTRY/EXIT:
-No significant barriers to entry e.g. gov regs/ high start up costs
PRICE MAKERS:
-Differentiated products allow some price control
-Other firms offer similar products - cannot significantly raise prices
IMPERFECT INFO:
-Makes advertising and branding imprtant tools
Monopolistic Competition: Profit maximising equilibrium in short run
-MC=MR
-Set price corresponding to that quantity on demand curve
If:
-P>ATC SNP earned
-P<ATC>AVC incur losses but continue to produce
-P<AVC - shut down temorarily</ATC>
Monopolistic Competition: Profit maximising equilibrium in long run
-If firm is making SNP new firms attracted to market - increased competition
-As more firms enter, demand for each firms individual product decreases - decrease in demand curve for each firm
-In LR SNP reduced to zero as demand curve shifts to the left
-Firms may continue to operate with no SNP as long as ATC is covered
-Some firms may leave market if experiencing losses - firms remaining in market may experience smaller decrease in demand - can cover costs
Characteristics of Oligopoly
HIGH BARRIERS TO ENTRY/EXIT:
-Prevent new firms from entering the market
-Prevent existing firms from easily exiting
-e.g. high capital requirements, patents, gov regulations
HIGH CONCENTRATION RATIO:
-Small number of large firms dominating the market
-Measures market share held by dominating firms
INTERDEPENDENCE OF FIRMS:
-Highly aware of actions and decisions of their competitors
-Consider how own choices will affect behaviour and reactions of rival firms
PRODUCT DIFFERENTIATION:
-Distinguish products
-Branding/ quality
N- firm concentration ratio significance
High - more concentrated industry with fewer dominant firms
Low - more competitive - greater number of small firms
Shows degree of market power
Show potential antitrust concerns
Calculation of N-firm conc ratio
-Percentage of total market share by n firms
- (total sales of n firms / total size of market)
x100
Collusion
-Collective agreements to reduce competition
-UK energy market suspected of collusion
